»5 Minute Wrap Up by Equitymaster

On This Day - 29 MAY 2012
What will really make the rupee stronger?

In this issue:
» US shale gas is banking on Indian beans
» 500 projects get shelved in FY12
» Slowdown threatens to increase poverty
» Investment bank salaries still see a rise
» ...and more!

------------------------------------- Try the best at the lowest price ever! -------------------------------------

You have only until 31st of this month...

...to sign up for our Best Research for just Rs 499.

And get instant access to our 5 latest stock recommendations.

Why are we doing this? Click here for complete details...


The dramatic slide of the rupee has sent shivers down the spines of investors, businessmen, consumers alike. It is a worrying aspect for the government as well. The rupee hit an unprecedented string of all-time lows last week, falling as low as 56.38 to the dollar before recovering a bit since then. As the government struggles to reduce its deficit, a weaker rupee only adds on to the pressure.

This is because a steep depreciation raises the import bill further worsening the current account deficit. And given that India imports around 70% of the oil that it consumes, unless it becomes energy self sufficient, bringing the amount of imports down will be a challenge. While such a development is bound to be profitable for exporters, total exports have failed to trump imports and so the deficit has only widened.

In such a scenario, the government is looking to bolster the rupee by encouraging more foreign capital flows into the country. It is expected to announce steps that could include easing rules for overseas retail investors to buy local shares or bonds. The government may also conduct road shows in the Gulf countries next month to promote investments in India.

Before implementing any such moves, the government needs to understand why capital is leaving the country in the first place. Policy inaction, unfavourable tax rules have been some of the main culprits. Policy u-turn on retail FDI and the drama surrounding the Vodafone tax case has only made foreign investors jittery. Corruption scandals and coalition infighting has taken up much of the government's time rendering it ineffective in addressing some of the pressing needs of the country. Thus, unless and until the government shows some resolve in pushing reforms and making the climate favourable for conducting business, foreign capital may continue to elude the economy from a long term perspective.

Do you think that the measures proposed by the government will help in attracting foreign capital to the country? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
FY12 was a challenging year for the Indian auto industry. So how has the start to FY13 been? Not that well as is evident in today's chart of the day. In the month of April 2012, two-wheelers clocked the highest growth largely led by a healthy growth of scooters. Passenger vehicles also fared relatively better with growth largely coming in from utility vehicles. The slowdown in the economy took its toll on commercial vehicles though. Growth in this segment was led by light commercial vehicles (CVs) as medium & heavy CVs slipped into the red. Exports, which were the show stealer, in FY12 got off to a poor start in FY13.

Data Source: SIAM

Indian parliamentarians are too busy protesting against petrol price hike. We are all eyes on Iran to judge how much more will our oil bills move up. The gyrations of the rupee against the US dollar are giving the RBI governor sleepless nights. All this while the US is quietly using a resource from our own backyard to make itself energy self sufficient. Yes, that's true! As irony would have it, US shale gas drilling companies have developed a voracious appetite for the powder-like gum made from the seeds of guar or cluster bean. The gum is used to increase the viscosity of materials which are forced into shale fractures to enlarge them so that the oil and gas can be extracted. While few Indian farmers have achieved instant riches with what they now call 'black gold', others are yet to get a hint of the bean's 10-fold rise in prices over last year. India however, is the largest producer of the crop in the world. But the scope of growth doesn't end there. With the North American shale boom expanding to China, South America and Eastern Europe, oil drilling firms are poised to gobble up more cluster beans than ever before. If prices become unaffordable, they may however, look for substitutes. But if such useful resources get ignored by the government, India's energy problems will be here to stay.

Which is one of the most important factors that determines the growth prospects of any business? The answer is capacity expansion. If there is no addition in capacity, how possibly can a business grow? In a similar vein, an economy needs newer capacities to grow. So it is certainly a worrying sign if new projects are not coming on stream. Factors such as policy paralysis and difficulty in land acquisition have adversely affected the project pipeline in India. In 2011-12, more than 500 projects got shelved or were put on hold. It must be noted that these projects entailed total investments of about Rs 5 trillion. About 60% of the value of the projects shelved during the fiscal involved the core sectors. Projects in the power and steel space were the worst hit. You would be shocked to know that this is the highest ever shelving or freezing of projects in India. Before this, the worst record was in 2009-10 when Rs 2.8 trillion worth of projects were shelved. If you still have any doubts about India's slowing growth, you may want to reconsider your position.

The bottom of the pyramid is a difficult place to get out of. And with GDP growth in the country slowing, it is almost impossible. India's economic growth has slowed from over 8% seen in 2010 to around 6% in late 2011. The slowdown threatens to spread poverty and unemployment across the country. The benefits of growth are unequally shared, and the poor always get the short end of the stick. When the going gets tough, the situation really heat up for the poor of this country. The weak rupee, rising inflation and high interest rates make matters worse. For investors, going long on the economy makes sense, as the things should ease out over the next year or two. But the poor of the country, for whom daily survival is a challenge may not be able to wait that long.

It was Murphy's Law governing Indian energy sector in FY12. Everything that could go wrong did. Be it high crude prices, falling rupee, rising under recoveries or poor refining margins. What made things worse was state elections schedule that precluded revision of fuel prices causing state run oil refiners to bleed. Given the backdrop, the Government's decision to dole out subsidies worth Rs 385 bn to oil PSUs will soothe some concerns. This along with a prior compensation will take care of 60% of under recoveries. The rest will be taken care of by upstream segment.

The decision looks positive for refiners, but only from a very myopic perspective. The root of the problem is lack of a transparent subsidy sharing mechanism, high fuel taxes and regulated prices - issues that still remain unsettled.

Since the financial crisis that destroyed a few investment banks (IBs), profits in the space are under pressure. However, IBs globally have increased salaries by 37% over the past four years in order to retain staff and bypass regulations. This has unfortunately put the entire sector under the burden of higher fixed costs. The sharp increase in fixed pay has driven up its proportion from 30% in 2007 to 55% in 2011. Fixed remuneration includes salaries, pensions and benefits in kind. All this is set to add further angst over bankers' elevated pay. However, more regulatory changes are on the way that may reduce banks' profitability. This will help reduce pay scales over the next few years. Banks have also added caveats on variable compensation post the 2008 crisis, including the right to claw back bonuses. This move was implemented by Goldman Sachs, Morgan Stanley and UBS. Barely any banks used such measures in 2007.

In the meanwhile, the Indian stock markets have been trading well above the dotted line today. At the time of writing, the BSE Sensex was up by 99 points (0.6%). Sectoral indices were trading positively except FMCG and consumer durable stocks. Barring Indonesia, Asian stock markets were all trading strong. European markets too started the day on a positive note.

 Today's investing mantra
""The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!." - Warren Buffett

  • Test Your Warren Buffett Quotient Now!

  • Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

    Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

    This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

    This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

    This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

    As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407