»5 Minute Wrap Up by Equitymaster

On This Day - 1 DECEMBER 2008
As FIIs sell, retail investors load up on equities

In this issue:
» More resignations follow that of Home Minister
» Indian Hotels can lose up to Rs 2.6 bn of revenue
» New York companies claim tax refunds of US$ 800 m
» India amongst the poorest in the world in terms of educational disparity
» ... and more!

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The SEBI chairman, Mr. C.B. Bhave in his speech at the HT India Leadership Summit seemed amply confident that the retail investors in the country have enough bandwidth to fill in the vacuum created by the outgoing FIIs (foreign institutional investors). Citing that the equity markets are much more evolved than the credit markets due to the presence of clearing agencies, which can state the counterparty risk, the regulator did not foresee any instance of 'scams' in the recent market upheaval.

More importantly Mr. Bhave opined that the Indian markets were well poised to be amongst the first to recover, once sentiments improve in the global markets. And that the weightage of market capitalisation of Indian companies going forward is set to grow much higher than before. According to Mr. Bhave, SEBI had conducted an analysis of the transactions between the 1st of September and 14th of November and arrived at some interesting statistics. FIIs and proprietary accounts of brokers were net sellers of equities worth Rs 220 bn and Rs 7 bn respectively during this period. At the same time, mutual funds and domestic institutional investors were net buyers of equities worth Rs 10 bn and Rs 160 bn respectively. But what is most notable, is that retail investors were net buyers to the tune of Rs 56 bn. Further, it were only the leveraged FIIs that were heading out and that the ratio of purchase to net sales of the FIIs was 3:1, signaling that they bought 3 stocks for every 4 stocks sold.

A day after the 60-hour ordeal of terrorist assault on Mumbai ended claiming the lives of nearly 195 people, the Congress-led UPA government seems to have finally realised its responsibilities. The Home Minister, Mr. Shivraj Patil, who faced widespread criticism for the lack of security measures to counter terrorism, resigned yesterday on the grounds of 'moral responsibility'. The latest to head for the exit door have been the Chief Minister and Deputy Chief Minister of Maharashtra.

It must however, be pointed out that this is not the first instance of such an attack during Mr. Patil's tenure as Home Minister, as about 300 people have died this year itself in India as bombs have exploded in markets, religious places, bus and train stations and theaters. The Mumbai attack, was nevertheless, the deadliest such assault in the country in 15 years. As per a leading business daily, the loss to the city in financial terms during the three day ordeal was to the tune of Rs 500 bn.

Mr. Patil's portfolio will now be managed by Mr. Chidambaram who was so far shouldering the responsibility of guiding the Indian economy through the global recession as the Finance Minister. The Prime Minister, Mr. Manmohan Singh who will now also act as the Finance Minister, will not just have to fortify the country's fragile defense infrastructure but also try to minimise the impact of the global meltdown on the domestic economy. He has already sought the support of the largest democracy in the world, the US, in his endeavour. He has sought for guidance on building a crime-fighting agency modeled on the FBI and tougher anti-terrorism laws.

We are not sure if Ratan Tata believes in horoscopes, but given that 2008 especially has been a terrible year for his group of companies, he must surely be looking at the stars and contemplating his fate. While the year started off on a good note with the acquisition of the iconic brands Jaguar and Land Rover, things since then have only deteriorated sharply. The furore over the Tata Project in Singur and the subsequent pullout from the State started the downslide. Further, worsening economic conditions globally and lack of adequate credit has hurt the performance of his group companies. The situation only escalated to a crisis when the majestic century old Taj hotel was at the centre of one of the most deadliest terror attacks in the country. The grim look on Ratan Tata's face during each of these instances gives an idea of the heartaches that he must be suffering. If astrologers are to be believed, the scenario is likely to perk up February onwards next year. He must be fervently hoping that this turns out to be true!

When a market suffers, the market makers feel the heat too. When the assets that backed complex derivatives collapsed, so did the investment banks that wrote the instruments. When the equity markets plunged, the broking houses shrunk. Small wonder that CB Richard Ellis, world's largest real estate services company is in trouble. After all, the US housing is the epicenter of the global financial tsunami. As per LA Times, the company has come in for sharp criticism from investors. Its third quarter profits have declined by 60% on a YoY basis and its share price has tanked by nearly 75%. It has also been forced to lay off more than 1,000 positions in a bid to cut costs. While, the company has recently raised US$ 207 m in a bid to maintain its debt equity ratio, its future is clearly tied to the timing and extent of the recovery in the US real estate market.

In an interesting summary of its predictions for 2009, the Economist has outlined the destiny of the best and worst performing economies in 2009. The champion, according to the Economist Intelligence Unit's forecasts will be Qatar, whose gas-fired economy is forecast to grow by 13.4%. Qatar will be a champion in other ways too. Its population will grow by more than 14%, to 1.8m, thanks to the world's highest rate of immigration. Many are lured to one of the richest countries in the world, with an income per head of close to US$ 65,000. While India scores well in terms of growth rate, it has a long way to go in terms of per capita GDP. Infact countries like Paraguay (US$ 4,920), Jordan (US$ 5,070) and Algeria (US$ 8,670) score better than India in this respect.

The world in 2009
GDP growth (%, YoY) Inflation (%) GDP per head (PPP, US$)
Angola 9.8 11.8 5,550
China 8 3.6 6,830
India 6.5 7.3 3,270
Russia 4 11.5 16,330
Brazil 2.7 6.3 10,880
Germany 0.2 2.1 36,100
France -0.1 1.7 35,750
US -0.2 2.1 48,400
Spain -0.6 3 32,120
UK -1 1.9 36,820
Zimbabwe -4.4 N.A 160
Source: Economist - World in 2009

Domestic major Sun Pharma, in recent times, has been in the limelight for a variety of reasons, some good, some not so great. While the company's attempts to take over the Israeli based company 'Taro' has run into a host of problems, things shaped up very well as far as performance was concerned both in FY08 and 1HFY09. The company managed to garner the 180-day exclusivity window for two blockbuster drugs which bolstered its revenues and profits in ample measure. Having said that, recent developments have not gone the company's way. For instance, Sun Pharma along with the US based company Osmotica had filed an ANDA for launching an improvised generic version of Wyeth's US$ 3 bn anti-depressant drug 'Effexor XR' ('Venlafexine'). While the US FDA has approved Osmotica's version, Sun Pharma's version has been deemed invalid. This means that Sun Pharma may have to conduct fresh bio-equivalence studies and re-submit its ANDA application for the drug, a process which is likely to take two years. Thus, Sun Pharma has possibly lost out on potential revenues and profits from this drug in the US market. However, we would like to add here that investors should not base their investment decision in pharma stocks on the success or failure of getting approval for a particular blockbuster drug but rather on the strength of the entire product portfolio and the potential to generate revenues from the same going forward.

Cement is the highest taxed essential infrastructure input in India. Taxes and levies account for nearly 60% of the ex-factory cost and nearly 20% of the current selling price. The current VAT on cement is higher compared to important construction materials, such as steel, which is at 4%. It is also on a higher side as compared to other developing nations. Such high incidence of tax deters the competitiveness of the cement industry.

Taxes and levies % of sales
India Around 20%
China 19
Malaysia NIL

Source: Equitymaster

Cement manufacturers have been urging government to rationalise tax structure and duties levied on input materials. However, the Union Budget has always been silent on the same. Infact to curb inflation differential duty has been levied on cement. The economic slowdown has impacted demand for cement. Moreover, upcoming capacities (the same has started taking place) are likely to result in excess supply situation. The same is expected to exert downward pressure on cement prices and topline of the companies. Hence, once again the industry has approached the government to rationalise its tax structure to restrict fall in margins.

Built in 1903, The Taj Mahal Palace & Tower (TMPT), Mumbai has created its own unique history. Apart from being Indian Hotels' (IHCL) prime property, it was a monumental structure and the face of the Indian hotel industry. It had 565 rooms, 11 dining restaurants and 11 banquet halls. The second half of the year is normally the peak season for the hotel industry. As per our estimates, the 565 rooms of TMPT will not be available for the last four months of FY09 and for the full year in FY10. TMPT formed 16.5% of the standalone rooms of IHCL and 5.2% of the consolidated rooms. Located in prime location in India's commercial capital, it commanded higher occupancy and room rates. Our calculations show that the loss of revenue to Indian Hotels due to non operation of TMPT over the next 12 months will be to the tune of Rs 2.6 bn. This is without considering the cost of reconstructing the property and receipts from insurance claims.

Probable revenue loss for next 12 months
No of rooms 565
Assuming 61% occupancy 345
Room Rates (Rs) 12,349
Room revenues (Rs m) 1,553
Add F&B revenues 932
Add: Other services 155
Total revenue loss (Rs m) 2,641
Source: Equitymaster

Is it possible to turn an expense into an income? Yes, if the expense has been overestimated. With liquidity traps running dry elsewhere, companies in the US city of New York are calling back tax payments of nearly US$ 800 m that they now feel are rather overestimated. Tax liabilities for the full year are usually estimated by taking into account performance in the previous years. With the first half of 2007 turning out quite robust for the New York based financial firms, most of them had prepaid taxes a great deal more than their eventual liabilities. Thus, these firms have now asked the city administrators to repay the difference. Not good news for the latter as their already huge budget deficit is likely to bloat further. Tough times indeed!

A recent report from UNESCO, the United Nations' education arm shows that when it comes to spending on education, both the amount and pattern matter. A distorted pattern such as inequality between the richest and poorest is undesirable. As reported in the Economist, in India, a rich 17 to 22 year- old has an average education of 11 years, almost 7 years more than his poor counterpart. We often say India's young population is not a burden but a demographic dividend. With such inequality, can we really say that?

Image source: Economist

It is an economy that derives nearly 2/3rd of its output from the money its citizens spend to consume goods and services of all shapes and sizes. Thus, when the curtains were lifted on the biggest annual US shopping season last Friday, spreadsheets were pressed into work so that sales data can be crunched and a clear picture of the state of the US economy could be arrived at. "So far so good" is what the data seems to be telling. As against the popular notion that the US citizens would hold back this year on the back of a slowing economy and record job losses, sales have come in higher as per a couple of retail research firms. However, according to industry analysts, the same cannot be said for margins as plenty seems to have been sacrificed for want of higher volumes as well as topline. What also seem to be worrying are the statements by shoppers that they are already through with a larger proportion of their Christmas shopping than last year. 'Black Friday' is the term used to denote the day when traditional Christmas shopping season commences as it helps a lot of retailers to turn into black at the bottomline level after incurring losses for the rest of the year. This year though, the 'Red' may not likely turn 'Black' at a lot of places.

In the meanwhile, the Indian markets that started on a positive note today nosedived into the red in the latter half of the session. This can be primarily attributed to political uncertainty with the heads of state of Maharashtra offering their resignation and rumours of mobilisation of troops at the Indo-Pak border. The benchmark BSE Sensex closed lower by nearly 3% led by construction, banking and auto stocks. Most Asian markets, excluding China and Hong Kong closed in the negative today. The European markets have also opened lower.

Today's investing mantra
"Accurately forecasting swings in investors' emotions is not possible. But forecasting the long-term economics of investing carries remarkably huge odds of success." - John Bogle

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