'Incredible Monsoon' and more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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'Incredible Monsoon' and more... 

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In this issue:
» Tatas find the going tough
» 3% of GDP lost to road accidents!
» Steel companies' vision 2020
» Gustav fires oil prices
» Mayawati follows Clinton, Gandhi
» ...and more!

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 00:00    Promoters beware!
A prison term of three years and a fine of up to Rs 5 m is what promoters have to pay if they attempt to raise money through initial public offering by misleading investors. This is as per the Companies Bill 2008, which was recently cleared by the Cabinet. This penalty, which is significantly harsher as compared to the existing one comprising of a term of two years imprisonment and a fine of up to Rs 0.1 m, is expected to keep scrupulous IPOs off the market. While the cause of vigilance on quality of IPOs by the Ministry of Company Affairs may be attributed to the fate of some recent IPOs that have lost nearly half their market capitalisation after the market crash in January, there are several loopholes that the Ministry needs to address. These are particularly in terms of declaration of items under the head 'use of IPO proceedings'. There have been instances in recent past of companies coming out with IPOs without having any specific objective in mind as also promoters buying private jets with the IPO money citing 'cost savings'. The Ministry has blocked one of the loophole by according the bill the status of 'non-compoundable', which means that it cannot be mutually settled between the two parties. The Bill, four years in the making, is expected to further dry up the pipeline of IPOs, which has reduced from 77 companies until August 2007 to 37 companies in 2008 so far.

  • Also read- IPOs - Look before you leap

     00:45    The slowdown is showing...
    After blazing its way through in the past couple of years with 9% plus growth, the GDP growth in the first three months of FY09 has slowed down to 7.9% as published by the Central Statistical Organisation. This is hardly surprising given that inflation had soared to 13% against a backdrop of rising crude and food prices, which compelled the RBI to raise interest rates. As a result, demand for interest sensitive products such as automobiles and houses slowed down. More importantly, monsoons were not upto the mark and the June to September monsoons, which accounts for four-fifths of the country's annual rainfall missed the target by 39%! That said, despite the slight slowdown, economic growth is still almost double the average pace since India's independence in 1947.

     01:09    ...on car sales as well
    While Tata Motors continues to grab headlines on the Singur issue, things are not looking bright for the company on the sales front as well. The company expects growth in the second quarter of the current fiscal to remain at single digit levels in the wake of steep increase in financing costs. Growth during the first quarter has come in lower at 7%-8%, in stark contrast to the 17% and 26% growth witnessed during 1QFY08 and 1QFY07 respectively. The industry sales figures for commercial and passenger vehicles show signs of slowdown since early 2QFY09 itself. As per Tata Motors, with lending rates inching upwards by as much as 300 basis points (3%), only those people who are in urgent need of a car are going ahead with their purchase with the rest opting to wait for the interest rates to come down. Not one to get bogged down by a slowdown, Tata Motors has lined up some impressive products in the passenger vehicles space, amongst which, the Indica Vista, based on a new generation platform has already been launched to favorable reviews. With this, it intends to recapture its market share in the compact car segment that it lost to its rivals in FY08.

     01:33    Politics over economics
    Meanwhile , work at the Tata Motors' controversial plant at Singur continued to remain disrupted for the fourth day in a row today. It should be remembered that following threats by the West Bengal's main opposition party Trinamool Congress, the company had asked its workers to stop work on August 29. However, with no solution being found yet, Tata Motors has continued with its stand of not allowing the workers to resume work. Support to the beleagured project though has been flowing in thick and fast, especially from India Inc where industry titans are rallying behind the company in huge numbers. In what was meant to be a showpiece event for India's low cost manufacturing might has now turned into a ugly war with both top political parties in the state not willing to give an inch to each other.

  • Also read- Politicians use sandpaper

     01:56    In the meanwhile...
    Concerns over oil prices loomed large over Asian markets today, as the Chinese and Japanese markets turned out to be biggest losers with losses of nearly 3% and 2% respectively. The geo-political issues in the domestic region are also not letting the Indian markets breathe easy. The benchmark BSE-Sensex languished in the red through out the session today and closed marginally below breakeven. Amongst the Asian markets that have managed to close higher, the Hang Seng (up 2.8%) was the biggest gainer. The European markets have opened on a negative note.

    In the US, with Hurricane Gustav on track toward the Gulf Coast, investors are worried that oil prices could shoot higher. The uncertain fate of troubled mortgage financiers Fannie Mae and Freddie Mac has also kept investors on edge. However, despite the uncertainty over oil, consumer spending and the financial sector, there are signs that the US economy is holding up. The US Commerce Department declared last week that country's GDP grew by an estimated 3.3% during 2QCY08 - much higher than expected.

     02:21    3% of GDP lost to road accidents!
    While poor infrastructure has created huge stumbling blocks on India's path to a much higher economic growth, India also has the dubious distinction of having one of the worst road tolls in the world with 0.1 m people killed in traffic accidents last year. Fathom this. The World Bank estimates that every year road accidents cost India about 3% of its GDP, which was more than US$ 1 trillion in 2007. These are huge numbers indeed! So much so that the World Bank has further forecasted that by 2010, road accidents could become one of the biggest public health issues in India overtaking diseases such as tuberculosis (TB) and AIDS.

    While nothing substantial has been done in terms of improving the quality of roads, cars on the roads have meanwhile piled on in the wake of India's scorching pace of GDP growth and enhancement in lifestyles of the middle class. The International Herald Tribune states, "Pot-holed roads, inadequate safety regulations, a lenient license system and a lax attitude toward drunk and underage driving are all blamed for accidents that kill an estimated 275 people every day. But the biggest killer is arguably the growing numbers of vehicles using Indian roads that are incapable of supporting the massive volume of traffic, steered by drivers who lack basic skills".

    The scenario going ahead is only likely to get bleaker if some drastic steps are not undertaken to address this issue. The Indian Transport Ministry has cited that the annual number of deaths from road accidents is likely to mount to 150,000 by 2015 attributing the same to rapid growth in ownership of automobiles, which in turn are expected to double to 2 m units by 2010 (passenger cars). While the government has outlined a gargantuan investment of US$ 500 bn for the next five years to upgrade and build infrastructure, given the high level of corruption, inefficiency and red tapism, it remains to be seen whether these ambitious targets will indeed be met.

     03:02    Steel companies' vision 2020
    Indian steel industry has come a long way from having a negligible global presence to becoming the world's fifth largest steel producer currently. It produces 53 m tonnes of steel, which account for 4% of global steel production. The country's steel production grew at a compounded annual rate of 10% over the last five years, which was driven by both capacity expansion (40.4MT in 2003 to 56.8MT in 2007) and improved capacity utilization (86% in 2003 to 89% in 2007). The government plans to further raise the capacity to 124 MT by year 2011 and 200 MT by year 2020, making India the second largest steel producer in the world. Towards this target, a host of domestic steel companies are expanding their capacities through greenfield and brownfield projects. For instance, Tata Steel plans to raise its standalone capacity from 6 MT to 35 MT by year 2015. Similarly, SAIL and JSW Steel have capital expansions of 14 MT and 12 MT lined up until 2020. Also, international players like Arcelor-Mittal and Posco are not letting go of the opportunity by setting up two and one plant of 12 MT each in the country. It should be noted that as per IISI report, global consumption of steel will grow at a CAGR of 4% upto 2016, while on the other hand steel consumption in India is expected to grow at 9% YoY in 2008 and 12% in 2009.

  • Also read - The arithmetic of steel

     03:21    After 'Incredible India', its 'Incredible Monsoon'
    Tourism being a multi-sectoral activity with tremendous potential for income and employment generation, the Ministry of Tourism is constantly undertaking initiatives to unleash India's potential as a tourist destination. After the 'Incredible India' campaign in 2002, the Tourism Ministry has finalised a fresh action plan that includes road shows in foreign countries in an attempt to woo tourists to visit India during the off-season monsoon periods. It may be recalled that the 'Incredible India' campaign was launched in the wake of the events of September 11th 2001 terrorist attack and the resultant fear of travel. The campaign differentiated India from the competing destinations by developing a unique market position and image. The Ministry of Tourism spent around US$ 15.7 m in overseas markets on the promotional campaign during 2006 - 2007. The campaign was a success with tourist inflow growing at 17% CAGR in the last 5 years.

    Banking on this, the government is planning to launch the 'Incredible Monsoon' campaign. The June to September period is considered as off-season as the arrival of tourists slows down during these months. In order to promote the monsoon period, the Ministry will host road shows showcasing Indian monsoons in countries like Middle East, West Asia, USA and Northern Europe. Special monsoon packages are also being worked with tour operators to attract tourists. Any positive outcome of this campaign may bring some cheer to the hotel players in the country as they witness a dip in occupancy and room rates during the slack seasons, thus affecting their earnings. The Ministry anticipates the momentum will continue with tourist arrivals expected to reach 10 m by 2010. However the global slowdown, rising fuel prices and infrastructure woes may put a speed breaker on the tourist arrivals.

     03:58    Changing dynamics of India IT
    While the Indian IT sector is bearing the brunt of financial crisis in the US, the industry association NASSCOM has projected a lower growth rate of 24% YoY (28% in FY08) for the current fiscal. The dynamics of IT industry is changing and the firms are now preparing themselves to meet new challenges. Traditionally, Indian IT firms have been deriving a large chunk of their sales from the Americas and Europe. But going forward, the growth rates of IT spending in these markets are expected to be lower as compared to those in Asia, which are expected to grow at a very fast pace and approach the size of the European markets by 2011. The emerging Latin American, Middle-East and African markets, though smaller in size, are also expected to have a higher growth rate. Further, the growth in the Asia-Pacific region is expected to be higher mainly on account of growth in IT spends in China (20%) and India (18%). Thus Indian software firms are targeting these markets aggressively to drive their future growth. The companies are increasingly focusing on expanding the breadth of service offerings and capabilities to become a full services provider, which entails entire value chain of IT - from consulting to products and solutions and from implementation to support. Furthermore, software companies are offering cost effective services like pay-as-you-use software and platform based back office where IT companies set up a common process, for say insurers and offer it to several customers.

  • Also read - Outlook on Indian IT sector

     04:11    Oil catches fire on hurricane threat...
    Oil prices inched upwards on Friday as producers evacuated rigs ahead of the arrival of hurricane Gustav, which is touted to be the worst Gulf of Mexico hurricane after Katrina. Increased tensions between Russia and the West further contributed to the prices nudging higher. As of mid- Saturday, nearly three-fourths of the Gulf's oil production and nearly 40% of its natural gas output had been shut down, according to the US Minerals Management Service. The Gulf of Mexico is home to 26% of US' oil output, 14% of the country's gas production and nearly half the nation's refining capacity. The intensity of the hurricane is expected to determine the course of movement of the oil prices this week. While oil prices were up 2% last week, they are sill 21% lower than the high of US$ 147 a barrel reached on July 11.

     04:22    Talk about disaster management
    In the US, as officials predicted possible devastation on account of hurricane Gustav, in response to the alert signals, nearly 2 m people were evacuated from Texas in a few hours. However, nearly the same number of people continue to remain stranded with nearly 6 feet of water around them in the north Indian state of Bihar after nearly 5 days. 15 of the 30 districts of the state have been struck by a natural disaster of the river Kosi changing its course and flooding the villages, which ironically had also been envisaged in the event of heavy monsoon. The Indian disaster management cell, however, seems to be taking few lessons from its counterparts in the West.

  • Also read - Catastrophe hits Northern India

     04:38    Mayawati follows Clinton, Gandhi...
    Bahujan Samaj Party (BSP) chief Mayawati has made a debut at the 59th spot in the Forbes Magazine's List of 'The World's 100 Most Powerful Women'. The list is an annual ranking of the most powerful women in the world, measuring 'power' as a composite of visibility, past career accomplishments and economic impact. This inclusion of Mayawati in the list puts her alongside high profile personalities like Angela Merkel (Chancellor, Germany) and Hillary Clinton, (US Senator) and also Sonia Gandhi who has the 21st position on the list. "Although she remains firmly at the head of the country's ruling party, a rising star, known by the single name Mayawati, is challenging Gandhi's position as the country's most powerful woman," the magazine said. Although the BSP recently withdrew its support to the UPA, the Forbes magazine described her as the one "in the running to be Prime Minister, from her perch as chief minister of Uttar Pradesh, India's most populous state".

     04:57    Today's investing mantra
    "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." - Warren Buffett.
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