Is Recession Round the corner?? - Part 2 (Slowdown)

This is in reference to my earlier article on recession. Now I am bit convinced that India is on edge of a slowdown at least for the moment

http://luckylehana.blogspot.com/2011/04/is-recession-round-corner.html

Consider these
1. Real Estate Slump – After a booming 2010, there is considerable overcapacity in Real Estate, which have been responsible for revival of downstream industries such as Steel and cement.

Cement have already shown that the overcapacity will push the margins downwards
http://www.moneycontrol.com/news/business/india-cement-sector-to-see-overcapacity-aheadfitch_437483.html

A very good note
http://www.thinkindia.net.in/2010/08/an-unreal-market-.html

I have myself taken note of the situation – The labor costs are cutting the margins of the small business owners

2. Governance Issues – I think (my personal opinion) Congress is responsible for many of the woes India has currently. I have lost the count of the scams and Congress leaders are still hiding around (including Manmohan, Sonia and PC). They are shedding their responsibilities by playing aloof.

Anyway, I think there are more 2G, CWG, Adarsh in the bag.

3. Outflow of Funds – India is the only BRIC country to have net outflow by FII in 2010-11. This indicates that the FII does not believe in the Indian story or they are scared away by the 2G, CWG etc

4. Inflation – I don’t buy the contention the inflation in India is only due to poor Supply Chains. Having seen the loosing of purse by the Government in 2008-09 for the cheap lending and popular schemes, I am convinced that wrong fiscal and monetary policies are responsible for this monster

I consider Inflation as the worst factor to derail the Indian growth story.
Inflation is nothing but redistribution of wealth. Inflation makes worth of the currency you hold to tumber but increases the worth of the land and the house you are building to increase. A real estate developer (assuming input prices takes time to increase) gains in real terms through inflation but the workers and the engineers working for him loses in real terms through inflation. So, inflation is equivalent to shifting of economic benefits from a lagging earner to a leading earner.

Unfortunately, increase in wages is a lagging indicator in economic recovery. Hence, wage earners will be the one, who will suffer the most in an inflation cycle.

Is Recession Round the corner??

I was thinking about the business situation in real life and found a very interesting case in my home only.

My brother has an AC sales, distribution and repair business in Gurgaon. In last 5 years, he had seen his percentage margins going south slowly but steadily. The trend accelerated in last 2 years due increase in
1. Cost of Capital (10% Fixed income rates in India)
2. Cost of Labor

The repair is the worst hit business as cost of spairs and labor cost of mechanic has increased by 100% literally, while the unit repair rates are pretty same. Much of it has to do with the 15% food/commodity inflation in India. He has to decide to either run at loss or shut down repair business totally.

I am not sure what is the way out of this situation. I have advised him that Recession is round the corner. Wait for the inputs to subsidize.

Things apart, some of the concepts of marketing such as finding blue ocean of niche segments seem to be too hard to implement if you just have 0.001% of the highly fragmented market.

Short USD Long Yen, Major Asian Currencies

Just an hour ago, US Dolloar (aka Treasury) is downgraded for the first time by US based agency - S&P. Though it has already been downgraded by the biggest investor in US economy - China. When this happened some 6 months ago, almost all my American Classmates at my Alternative investment class, in Kenan Flagler Business School, UNC were of the opinion that this is none-sense and nobody cares a damn about Chinese downgrade.

I argued a bit but then there were people, who believe that they have better knowledge of the financial world. This points out one of the biggest problems with US business Schools Graduates. They operate as just like Muslim Ghetto's and believes the world outside the ghetto is stupid. THANK GOD, I went to CEIBS to get broad outlook of world rather than narrow US based outlook of world.

Anyway, its time for some quick buck. I am sure many long-short macro funds would have milled millions by now.

Coal India IPO - Is Indian Govt. giving too much away

I was not surprised by the 17 times over-subscription of Coal India Ltd. Given by the reserves (Biggest reserves in the world), the valuation was bit of a tough task. Even the company had a huge cash in hand.

Some 2 months ago before the deal, I calculated that the cash in hand per share would be around Rs.40 per share. Though I was not sure about the exact valuations, but analyst were quoting around Rs. 300 in contrast to highest band price of Rs. 245

This brings a critical issue in privitisation of the PSU's in India. Is the Indian Govt giving away a lot of assets too cheap??

EIL and others were not so exciting as markets were not so buoyant in 2009. Next in line - IOC, PGCIL. I would place my bets for PGCIL - Power sector is going to have a good boost in coming years.

IOC will still suffer from existing price restrictions on retail fuel prices in India.

First week in US

I would say right on the very first week, I got to realize that
1. Why people call US to be greatest country in the world
2. Why economist say this country is going down.
and
3. Why I think USD will go down (below 42 INR/USD by December)
4. Why India and China is future of the world

Let me illustrate 1 by 1

1. People are really warm here. They are not only open, they are willing to lend you an extra hand. Infact I would say - After travelling so many countries around the world, I found people in US to be most cooperative. Though I am bit biased as I live in North Carolina which is known for friendly people. But this soft power is absent in India and China. In fact, I found China to be most unfriendly place till now. I think it is due to the culture that Chinese people do not want to cooperate and they are too mean and selfish in negotiations and relations. India is in between. But yes US is true soft power.

2. Lot of inefficiency and overcapacity all over the place. Lawyers earn more than engineers. Value destroyers (lawyers) are powerful enough. Taxes are really high. No incentive for creating value. Informal channels such as tips in restaurants. Free buses, which are mostly empty.
Hence, the economists seem to be right.

3. An overburdened economy can survive this for long. Broad unemployment (not net) is close to 20%. This means that 1 in every 5 person is facing blues. In absence of any expansion space, inducing inflation and hence, lowering the relative wages and taxes seems to be the only method of escaping the deflation spiral.

4. China/ India - Wage and taxes are low, Lawyers are not powerful, People want to become Engineers (read value creators). Though there is some BS going on in India, China seems to be spearing ahead with unprecedented pace.

Baggage Limits

Airlines esp.........the international ones are smart enough.......

China Eastern charges Rs. 920 per extra Kg of baggage....and all the international flights have limits of 20 Kg for baggage and 8 Kg for cabin ...

Thats a fair method of earning extra bucks by the airlines.

Maruti to launch CNG vehicle :- Ananlysis of Indian CNG Markets

Maruti is going to launch a CNG variant of the famous ALTO, the people's car..............

On the other hand IGL ( Indraprastha GAs ltd.) had increased the prices of CNG by Rs. 2.10 in New Delhi.....

Obviously, the demand is fuelling increases in the price of LNG. But there's another factor at work as well: the chronic gas shortages and the uncertainties related to international pipeline gas projects- Iran-Pakistan-India and the Myanmar-Bangladesh-India pipelines are still in the air.


ONGC and IOC had planned their Import terminals........At Dabhol, NTPC and Gail, which own the power plant and the attached LNG facilities, are planning to sell the plant to an LNG operator such as Petronet LNG.........this makes economic sense as Petronet has got good contracts for LNG supply abroad ................

In turn, Petronet is considering doubling the plant's capacity from 5 MMTPA to 10 MMTPA and is involving Qatar gas for a stake in turn for supplies.......


One big supurise is Africa (mainly Nigeria, Algeria, Angola and Egypt) could also become a major source of LNG. CEIBS seems to have placed their bets on Ghana rightly by opening a campus there.

Biggest advantage with LNG - its SCM- it can be transported from any where to anywhere........

Indian CNG market is growing by 50-70 % annually a robust growth by any standard.........and is poised to touch 4 times in next 4 years.......

Though power and fertilizers will be having robust growth......the real addition will be from the nascent sectors such as the Automobile fueling and industrial heatings......

KG basin and GSPCL will be the new additions to the Indian Kitty.....and other such additions could make the country a less deficient destination.......

The first demand driving factor for LNG was the replacement of Naptha and other Carbon chains from the Fertilizer manufacturing plants..........I remember Naptha was blackmarketed in remote places like Dhule and Nandurbar in northern Maharastra........

There were so many local heavy weights in that business of Naptha and solvents plants of Nandurbar........and rest is history........

There are lot of global factors which are going to have stains on the Indian Market in terms of the price escalation......

For Example the Drama over the cancellation of the Shell Environment contract in Shakhalin II project in Russia have significant effect over the Futures of the LNG contracts..........


Conclusion :-
1. Indian demand for CNG is here to stay and increase furhter
2. Supply is not showign any major development in near future of 5 years.
3. Sectors other than Fertilizers and Power are going to real growth drivers.

Hence, Marketiers and suppliers should engage in long term contracts.....to get a price advantaage and stable supplies in future.......

CEIBS campus in Ghana

Capitalising on the campaign of the chinese Govt for the Chinese companies to look at Africa as future Market for Growth, CEIBS has opened the Ghana Campus..

Main focus will def be the companies looking forward to expand sourcing and markets in Africa.

Upper Circuit

A strange call came from one of my friend........"Hey Lucky the Market halted today as it hit upper circuit."

Thats really surpurising for a market to hit the upper circuit in recession. Are we really in recession. ????

Well there does not seems to be any correct or I would say good answer. On person front I take the following factors..

1. P/E
2. EPS
3. Cash Flows
4. Prospects of the particular industry in which the company operates

The average P/E ration for last 15years for the Indian market is closer to 14.5. The same is true for Average global P/E across markets which is closer to 16.

But here is the catch. With this sudden sprut in Market from 8k to 14k. Valuation for equities does not seems to be fair enough.

India Managed the crisis better

Well a very nice article about Indian Economy robustness and the reasons behind it.......
http://www.nytimes.com/2008/12/20/business/20nocera.html?_r=2&pagewanted=1


One of the biggest reason - Strong regulations to check speculative activities and profiteering.


BUT STOP A MIN - WAS BAD FINANCIAL REGULATIONS A REASON OF FAILURE FOR US - I BEG TO DISAGREE

SWOT

Strength

Extensive Experience of 7 years
Diverse Experience in various domains – Projects, Operation, Marketing, Retailing


Weakness

Opportunities

Doing internship in India and China
China Guanghua School of Management, Peking University
(PEKING), Beijing
• • Chinese University of Hong Kong (CUHK), Hong Kong
• China Europe International Business School (CEIBS), Shanghai
India • Indian Institute of Management, Ahmedabad (IIMA),
Ahmedabad
• Indian Institute of Management, Bangalore (IIMB), Bangalore
Indian School of Business (ISB), Hyderabad

Singapore • Nanyang Business School (NBS), Singapore
• National University of Singapore (NUS), Singapore
Leveraging CFP

LNG Boom in India

IN 2003, NTPC dropped deals at around 4-5 per MBTU

It was summarily turned down as an "overpriced" and "unviable" offer. Less than three years later, potential buyers from India -- including those who passed on the $4.5 offer -- are scrambling to buy LNG even at $7 or $8. It's a steal at that price: countries like Japan and South Korea are buying LNG at $11 and $20.

It's taken just three years to turn the market dynamics of the LNG industry on its head. With demand in India and China growing at 6-7 per cent a year, suddenly LNG is a suppliers' market.

But it's no party for suppliers, either. Between buying gas at respectable prices from producers across the world and India, to selling them to customers like power plants and fertiliser companies at a profit-generating rate, the suppliers have their work cut out.

This isn't a temporary situation. Natural gas is a clean fuel and given the rising costs of emission control equipment, Indian power generators are increasingly switching from coal-fired to gas-fired plants. As are auto makers.

Stir frying

Why Chinese companies have multiple Accounting systems

China, of course, is legendary for its lack of financial transparency, and has actually brought financial misappropriation to an art form.

While the numbers vary, estimates suggest that some 20% to 30% of all loans extended have actually been diverted for re-deposit or for “stir-frying” purposes.
Re-depositing is the practice of obtaining loans at extremely low interest rates and depositing them in the issuing bank to earn a profit in higher-yielding bank accounts.

“Stir frying” is the Chinese slang term for putting the money into Chinese markets in an attempt to manipulate share prices and profit. But most of the money has come back and remains “performing” at least to date.

In a related wrinkle, a hugely disproportionate amount of money (at least, by Western standards) is loaned out on a long-term basis, only to be paid back a month later. While this creates havoc with asset matching, this helps the borrowing company look more financially active than they are and presumably appear sounder at the same time. Asset matching, in case you are not familiar with the concept, refers to the practice of having long-term loans extended against long-term assets, and short-term loans extended against short-term assets.

When long-term funds are lent against short-term assets, or vice versa, there is a “mismatch. India has its own stories of mismatches. Reliance has very well used the same techniques to fund its mega projects.

This kind of short-term/long-term mismatch is actually surprisingly common in many Asian markets - including China - because it’s a strategy that can help a company obtain still more funding, especially during times of high growth. The rough equivalent in U.S. terms would be a person who borrows money even though he or she may not need it and then pays it back in an attempt to boost his or her personal credit rating.

The lending crisis in the United States was the result of two things:

Derivatives contracts that were unmonitored.
And improperly categorized risks unseen by both management and regulators alike.
Here in China, however, the real danger stems from lending driven by guanxi, or “connections.” [Although the West defines guanxi as "connections," that's actually something of an oversimplification; some sociologists have actually likened it to "social capital." But even that doesn't capture all of the nuances that make the Asian culture so fascinating to watch and study.]

Because the social concept of "face” is so important in Asian cultures, there has historically been a tendency to lend money on a preferential basis to favored clients based on nothing more than the connection between lender and borrower - regardless of actual credit worthiness.

China’s bankers are learning quickly, however. Beijing is keenly aware that many banks may not have been properly checking the creditworthiness of their borrowers, so the government has taken steps to implement stricter lending requirements even as it has increased the amounts of lendable cash available.

While many Western executives claim to have been surprised by the credit crisis, I find it interesting that many of China’s bankers seem to be anticipating a credit crunch of their own. Indeed, a recent survey by China Orient Asset Management Corp. of 333 banking officials - including 89 risk-management officers - found that more than half the respondents expected their bad loans to rise in 2009. Additionally, nearly 40% of the respondents expected sharp increases in non-performing loans within the first half of the year.

Yet, few bankers expect Beijing to turn off the lending spigots anytime soon. While Beijing could certainly do so, it wouldn’t be in its interest to cut back on new loans, or to change the rules when it comes to stimulus-driven-lending programs - at least not for the time being. After all, there’s just too much riding on China’s ability to maintain a high rate of economic growth.

Beijing remains optimistic it can hit its growth targets, although “caution” is becoming the watchword around here. And as long as the growth imperative remains in effect, consumers and businesses here can have every expectation that the money will continue to flow from the banking faucet - even if an increasing percentage of that credit is destined to turn into “bad.”

But that’s okay: Government perhaps want its companies to just earn money.

Retailing in India - Entry of Wal Mart

Indian Telecom giant Bharti and World’s retail gaint Wal Mart are eyeing the $400Bn Indian retail sector. Only 5% of the sector is with the organized players. Whopping 95% is still unorganized.

So, they are eyeing a market of 380 billion dollars. They have appointed Technopak Consultancy as their advisors.

But there is a catch here. Already a lot of problem are being faced by the already existing players. The margins have really shrunk for them. Some of them are on the verge of extinction. Subhiksha, a well established player, is in dire financial situation.

Following are the challenges before the new joint venture between the 2 players.

1. Vastness of the Supply sources. – Food grains from Punjab and Spices from south India covering a distance of 3000 kms. Remember just 10 years back India was importing some 20 percent of its wheat requirements not because it produced less but because it found it cheap to import the same from Australia than moving it from Punjab and Haryana.

2. Resistance (Mentally ) to a foreign Player. :- Just remember what happened the KFC in south India when the launched their chain there. There was a lot of ill word and hatred spread against it in both the print and electronic media.

3. ROI- well the biggest question yet to be answered in the big projects are those related to the ROI. How they will be able to justify the ROI among such a tough competition from already established players. Location is very important in this business and its very important to have locations of high footfalls, which are unfortunately already occupied. Also it’s very uneconomical to have crowding of a particular place.
4. Competition from the unorganized sector: - People from unorganized sector is bound to be there. Currently they are operating on very high profit margins. But with increased competition they are bound to reduce their margins and put up a great with new players.


Now what should be their strategy.

India specific strategy.
1. Focus on select few markets and select few products instead of putting up a broad front of products.
2. Dynamic Supply Chain :- India is a dynamic and growing economy and hence rigid supply chains will falter soon. See how fast Pune has grown as a manufacturing hub and gugaon as service hub.
3. Recruitment :- Focus on training more than giving perks.
4. Buy / Produce decision :- Very critical and depends on location to location.