A great business to be in, except if you're in India

Oct 6, 2012

In this issue:
» Indian Bank NPAs may surge 27% in 2013
» Another housing bubble in the making
» Friday Flash Crash makes Nifty drop 800 points
» Indian pharma has a US$ 40 bn opportunity
» ...and more!

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Which is the number 1 company in the world? Well, as per the Fortune 500 list for 2012, energy company, Exxon Mobil takes the top spot. It benefitted from rising oil prices in 2011 and posted profits of US$ 41 bn, up 35% from 2010. Thanks to its purchase of XTO Energy in 2010, Exxon now produces almost as much gas as it does oil. With the world demand for energy expected to rise considerably over the coming decades, this company has placed itself in a sweet spot.

Clearly the energy space is a great business to be in. Demand is growing, supplies are limited (hence one can charge premium prices). Plus there are no real substitutes available. Indian oil marketing companies, Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL) may be in the Fortune 500 list, but they are virtually powerless. So why are India's oil marketing companies (OMCs) floundering?

These three companies combined have product sales of 132 million tons. Revenues and profits are around Rs 8.2 trillion and Rs 57 bn respectively with almost 60,000 employees. However, their combined borrowings have now risen to Rs 1.7 trillion, as they are forced to borrow heavily in order to meet working capital requirements. In the current quarter they reported combined losses of Rs 405 bn and are expected to report losses in the second quarter of FY13 as well if the government doesn't compensate.

Their problems all stem from policies on fuel pricing. These policies make these companies sell diesel and other fuels at a loss in the hopes of pleasing the vote bank. As a result these companies are bleeding and shareholders are suffering. Petrol prices have been decontrolled; however the chairmen of these OMCs cannot really tinker with prices without a green signal from the ministry, and public backlash. Plus, with the huge cost differential between petrol and diesel, more and more customers are shifting to diesel cars. The future outlook for these companies is also bleak. Bailouts from the government look unlikely as there are a number of sectors in the lurch. Plus India's deficit situation is ugly and the government cannot afford higher subsidies. Money also needs to be put into refinery capacity expansion, but we wonder who can afford the same?

Is there light at the end of the tunnel for India's oil marketing companies? Or will they continue to bleed? Let us know your views or you can also comment on our Facebook page / Google+ page

 Chart of the day
Who says Indians are not good innovators? According to a study by Kauffman Foundation, almost every third tech start-up in the US has Indian blood. Today's chart shows that 33% of the co-founders of tech start ups in the US, between 2006 and 2012 were Indians. Indians, in fact, founded more engineering and tech firms than immigrants born in the next nine countries combined. Overall, immigrant founders employed about 560,000 workers. Plus they generated an estimated US$ 63 bn in sales from 2006-12. With the US facing a gloomy job outlook, this could be a huge opportunity. It is important that the US not create blockages and in fact encourage start-up visas for such entrepreneurs. It should also expand the number of green cards issued for skilled foreigners to work in these companies.

Data source: Kauffman Foundation survey, Business Standard

Rs 1.6 trillion. That is the staggering amount of bad loans that have accumulated in Indian banking system at the end of the June quarter. This estimate put forth by Assocham seems unbelievable at first glimpse. Especially given the fact that Indian banking sector is governed by a regulator as prudent as Reserve Bank of India (RBI). But that is not all! Assocham has gone ahead to predict that the non performing assets (NPAs) may surge by 27% in FY13 alone. This will result in pushing up the net NPA to loans ratio from 2.9% to 3.8% for the entire sector. Not one but many issues have contributed to this mess. Poor health of borrowers, in some cases government entities, is prime amongst them. Cases in point being Air India and State Electricity Boards. The government's insistence to lend more to bad borrowers by restructuring the loans has magnified the mess. In addition, lack of reforms, policy bottlenecks etc are issue on which neither the bankers nor the RBI have any control. Further lower profits for the sector have limited banks' ability to write off bad loans. All in all, the health of Indian banking system is not very sound. Even in 2008, when global banking was in a state of crisis, Indian banks enjoyed a safe haven status. For problems that are of our own making, Indian banks have lost the halo around them. The sooner they address the problem, they better for the economy.

Technology turns things around. But not always for the better. Operational errors happen once in a while but when they do, they really can disrupt things. A glaring instance of this was seen in the markets on Friday when an erroneous trade by domestic financial services firm, Emkay Global, ended up halting the trading systems of the National Stock Exchange (NSE). Involving amounts over Rs 6.5 bn, the multiple erroneous trades at low prices triggered index filter and led to a halt in trading. As an outcome, NSE-Nifty lost 800 points. BSE-Sensex wasn't spared either and took a 200 point hit. While there were no long term consequences, the event is indeed an eye opener and offers us opportunity to make amends. The wide usage of algorithmic trading software in such large numbers can cause huge losses to the market and is something that needs to be addressed by the exchange.

Indian pharma companies benefited a lot from the first wave of patent expiries during the period 2006-2008. Thus, it is hardly surprising that they intend to make the most of the next wave as well. Indeed, the potential size of drugs losing patents in the global generics market is around US$ 250 bn. This is over the next three years. India is hoping to capture at least around US$ 30-40 bn of the global generics market. Cost of healthcare is rising in the developed markets. Population is ageing too. These have been the key drivers for the healthy growth in generics in the past. This trend is expected to continue going forward as well. The US and Europe are obviously lucrative markets. But plans are on the anvil to increase strides in Japan and the African countries too. Most top Indian companies have already begun to reap benefits in the US markets. They are especially focusing on launching niche products having limited competition. These have the potential to generate higher revenue and profits. The commerce department is also going all out to hard-sell Indian generics in difficult but promising markets. This under its recently launched Brand India Pharma campaign. The focus being on credibility, quality, availability and affordability of Indian medicines. Of course, large patent expiries also mean more competition. And this has become a regular feature of the generics market. But this is the time for Indian pharma companies to step up pace and make most of the opportunity.

The end of 2007 marked a turning point in global financial history. With the debacle of Lehmann Brothers the vulnerability of a financial behemoth was revealed. The root cause of all evil was subprime loans. What followed was a financial turmoil the shockwaves of which are still visible in the global markets. In hindsight experts state that there were several signs indicating the financial disaster. One of them was spiraling housing prices. Apparently it was a bubble waiting to burst. Now one such bubble is building up in another major economy in the world. This time it is in Canada. The housing prices in the country have been touching new highs. In fact prices have gone up by over 100% in the past year. At the same time subprime loans have gone up too. Given the level of inflation and growth rate in the country, the administrators are now looking at raising interest rates. If these go up, affordability of housing is going to take a severe hit. The net result would be that housing prices would come crashing down. If that were to happen the entire banking system would take a severe hit. Unlike US, Canada would be protected to some extent given their more conservative banking system. Nonetheless the scars would be deep.

Barring Japan and Brazil, global stock markets closed the week on a positive note. US stock markets were up 1.3% during the week. The rise came in on the back of a strong jobs data. The unemployment rate in US fell to 7.8% in the month of September. For the first time in the last four years the rate fell below 8%. Retail sales in US also picked up signaling that spending in the economy is on a rise. These are encouraging signs considering the political and economic uncertainty in the US.

The Indian stock markets ended the week on a flat note with gains of 0.9%. After announcing foreign direct investment (FDI) in aviation and retail just a few days back the government continued with its reforms process. It has now opened up FDI in pensions, increased FDI in insurance and approved the new Companies Bill. While this is a step in the right direction it would be interesting to see if the reforms get a nod in the parliament. Most opposition parties as well as some key allies of the government are against these reforms dubbing them as non-populist. Amongst the other markets, France (up 2.9%) was the biggest gainer followed by Germany (up 2.5%). However, Japan and Brazil were down by 0.1% and 1.0% respectively.

Source: Yahoo Finance
* The Chinese markets are shut from 01 Oct to 07 Oct on account of autumn festival and national day

 Weekend Investing Mantra
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    5 Responses to "A great business to be in, except if you're in India"

    r k tiwari

    Oct 13, 2012

    The subsidized kerosene is grossly misused for the purpose of adulteration in petrol by autoworker drivers and old less efficient two wheelers. Further large proportion of subsidized kerosene is sold in black market by kerosene dealers. This is a gross misuse of subsidized item via-a-vis serious air pollution hazard.

    Like (1)


    Oct 8, 2012

    Unfortunately various policies framed by successive Governments in POWER are to be blamed.Loopholes are purposely kept in distribution system so that few can mint money. Kerosene distributed at Rs 12/litre in Ration shop is mixed with Diesel which is approximately Rs. 45/litre.Long term damaging effect on Diesel engine ! Nobody is worried.
    Those thousands of poor labourers who do not posses Ration Card are compelled to buy Kerosene @ 50-55/litre.
    Otherwise (Fast/Roza)
    If other countries in the world can afford to sell Petrol@ Rs.50 India can definitely.If we adopt proper system, Vote Bank will go Bankrupt. So continue to exploit the situation & fill pockets of few ! If OMC'S are bleeding billions on sale of products ,how they are declaring Dividends ? This question is asked in Hindustan Times - editorial recently

    Like (1)

    N Viswanatham

    Oct 6, 2012

    The Government should scrap all subsidies on all petroleum products except the diesel used by agriculturists.

    All other subsidies also should be scrapped a cash transfer scheme as proposed by Mr.Chandrababu Naidu should be introduced for the poor people. However, the scheme should be implemented properly so that ineligible people are kept away from the scheme

    Like (1)

    Umesh Sharma

    Oct 6, 2012

    The problem is the taxation policy adopted by the Government If Pakistan and Indonesia can sell Petrol at less than Rs.50 a liter why India a much bigger economy cannot do so.the answer is obvious our petrol prices include a hefty dose of taxation which goes on increasing with the increase in international prices of crude.What is the need for collecting taxes and then paying subsidies separately It only creates additional work at different levels and gives rise to manipulations.If a realistic approach is adopted and the Government is pragmatic all the problems will end without much trouble.But for that the Government has to give up or cut down its development programs Which will affect its vote prospects.The so called development schemes have created rampant corruption and the targeted group hardly gets anything without offering a hefty bribe and those who pay such bribe hardly deserve the Government aid.So what we have is economics of compulsion and not economics of prudence.So the petrol companies which are owned by the Government will have to grin and bear it.

    Like (3)


    Oct 6, 2012

    Would not it be sensible to get refined petrol/diesel from the exporting countries, as the rate for refined petrol/diesel is far below those in India, This will lower the price for the public, appease the votebanks as well as be profitable for the companies.

    Like (1)
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