An 'energetic' revival for India by 2017? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

An 'energetic' revival for India by 2017? 

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In this issue:
» New banking licenses on their way
» Master the art of selling a stock
» Why is China holding a vast chunk of US Treasuries?
» Global money managers bullish on Indian stocks
» ...and more!

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Fiscal cliff. These two words have come to symbolize America's fall from grace. The fiscal profligacy of the world's most powerful economy has threatened its position in the pecking order. However, a potential energy resource in abundance could offer it riddance from the fund shortage. The resource goes by the name of shale gas. And as the supplies of oil and natural gas from the Gulf get more expensive, America will increasingly rely on its own resources. At some point of time, shale gas supplies from the US are expected to even meet the energy needs of other economies. Thus shale gas is expected to bring an energy renaissance of sorts to the US .

The International Energy Agency (IEA) believes that yet another energy resource could rival oil by 2017. And if that were to be indeed proven true, even India might find her place under the sun. For the resource being talked about is none other than coal.

Now despite India having one of the largest coal deposits in the world, the mineral has not been mined enough. Corruption, wrongful allocation of mines, environmental concerns and inefficient procedures have been the key stumbling blocks. Monopolistic position of state owned miner Coal India has also ensured that coal output grossly lags the demand for mineral. It was only in 2012 that a potential blackout of the power sector forced the government to hold Coal India more responsible. Even then, private sector power, steel and cement producers are banking on imported coal or captive coal mines. They would rather pay a higher price than rely on Coal India's bumpy track record.

The IEA, however, expects Coal India to share some glory along with the likes of Shenhua Group of China and Peabody Energy of the US in coming years. The significant lead time needed to ramp up coal supplies to catch up with demand will keep the prices of the mineral firm. Coal consumption is expected to grow faster than any other fossil fuel, except gas, upto 2017. Nevertheless, the commodity faces strong head winds. Not just from green policies and competition but also from cheap natural gas. Australia and Indonesian coal supplies will also be the key determinant of the prices of the mineral.

Thus coal can bring to India the kind of energy independence that shale gas promises for the US. However, it is left to industries and policy makers to ensure that we do not lose the opportunity.

What policies do you think can bring to India the kind of energy independence that shale gas promises for the US? Share your views or you can also comment on our Facebook page / Google+ page

01:30  Chart of the day
The RBI's reluctance to tweak the key lending rates during the Monetary Policy review left the repo rate at a stiff 8%. In fact as the chart shows, the repo rate at which the central bank lends to commercial banks has been stiff for nearly 30 months now. Although the government has been prodding the RBI to adopt a more liberal approach to interest rates in order to boost GDP growth, the RBI has refused to do so citing sticky inflation numbers.

Data source: RBI

A much awaited Bill was passed by the Lok Sabha yesterday. This one was on banking laws. The Bill did three things and that were to give Reserve Bank of India (RBI) more power to regulate banks. Second was to raise the voting power of investors in banks. And third was to allow the state owned banks to raise capital through bonus and rights issue. But a crucial thing that this Bill has done is to clear the path for RBI to issue new banking licenses. This is something several private sector companies and NBFCs have been keenly waiting for. Once the Bill is cleared by the Rajya Sabha, the RBI can sit down and think over how it would go about issuing these licenses.

This move is naturally a cause for celebration and has sent the stocks of most of the banking license hopefuls into a frenzy. The only thing we hope for is that the RBI maintains its conservative stance in this area as well. This means that the licenses are issued with thought and care and not to everyone and anyone. However, given RBI's history of remaining conservative, the possibility of this is bleak.

Have you ever wondered why is there a plethora of books trying to explain the art of buying stocks but very few that delve into when to sell? This despite the fact that selling is as important or may be even more, than buying a stock. Perhaps it has to do with the whole psychology of investing. The very fact that it so hard to decide when to press the exit button has perhaps made many an author stay away from openly discussing it.

But this does not mean that an investor would never be able to master the art of selling. He certainly can we believe given enough experience and feedback mechanism. Like how the famous professor of finance, Aswath Damodaran, managed to do so in the case of one of his favourite holdings. Mr Damodaran opined that he decided to pull the plug on the stock under consideration on account of three major factors. These were the stock becoming a momentum play, becoming an institutional favourite and lastly, becoming a clientele of dividend seeking investors.

It is obvious that Mr Damodaran believes that when a stock becomes a momentum play, the link between intrinsic value and price gets broken. Thus, value investors should stay away from it. Also, since institutional investors also mostly tend to be momentum buyers, long term investors should exercise caution once a stock becomes the favourite of institutional investors. Lastly, a stock should stick to its policy of being a dividend paying or a high growth pursuing stock. If it breaks away from this trend, then it starts attracting both types of investors. And this ends up pulling the management of the company in both directions, thus creating confusion.

Thus, as we saw, it is not necessary that one always has a target price in mind when deciding to sell a stock. Subtle hints that Mr Damodaran used so effectively can also become the reasons you choose to sell the stock.

In a world where level of uncertainty has considerably increased, many are flocking to US Treasuries for a safe haven. But this is a paradox. Because the US is also grappling with many serious issues such as a deteriorating fiscal balance and massive debt. Not to mention high unemployment and recession. The government and the US Fed have resorted to umpteen rounds of money printing till now. This has done nothing to fuel the income but has certainly increased the prospect of the dollar losing value. That is why countries such as China holding a vast chunk of US Treasuries are contemplating diversifying into other assets.

Where does India stand in all of this? As per the latest data released by the US Department of Treasury, India's holding of treasury securities stood at US$ 58.9 bn at the end of October 2012. This is the second straight month of decline after an uptrend for seven continuous months. Ironically, the holdings of countries like China, Japan, Brazil, Switzerland, Russia, France and Canada rose during the month. Is this a conscious strategy adopted by India to reduce its holdings in US debt? Is it investing in gold instead? We are not sure but if that indeed is the case, then the country is taking a step in the right direction.

Five years back, paying an electricity bill was considered a sundry expense for an Indian household. However, things have changed considerably in the recent past. Shortage of coal, a key fuel, has meant that electricity bills are now a sizeable portion of monthly household expenditure. And the bad news is that it is expected to rise even further.

Nowadays, power generators are quoting higher prices when selling bulk power to distribution companies. Take the case of the recent tender in Uttar Pradesh. The state invited financial bids to buy 6,000 MW of power. The average tariff was in the range of Rs 5-6 per unit with the highest being Rs 7.1 per unit. These rates are considerably higher when compared to the past. Shortage of coal meant that power tariffs were bound to rise. However, it may be noted that the current tariffs have built in contingencies with respect to availability of coal. Generators are now being extra cautious when it comes to tendering bids. In the past, bids were more competitive as generators relied on the escalation clauses if there was any increase in fuel cost. However, with the current situation of distribution companies not being that great, bids are tendered at the higher end. And if the coal issue is not sorted out soon power tariffs may rise even further.

The Indian stock markets have risen by almost 25% this year. So, who is investing in these stock markets? As per Wall Street Journal, it is not the Indian domestic investors. In fact, they have mostly stayed away from investing. Most of this rise in stocks has been on account of global money managers. So far this year, foreign investors have invested US$ 22.5 bn into Indian stocks. They have been investing huge sums of money into the initial public offerings too.

The reason for such renewed interest in the Indian economy lies in the series of recently announced policy reforms by the government. Fund managers feel that allowing foreign direct investment in retail and aviation would help these industries in the future. Industry players would earn better profits and they expect stock prices too to move higher. Investors are also pinning hopes on finance minister's objective to reduce budget deficit by lowering fuel subsidies. Not to mention the hope of a more liberal monetary policy from the RBI.

Buying interest in auto, energy, pharma and commodity stocks kept the benchmark indices in Indian equity markets firm throughout the trading session today. The BSE Sensex was trading higher by around 86 points at the time of writing. Other major Asian stock markets closed higher while Europe also opened flat to positive.

04:50  Today's Investing Mantra
"On one point, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital." - Warren Buffett

  • Warren Buffett - The Value Investor
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    1 Responses to "An 'energetic' revival for India by 2017?"

    Suresh A S

    Dec 19, 2012

    As honey collected every drop, we have to collect solar energy and use more efficiently, localize the requirement like street light, warm water for bathing; office lighting should be self sufficient. Installment cost and maintenance cost should come down. Companies should not look at getting money every month. We lose in the philosophy of the company that they want consumer has to pay every month to them.

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