»5 Minute Wrap Up by Equitymaster

On This Day - 13 NOVEMBER 2008
Mr. Tata's mantra for survival

In this issue:
» Mr. Tata speaks
» Redirecting the bailout
» Inflation declines sharply
» King of bad times
» ...and more!

 Cash is king, says Mr. Tata
Austerity is a virtue. Who else can vouch for that than Mr. Ratan Tata, whose group companies have made a couple of expensive acquisitions in recent times only to find out later that these were probably mistimed?

Now, in communicating to his group companies that the global crisis will continue for the next 12 months, Mr. Tata has advised them to go slow on spending - either for acquisitions or for daily operations.

In a letter he shot off to his senior managers yesterday, Mr. Tata asked for improving operational efficiencies, implementing aggressive cost control measures, reducing operating expenses considerably and postponing non-essential capital expenditure and capacity expansion. He has also asked for freezing all acquisition plans except those that are considered highly critical. "Failure to manage this crisis could result in irretrievable positions," he said.

"Some of our companies with substantial foreign operations or those which have made substantial acquisitions are already facing major problems in raising capital or establishing lines of credit for their operations," Mr. Tata said and Business Line reported.

He was most probably hinting at his two lead companies - Tata Motors and Tata Steel - which have faced serious troubles in recent times. The former, for instance, has faced delays in the planned launch of 'Nano', considerable decline in sales of commercial and passenger vehicles, and heavy financial burden on its acquisition of the Jaguar and Land Rover brands.

The latter, on the other hand has witnessed considerable pressure in its international operations (Corus) as steel prices continue to fall amidst slowdown in demand.

Interestingly, while Mr. Tata's call for austerity might indicate the right voice in these troubled times, Warren Buffett has something interesting to say on such initiatives. This is what we also mentioned in our yesterday's newsletter. He says, "Whenever I read about some company undertaking a cost-cutting program, I know it's not a company that really knows what costs are about. The really good manager does not wake up in the morning and say, 'This is the day I'm going to cut costs', any more than he wakes up and decides to practice breathing."

 Redirecting the bailout
The US treasury has announced a modification to its US$ 700 bn bailout package. The package, officially called Troubled Asset Relief Program (TARP) was originally intended to buy troubled mortgage-related securities. As per the International Herald Tribune (IHT), it will now be redirected towards a broad program of helping financial markets. The thrust of the modified package will be to make loans available to credit worthy borrowers going forward. The US treasury has now decided to support good borrowers because banks continue to be unwilling to lend.

While details on this 'consumer credit' plan are still awaited, it is believed that it will provide a greater 'bang for buck' as compared to buying mortgages. It may be noted that this shift in strategy disheartened investors leading to nearly 5% decline in the Dow Jones on Wednesday.

Interestingly, while the treasury is unwilling to use TARP money to help bail out the automobile industry, it is willing to consider the case of non banking financial companies engaged in auto finance.

The IHT calls it 'devising policy on the fly' and we agree. The unexpected scale and severity of the financial meltdown has meant that the US treasury is forced to make changes even while the bailout package is underway.

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 Bloomberg sues the Fed
Bloomberg News, a unit of New York-based Bloomberg LP, has asked a US court to coerce the Federal Reserve into revealing the details of the collateral that the central bank is accepting on behalf of the American people against the US$ 1.5 trillion of loans it has issued. In the event of a default by any of the companies, it is this collateral that would matter the most. The basis of the lawsuit is the U.S. 'Freedom of Information Act' which is an act which requires federal agencies to make government documents available to the press and the public, similar to the 'Right to Information Act' in India.

Apparently, the Fed's stance is that the information should not be given out because it is highly sensitive and would remain so for some time to come. Given that it is the tax payers' money that is involved here, we wonder whether the average American citizen will buy the argument.

  A chip off the block
Daily reports in the newspapers about how the financial crisis is engulfing many companies across industries across the world have now probably reached a stage wherein they have failed to raise eyebrows. This is more so as the gloom surrounding the crisis has been embedded into the psyche of everyone. Despite this the stock of Intel received a battering when the earnings forecast made by the company was lower than the lowest end of the range that it had announced a month ago. During that time, the Intel CEO had estimated that the company would log in sales of US$ 10.1 bn to US$ 10.9 bn during the fourth quarter. All that changed in the space of one month and the company has now pegged sales figures at a much lower US$ 9 bn. Further, as PC and server makers around the world try to adjust to the slowing economy, things are just likely to get harder for the chip maker. What is worrisome is that sales are expected to slump during a quarter which usually sees highest sales due to the festive season of Christmas. This only points to ominous signs that things are not likely to get any better next year.

 In the meanwhile...
The news flow continued to be bad - Germany has entered recession, companies are reporting lower earnings and are revising their estimates downwards and China's industrial output growth has slumped. Crude oil prices that fell to a 20 month low yesterday continued to witness pressure on account of fears that prolonged global economic slowdown will depress oil consumption. However, the declining prices of manufactured goods and commodities that form part of the Indian wholesale price index led to the fall in inflation by 1.74% to 8.98%. The rupee closed at 49.25 to the US dollar.

While most of the key Asian indices closed in the red today, China gained nearly 4%. Indian markets were closed today. European markets have opened on a mixed note on account of increased worries about a deeper slowdown.

 No leniency on credit card defaults
US$ 900 bn (nearly 75% of India's GDP) is what the Americans owe to their credit card companies. And now, in their generic style, the defaulters are seeking a bailout.

According to rating company Moody's, gross non recoverable balances (in other words, gross non-performing loans) on credit cards rose to 6.8% in August 2008 (up 48% YoY). Almost each of the large American credit card companies have had to provide between US$ 1 bn to US$ 3.5 bn in the third quarter for losses on card loans as a result of which their profits plummeted. The likes of American Express have also had to get themselves converted into a bank to get the lifeline of Federal 'bail out' funds.

The Fed has, however, now taken an austere stance on the proposal for a special program that was to allow non repayment of as much as 40% of credit card debt to customers who do not qualify for existing repayment plans. The said plan was based on delaying tax payments until the credit card dues are recovered. However, this time the Fed has tightened its own belt and those of the defaulters. Probably again because they are not 'Too Big to Fail'!

 Oil continues to slide
Yesterday, crude prices fell to their lowest level in over 20 months to US$ 56 per barrel. Prices have plummeted since peaking at US$147 a barrel on July 11. While the OPEC continues to try and stem the decline, it is proving to be insufficient in the face of falling consumption and a weak global economic outlook.

 Visibility into the grey future
These days when we ask corporate India, particularly export oriented companies, about their visibility into the future, they tell us that they can see shades of grey.

The once bright future of India Inc. has suddenly been shadowed by a haze of grey. The reasons vary from high input costs, lower sales, lack of increment to order book and shortage of capital.

The ones dependent on exports are in fact looking forward to the 'Hand of Obama' blessing them in the near future.

When we recently spoke to one of the largest exporters of silk fabric from India, the company was not even sure of its sales in the next quarter. Trends in volume and realisation growth were therefore not hard but impossible to predict.

Indian individuals and companies are yet to come to terms with 2% of the country's GDP being shaved off. At such times, the ones that cater to economies not growing at all or de-growing must obviously be finding the reality unpalatable. Probably it is time that we stop paying heed to the soothsayers and take note of the inevitable.

 Sharp decline in inflation
Amid all the gloomy news, India's Wholesale price index based inflation has declined sharply. At 8.98% in the 12 months to Nov. 1, the inflation number is the lowest in almost 6 months and substantially below the peak of 12.91% registered in early August this year. The main drivers behind the decline are fall in metal and fuel prices.

A lower inflation number provides room for RBI to cut rates. This must be welcome news for New Delhi as it has been struggling to sustain India's growth momentum in the face of a worldwide economic slowdown.

 King of bad times
With that kind of a track record, little wonder Warren Buffett has called the company one of the biggest mistakes of omission (companies where he failed to invest) in his investment career. The company in question is none other than Wal-Mart, widely believed to be the gold standard in the US retail industry and the one whose value proposition remains unmatched to date. Infact, it can be called a company for all seasons as while it is likely to do well during good times, during bad times such as the current one, its low cost leadership benefits it even more. This is a fact that has not been lost on analysts who track the company and have projected a healthy profit growth rate in the region of 10% for the quarter ended September 2008. Even the stock markets have been relatively kind to the company. Although its market cap has fallen 14% from its September highs, its rivals have had to suffer a much steeper fall. Infact, the company's shares are up 27% on a YoY basis. Retailers in India could do well to take a leaf or two out of Wal Mart's book. Focusing mindlessly on expansions, they have paid little heed to their distribution infrastructure as well as the overall cost structure, factors that have made Wal Mart the benchmark for efficiency.

 Today's investing mantra
"While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster" - Benjamin Graham

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