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Credit risk, subprime and more... - Views on News from Equitymaster
 
 
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  • Jul 14, 2008

    Credit risk, subprime and more...

    India to be downgraded
    Within 18 months of India being lifted to the 'investment grade' category by global rating agency Standard & Poor's (S&P), failure to respond adequately to negative macroeconomic developments and political instability has led the agency to propose a downgrading of the economy's debt rating.

    India's long-term local currency debt is rated BBB-the lowest investment grade, by S&P. The rating may be reduced to 'speculative grade' if steep inflation and higher government spending ahead of next year's election impair the budgetary deficit. A one-notch drop in its ranking would place Asia's third-largest economy on par with Indonesia, El Salvador and Guatemala.

    Although India's ratings were lifted to the investment grade last year for the first time since 2002, the same has been instrumental in allowing Indian corporates seek cheaper funds overseas for their expansion plans and funding inorganic growth. A lower rating may deter foreign investors and make it more expensive for Indian companies to raise money, slowing growth in the US$ 912 bn economy.

  • Also read - Political hypocrisy on display

    Not all is bad about subprime!
    According to Bloomberg, legal process outsourcing is rapidly growing and is expected to become a US$ 4 bn industry globally by 2015 with India occupying a significant chunk of it. The current value of legal outsourcing is estimated at US$ 80 m, with more than three-fourths of it based in India. Legal process outsourcing is an industry in which in-house legal departments or organisations outsource legal work from areas where it is costly to carry out. The main areas of growth are discovery and litigation support, contract and document review services, legal analytics and due diligence.

    What's more, the subprime crisis in the US has added fervor to legal process outsourcing (LPO) boom. After the subprime, the subsequent defaults have given rise to a lot of litigations in the US. Further, the economic slowdown in the US and other developed economies has motivated legal departments and law firms to take a hard look at their own processes and physical functions carried out by their employees in their domestic markets. They are reviewing organisational costs and efficiencies and are expected to offer cost savings of 30% to 70% by offshoring a bulk of their requirements to India.

    India sees an annual output of 80,000 law graduates. The top 3,000-4,000 graduates either go overseas or join top-notch law firms, leaving the rest of the field clear for alternative careers such as outsourcing firms. Some of the top law firms in the US plan to invest close to US$ 50 m in India over the next 5-8 years.

  • Also read - Subprime pain may prolong

    Indian airlines to takeoff by 2011
    According to a recently published KPMG report, Indian airlines are expected to become profitable once again by FY11. This however, would be after posting aggregate losses of around US$ 2 bn (Rs 87 bn) in FY09, and assuming that oil prices would continue to stay at the current levels.

    The KPMG report comes at a time when most airlines are ridden with significant losses, and spiraling ATF (aviation turbine fuel) prices are only adding to their woes. ATF constituted 45% of the operating cost of airlines in FY08, against 25% in FY06. KPMG believes that though ATF will continue to be a critical factor, airlines can post break-even by adopting strict cost-cutting measures.

    India's largest private airline Jet Airways recently said that the industry is losing at least US$ 20 per passenger, signifying close to a 20% oversupply or imbalance, which has led to route and capacity rationalisation. The estimated fuel cost per passenger carried (for Jet) is US$ 85. As against this, the average yield per passenger is only US$ 150. Jet estimates the industry seat capacity to grow at 18% and passenger growth rate to be 11% in FY09.

     

     

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