India Inc. can get this straight to bottomline... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India Inc. can get this straight to bottomline... 

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In this issue:
» Another cockroach out of Goldman's cupboard
» US' transition into a fallen empire
» Gold could go up to a couple of thousand dollars an ounce
» Wind energy breeding corruption
» ...and more!!

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00:00  Chart of the day
There are few Indian companies that feature amongst the biggest in the world. There are fewer that carry the tag of being 'multi-national'. However, a harder look at the business models of some of the world's largest companies can make you a proud Indian!

We are referring to the world's largest retailers, world's largest IT companies, world's largest telecom giants, world's biggest automakers and world's biggest banks. Each of them attributes some portion of their profits to their Indian partners. And they hope to expand the number in the years ahead. The Indian partner (although much smaller in size) is getting more important to them by the day. For they give the global giants what it takes to remain globally competitive - profitability.

Source: Asian Development Bank

India Inc. has one of the biggest advantages - cost competitiveness - that keep its business dynamics in tall order even in comparison to US, European and Asian peers. As today's chart shows, the price levels in India continue to remain less than half of that in the US even after nearly a decade.

Many Indian mid and smallcap companies have it in them to create the niche in global outsourcing and excel in it. Our meetings with some of their managements have only firmed up this belief. What they need to ensure is that the cost benefit continues to flow into their bottomline without sacrificing on quality.

There's one more cockroach that has spilled out of the cupboard of Goldman Sachs. The former US investment bank has been blamed as one of the major hands in last year's financial crisis. Now it is being accused of playing a big role in the near bankruptcy of AIG.

As per The Wall Street Journal, Goldman originated or bought protection from AIG on about US$ 33 bn of the US$ 80 bn of US mortgage assets that AIG insured during the housing boom. This was huge! And when the crash came, Goldman avoided losses on its trades, with AIG covering a total of US$ 22 bn in assets, as the US government bailed out the latter. And who, you might ask, in the US government did that? None other than Treasury Secretary Henry Paulson, the former Goldman boss!

The honeymoon period for Indian FMCG companies may soon be nearing its end. The government is considering ending the tax holiday for manufacturing units located in Himachal Pradesh and Uttaranchal this fiscal. The move to pre-pone the earlier deadline of FY13 is to have a uniform goods and services tax (GST) regime.

Many FMCG companies had set up manufacturing unit in these areas to take advantage of the tax sops. According to estimates, the higher effective taxes will scale up costs for these companies by upto 30% from current levels. An increase of this magnitude would put pressure on these companies to increase their prices. The cascading effect of this will be a slowdown in sales and an impact on margins.

Did you know that Spain defaulted on all or a part of its debt a record 14 times in the 16th and 17th centuries? Also, that pre-revolution France was spending a gigantic 52% of revenues as interest on debt in the 18th century? Or the fact that interest payments consumed 44% of the budget of the British Empire, thus making it difficult for Britain to incur defense expenditure to protect itself against the Nazis?

All the above mentioned countries were extremely wealthy and powerful in their own times but finally succumbed to a phenomenon. The phenomenon was nothing but the debt that these empires had built up steadily over time. And if there is one country in present times that is the most likely addition to this list, it is the US.

If Prof. Niall Ferguson, a Harvard University Professor and author of a well-received recent book, The Ascent of Money is to be believed, the US empire is being threatened and very seriously at that, by a strong surge in its public debt. He believes there will not be a balanced budget in another 30 years in the US, thus implying that every year, the US will have to keep borrowing to meet its expenses. This will further add to the economy's gargantuan debt burden!

Amongst all the doom and gloom that many of headlines these days convey, gold is one of the few investments that offer the most promising returns if the global economy were to go in a tailspin.

Consider commodities guru Jim Rogers' comments. In a recent interview with CNBC, he shared his detailed perspective on gold. Even though he owns gold, he's not buying the precious metal currently. That's because gold has shot up in price and according to him, whenever something shoots up it probably will go down for a while. But if gold goes to US$ 1,000 per ounce again, he will surely be smart enough to buy more. Infact, he has gone as far as to say that gold will certainly go to a couple of thousand dollars an ounce over the next decade. So he remains a firm believer of the theory that am gold will be a great investment over the next decade or so. With the kind of problems that the western economies are facing, we must say that that does not seem such a far off possibility after all.

An impending recovery in the IT sector has brought with itself its share of pains. There has been a hiatus in overall hiring for around a year. With the demand scenario improving now, companies particularly the IT biggies are revamping their hiring plans. Small start-ups are particularly feeling the pinch of this flight of talent towards better paying large IT brands. This is a big concern as it might take some time to fill in the gaps created by sudden exits. However, money is not always the sole reason for employee attrition. They need to ensure competitive levels of job security, challenging work profile as well as compensation so as to retain their resources.

Subsidies are fertile ground of corruption. No Indian needs to be told about that. But the phenomenon is universal. The New York Times reports how the wind energy sector is rampant with corruption with operators hiding under the good press that renewable energy receives.

The European Union grants billions of Euros in subsidy for clean sources of energy such as wind farms. Then there is also the matter of public land being misappropriated in the name of wind farms.

In our view, the solution is better regulation and creating standard procedure. For landowners, municipal bodies, local entrepreneurs, large companies and utilities. Whenever there is easy money to be made, the scamsters can't be far away. Whether it was the gold rush, the rush for crude oil or now the rush for clean energy.

Meanwhile, Indian markets witnessed a volatile trading session today after a weak start. The BSE-Sensex was up nearly 28 points at the time of writing. Stocks from the telecom and banking sectors were amongst the lead contributors to the overall weakness. Amongst global indices, while the Asian markets are trading a mixed bag, Europe has opened in the positive.

04:50  Today's investing mantra
"The price of a stock can be influenced by a 'herd' on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person. " - Warren Buffett
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8 Responses to "India Inc. can get this straight to bottomline..."

bath mate

Dec 28, 2009

Very interesting posting. i agree with it.


Sunil Kumar Singh

Dec 16, 2009

5 Minute wrap up is as refreshing as always. I would like to answer comments from Pravin and Devang as follows:

Dear Pravin:you have very noble thought about the upliftment of poor. Indian Incorporation is doing its job by outperforming their competitors. Kindly do not pull their legs. There will be some exploitation in beginning, but when competition increases, exploitation will decrease. Also, certain regulations can reduce exploitation, political corruption has to reduce so that tax collected from profitable businesses can reach to poor and needy. Please contribute by raising awareness among people who are being exploited in addition to bringing your kind good thoughts in blog.

Dear Devang: Your thoughts on lack of research by Indian Companies is very valid. However, there is gradual process through which any economy has to pass through. Very few Indian companies spend enough on research as compared to their western counterpart. However, I strongly believe Indian businesses will also excel in research in time to come. Be patient. Most of the Indian growth (or it is recognized) has come in last 10 years. So, hold on, wait for sometimes and try to promote it in your company and your neighourhood. Things will move in right direction.



Dec 14, 2009

there is good article on deglobalization on slate DOT com its worth a read , sad we are not allowed to post links here :(


Pravin Patel

Dec 14, 2009

There is nothing to be proud about being an Indian when profitability is based on exploiting the poor. Let us raise the living standards of the ‘enslaved” labour force to western standards and then boast about being profitable. With the inefficiencies engraved in the Indian workforce, it will be a pleasant surprise if we can be counted in the top 10 countries where companies are profitable.

Pravin Patel, Bamni, Surat, Gujarat



Dec 14, 2009

Your daily wrap is good, Can you provide links to the original source articles also?


Devang Gardi

Dec 14, 2009

Your research on the competitiveness of Indian companies is at best amateurish! Everyone is aware that productivity and not price is the most metric to measure business competitiveness. Indian companies, both large and mid-cap, fall way short on this metric.
Yes, over the last five years or so, Indian organizations have increased their share of the outsourcing pie. However, off late this share has decreased or, at best, stagnated. The reason - Indian companies have always competed on price and not on innovation. The time has now come that another country is at the better end of the cost curve than India. Take the example of the Indian IT giants. Most of them are sitting on piles of cash and doing nothing about. When was the last time you heard of a product being rolled out by them. Well, the last product I heard of was Finnacle rolled out by Infy in 1997.
Even, Nano is not an example of innovation. At best, it is an example of cost innovation. Designing Nano was not rocket science. It was backward cost calculation. What features and materials I need to use to develop a Rs. 1 lac car?
I suggest that you have a hard look at India. There are serious issues with the Indian Rupee (twin deficit a la US Dollar, except Rupee is not the reserve currency). Also, India has the highest public debt in the world as a percentage of its GDP. Please spare your readers the Indian rhetoric.
Disclaimer: a proud Indian.



Dec 14, 2009

Add this to ur contents! The U S GOVT IS HIDING THE DEBTS IT S SITTING ON CREDIT CARDS. DO U KNOW THE AMOUNT? ITS $80 TRILLION!!THE GUYS WHO HAVE UNPAID CC DEBTS ARE REFUSING TO TAKEUP JOBS SINCE U S LAW STATES THAT ONE CANNOT BE TOUCHED FOR CC DEBTS IF HE S JOBLESS!The Indians r planning to come back home or remain there n do cash jobs r else they end up paying debts only instead of earning.Any way there no jobs like before!Its going to be worse than subprime when the crap hits the fan!



Dec 14, 2009

your coments are more valuedone thank u

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