'Buy Indian, we are' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

'Buy Indian, we are' 

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In this issue:
» Can US bring down oil imports to virtually zero?
» Europe just days away from a financial Armageddon
» Oil prices are from being deregulated yet
» Consumer goods sector in India poised for a huge boom
» ...and more!

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October 2008. Those associated with the financial markets will not find it easy to erase this period from their memory. This was the time when people were pulling out money from every risky asset imaginable. They were getting into cash, making asset prices across the world fall like nine pins in the process. In other words, there was virtually a stampede for heading towards the door and out.

Just then, like a bolt from the blue, an article appeared in the New York Times. Its editor talked about how he was making a move into and not out of stocks. And how his entire net worth was about to become 100% US equities. Frankly speaking, the man is no stranger to going against the crowd. It is in fact this trait that has made him the world's most successful investor ever. Quite clearly, Warren Buffett was sending a signal to the world. The signal that courtesy the broad sell off, US equities had suddenly become very attractive.

His thesis was very simple. At a time when the entire world was taking a short term view of things, Warren Buffett had his mind fixed firmly on the long term. He argued that investors were extremely correct in taking a negative view of highly leveraged entities like financial institutions and businesses in weak competitive positions. But to paint even the strongest companies with the same brush was not fair according to him. This is because he believed that these companies would be setting new earnings record from a 5, 10 and 20 year perspective and hence the steep correction in their prices made them very attractive from a long term point of view.

We believe that a somewhat similar story is being played out in India as well. With interest rates high and tremendous amount of global uncertainty, investors are exiting even the most fundamentally strong companies and taking a very short term view of things. But just as Buffett observed, these companies would certainly create new earnings record 5 to 10 years from now and hence, a steep correction in their prices should be looked at as an opportunity rather than be scared of it. To sum up, the title of the Buffett's article read 'Buy American, I am'. What we would like to tell you is 'Buy Indian, we are'.

01:15  Chart of the day
While long term India growth story remains intact, we believe there is still a lot that needs to be done. Take innovation for instance. As today's chart of the day shows, India ranks a poor 62 as per the global innovation index brought out by an international agency. What is more worrying is that China is way ahead of India with a rank of 29. Thus, if India has to strive for moving onto a higher growth trajectory, it has to create an enabling environment that will help foster innovation.

Source: Financial Express

Easiest way to save money on things we buy is to produce it ourselves. This is the same philosophy that billionaire oil tycoon Boone Pickens wants US to adopt. He has stated that US could save billions by simply producing oil indigenously. All it needs to do is to develop a new energy plan that relies more on home grown energy resources. As per him, the energy sources in US are the cheapest in the world. As a result, if US were to concentrate more on indigenous sources, then it would lead to enormous savings in its import bill.

At the same time, it would also help in bringing down the defense expenditure in the country as a large part of its paramilitary forces are currently deployed in the oil rich regions where oil is in danger. If the US government decides to follow Mr Pickens' advice then it could end its reliance on foreign oil within the next 5 years. Maybe India could take a chip off Mr Pickens advice as well. Oil accounts for one of the largest share of India's import bill. Introducing measures to boost investments in efficient and indigenous energy technologies and resources could lead to huge savings for the country.

China is really a capricious dragon. So much so that many a critics are at loggerheads about their views on the Chinese economy. There are the likes of Jim Rogers who are extremely optimistic on China and view the current slowdown as an intervening adjustment process that will correct in the medium term. Then there are the pessimists. We believe we should listen to both. Today, let's see what the doomsayers have to say. "Every province in China is Greece." Sounds shocking? Even more interesting is the fact that the person who has said this is a Chinese Professor of Finance at the University of Hong Kong.

According to him, China's Gross Domestic Product (GDP) is going in the reverse and the economy is in the midst of a serious economic crisis- almost on the edge of bankruptcy. It is very difficult to say whether what the professor is saying is indeed true or an exaggeration. But we totally agree with him when he says that the communist regime, through its excessive censorship, does not allow the truth to be known.

Banks in the country, especially PSUs have been suffering from a sharp increase in levels of bad assets. A slowdown in the economy, 13 interest rate hikes and a shift to a technical system for recognition of non-performing assets helped contribute to this spike. But who exactly are these defaulters and do they have a capacity to repay?

Well, the Central Information Commission (CIC) is looking for answers to these questions. The CIC enforces the Right to Information act, and has directed the RBI to make public the names of the top 100 industrialists defaulting on loans taken from PSUs. But, getting this information may not be such an easy task. The Reserve Bank of India (RBI) has stated that it cannot share such data. Banks are saying that customer info is confidential. Having this data made public will serve a larger public interest, and may even help cornering the defaulters, according to CIC and we concur. But for this information to be dispensed on a regular basis, maybe an amendment in banking laws is needed.

It is one thing to enact policy reforms, quite another to implement them in spirit. A glaring example of the same is the reforms in the energy sector. After a long inertia, finally the decision to deregulate petrol was taken, giving oil marketing companies (OMCs) and energy sector some hope. But the political compulsions seem to have taken over the same. More than a year has passed and OMCs still don't have the autonomy to revise petrol prices, not even in line with the international market trends. They still need a nod from the Government before a price hike so as not to harm its political interests. No wonder the prices of petrol were rolled back recently following a hike, despite rupee depreciating, OMCs running in losses and Government struggling with the overshooting fiscal deficit.

Taking this farce a step further, the state-run oil firms will now revise petrol prices every two weeks if domestic prices need to be aligned with international levels. This is a disingenuous way to formalize the roll back in price that the Government feels is high enough to jeopardize its position. Far from helping any stake holder, they will just distort the supply demand dynamics of markets with consumer deferring purchase post roll back and marketing companies hoarding to offer only when prices are up. With petrol facing this, we hardly have any hopes of diesel deregulation and reforms in LPG.

As per reports, the FMCG industry is reaping the twin benefits of rising rural penetration and increased uptrading or premiumization in urban India. In urban India, rising disposable income and increased aspirational levels has led to the phenomenon of uptrading wherein after a threshold level of penetration, consumers move up the value chain rather than increase consumption. This trend of premiumization has been catalyzed by modern trade format and explosion of new launches and is particularly prevalent in personal-care and convenience food categories.

Reportedly, sales contribution from modern retail format is a substantial 40% for breakfast cereal maker Kellogs India and over 10% for FMCG behemoth Hindustan Unilever. Not to be left behind, companies like ITC, Godrej Consumer Products, Marico and Britannia are increasingly focusing on this channel to increase sales. Market research agency, Nielsen has projected sales from modern retail format to triple to $ 5 bn by 2015 from the current $ 1.8 bn.

Meanwhile, indices in the Indian stock markets are trading quite volatile today, albeit in a narrow range. At the time of writing, BSE Sensex was trading lower by around 45 points with heavyweights like RIL and ITC driving most of the decline. While most of Asia closed lower today, Europe has also opened on a negative note.

04:57  Today's investing mantra
"An investment in knowledge pays the best interest." - Benjamin Franklin
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1 Responses to "'Buy Indian, we are'"

bhaskar mukherji

Nov 17, 2011

yes,buy Indian,we are.

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