The end - or a new beginning? - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The end - or a new beginning? A  A  A
30 JUNE 2008

Reading the papers these days is depressing.
Watching the TV channels is even more depressing.
Reading the intelligently-worded reports written by research analysts from global banks is frighteningly depressing.

Everywhere there is gloom. The end is here, we are told.

Oil will get to USD 200 per barrel (the price of oil needs to move by 40% for this prediction to come true).
The BSE-30 Index will get to 12,000 (only 15% away for this prediction to come true).
Inflation will get to 12% (nearly there).
India is in bad shape.

The Economic Times has stopped publishing pictures of good looking models on the front pages which are totally irrelevant to their articles. Sadly, they no longer write those humorous articles about how M-Cap has made India such a powerful nation. TV channels no longer have cheerleaders waving each time the Index surges by 1,000 points - there is no surge left in the market. The market is heading the other way - solidly south.

Ladies and gentlemen, I am sorry to announce the death of "India Resurgent".
The one billion people living in this country seemed to have rolled over and died.
All of them.
No one is buying any more cars, two-wheelers, mobile phones, TVs, homes, clothes, food or medicine.
The 1 billion people have frozen.
There is no global warming here - we are in the Ice Age.

Feel the pulse?
Well, that is what the authors of these depressing views would have us believe.
Maybe reality is a little different.

I look around the shops and still see people.
I look around the office and still see my colleagues.
I look at the company's financials and I still see that salaries are being paid.

Last time I checked, there still seemed to be people earning money and spending it.
So, maybe we all have not been frozen into Forgotten Land.

One year ago we were told what a great economy India was all set to evolve into.
The immense potential of the young population; the brilliance of the captains of Indian industry. India was on a roll. For years into the future.
Buy India - was the mantra - buy India forever.

One year later - India seems to be the worst place in the world to invest in.

All this because oil has increased from USD 70 to USD 140 per barrel?
All this because we have an election due in the next nine months?
And we have agitations and strikes and bandhs in many states?

Let's do a reality check here. A few reality checks.
We consume 1 billion barrels of oil every year. A USD 70 increase in the price of oil over the last 12 months has added about USD 70 billion to our "costs of doing business".
Not a small number. It is 7% of GDP.
But it is not crippling. Our estimates show that, as consumers, we have been paying for petroleum products as if oil was priced at USD 100 per barrel. That's right: USD 100 per barrel of oil.
So the shock to consumers is not as bad as people make it out to be.

India also has over USD 300 billion in foreign exchange reserves. We export products (including petroleum products) and services - so India has the foreign exchange to pay for oil.

There is still a pulse, a heartbeat - and it beats pretty regularly.
Yes, say the bears, but not as loud as we had expected it to beat.

Aha, we now have to worry about their expectations and the reality of facts.

One year ago, these analysts, commentators, and anchors expected India to continue surging at a 9% GDP growth rate forever.
We don't know where they got that number from - it is best to ask them.
Our own analysis had indicated that a 6.5% growth rate in GDP was a more likely, long term number.
Not as good as 9% for sure, but nothing to be ashamed of.
The 6.5% growth rate in GDP was still over 2x the global average rate of growth in GDP.

That has not changed - India will still grow 2x the global rate of growth.

But we recognise that the many stocks were nudging the expensive range at an Index level of 20,500 in January 2008. If the market - and the stocks we owned - had risen by another 15% to 20%, chances are that we would have been sellers. We would have found it better to have sold our shares and waited in higher levels of "cash" for share prices to correct to more reasonable level. We did have some "cash" waiting on the sidelines for an opportunity to buy.

And since February, 2008 we have been buyers - and willing to buy even more at these current levels.

Like I told my hosts on a CNBC show, "We are in a restaurant, and everything in the menu looks good". And the chef has just announced that he is willing to cut the prices by another 15%. We love it.

Supply and demand.
We have pointed this out before: the price of any product is also a function of demand and supply for that product.

Demand for Indian shares was really high in the years 2004, 2005, 2006, and 2007 - so the share prices move upwards rapidly.
As long as there was an underlying "business value" which made sense for us to own the shares of companies in this rising tide, we owned them.
When we did not like the valuations, we sold the shares that were no longer "value" and stayed in "cash".

But now, the supply of shares is far exceeding demand.
The foreign investors are selling out of India. They have sold USD 6 billion in 6 months so far.
Since 2003, they have been buyers of USD 0.8 billion every month.
In the year 2007, the foreign investors bought USD 17 billion worth of shares in 12 months - that is nearly USD 1.5 billion every month.
This year they have sold USD 1 billion every month.

And the local Indian money has been coming into the stock markets via the mutual funds but, it is not enough.
If the pension money flows in - maybe about Rs 30,000 crores or so could find its way into the stock markets, but the Left parties don't feel like supporting that move.

So there is only one way to create demand pretty quickly - give incentives to individual Indians to buy into mutual funds. If any individual buys into a mutual fund and hangs in there for 5 years, make his initial contribution free of tax - an idea we mooted a few weeks ago.

Table 1: Encouraging long term domestic investments in India.
Number of tax payers Amount invested Total pool in mutual funds Tax loss to government Tax loss to government
360,000 Rs 10 lakhs Rs 36,000 crore 35% Rs 12,600 crore
360,000 Rs 5 lakh Rs 18,000 crore 30% Rs 5,400 crore
35 million Rs 25,000 Rs 87,500 crore 10% Rs 8,750 crore
Total 36 million Rs 141,500 crore Rs 26,750 crore

Since then the market had declined another 15%. The market cap of the companies controlled and owned by the government probably declined by another USD 100 billion.

We really don't know if anyone from the government reads these articles or takes our advice seriously.

But that does not affect our actions.
Maybe we are stupid.
Maybe we are optimists (though CNBC keeps calling me a "bear").
When someone is willing to give us what we think represents an opportunity to own a piece of some pretty good businesses and attractive prices, we are willing to buy them.
And hold onto those shares for years, if need be.
Till the demand for shares increases again - and India Climbing becomes the next theme.
And the Economic Times puts those models back on their pink pages again.
We have no clue whether the analysts, the press, the TV anchors, and all these experts are right on their "sell India" call.
We recognise "value" and we are buying.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.

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1 Responses to "The end - or a new beginning?"

Dr. Suhas Shah, Pune

May 8, 2011

Dear Sir,

I always have wondered that nobody, but NOBODY is taking any objections to the EXORBITANT PRICES of Petroleum products in India, compared to those in the USA. AND STILL THEY SAY THAT OUR COMPANIES ARE RUNNING INTO THOUSANDS OF CRORES in losses!!!!!


The American companies buy there oil from the same arabs we are buying. Then they have to carry it far longer distance, compared to our own petroleum refiners.

So OBVIOUSLY there EXPENDETURE on the production of diesel/petrol would be HIGHER THAN OURS!!!

Then again, those in US are TOTALLY COMMERCIAL CO's, Doing it FOR THEY SHOULD BE SELLING diesel/petrol at a much higher rates.

IF you see the REALITY, Petrol in US is about $ 2/ US Gallon.
This comes to about Rs. 24.30 PER A LITER OF PETROL.

WITH HIGHER SPEND ON SHIPPING AND considering there " MUST GET A PROFIT " mentality, THEY CAN STILL SELL PETROL @ Rs. 24.30 per liter.

AND OUR OWN PETRO COMPANIES ARE selling it at Rs. 62.15 a liter AT LOSS!!!!!!


Dr. Suhas Shah.

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