Small is Big in India - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Small is Big in India 

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In this issue:
» Mr. Market will be in action for longer hours
» A clear trend in operating margins of India Inc.
» Sun is setting on the US empire
» India's foreign inflows to surge in FY10
» ...and more!

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No doubt these companies have a long way to go before they find a place for themselves in the benchmark indices. But you can ignore them at your own risk! There are 3.2 m of them. Striving each day to achieve technological superiority, cost efficiency and a refined and holistic business model in a liberated economy. We are referring to the small and medium enterprises (SMEs) in India whose contribution to India's GDP is estimated to increase to 22% by 2012 from about 17% in 2009 (as per ASSOCHAM).

The industry body believes that since over 60% of the SMEs are in the process of aggressive technological upgradation, it would not only help in increasing production but also bring down the input costs for these companies. The liberalisation and deregulation in the industry would also contribute to the sector's growth, ensuring that the sector, which has grown at the rate of 35% in the last two years, registers 40% growth in the next five years. Further, the share of these units in the country's exports would also surge to over 44% in the next five years from about 40% at present.

Aren't these statistics good enough to lure investors wishing to bet on India's long term growth potential? Sure they are. But there is a caveat. Not all small companies have long term sustainable business models and sufficient moat to see them through difficult times. Most face several hurdles to their growth and as a result, may not be able to give stiff competition to larger companies that get away with superior returns on capital. The hurdles include, amongst other things, non-availability of credit facilities and high interest rates.

Small companies, as you know, are relatively under researched. Their progress is sparsely covered by the media. There is an opportunity here, but at the same time there is a serious lack of credible information. Hence, although the scope for these small companies is indeed big in India, investors need to rely only on very credible information before investing in them.

01:34  Chart of the day
Compared to their counterparts in other emerging Asian economies, small companies in India are relatively better hedged as they a major portion of their revenues from the domestic economy. As today's chart of the day shows, on an average small and medium enterprises in India (as per ADB's definition) derive 80% of their sales from within the country itself. While on one hand this protects them from demand volatility in the export markets, it also keeps them away from foreign exchange related risks.

Source: Asian Development Bank - Key Indicators 2009
* 5- 49 workers, ** 50- 199 workers, # 200+ workers

In what would bring cheers to those in love with the stock ticker tape, the SEBI has allowed stock exchanges to extend their daily trading period by 2.5 hours. When implemented by the stock exchanges, trading can be done for up to eight hours daily, between 9 am and 5 pm as against the current timing of 9.55 am to 3.30 pm.

The rationale SEBI had earlier given for proposing increase in trading time was that this would give market participants in India a better chance to 'react' to development in global markets. Well, at a time when the SEBI still needs to go a long way in establishing better safeguards for minority investors and promote equity culture by way of educating investors on long-term investing, increasing the trading times so that traders are better equipped to track daily global developments doesn't make material sense.

For you, dear investor, this would mean longer hours to see Mr. Market in action who, with his baggage of stock quotations, will have a greater chance of frightening or enticing you. And, least to say, for many who are glued to the stock ticker on a minute by minute basis, this would mean lesser productivity at work as more time will be spent in tracking how their stocks are doing!

Amongst predictions about the decline of the US empire, one prominent voice is that of Niall Ferguson, the Harvard professor and a noted financial historian. This is how Ferguson put it in a recent interview - "People have predicted American decline in the past and been wrong. But let's face it. If you're trying to borrow US$ 9 trillion to bail out your financial system and economy and already half your public debt is held by foreigners, it's not really the conduct of a rising empire."

The September quarter result season is well and truly underway. And so far India Inc. has posted lackluster sales although the profits are buoyant. Growth in sales has varied from sector to sector depending on how their key markets are performing. However, there is a clearer trend in operating margins, which have expanded on the back of lower costs.

Companies from the capital goods, pharma and FMCG spaces, which are particularly depended on commodity prices, have benefited from lower cost of raw materials as a percentage of sales. L&T, BHEL, Dr. Reddy's, Asian Paints, ITC and Pidilite have all reported significantly higher operating margins. However, with inflation again rearing its ugly head, we believe that these companies may not be able to ride the tide of lower commodity prices for much longer.

According to the Prime Minister s Economic Advisory Council, India is expected to receive net capital inflows of US$ 57 bn in FY10, up from US$ 9 bn in FY09. However, it will still be below the US$ 108 capital flow witnessed in FY08. It may be noted that capital flows come into India through three main routes - foreign institutional investment (FII), foreign direct investment (FDI) and external commercial borrowings (ECB). Foreign capital finds its way into India due to greater growth prospects, the interest rate differential and expectations of appreciation in the rupee.

We believe this is welcome news as a growing economy like India needs a lot of capital for funding its infrastructure and capital goods. The increased capital flows will also help the government finance the current account deficit for FY10 estimated at US$ 25 bn or 2% of the GDP.

After witnessing strong buying interest during the previous week, the Indian markets ended up as the top loser amongst key world markets this week. We assume that the two key reasons behind the same would be - stretched valuations, and September quarter results not meeting market expectations.

Source: Yahoo Finance, Kitco

India's benchmark index, the BSE-Sensex ended lower by 3% this week. The scenario in the global markets this week was quite mixed. While Asian markets ended higher, indices from Europe and the Americas ended on a weak note.

04:51  Weekend investing mantra
"To be a successful investor you need to understand your own psychology, if losing money makes you miserable, you should use a very conservative pattern of saving and investment." - Charlie Munger
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10 Responses to "Small is Big in India"

Suhaas Jogdeo

Oct 28, 2009

Dear Sir

Kindly reply to my todays mail regarding
Extensio to the current market trading hours, in a phased manner which was my idea suggested to SEBI NSE and BSE way back on 7 Sep 2008.

Thanks and best regards.

Suhaas Jogdeo



Oct 26, 2009

is there any possibility of fully removal of circuit breaker limits in indian stock market in future........


Sunil Doshi

Oct 26, 2009

Increase of 2.5 hrs Trading time by SEBI is more for the benefit of Traders and Brokers.Sebi is facilitating
traders to "react to world markets" without Traders having time to Think / Analyse. It is harmful for Genuine and Small Time Investors.



Oct 25, 2009

I am impressed. Lately I have become a regular reader.



Oct 25, 2009

An excellent jist of Indian economy and market. A must for 15 min. reading every week , if one needs to benefit out of Indian market



Oct 25, 2009

The better results posted companies is stated by you as a result of lower cost of raw material. What is forgotten is lowering of interest rate to the borrowers which has resulted better corporate results. This is exactly what happened earlier when the interest rates were lowered. The policy of the government appears to steal from the common man (lower interest rate) and reward the corporate sector.


Prem Singh Dhankar

Oct 24, 2009

Excellent- liked investing Mantra too.


Hiren Patel

Oct 24, 2009




Oct 24, 2009




Oct 24, 2009

pl don't send mail further

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