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Buying into a global story? - Views on News from Equitymaster
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  • Jun 19, 2006

    Buying into a global story?

    India opened its economy for foreign competition in the early 1990s when economic and financial crisis threatened to destabilise the country. Today, a recent report by Goldman Sachs on the BRIC nations (Brazil, Russia, India and ChIndia opened its economy for foreign competition in the early 1990s when economic and financial crisis threatened to destabilise the country. Today, a recent report by Goldman Sachs on the BRIC nations (Brazil, Russia, India and China) states that India is likely to be the fifth amongst the fastest growing nations in the world by 2025, based on the countries' real GDP. In this write-up, we shall take a look at how globalisation has impacted India's industry and markets.

    Globalisation in the industry

    Pharma: Increased focus on generics and significant patent expiries in the coming years has prompted Indian pharma companies to expand their global presence. For example, Ranbaxy derives 80% of its revenues from the international markets and has ambitions to be ranked amongst the top 5 generic companies in the world by 2012. Indian pharma companies are also making their mark in the international arena by making big ticket acquisitions as can be evinced by Dr.Reddy's acquisition of Betapharm in Germany and Ranbaxy's acquisition of Terapia in Romania. Besides this, global pharma majors are resorting to partnering with Indian companies for activities such as contract manufacturing, contract research and innovative R&D.

    Software: The software industry in India has also made major strides in the global space as can be evinced by strong performances of the top tier companies Infosys, Wipro, TCS and Satyam. The key factors driving growth have been labour cost arbitrage, the 'Global Delivery Model' perfected by Indian companies, resulting in considerably enhanced efficiencies and cost savings for clients. Besides this, increasing acceptance of offshoring by global corporations has also fuelled growth of software companies.

    Commodities: While commodities have always been a global play, the decline in customs duty over the last ten years has exposed commodity companies in India to act swiftly to global trend. The recent meltdown in the metals prices on the London Stock Exchange (LME) prompted aluminium majors like Hindalco to undertake price cuts. Any sputter in the growth of the Chinese economy will most likely have an impact on the commodities sector as well. Also, with the growing appetite for oil and rising crude prices, Indian oil companies are looking to acquire oil assets abroad in regions such as Sudan, Libya and Russia in a bid to be self sufficient in crude reserves in the long term.

    Globalisation in financial markets
    Stockmarkets: Globalisation has made its mark even on the Indian financial markets. With India's GDP projected to grow at 8% and strong growth in corporate earnings, Foreign Institutional Investors (FIIs) evinced considerable interest in the 'India story' and have been major contributors to the sharp rally witnessed on the Indian bourses in the past one year. Similarly, the recent steep fall in the Indian indices was also more a factor of global events such as rise in US interest rates and meltdown in the financial markets around the world.

    To sum up...
    In our view, many Indian corporates have expanded their international presence organically and inorganically. While this reflects the change in mindset (before five years, many Indian companies were worried about foreign competition), we believe that there are many risks involved.

    1. It is not a cakewalk: International markets, including other emerging markets, are characterized by intense competition. In fact, some of the other emerging markets are yet to open up completely indicating that any changes in economic policies will have an impact on global operations by Indian companies. In our view, except for one or two sectors, operating margins outside India are likely to be lower than India margins. Therefore, on a consolidated basis, profitability will be affected.

    2. Not an easy turnaround story: As we have seen in the last five years, many international acquisitions by Indian companies have had a negative impact on the consolidated financials (including the likes of Tata Tea, Asian Paints, Tata Daewoo) because these operations require significant restructuring. This consumes the valuable time of the Indian management and in some cases, affects their Indian operations as well.

    3. Currency and country risk: This is overlooked many times by investors. Even as companies adopt hedging mechanism, as we have seen in the last five years, gains or losses on foreign exchange transactions have had a significant impact on the consolidated profitability. Political instability in economies also tends to have a negative impact on companies (for instance, Asian Paints' Fiji or some Caribbean operations).

    4. Understand the India strength: These days, it has become a norm for an Indian company to 'go global'. Before you, as an investor, invest in these companies, understand how strong the company is in the domestic market. If a company is not an efficient a producer or seller of its products in India, it is unlikely (of course, there can be exceptions) that the company will succeed in the international markets. Also, it is important to understand the rationale for the global acquisition - what it is the company getting from this acquisition and what is the time frame by which the acquisition will provide adequate returns to shareholders.

    Overall, we suggest investors not to get swayed by the 'we-are-also-going-global' story. As it is commonly said, every company has to 'act local and think global'. But in our view, 'thinking' and 'executing' a global strategy is a different ball game altogether.



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