»5 Minute Wrap Up by Equitymaster

On This Day - 4 APRIL 2011
Which companies to invest in?

In this issue:
» 'No investor can ignore India' : Mark Mobius
» Chronic problems of India's power sector
» Tata Steel the most respectable Indian Company?
» Real estate companies turn to PEs for funds
» ...and more!

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Since the dawn of 2011, Indian stock markets have shifted to the path of volatility. Markets have see-sawed as investors turned cautious in light of growing inflation concerns. The rising interest rates did not help the situation either. As a result, the big question that haunts everyone is "Which stocks should we invest in?"

The head of Morgan Stanley Investments has tried to answer precisely this question in his recent interview to a leading daily. As per Mr. Nandra, investors need to look at those sectors that would do well in the scenario of demand revival from the West. In other words, he advises investors to invest in those sectors that rely more on global demand to drive growth. As per Mr. Nandra, the Indian domestic consumption growth story remains intact. However, due to the high inflation as well as higher interest rates, it would be better for investors to balance domestic consumption with global demand. As a result, he advises investors to look at sectors like IT, pharma as well as the specific companies that are major players on the global stage.

With due respect to Mr Nandra, we believe that there will always be something or the other that will keep happening in the world. Today, it is the expectation of a revival in the west, tomorrow it could be something else. But this should not call for changing one's investment patterns we believe. What matters according to us, is the long term view. In the long term, we are quite confident that India will keep growing faster than the western economies. Furthermore, there are companies in India which will continue to flourish in the western markets, irrespective of whether those economies will revive or not. Thus, the key here is to buy into those companies when they are available cheap and come equipped with some sort of competitive advantage. All the rest is noise according to us.

Do you think that in the current scenario, it makes sense to invest in sectors that rely on global demand alone? Share your comments with us or post your views on our facebook page.

 Chart of the day
Rising interest rates in the country have driven India Inc to look outside the country for funds. No wonder that foreign borrowings for India Inc, is on the rise. Today's chart of the day shows the trend in foreign borrowings for India Inc. As per the latest release of the Reserve Bank of India (RBI), the foreign loans from abroad have increased by a whopping US$ 18.5 bn in the period from March to December 2010. This is the highest ever inflows recorded in the 9 month period (March to December).

Data source: Reserve Bank of India

The Indian stock markets posted very good returns in 2010. But 2011 started on quite an ominous note. It seemed like the "emerging market" story had run its course. There were pressing concerns of high inflation due to rising food and fuel prices. So investors fled to the developed markets in search of better returns. And in the meanwhile, the Indian bourses remained one of the biggest underperformers across global equity markets. But something seems to have changed in the last couple of weeks. The broad indices have gained by almost 9%. Why? What has changed all of a sudden?

Let's hear what Mark Mobius of Templeton Asset Management has to say about this. According to him, the sell-off in the recent few months was mainly a profit-booking exercise. He opines that investors have realized that they cannot afford to ignore a growing market like India. Because in the long run, emerging economies are bound to outperform developed economies by a wide margin. The fact that the legendary investor Warren Buffett has finally "arrived" in India underlines this point. Investors are also beginning to realize that the US dollar and Treasuries are no safe haven any more. They have to invest elsewhere to escape the US government engineered value-erosion.

We quite agree with Mr Mobius. There is no denying that there are some grave short to medium term inflationary concerns. But the long term Indian growth story remains very much intact.

It would perhaps be fair to say that while availability of water drove the earlier economies, today's economies are driven primarily by energy. The availability of efficient and cost effective sources of energy is indeed the key to a nation's growth and development today. Sadly, India's track record on this front is nothing much to write home about. A leading daily points out how industrial power tariffs in India are the highest amongst major emerging nations. And around 57% of rural households and 12% of urban households still do not have access to electricity.

These are by no means impressive stats. And it isn't that we are not doing anything about it. Certainly, private sector participation is on the rise and there has also been a rapid growth in debt financing. However, all is not well on the cash generation front, an area that has the potential to make or break the future of the power sector in India. The daily goes on to add how speedily the sector's financials are deteriorating. Especially the state level utilities where losses doubled to a whopping Rs 523 bn in FY09.

Given this sorry state of affairs, there remains a big question mark over debt servicing ability of upcoming power projects. Thus, in order for the sector to grow, something has to be done to curb the mounting losses and pretty fast at that. For if investors get the whiff that the whole sector's financial viability is risk, there could be some serious repercussions.

The Tata brand is highly revered in corporate circles and the investor community. And now there is one more reason for the group to cheer about. One of its companies Tata Steel has been rated the best in terms of corporate reputation as per a survey conducted by AC Nielsen. As per the study, factors that drive corporate reputation are customer service, product quality, financial performance, innovation, pace of growth, media visibility, vision, leadership and talent pool. Tata Steel appears to have scored well on all these fronts. Indeed, management quality is an important parameter that one must assess when it comes to investing in any stock. This is a factor that cannot be gauged in numbers, but is nevertheless critical as far as investment decisions are concerned. After all, the growth of the company, its financials, and its ethics is driven by the top management. And a good performance on all these parameters gives ample idea of the strength of the people at the helm of affairs.

Real estate players haven't had a good run over the past year. And things don't seem to be getting any rosier. These players are strapped for cash. And what doesn't help is that they have a huge mountain of debt above their heads. According to estimates by a leading business daily, real estate firms have debt of about Rs 750 bn. Out of this, at least Rs 200 bn has come up for repayment at the end of the fiscal (FY11). With banks reluctant to lend to this risky sector, it leaves these firms scrambling to private equity (PE) investors and non-banking finance companies (NBFCs).

Desperate times call for desperate measures. Sensing the pressure on realty firms to repay debt, execute projects, and considering the scare liquidity scenario currently, investors are looking to reap benefits. They would need higher returns, commensurate with the excess risk they are undertaking. PE investors are looking at returns on investment (ROI) of close to 30% from 20% previously. NBFCs are also lending at a 14-19% ROI. Most of the demand for cash from realty players is coming in from metros like Delhi, Mumbai and Bangalore. It looks like these developers priced themselves out of the market and aren't finding many takers for their projects. What we would prefer is if developers focused on more projects for affordable housing. These will always see significant demand, no matter what.

In the meanwhile, Indian stock markets continued to trade above the dotted line. At the time of writing, the benchmark BSE Sensex was trading higher by around 129 points. Almost all the sectoral indices are currently in the green. Stocks from IT and banking sectors are the major gainers. Major stock markets in Asia are trading in the green as well with China and Hong Kong leading the pack.

 Today's investing mantra
"As the old saying goes, what the wise man does in the beginning, fools do in the end." - Warren Buffett

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