Greed back in full force - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Greed back in full force 

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In this issue:
» Look, who's back in the IPO market
» India Inc awash with orders
» Dollar weak but no plausible alternative
» Lethargy in M&As hurting Indian IT
» ...and more!

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The Indian real estate companies seem to be hell bent on making a mockery of Warren Buffett. Surprised, isn't it? Well, allow us to explain. Amongst the Oracle of Omaha's favorite quote is the one where he says that invest in such a company that even if the capital markets are shut for the next five years, it should not do your returns any harm. If there is one sector that is proving to be a complete antithesis of the same, it is the Indian real estate. Their thirst for capital just doesn't seem to satiate. So, after getting bankrolled by banks and having thick wads of cash thrown at them by way of QIPs, a clutch of companies have now trained their guns at the Indian IPO market. In other words, greed seems to be back in all its glory in the Indian real estate space.

As per a leading daily,three real estate companies have already filed their IPO prospectus with the SEBI and are together aiming to mop up a princely sum of Rs 100 bn over the next few weeks. And this may not be over by any stretch of imagination as more companies will follow suit. While real estate in India remains a sector with one of the best potential from a long term perspective, we have reasons to believe why these issues could turn out to be potential landmines. For one, when a similar fund raising spree happened the last time around, the downturn that followed led to enormous wealth destruction and secondly, the quality of disclosures of Indian real estate companies leaves a lot to be desired. Hence, investors are advised to tread with caution.

00:55  Chart of the day
The roots of the current financial crisis lay in the US economy and its banking system. India on the other hand, emerged largely unscathed. So, as today's chart of the day suggests, why did Indian stocks crash by a greater margin that those in the US? The answer - due to mass selling from the foreign institutional investors and their P-Note holders! Already much ink has been used to talk about the large FII outflows from Indian stocks in 2008 and their re-entry in 2009, so let us not write any more on this. What we are concerned about is that even serious long term investors in India have been seen worrying about how FIIs are doing in order to make their own investment decisions. Probably not the right way to go about long-term investing, we believe!

Data Source: Yahoo Finance

Yesterday, we reported World Bank President Robert Zoellick's view that the US dollar is likely to lose its status as the global reserve currency of choice. And now, Dr. Doom, Nouriel Roubini has also thrown its hat in the ring and he believes that although dollar is a weak currency, there aren't enough alternatives around with as much liquidity as the US dollar.

Furthermore, as countries like China and Japan that have strong currencies, themselves face an acute crisis, they will not let dollar sink into oblivion and hence, would be willing to buy dollar denominated debt despite its structural weakness. "A new plaza accord to support the dollar seems unlikely. Yet the most vocal U.S. creditors, like Russia and China, are likely to make only very muted calls for new reserve assets and fiscal consolidation in the U.S," is how Roubini, one of the most respected economists of our times chose to put it across. However, he also cautioned that if US failed to rein in spending, willingness to hold US dollars might diminish, putting dollar under renewed pressure. Its over to the US for now.

There has been a lot of talk about the US economy being past the lowest point in the recession. Even if that were true, at the micro level - that is at the level of individual firms - there is still considerable pain left. As per a recent forecast, about 600 US companies are expected to default on their debt between 2008 and 2011, up five fold from the previous four year period. Given that only 300 companies have so far thrown in the towel, there is considerable amount corporate casualty yet to come, if the report is to be believed. Interestingly, instead of declaring bankruptcy, many of these companies are expected to swap old debt for new debt and equity. In our opinion, this will only defer the problem and not solve it. There are generally no quick fix solutions to debt traps.

As per reports, Indian companies seem to be having a gala time with their aggregate order book hitting an all time high of Rs 733 bn in 2QFY10. This is double of what it was in the first quarter of FY10, and a robust 21% higher compared to the same period last year. The sector by far leading the pack is capital goods and infrastructure, with L&T at the top of that list by roping in new orders worth a towering Rs 142 bn. Many other smaller players too have similar stories to tell and the gates really seem to have opened up in a big way post the general elections earlier this year. With their bulging order books, these companies seem to be all set with respect to their revenue streams for the next few years.

However, execution risks can always be just around the corner without anyone noticing them until they finally strike. Just like the liquidity crunch that suddenly took the wind out of all projects during the credit crisis. Thus, in these times of exuberance, one would do well to not get so optimistic about the sector that one became the victim of paying overly optimistic prices.

The Indians and the Chinese seem to be an optimistic lot. Otherwise what would explain the fact that in a survey conducted by the Economist Intelligence Unit, 60% of the executives in India and China had faith that the economy would turn around. Infact, both these economies are expected to grow at a much stronger pace as compared to the developed nations in the coming fiscal even if by their own standards the growth rates would be lower than what they had recorded before the crisis unraveled.

In stark contrast, the Japanese executives were the most pessimistic as 44% of respondents opined that the recovery will falter, while another 44% said there is no recovery in the country at all. While we too are of the opinion that India and China will be better off than their peers, they still have their own set of problems; In India's case, rising fiscal deficit and likely inflation on the back of higher food prices are causes for concern, while China has the possibility of asset bubbles looming what with the stock markets and real estate prices reaching unjustifiable levels.

The global IT arena has been buzzing with mergers and acquisitions during the last couple of months. The downturn has impacted the valuations of many software firms, giving the likes of Dell (hardware maker) and Xerox (document management company) much-awaited opportunity to heave up their IT services businesses. As another fallout of slowdown, the IT industry is seeing consolidation as clients prefer vendors with end-to-end solutions i.e. hardware portfolio bundled with software services.

So what are our domestic mega-vendors doing? Yes, there has been some domestic M & A activity. But so far, the Indian IT majors like TCS, Infosys and Wipro have remained somewhat sluggish with their inorganic plans to expand globally during the downturn. We believe that it is high time that Indian IT bigwigs realize this fact and use their cash war chests to adequately ramp up their portfolio, which at present are tilted heavily towards IT services.

Meanwhile, the Indian benchmark indices went from strength to strength with each passing hour on the bourses today. BSE-Sensex was trading higher by nearly 250 points (1.5%) at the time of writing. Heavyweights from the banking space were leading the rally. While other Asian indices closed mixed today, majority of the European indices are trading strong currently.

04:49  Today's investing mantra
"In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor." - Warren Buffett
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11 Responses to "Greed back in full force"

krishan kumar diwan

Oct 5, 2009

The information given is very very useful an fruitful for the people like us those wants to know more about the current happenings in and around us. Its' really brilliant. Thanks and regards. Please keep this goodwork continued.


vivek nigam

Oct 3, 2009




Sep 30, 2009

your information is very fine. it is nice to caution innocent people who often act with herd mentality. You think ahead with due deligence. thank you.



Sep 30, 2009

your unbiased furnishing of facts, laced with wit are thoroghly educative and enjoyable. Thanks-I look forward to writings. Regards.



Sep 30, 2009

Greed back in full force - Precise assesment of situation in Share-Market today ( 52 week high).Sensex & Nifty advancing without any positive trigger.Investors are ignoring global situation and jumping in market cartelisation. God may save us if it desent turn out scinario like 21000 to 8000 BSE INDEX !



Sep 30, 2009




Sep 30, 2009

The way market is galloping, a retail invester is apprehensive. The economy indicators are positive, but then are they so good as is being reflected by the increase in Index? The dilemma is Am I missing the bus if I do not invest now or if I invest now and market goes in negative spin with the speed with which it has risen. What to do? Is investing in Mutual funds at this time comparitively safer option? Any answers?



Sep 30, 2009

Your newsletter is very good and I read it every day.Thank you and keep up the good work.
Around the world retail investors are selling and only speculators are buying- the herd mentality trap is being set.

I have one question of you- can you explain the huge disparity in the prices of Gold ETF's traded on the NSE- was told each unit is a gram of pure gold equivalent so why the 60/70 rupee difference.



Sep 30, 2009

Brilliant. Just brilliant. In-depth analysis of very high order.Keep it Up.


shivendra sharma

Sep 30, 2009

its simply brilliannnnnnnnt.please keep it up

u r a good financial socialworker

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