The world limps. But 20 m Indians go mobile
(Dec 30, 2008)
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In this issue:
If there is one industry where slowdown is not ruling roost, it is the Indian telecom industry. As per reports, Indian telecom players are adding subscribers by the truckloads. To put things in perspective, the sector added 10.4 m customers in November alone, though slightly lower than the all time high record of October but nevertheless a formidable one. It should be noted that the country is the second largest mobile market in the world, trailing China. Our user base has grown by a strong 44% YoY in the first 11 months of 2008 and with affordable handsets and low call rates driving growth, the momentum is unlikely to slow in the near term.
» Will US be split?
» US dollar's frantic moves
» Quarterly results few days away
» DTH players' dilemma
» ...and more!!
----------- Equitymaster Research -----------
The bailout season continues in full swing in the US. In order to further prop up the auto industry, the US government has decided to inject US$ 6 bn into GMAC, a car financing company 49% owned by General Motors. While US$ 5 bn will be directly pumped into GMAC by way of preference share capital, another US$ 1 bn would be lent to GM. GM will in turn invest the sum in GMAC. On its part, GMAC will convert into a bank holding company, a condition that is necessary in order to receive the bailout funds. The US treasury views this as just another step to make credit available to consumers and businesses for the purchase of automobiles.
A prediction of enormous geo political importance and implications was made 10 years back. But it was put on the back burner as people felt that it was too outrageous to be true. The prediction has been made again and by the same man. And now, all of a sudden, people have started taking it somewhat seriously.
Why buying some "about-to-go-bankrupt" companies
can be the best decision you ever make.
Igor Panarin, a former analyst with Russian secret service agency KGB and the current dean of the Russain foreign ministry's academy for future diplomats, was a decade back and is still of the opinion that by mid 2010, the US will likely break into six pieces. And he believes that there is a strong 55% chance of the same happening. For fear of being labeled an astrologer, he has some compelling reasons to back it up.
The country, he reckons, due to enormous moral and economic degradation, is getting crushed under the mountain of its own debt. And this will lead to a situation where its citizens start yearning for change. Quite unsurprisingly then, he has become somewhat of a hero in Russia, a country known for its bashing of the US. But here too, not all people agree with his views, calling it instead a prominent degree of Anti-Americanism. As far as the US is concerned, a spokeswoman of the White House has declined to comment. We can understand why.
While we don't know for sure whether the US will split and become weak, the country's currency is indeed showing signs of weakening of late. In fact, it has slipped anywhere between 9% and 10% against major currencies like Yen and Euro since the start of November. And this pattern is once again likely a turn one list on its head - the list of winners and losers from the movement in US dollars.
Major economies like Japan and Germany, where reliance on exports for propping up economic growth has grown even more, are likely to be the major losers while emerging market nations that are running a trade deficit are likely to gain from the move as they will have to now repay fewer dollars on their dollar denominated debt. For the US too, it is a welcome move as its exports will become competitive and help beat the slump at home. But considering the way the currency is behaving, a move in the other direction cannot be denied. Turbulent times indeed.
Come January 2009 and the results season will start in full swing. And it will be one that will be watched with bated breath given that the economic slowdown has become all pervading. Obviously, companies that have strong cash position with less debt on their books will have the upper edge as they will be able to weather the storm that much better. This was brought to the fore last quarter as well, when companies with high levels of debt not only had to bear the burden of high interest costs but also considerable forex losses where the debt comprised a large chunk of foreign loans. With the economy slowing down, sectors such as auto, consumer durables and capital goods are likely to witness restricted growth in sales whereas FMCG is likely to fare much better.
Having said that, quarterly results should not be the sole criteria for making investment decisions. These are like intervals in a film, only that there are four such intervals in a year! What happens in one quarter might not tell you much about what will happen in the next one, and the next two. These shall just be considered as 'breaks' that allow you to take stock of your investments, which should ideally span over a minimum of 12 to 20 such intervals (3 to 5 years, in other words)!
China seems to have emerged one up on India in the race for energy security. India has been beaten by the former to a significant 30-year deal to import natural gas from fields in Myanmar offshore. This is despite the fact that India's ONGC and GAIL together hold about 25% stake in these gas blocks. It may be noted that GAIL had offered a price of US$ 5.01 per million British thermal unit (mbtu) to buy the entire gas from the offshore fields and intended to pipe it to India through the north-eastern states. But the military-rulers of Myanmar seem to have preferred China, which will have to lay a longer pipeline to reach its south-western Yunnan province.
Competition is good for the consumer, but often takes a toll on the companies involved. Look no further than the direct to home (DTH) space for proof. As per a leading business daily, there were 2 pan India projects in FY08 and operating losses for the sector amounted to Rs 100 bn. In FY09, there are 5 players - Dish TV, Tata Sky, Sun Direct, Big TV and Digital TV. Losses are expected to touch Rs 200 bn this fiscal.
DTH players have to incur a loss of around Rs 2,000 to Rs 4,500 for each unit of equipment that needs to be provided in acquiring a customer. With Dish TV, Tata Sky and Sun Direct having 4 m, 3 m and 2 m subscribers respectively under their belts, no wonder losses are mounting. The companies will require a great deal of capital infusion at some point, if they continue to hanker after market share and do not look at increasing their profitability.
Ever heard of 'rocking' bailouts? Back in the 80s, rock stars were known for their ruthlessness and wildness. Most of them dropped out of school at early age to pursue careers in music. Many now seem to be regretting their recklessness and have even opted for going back to B-schools or trying hands in the finance business. One of the most celebrated rock star of present times, Bono, who is the lead singer of the group U2, has his own private equity firm. Called "Elevation Partners", the firm has relationships with experienced professionals such as ex-EVP and CFO of Apple and the former MD of the Blackstone Group.
In one of its latest moves, the company has given another US$ 100 m to rescue a smart telephone maker, Palm Inc. This bailout is mainly to rescue the debt riddled firm. The company previously had pumped in US$ 325 m into Palm Inc in October 2007 in exchange for a 25% stake in it.
Affordability being the key in an economy stressed with recessionary pressures and shortage of liquidity, the government task force on 'affordable housing' could not have been better timed. The committee, in its report submitted to the Housing Ministry, has suggested different parameters for defining affordable housing for medium and low-income groups. More importantly the task force has indicated how resources could be collected from the wealthy to offer cheap accommodations to those without it. Besides asking the government to collect additional taxes for a dedicated shelter fund, the committee has also emphasised on fiscal benefits and reduction of stamp duty rates and registration charges. These recommendations are expected to be considered by the government in its second stimulus package, if any.
Noble Laureate for 2008, economist Paul Krugman has expressed some strong views on the myopic nature of governance being conducted by select state governors in the US. The reason why this is being done is because the state governments are making efforts to solve severe fiscal problems. However Krugman fears that this may make the economic crisis even worse. The economist believes that the state governors are slashing spending on health care, education and infrastructure, often at the expense both of their most vulnerable constituents and the nation's economic future.
The economist has justified his view by stating that while the recession has led to a slump in private spending, it made no sense to add to the problem by cutting public spending too. Especially since the cost of public spending is much lower now than in more prosperous times as it does not have to compete with private investment for scarce resources like labour and capital. Further, he has also questioned the logic of the central government busy bailing out large entities while basic infrastructure is being compromised due to lack of funds available at the state level.
Most Asian stock markets including India ended the day on a positive note. The Chinese market was one of the important ones to buck the trend. Almost all the major European benchmarks are also trading in the positive currently. In the US markets yesterday, both the Dow Jones as well as the Nasdaq edged lower as corporate news as well as tensions in the West Asian region continued to disappoint. The West Asian tensions also played its part in pushing crude prices higher as renewed supply fears have cropped up.
"If you remember nothing else about p/e ratios, remember to avoid stocks with excessively high ones. A company with a high p/e must have incredible earnings growth to justify its high price" - Peter Lynch
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