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World economy, Indian IPOs...

Jan 15, 2008

  • The weak jobs data released in the US recently, which sent out ominous signals of a likely slowdown in its economy, had rattled investors. And the week ahead is laden with more economic data, such as the ones on inflation, retail sales and earnings, which is expected to give a clearer picture of where the US economy is headed. Just as in India, corporate earnings for the October to December quarter will start pouring in the US as well and the financial services firms and banks will be under scrutiny.

    With falling asset prices on one hand (read the housing sector) and rising crude and food prices on the other hand, Americans are walking on a tight rope. While the Fed is trying to shy away from the 'R' word by cutting interest rates and injecting liquidity into the system, this very slush of money is driving up commodity prices (especially crude and gold) and weakening the strength of the dollar. It is indeed going to be a tough job for the Fed to deal with this situation, which is being touted as stagflation.

  • The World Bank has released its report titled 'Global Economic Prospects 2008'. In this, it has highlighted that world growth slowed modestly in 2007 to 3.6% compared with 3.9% in 2006. The bank has attributed this to weaker growth in high-income countries. The World Bank expects global growth to slow further to 3.3% in 2008 and has cited reasons such as a weaker US dollar, the spectre of an American recession and rising financial market volatility as the main catalysts for the same.

    The report also states - "resilience in developing economies is cushioning the current slowdown in the US, with real GDP growth for developing countries expected to ease to 7.1% in 2008, while high-income countries are predicted to grow by a modest 2.2%." What must be noted is that though the emerging economies are expected to grow at a much faster clip than their developed peers, the possibility of a US recession and slow growth in the European zone will mean that this growth rate will be lesser than those recorded in the past. As far as India is concerned, export oriented sectors, which are already reeling under the negative impact of the sharp appreciation of the rupee against the dollar, could face a double whammy if the US too slows down curbing exports to the region.

  • Wockhardt, by announcing its plans to hive off its R&D division into a separate company, becomes the fifth domestic company to do so after Dr. Reddy's, Sun Pharma, Nicholas Piramal and Ranbaxy. While the board meeting is scheduled for January 18, reports indicate that besides the NCE assets, biotech products will be transferred to the new entity as well. The entire drug discovery process is time-consuming, expensive and risky and clinical trials form a larger chunk (around 43%) of the total R&D investment putting a strain on the profitability of the companies. Hence, in a bid to mitigate the high risks involved in discovery research and at the same time keep the discovery programme intact, domestic pharma companies are looking to hive off the NCE R&D business into a separate company. This also helps the companies focus on their core business, which is relatively less risky and perk up margins going forward.

  • The 'mother of all IPOs' is here! In the largest ever equity fund raising by any Indian corporate, Reliance Power begins its initial public offering today. The company is aiming to raise almost US$ 3 bn by selling 228 m shares to institutional and retail investors. The issue has been priced in the range of Rs 405 to Rs 450, with retail investors been given a discount of Rs 20 per share. Power deficiency in India and Reliance Power's plans of removing the same by adding almost 28,000 MW capacity over the next few years is touted as reasons why investors should apply to the IPO. But is anyone heeding to the risks attached on the execution front? Read our view on what you should do with respect to this IPO.

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