Will this be a dream destination for investors in coming years? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will this be a dream destination for investors in coming years? 

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In this issue:
» Funding takes priority over paying dividends
» Is the world economy in danger?
» New growth driver for infrastructure is Africa
» India's gas demand to double by 2017
» ...and more!

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00:00
 
To all those who think investing in India is losing its' 'fizz', well think again. India is and will continue to be a leading investment destination at least for some time to come. Here's why.

The financial crisis that has gripped the developed world has made those countries unlikely candidates for investor money. Who wants to invest in a zero interest rate, negligible growth, environment which is most likely to crumble thanks to the mountain of debt? Therefore an obvious choice for most investors would be to look at the emerging economies. More precisely to look at India or China as an investment opportunity.

But China comes with its own set of problems. The country is dependent on US and other western countries for its growth. To elaborate this, China's economy depends on exports to fuel growth. As these countries cut down on their consumption from abroad, China would be hurt unless it is able to boost domestic consumption to compensate the slowdown. This seems quite unlikely at the moment. India on the other hand depends more on domestic demand, which remains intact despite higher inflation rates in the country.

In addition to this, China has been a subject of international criticism due to its exchange rate policy. It has been asked to free up its currency Yuan. In the event that it yields to international pressure, it would mean that Chinese goods are bound to become more expensive. This in turn would lead to a further slowdown in exports from China. Indian goods on the other hand will become more competitive in the export markets.

So all in all India appears to be in a win-win position as a favourite for global investors. It has a currency whose rates are governed by macroeconomic factors. It has higher interest rates which make investments attractive. At the same time it is bound to deliver economic growth that is higher than that in the developed world even though it is not as high as what was seen in recent past. True it has some glitches in the form of higher inflation, fiscal deficit and slowing growth. But these are just short term in nature. In the long term, India would still continue to be an attractive investment destination. All an investor needs to do is to pick up stocks of fundamentally good companies at cheaper valuations. And then sit back and enjoy the returns in the years to come.

Do you think India would be the hottest investment destination in the coming years? Share your comments with us or post your views on our Facebook page.

01:10  Chart of the day
 
Higher interest rates and inflation have eaten away yet another income source for Indian investors. This time it is the dividends. Higher input costs have shrunk the margins of most companies in India. To add to this, higher interest rates have forced them to look at internal accruals for funding capex requirements. As a result, companies have cut down on the dividends paid out to the shareholders in the financial year 2010-2011 (FY11). As shown in today's chart of the day, the percentage of net profits paid out as dividends (dividend payout ratio) by all the listed companies has declined to 24.8% in FY11. The same ratio in FY10 was 25.3%. Unless there is an easing of inflation rates, interest rates are not really expected to come down anytime soon. This would mean that the quantum of increase in dividends is expected to remain under pressure for sometime at least.

Data source: Livemint
* Data for all listed companies (3,614 in no.)

01:50
 
That last week's gains on the benchmark indices in Asia and Europe would be short-lived was anybody's guess. For the reasons to cheer the EU deal that offered hopes of economic recovery were frail enough. Concerns that the European leaders will fall short of sufficient rescue fund to bail out the likes of Greece, Spain and Italy still linger. Europe is looking to emerging economies to provide the extra financial firepower to strengthen the fund four to five-fold, to about 1 trillion euros. However China on its part has been very cautious on this front. The US' latest GDP growth and corporate earnings may have been enthusing. But if fiscal and jobless benefits expire by 2012 the American economy may also begin to contract. Hence a certain and near term solution to the Euro woes is definitely not on the cards. Markets may show knee jerk reaction to hints of positive or negative news. But investors would be better off looking at the realistic long term picture.

02:30
 
Policy paralysis and bureaucratic impediments have impacted the order pipeline of infrastructure companies in domestic markets. As a result, these companies are increasingly focusing on overseas markets particularly Africa to shore up their order books. Bright prospects in areas such as road development and low entry barriers have attracted Indian companies to the African continent. Ease in obtaining clearances and liberal regulatory standards have also made Africa a viable option when compared to other countries. Also, considering that Africa's infrastructure is relatively under-developed the future growth prospects in the region appear to be bright. As such, in an environment where domestic orders have dried up, Africa has emerged to be the next growth driver for these companies. This strategy to explore overseas markets (where ease of doing business is high) would not only help companies diversify their order book but also shield them from temporary slowdown in domestic markets.

03:00
 
In 2006, when the National Pharmaceutical Pricing Policy (NPPA) had proposed bringing 354 drugs under price control, there was a big hue and cry in the Indian pharma industry. Most pharma companies opposed the move since at that time, it was likely to bring at least 80% of the Indian market under price control. That policy since then did not see the light of day although the possibility of it happening sometime in the future could not be entirely ruled out either. Now it seems that drug price control has reared its head once again. Under the NPPA 2011 proposed by the Department of Pharmaceuticals (DoP), the government will fix and regulate prices of all 348 essential drugs and their combinations - which will cover 60% of drugs sold in the country. The policy also proposes a shift from fixing the ceiling price based on cost of production to the reference pricing method. Most pharma companies are likely to once again oppose this move given that cost of drugs in India is already one of the lowest in the world. Despite this, the government has not been able to improve the accessibility of medicines. And so the question remains whether such a move will really be beneficial for both companies and consumers alike in the longer term. The silver lining in the cloud appears to be that the pricing will not be based on cost of production, a method which has been severely criticized in the past although the proposed reference pricing method has its share of detractors as well.

03:30
 
India and China may be neighbours, but are they really friendly? The two nations have a billion plus population and are both emerging market superheroes. However, the symbiotic relationship between the two is at question. In response to a new law Indian businesses may have to reconsider expansion into China. The red dragon nation has decided to impose social security obligations on foreign employees. Under the law, employers are expected to contribute 37% of salary into a social security pool. Employees have to put in 11%. This will push up the wage bill of companies by 40%. Indian companies will now really have to weigh appointing senior staff into China. Knowledge transfer between the two nations may thus suffer. Indian companies will also have to rework their offshore employee budgets.

04:00
 
As per the latest projections of oil ministry, the gas demand in India is projected to more than double by 2016-2017. For next 10 years, the average annual growth rate comes to 7.5%. And guess where the chunk of demand comes from. Well, most of the incremental demand stems for priority sector - with the power sector and fertilizer plants accounting for the maximum part. The remaining will be used by city gas city gas projects, refineries, petrochemical plants and sponge iron units.

So what does this imply for gas markets in India? For this, we need to look at some more statistics of gas market in India. The existing supply of gas from domestic sources can meet just 63% of the current gas demand. Even if imports are included, they meet 87% of the current demand. As of now, the power sector is supplied gas at subsidized rate of US$ 4.2 per unit. The share of imported gas currently in total supplies is around 30 %( that comes at a price of US$8.4-16 per unit) and is expected to rise to 55% in next five years. There is no way that gas based power generation can remain a viable business with that much share of costlier imported gas in the total gas basket. To conclude, India has limited options available for power generation. But power is crucial to maintain the growth momentum. Perhaps, it's time to explore the option of using nuclear energy to generate power.

04:45
 
In the meanwhile, the Indian stock markets have been trading below the dotted line since the time of opening. At the time of writing, the benchmark BSE Sensex was trading lower by 41 points (0.2%). Energy and auto sectors are the biggest losers. Other Asian markets also closed the day on a negative note with markets in Indonesia and Singapore leading the losers.

04:55  Today's investing mantra
"Before you can really start setting financial goals, you need to determine where you stand financially." - David Bach
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5 Responses to "Will this be a dream destination for investors in coming years?"

shyam sachdev

Oct 31, 2011

THIS IS A COMPLETELY BIASED OPINION ON INVESTING IN INDIA.AS THINGS CURRENTLY STAND THERE IS ABSOLUTELY NO COMPARISON BETWEEN CHINA AND INDIA. CHINA HAS BEEN AN ECONOMIC SUPERPOWER AND WILL ALWAYS BE ONE IRRESPECTIVE OF WHAT HAPPENS AROUND THE WORLD. THE CHINESE WILL ALWAYS FIND OUT A WAY TO GET THEM OUT OF ANY KIND OF A MESS.CHINA IS AN ENGINE OF GROWTH AND WILL ALWAYS STAY ONE.THE INDIAN GOVERNMENT CAN LEARN A LOT FROM THE CHINESE GOVERNMENT. ONE LOOK AT THE CHINESE INFRASTRUCTURE SAYS IT ALL. THERE IS NO COMPARISON BETWEEN THE VILLAGES IN CHINA AND THE VILLAGES IN INDIA. INDIA WILL REQUIRE AT LEAST TWO DECADES IF NOT MORE TO MATCH UPTO THE EXPERTISE OF THE CHINESE. INDIA IS NOTHING BUT A HYPED UP STORY IN THE CURRENT GLOBAL SCENARIO.

Like 

ss Varadan

Oct 31, 2011

India the best Investment Destination?
YES!
+High Interest Rate,+Good GDP Growth +Good Demography +Growing Domestic Consumption +Less Dependancy on Exports, +Market Currency rates +Low-level corruption growing to Big-size Corruption! +Democratic Country + Good Legal frame work.
-High Inflation -High Fiscal deficit -/+ Poor Infrastructure being attended-to -/+ Poor Govt Policies expected to become better!
.
.

Like 

S.Sridharan

Oct 31, 2011

100% correct pl.

Regards.

S. Sridharan

Like 

Nayan Kamat

Oct 31, 2011

It would be good if you could share the %age composition of China's exports across various countries to emphasise China's dependence on only US for exports.
Reason being I see made in China products swamping India markets ( right from low technology to high technology ). This could be the case with other countries as well. Does Made In India products have the same kind of presence in other countries ?

Like 

Ganapathy Sastri

Oct 31, 2011

India is facing several head winds:
1. MASSIVE INFLATION - over 15% CAGR over the last 3 years.
2. MASSIVE Trade Deficit. Over USD 150 B compared with $ 6B in 1991.
3. Poor governance - wastages at all levels, low returns on infra investments etc.

The result:
High interest rates - still likely to go higher.
Possible swift devaluation of rupee vis a vis stronger international currency.

All these are likely to keep a lid on higher stock prices.

Like 
  
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