»5 Minute Wrap Up by Equitymaster

On This Day - 11 JANUARY 2013
Why Buffett will never buy an 'Apple'?

In this issue:
» Electricity growth in India: 2001 to 2011
» Infosys reports flat profits, beats expectations
» US debt problem: From fiscal cliff to debt ceiling
» Govt to infuse Rs 125 bn in 10 PSU banks
» ...and more!

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Apple Inc. The company is without doubt the most valuable and profitable in the world. And only a great company with great products can get there. Be it product design, manufacturing or distribution, Apple excels on all important parameters. All these factors indicate that the company has a very strong competitive advantage, or 'moat', as Warren Buffett likes to call it.

Even then, Buffett would never buy the stock we believe. The reason is that while looking at moat, the important thing to look at is its durability. Investors need to ask whether a company's moat could endure over the longer term.

And this is exactly where Apple may leave you with a pinch of doubt. An article in Business Insider suggests that Apple is already losing its edge. For a major part of the last five years, Apple led the world in smartphones, tablets, gadget market share and cloud-based services and applications. In fact, it even enjoyed the best pricing power. But a lot has changed in the last two years. Apple has lost its lead in some areas, whereas in others it has fallen even further behind. Competitors such as Samsung and Google have posed a strong challenge to Apple's dominance in the smartphones market. In the mass smartphones market in emerging economies, Samsung has taken a significant lead over Apple. It's hardly surprising that Apple's stock price is down 25% from its peak.

Investors must understand that the problem here is not with Apple. The problem lies in the sector in which it operates. As Buffett himself says, "Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy." It is this changeability that poses the biggest risk to the durability of Apple's moat. On the other hand, a company like Coke still makes and sells the same products it did half a century ago. No wonder the soft drinks giant has seen its moat getting stronger and stronger over time.

So while making your investment decisions, do not solely focus on the company's current competitive position. If the future of the business seems uncertain or the sector is exposed to too many changes, it would be best to avoid such stocks. Buy stocks with durable moats and long term earnings visibility.

According to you, which Indian companies have the most durable competitive advantage? Share your comments with us or post your views on Facebook page / Google+ page

 Chart of the day
The electricity sector is the growth engine of an economy. In India, providing access to electricity is the function of the ruling government. As such, household access to electricity is a key indicator of the quality of governance. Today's chart of the day shows states with the highest and lowest growth in households with access to electricity over the last decade (2011 versus 2001). States such as Uttarakhand, Tripura and Andhra Pradesh (AP) displayed significant improvement in access to electricity. On the other hand, Madhya Pradesh (MP) is the only state that showed decline in the number of households with access to electricity during the period. The growth in states such as Chandigarh, Himachal Pradesh (HP) and Goa was slow as more than 90% households had access to electricity even a decade ago.

Data source: Business Standard
*Per cent point difference in households with access to electricity 2011 versus 2001

The result season kicked off with IT major Infosys Ltd announcing its results for the quarter ended December 31, 2012. The company reported a revenue growth 5.7% on a sequential (QoQ) basis. However, net profits remained flat over the same period of time. This is way better than what was expected of the company. The company had announced earlier that they have seen US clients cut back on spending as well as delaying big deal spends. Given the company's huge dependence on US, such comments were perceived as a warning that the quarter results would come under pressure. But despite the warnings and pressures, Infosys was able to report decent results on an expanded client base.

The Indian IT industry is facing tough times given the uncertainty haunting the global arena. IT majors are looking at markets beyond the US and Eurozone to drive growth. At the same time, they are also cutting back on their hiring plans as well as looking at ways to trim costs. The thing is that every industry has a down cycle and an up cycle. But these cycles are short term in nature. Eventually things would get sorted out. But the essential thing is that only companies that have strong business models and are able to adapt to the changing environment will survive. And those who do will clearly come out as winners.

What is the one thing that is easy to get into but difficult to get out of? Things like troubles, lies and bad habits do indeed fit the description perfectly. But there's one more thing that fits the bill and has most Americans worried these days. Well, it answers to the name of debt! The Economist is carrying a report about how US Treasury department will soon run out of legal authority to borrow. In other words, if the US debt ceiling is not raised soon, the country may well face the prospect of a full on default.

However, raising the debt ceiling is not the easiest of jobs out there. For under US law, while the congress can sanction any budget, its ability to borrow is restricted by the debt ceiling. And this ceiling can only be raised with a separate vote. In other words, the process of arriving at the debt ceiling is separate and distinct from financing government operations. What this has done is that it has effectively given a tool in the hands of the opposition to force the Government to arrive at some sort of compromise. And the last time such compromise was being reached, it took a downgrade in US credit ratings to arrive at some sort of consensus. We just hope the history doesn't repeat itself again.

Basel III norms have been deferred by around four years. But the Reserve Bank of India (RBI) may not wait until then to ensure compliance amongst Indian banks. Keeping this in mind, the government is already planning capital infusion for the PSU banks. It is after all aware of the NPA provisioning hit that the banks may have to endure in FY14 as well. Ten public sector banks will therefore get a total capital infusion of Rs 125 bn in FY13 itself. Besides capital adequacy compliance, the government also wants PSU banks to step up lending. Higher credit disbursal is seen as the lone hope to revive the economy. At the government's behest, the PSUs may also have to lend at lower rates compared to the private sector. While the higher capital infusion does mean more stability for PSU banks. But we are not so sure about the same generating higher return on equity in the longer term.

Huge subsidy burden has created a hole in the pocket of the government. With the divestment plan not going as per schedule, financial resources of the Centre are further getting strained. In such an environment, the only way to avoid worsening deficit is to cut expenditures. As such, the government has decided to raise the plan outlay for FY2013-14 by just 5%. The plan expenditure for the next fiscal year is pegged at Rs 5.5 trillion compared to Rs 5.2 trillion for this fiscal.

It may be noted that FY2013-14 will be the second year of the 12th five year plan. And in that year, let's assume that the plan expenditure registers just a modest increase of 5% as predicted. If that happens then the overall projections for expenditure in the 12th plan could go for a toss. It may be noted that the 11th plan had witnessed plan expenditure of Rs 15.9 trillion. And in the 12th plan the expenditure is expected to more than double to Rs 35.7 trillion. Thus, any slowdown in spend in the initial years will make the target difficult to achieve.

In the meanwhile after opening the day on a positive note, Indian equity markets continued to trade above the dotted line. At the time of writing, the BSE-Sensex was up by 67 points (0.3%). Among the stocks leading the gains were Infosys and Wipro. Most major Asian stock markets were trading mixed with the stock markets in China (down 1.8%) and South Korea (down 0.5%) facing selling pressure, while the Japanese market (up 1.4%) was trading strong.

 Today's Investing Mantra
"We're just cautious in how technological advancements affect our businesses. We try to avoid ones where change will threaten the way a business is making money." - Warren Buffett

  • Warren Buffett - The Value Investor

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