Recession is a boon for these companies - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Recession is a boon for these companies 

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In this issue:
» Greed takes investors back to leveraging
» Consolidation in Indian banking up on government agenda
» Pay cuts for CEOs of bailed-out US firms
» India poised to top the list of pay-hikes
» ...and more!

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Two wheeler makers have taken the cake at the start of the result season. After Bajaj Auto, it was the turn of market leader Hero Honda to astound the street. The two-wheeler behemoth has managed to virtually double its bottomline for the quarter ended September 2009. It's time both these companies send a big thank you note to the average US citizen. Surprised isn't it? Why would these companies thank US citizens as not even a single motorcycle of theirs sells in the US? Allow us to explain.

While volume growth has no doubt helped these companies grow their topline, the main kicker has come from the operating margins. And here, reduction in raw material costs has played the key role. So, had it not been for the slowdown in the US and the huge cut back in spending by its consumer, which accounts for nearly 70% of the country's GDP, the reduction in raw material costs perhaps would not have happened for these companies. The good news just doesn't end here. Healthy margins could be a reality atleast in the medium term as the US consumer may not get up soon from the knockout punch that the financial meltdown has dealt it. Meanwhile, why don't you start looking for companies that could benefit from this trend? Recession may not be such a bad deal after all for some companies. Happy investing.

01:02  Chart of the day
The key reason why India is one of the best poised amongst the BRIC nations is its young and growing workforce. The same is expected to generate higher per capita income and better spending power so as to fuel our consumption driven economy. A higher participation of female workforce is expected to be major contributor to this hypothesis. However, as today's chart of the day shows, the ratio of female to male income in India is way below that in the other emerging as well as developed nations. This can foil the growth in per capita income as well as spending power hypothesis that one has come to expect from India. Besides, the lower income can also hurt the high savings and investment rates that are crucial to the economy's wellbeing.

Source: UNDP Human Development Report

Investing in leveraged instruments has been traditionally frowned upon by conservative investors. This is because leverage not only holds the potential to magnify your gains, but also to magnify your losses, not to mention its potential to completely wipe out the returns if things turn really nasty. But it is an old habit that most people have - to become acutely aware of the above fact when things are bad, but to throw caution to the wind and embrace leverage when they are optimistic. And old habits die hard.

As per a Bloomberg report, rich investors in Asia are once again back to borrowing more to boost returns, further encouraged by record low interest rates and an enthusiastic stock market recovery. This is despite the knowledge that a similar approach cost them a lot last year when their assets fell more than the global average. Due to the use of leverage, millionaires in the Asia Pacific region saw their total wealth decline 22.3% to US$ 7.4 trillion in 2008 compared with the global average drop of 19.5%. However, this has not served to dim their enthusiasm one bit.

The banking industry in the US has come under heavy criticism for having players that are too big to be punished for their wrong doings. The behemoths in China have traditionally been looked upon with cynicism due to their tendency to lend aggressively without any bias for asset quality. Banking entities in India have on the other hand are not only much smaller but also face stiff competition due to fragmentation of the industry.

However, the dynamics of the sector are set to change with the government set to push for consolidation in the public sector banking space. The Finance Ministry is reportedly working on a road map to create 8 to 10 large banking entities. While consolidation of the sector has been on the UPA government's agenda for quite a while now, the presence of the Left alliance in the erstwhile government made it a sticky issue. Dissent from labour unions has also been a prime hindrance. However, with 10 bank chiefs due to retire in 2010, it is expected to be easier for the government and bank managements to work out the process.

While bigger banks will certainly mean more financial inclusion, scalable lending power and improved pricing, the government needs to take care that they do not turn out to be 'Too Big To Fail'.

Simple and robust businesses stand the test of times. This is not to say that they are not impacted when times are bad. But what differentiates them from the majority is their staying power. World's largest beverage company Coca Cola is one such company. Despite the weak overall global environment, it has continued on its growth path though the same has slowed a bit due to the company's size. Interestingly, India has been the fastest growing market for the company with a 37% growth in volume sales.

Legendary investor Warren Buffett holds Coca Cola in his portfolio and the stock has multiplied almost 15 times since he first bought it in 1988. Among other reasons, the key factor that prompted Buffett to buy Coca-Cola (as he later clarified) was that he believed in the simplicity and sustainability of its business, factors that hold steady to date as well.

It's difficult to find such well-entrenched businesses like Coca Cola in India. But it's definitely worth a try given the huge upsides that such businesses can have for investors over the long term.

The Prime Minister's Economic Advisory Council (EAC) has estimated fiscal deficit to come down by 1.5% of GDP by FY11. The same comes with the rider that liabilities on account of pay revision and loan waiver being settled, expenditure on other schemes are kept constant in nominal terms. It may be recalled that the Finance Minister had projected fiscal deficit at 6.8% of the GDP for FY10 and estimated the deficit to come down by 1.3% of GDP to 5.5% by FY11. While the EAC's predictions are optimistic, reluctance to withdraw stimulus packages may prevent it from fructifying.

Over the past few months, experts from several quarters have been saying that the worst is over for the US economy. Warren Buffett is also of the same view. However, the legendary investor also believes that the rewards of capitalism should be balanced by punishments. He says, "You have to put in something where there is downside to people who really mess up large institutions...Too many people have walked away from the troubles they have created for society, not just for their own institution, and they have walked away rich." We couldn't agree more. There has to be greater accountability from people in power - either on their own or through effective government regulation.

Speaking of accountability, CEOs of banks and investment banking companies who have been the architects of the global financial crisis have continued to draw huge salaries and bonuses. This has raised an outcry among the American tax payers. Responding to this, the Obama administration has ordered the firms that received the maximum government aid to slash compensation for their highest-paid employees by about 50%. The companies who will be at the receiving end will be Citigroup, Bank of America, AIG, General Motors and Chrysler. Interestingly, the government may not be able to bring in its ambit banks such as Goldman Sachs, JP Morgan and Morgan Stanley since they have returned the loans taken from the government.

Do you support the view that the CEOs of bailed out firms should receive lower compensation? Tell us.

Experts round the world are of the opinion that emerging economies like India and China will drive the global economic recovery. A lot of indicators do testify these claims. As per a survey covering 2,000 local and joint-venture companies in Asia-Pacific region, India is poised to top the list of pay-hikes and salary growth in 2010. Indian salaried class on an average might get nearly 10% richer, while salaries in Indonesia, China and Japan are expected to surge by 8.7%, 6.7% and 2.1% respectively. Talking about India, potential salary hikes are a sure indicator of better economic performance and a positive outcome can trigger further economic growth through increased domestic consumption.

Meanwhile, after a lackluster opening, the BSE-Sensex continued to tread below the dotted line through most of the session today. At the time of writing the BSE-Sensex was trading 270 points lower. As for global markets, while other Asian markets closed in the red, the European markets have opened a mixed bag.

04:55  Today's investing mantra
"The chief losses to investors come from the purchase of low-quality securities at times of favourable business conditions." - Benjamin Graham
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6 Responses to "Recession is a boon for these companies"

Sundari Ramasubramaniam

Oct 23, 2009

Your articles are very interesting and every bit worth reading.I start my work after reading your updates.It acts as a tonic n keeps me enthusiastic through the day.
Thanks a lot.Keep it up.



Oct 22, 2009

Regarding feed back on CEO's pay of bailed out financial firms/companies I would answer NO. Because most of the current CEO's of these bailed out firms are new. They have been appointed to clean up the mess. If the pay is reduced for these new CEO's it is like punishing the hard working guys who are working tirelessly to turn around the firm/company. CEO's who have gone home with millions as a retiremnt bonus should be procecuted and made accountable , it would help to reduce the future scams/risky investment stratagies.


Subbarayadu Angisetty

Oct 22, 2009

Accumulation of wealth in fewer hands is not a healthy sign. Unscrupulous spending contributes to inbalance in the smooth running economy. It is not out of place to quote that unequal combinations are always dangerous to weaker society.


Pooja Gor

Oct 22, 2009

Hi All,

To receive such wonderfull articles from your website is really very very helpgul for me to know the current market share for every product like gold and all,

All the details which i have received from your company till now is really very fantastic and easy to understand the current financial status of the country.

Thnx & Regards,
Pooja Gor.



Oct 22, 2009

The CEO of defaulting cos should never be paid bonus however
their salaries should be reduced and increments stopped till reasonable turnaround.


Johnson Chacko

Oct 22, 2009

CEOs of bailed out companies should be held accountable for their actions if their company is in a mess. Their salaries should not only be reduced , but they should be eased out of their jobs for incompetence after the company stabilises.

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