Thursday, April 26, 2012

INDIAN ECONOMY TO CRY

DOWN FALL CONTINUES.
Well it seems that S&P is now very stringent in terms of rating after the debacle of its rating mistake in 2008 of US economy and its financial system. Today S&P has slashed the outlook on 21 Indian companies comprising of top banks, software exporters and public sector undertakings. It was in line with yesterdays call on Indian economic outlook. Don’t misunderstand that S&P is angry on Indian economy and that’s why slamming up one after another blows on Indian economy. According to S&P it has cuts its rating outlook to negative from stable of the following companies

1. State Bank of India,

2. ICICI Bank,

3. HDFC,

4. NTPC,

5. SAIL,

6. TCS,

7. Infosys,

8. Wipro and

9. IIFCL

10. Export-Import Bank of India,

11. Indian Railway Finance Corp,

12. Power Finance Corp,

13. NHPC,

14. Axis Bank,

15. Bank of India,

16. IDBI Bank,

17. Indian Overseas Bank,

18. Indian Bank,

19. Syndicate Bank,

20. Union Bank of India and

21. IDFC.

S&P has also affirmed the 'BBB-' long- term issuer credit ratings of all the 21 entities. The focus of S&P was mainly towards India’s banks due to its huge NPA in its books of accounts. This recent rate of RBI will help the banking system to restructure many NPA.I have already made comments on this very particular matter in my previous writings that RBI will only act for its banking system and less for the corporate India. RBI is mainly focused to keep its banking system to reasonable level where NPA doesn’t become similar to US banking system failure.

COLLATERAL DAMAGE OF DOWNGRADE.
The downgrade rating will create a collateral affect for the Indian economy in coming quarters. Borrowing cost will spook up which will make difficult for the Indian companies to raise overseas capital. This rating will degrade the confidence of investors, making the fragile financial market even worse. It will increases the global risk premium level by making the global market more sensitive to the Indian market investments. The biggest risk will be that it will damage the interests of Indian debt holders such as China, Japan and Russia as Indian treasury bonds lose their superior international status. Bond market will face the toughest times as Indian bonds will face difficulty in searching bond buyers from overseas market. Corporate bonds will also face similar hurdles.

PAINS OF RUPEE  DEPRECIATION
Among all these the most powerful affect this rating of S&P on Indian economic outlook will be on rupee. The dollar will gain its fundamental strength which would mean a weaker rupee. There may be concern in FX markets that Official and private investors instinctively may want to sell rupee and buy dollar. The rupee might propel up to Rs.54 to 57 ranges within this quarter. This, in turn, would put a pressure on the balance of payments of the country as we import 70-80% of crude oil followed with imports of edible oil, pulses & Capital goods becomes more expensive. If the rupee depreciates, we will have to pay more rupees to pay off the dollar-denominated imports. Demand for dollar would also increase, which would make the rupee weaker. This will also widen the gap of fiscal deficit. The depreciation also hurts Indian companies that have taken out loans in dollars. The interest on those loans, which is valued in dollars, effectively becomes more expensive as the rupee weakens.

In simple words I don’t find trust in the words of affirmation from the Indian government. Proof of the pudding is that Indian has about $270 billion foreign reserves in dollar terms with the Reserve Bank of India, which is enough to fund imports for the next six to eight months. But after this downgrade the when will rupee depreciate this reserve would start depleting fast, so hence India will face tough times.

ADVANTAGES OF DOWNGRADE
This will be advantageous for gold as an asset class and IT sector. Historically we have found that when currency turbulence begins gold shines brighter. Depreciating Rupee means gold price will increase in terms of rupee terms as Gold price (In Rs.) is directly proportional to Dollar Strengthening, Gold price(in $) & inversely proportional to Indian Rupee Strengthening. The depreciating rupee is the only positive sign for the Indian IT industry amidst the shadow cast due to global financial meltdown. This a welcome signs for the companies which are exporting out of India. A dip in the rupee helps Industry; particularly exporters, to meet the cost & wage bill better. In the times of global slowdown, the exports get the edge.

At a time when GDP growth rate has exhibited a slowing trend and also when the Reserve Bank does not mind a growth-inflation trade-off. Interest rates are the most interesting point here - higher interest rates, at a time of higher borrowing, would likely mean higher expenditure in terms of debt servicing. Flow of capital will head towards China and US economy. Foreign investors invest in an economy depending upon its ratings. This rating of S&P will spook a massive shift of minds of investors at times when the global economy is rattling. The international funding for ECB (external commercial borrowing), FCCB (foreign currency convertible bonds) will also get affected, which will ultimately affect Indian GDP, China and U.S will be the biggest gainers from this downgrade.
Well the situation is very intense and we should not vouch on the words of the government. Business strategies needs to be revamped to fight out these tough convoluted times. It seems 2012-13 will be another painful year for Indian markets unless government really presses the trigger of policy reforms. We need policy from government and not RBI actions.

INDIA DEFICIT........EXPLOITING RESOURCES

I find significant reason to justify the S&P downgrade of Indian economy. The Indian government needs to no introduction that it has been a master of delay in bringing new policies. The parliament of 2011 remained under the pressure of corruption of 2g scam followed with Anna Hazare movements. Well being a student of Journalism I find significant foreign support in these movements. Moreover the Indian corporate sector has also being an equal partner to exploit the resources of the Indian economy. Being a student of Journalism and dreaming to become a Financial Journalist in the next 2 years I have carried extensive research to present these facts at your end.

THE BIG HOLE IN INDIAN FISCAL.
The Indian corporate sector particularly the subsidy attracting sector has exploited maximum resources. According to the recent figures from the CAG it has been found that Tax exemptions cost to the Government is Rs 1,38,921 crore in revenues in 2010-11, on direct taxes. Of this, the lion's share went to the corporate sector. Corporate sector accounted for 63.5% (Rs 88,263 crore) of the revenue forgone of 2010-11. Just imagine the amount that the Indian corporate are having under the belt.

Further it has been found that Indian corporate sector is being promoted for doing tax evasion. Well this promotional activity has been carried out exclusively by the Chartered Accountants of India who has been doing it with full integrity for the past 60 years. The proof of the pudding is that according to CAG report s there were 7.2 lakh working companies in the country, according to the data with the Registrar of Companies, but there were only 3.8 lakh corporate assesses, according to the Income-Tax Department. Further drilling down the spinal cord of tax evasion it has been found in my research that Its being observed in the report that the assessee base grew over the last five years from 313 lakh taxpayers in 2006-07 to 335.8 lakh tax payers in 2010-11 where as the number of financial auditors were less. 

In another report on Union Government Finances and Accounts, the CAG said at the Central Board of Direct Taxes incurred a total expenditure of Rs 37,365 crore on interest payments over the last five years without obtaining approval of Parliament through necessary appropriations.

SQUEEZING AM ADMI.
Well the government in one hand will make the rich to become more rich where as the Am Admi will be squeezed through taxes and other levies which will increase the cost of living. In fact I have found that our salaries don’t grow as compared to the cost of living which doubles every year. In a recent note form the government it was found that India has made record food grain production for 2011-12 will touch an all-time high of 252.56 million tonnes, raising prospects for more exports. The above chart shows the food grain  production from 2004-05 to till date..Well that is very good news for Indian economy but my question is why the prices are not coming down of food grains. Why consumers have to pay hefty prices for food grain. Well the reply remains silent and raises more questions further. Even sugar output is expected to hit a record high of 26 million tonnes. This is bound to increase the profitability of sugar companies but did the price come down at the grocer shop. We are still paying Rs.32/kg for sugar where as the price in 2000 was Rs18/kg. Are we becoming too much focused for earning export revenue and more busy in squeezing the common man of india.

BECOMING RIC BY EXPLOITING RESOURCES.
We find coal prices are going up and increasing every quarter. Coal India plans to hike coal prices by up to Rs 175 a tonne to close the gap between domestic and international rates. Well we can feel the pinch of the rising prices from electricity bills and other energy related products. Indian industry will again go for a price hike of its products to pass on the rising coal prices. Coal India is having an cash reserves of Rs 45,862.28 crore. Well now just imagine despite of having such high level of cash reserves coal prices will rise and we will find various justification for further price hikes. Now tell me who is being squeezed in the battle of corporate earning and stupendous growth numbers.

One will be shocked to find that two dozen of India's largest public sector companies, including Coal India, power utility NTPC, miner NMDC, Steel Authority of India and oil producer ONGC, hold cash reserves of 1.8 trillion rupees. What an economic growth at the cost of Am Admi. I would like to ask my readers that do you think that after these huge amounts of cash reserves Indian industry is really struggling or busy in window dressing.

Now imagine the joke of the Indian economic growth. UPA government will find tough challenges to win the election of 2014.Media and free availability of information has increased the awareness among common man (Am Admi) that government is finding tough challenges to meet the objectives of its growth. Government will simply raises taxes and implement it on common man to reduce the gap of fiscal deficit. Whereas Indian industry will keep on exploiting the resources in form of subsidies and restructuring of debts and will keep on passing the higher prices as well the government debt burden. It seems like a double sword by which the common man is being cut into two half.

In the beginning I have mentioned that Indian corporate sector has been exploiting resources and those resources. I hope that I have been able to draw the attention of the society as being a student of Journalism.

Wednesday, April 25, 2012

INDIA DOWNGRADED......NEEDS POLICIES

WRITING ON THE WALL..NOW BEING HEARD.
The writing was on the wall and now it’s being heard. The country's weakening debt profile and sluggish investment climate has blown the trumpet of Indian economic prospects. Well the downgrading of Indian economy was very much in line with the government responsibility of inactions. What S&P has marked Indian economy is based on sound fundamental factors. S&P has downgraded India's outlook to negative from stable with rating of BBB-, which is the lowest investment grade rating. It is not S&P alone Moody's has a Baa3 rating on India, while Fitch rates India BBB-. Both are also the minimum investment grade ratings. The rating is based upon low opportunities of investments in Indian economic growth. Now please don’t mix up this investment with FII investments in stock market. Well this is what the speculators try to fool the investor community. My analysis is based upon fundamental and I did not try to confuse my readers with dozens of numbers and figures.

After 2004 when the UPA government came into force the Indian economy witnessed the first journey of its growth after the prolonged slow growth of liberisation. We economist, researcher, analyst and speculators have been trying to paint rosy colors for the Indian economic growth in 2012-13 and coming years. But the hard core fact remained at the same and no action was taken in real term to convert the portrait rosy picture into realty for the Indian economy.

THE BIRTH OF THE PAIN
High cost of interest rates has eradicated the growth and expansion plans of the Indian industry across all sectors. Moreover volatility and depreciating rupee has squeezed the margins of profitability of the Indian companies. Inflation was too high affecting the savings and consumption pattern of the consumers. This added more to the problems of downfall of Indian industrial expansion. This also resulted less profits for the companies and less government tax collection, affecting the government to meet its revenue targets. Now all of the blame cannot be slammed on RBI policies. Indian government failed to meet the FRBM targets and its fiscal deficit went up above 5% making it one of the most vulnerable economies reflecting negative growth of the Indian industry. India's fiscal deficit swelled to an expected 5.9% of GDP in the fiscal year that ended in March, far above the government's 4.6% target. We have been able to post good numbers in IIP backed my mining sector performance. If we make a quick glance at the IIP performance from December 2011 to March 2012 we will find the downfall performance of the real engines of the Indian economic growth.

Investments and gross capital formation of Indian economy was not supportive to achieve the growth of 7% for Indian economy. This is well proved through the performance in various core sector performance compared with the year back number of February 2010-11 v/s February 2011-12.

On Month on Month Basis IIP performance in 2011-12.

COOKED NUMBERS NOT BE TAKEN AS GROWTH.
Even if RBI has lowered the interest rates it will work less to bring growth and investments for Indian economic growth. Reason is simple rates reduction will lead to restructuring of loan books resulting less amount of disbursement of Real Loans for investments. Also banks are the master of disguise when it comes to preparation of books. This is proved from the fortnight performance of loan disbursement of banks from 15th March 2012 to 31st March 2012. Credit growth had dropped to 15.4% in February 2012 from 22% at the beginning of the last fiscal. But in March this year, it picked up suddenly. Loans given by the banking system show a jump of Rs 3 lakh crore in that month. The latest numbers show that credit has grown 19.3% in the last fiscal much above the indicative projections made by the RBI even a few months ago.Now one should be very clear about the growth of investments in real terms when books are being cooked.

In my previous articles which I have written 6 months before I depicted this threat of the Indian economy and the type of policy actions needed. Find the article here http://ianalysis.blogspot.in/2012/01/today-rbi-went-for-crr-cut-which-was.htmlI repeat here again that India needs reform in the these policies which will bring back Indian economy to an hot pot of investments.

• DTC will lead to huge savings and higher consumption demand under the DTC tax slabs.

• GST will lead to higher government tax collection from sale of goods and services.

• Land Acquistion bill -This will change the 117 years old land bill giving immense opportunity to Indian industry to start new venture.

• The companies bill 2011(Now 2012) -This will change the red tape delay of company and new venture formation. One single window and easy documentation will attract more investments.

Indian needs investments in capital goods and manufacturing segment. Infrastructure bottle necks needs to be removed in order to attract flow of capital. The above issues will enable Indian government to come back on FRBM tracks.But it seems that this government will fail and will face a hard landing. Since in 2014 India government will have elections and hence the time required for turnaround is quite troublesome. It seems to be a herculean task for the Indian government to get Indian economic investments back on track.

Delay and wastage of time by the Indian government is going to make Indian industry to face more hurdles in coming days. The downgrade will only find its way to come out when the polices of the Indian government and governance issues of the same is being looked upon in stringent fashion. Mere sanctioning funds on the budget table will not be sufficed. Indian government needs stringent governance in implement and achieves the declared budgeted investment targets made during the budget of 2012-13.

I know many economist, speculators and research analyst will say that RBI needs to do more policy actions to spook investment opportunities. Well I keep those friends alive to portray some more rosy pictures but the writing on the wall is now being heard. Over all the government of India has also declared very soon after S&P downgrade that there is nothing to worry. The government is committed to economic reforms. Well the commitment is just going to last for another 24 months from here.

Thursday, April 19, 2012

PRIVATE EQUITY BETWEEN AGRI & FOOD PROCESSING

The Indian political system went through tough times when the UPA government declared that 100% FDI investment in Indian Agriculture. Well I am not going to write a story about the doldrums about this issue, my objective is to draw Private Equity and Investment Bankers towards the sun rising sector of Food Processing Industry. Before I start off with the detail I would like to present the position of Indian agri production position globally.

• India's Position in World's Production

• Largest producer of milk in the world (105 million tonnes per annum)

• Largest livestock population(485 million tonnes per annum)

• Second largest producer of fruits & vegetables (150 million tonnes per annum)

• Third largest producer of food grain (230 million tonnes per annum)

• Third largest producer of fish (7 million tonnes per annum)

• 52% cultivable land compared to 11% world average

• All 15 major climates in the world exist in India

• 46 out of 60 soil types exist in India

• 20 agri-climatic regions

BRIDGEING THE GAP OF AGRI AND FOOD.
India stands to be well placed in terms of global agri production and this makes Indian food processing industry to become one of the leaders in global food processing by 2030.In my previous article I wrote about drawing the focus of the PE and IB for agricultural sector. In this regard development of the agricultural sector will boost up the growth opportunities of Indian food processing industry. The food processing industry provides vital linkages and synergies between the industry and agriculture production. The Food Processing Industry sector in India is one of the largest in terms of production, consumption, export and growth prospects.

With a turnover of $110 billion, it accounts for 35% of the Indian food market, and has been growing at a better rate of 14% in the last few years. Government has provided sufficient back up to enable this sector to propel up. For promoting exports from India two nodal agencies, Agricultural & Processed food products Export Development Authority (APEDA) and Marine Products Export Development Authority (MPEDA) were formed. MPEDA is responsible for overseeing all fish and fishery product exports; APEDA, on the other hand, holds responsibility for the exports of other processed food products.

The food processing industry needs PPP model of investments to achieve the industry size of $300 billion. It would be very dejecting to read that India has always remain late in identification of the jewels in new industrial growth. This is being proved by the presence of several global foods giants and leading Indian industrial enterprises in the country's food processing sector, such as: Nestle India Ltd, Cadbury's India Ltd, Kelloggs India, Hindustan Lever Ltd, ITC-Agro, Godrej Foods and MTR Foods Ltd.

Now when the majority market of the food processing industry is being run by global majors Indian government has come up with new packages and support system for the industry. The schemes included development of integrated cold chains, Mega Food Parks (MFP), Modern Terminal Markets (MTM) and bulk storage facilities as well as modernization of markets, quality control laboratories and abattoirs.

But agriculture sector is reeling still despite of such major’s global food processing companies. The reason behind is lack of governance issues of the Indian government. Well budgets are being laid down and million of funds are released for the agri and food processing sector but lack of governance issues keeps the gap widening only over the years. If Indian governance issues were stringent then the growth of both the industry Agriculture and Food processing should have been robust.PE and IB could find substantial growth opportunities through developing linkages between agricultural productivity and Food processing industry.

Now questions will come up that the food processing industry is having bottle necks of policy issues which make the sectors less attractive and this is quite true. Now unless investor’s community moves to the government to remove and simplify these issues then only sector will become free for unlimited growth. Among the bottle necks numerous laws, under the jurisdiction of different ministries and departments, govern food safety and packaging makes investors shaky about opening up new ventures. Infrastructure bottle necks are another hindrance but I find that these issues are opportunities for investment leading to Indian economic growth.

More than 30% of the produce from farm gate is lost due to inadequate cold chain infrastructure (covering only 1% of total F&Vs production) and inadequate logistics. About 80 per cent of the 217 lakh tonnes cold storage capacity is engaged by potatoes while other F&Vs account for only 0.2%. I don’t find one answer why we always blame the issues of lack of infrastructure despite of having resources to develop and improve the same.

Key Growth Drivers of Food Processing Sector in India.
Indian consumption pattern and living standards have taken a radical change resulting immense opportunity for growth. In my research I found few of the probable reasons which makes this sector a Sunrise Sector.

• Increasing spending on health and nutritional foods.

• Increasing number of nuclear families and working women

• Changing lifestyle

• Functional foods, fresh or processed foods

• Organised retail and private label penetration

• Changing demographics and rising disposable incomes

Research and development investments are also required to improve the standards of food preservation and improve the quality equivalently to global standards. Unprocessed foods are susceptible to spoilage by biochemical processes, microbial attack and infestation. The right post harvest practices such as good processing techniques, and proper packaging, transportation and storage (of even processed foods) can play a significant role in reducing spoilage and extending shelf life. The challenges in processing lie in retaining the nutritional value, flavour, aroma, and texture of foods.PE and IB has immense opportunities to do investments for developing the Indian agri product sector.

ONLY PE AND IB CAN CHANGE.
We are wasting our resources by doing investments in such sectors where investments return becomes risky. We are taking this risk in order to make quick returns from stock market gains. But we need a paradigm shiift in our investment theme. We need to invest for long since good thing takes time to grow. We have exhausted enough of short time return doubling investments. If India needs to achieve a sustainable growth then we investors needs to make a change in our style. Private Equity investments and IB should change their decade old process of doing business. India needs growth not for 2 years of 3 years. Proper policies and investments are only in the hand of capitalist and hence we should us it. We should be the first to identify the new investment avenues and work accordingly.

Wednesday, April 18, 2012

INDIAN AGRICULTURE THE BEST AMONG THE 3

The three sectors of the Indian economy witnessed slowdown in 2011-12. Moderation in agriculture growth notwithstanding, the year witnessed an all-time high food grains output. The services sector reflected the slowdown in construction, while industrial growth slackened due to the disappointing performance of mining and manufacturing sub-sectors. Data relating to Q3 of 2011-12 shows that growth moderated for the fourth successive quarter to 6.1%, recording the lowest rate in the last eleven quarters. The agricultural sector is facing the heat of non availability of storage facility. According to RBI its is marked that the current stock of food grains, at 53 million tonnes, continues to be much higher than the quarterly buffer and security reserve requirements.

PE & IB :IDENTIFY NEW AGRICULTURE AREAS.
India needs extensive investment to support agricultural research, development of water resources, infrastructure, particularly, power, storage and transportation.PE and IB needs to focus on these areas of investments where Agricultural growth can be achieved. New strategies need to be developed for doing investments into these areas. In Western economies its is found that factors which are driving interest in agriculture are surging commodity prices; increasing dfood demand of agri products thus prices will remain high for the medium-term and sustained or growing demand for biofuels.

In an recent projection like the one from the United Nations’ Food and Agriculture Organization found that 70% more food production will be needed to feed a projected global population of 9.1 billion people by 2050.Western economies are doing aggressive investments in agri products since they have identified that healthy commodity prices will continue to climb and are here to stay since Asia can’t feed itself. According to their investment target is focused on Asian nations which will need lot of commodity products and the suppliers will be from South America, but also from the United States and Canada. Hence western economies are making their PE and IB is just printing money from investments in agri sector. India has much potential to do investments.

PE can find investments in Crop insurance which is very much highly required in Indian demographic conditions.PE and IB will find prime opportunities in crop improvement and biotechnology, fertilizers, infrastructure, irrigation technologies and machinery. Yes among these entire investments one should not forget that a return from these investments is long term deal and good things takes time. Investments in agriculture typically have a longer time horizon than most private equity investments hence patience is the most important capital needs to be adopted by the PE.PE should invest in entrepreneurs who are coming into agriculture sector. Since they are equipped and well versed with modern technology and business centric strategies which will help Indian agriculture sector to achieve tall heights. Once the land acquisition bill get changed PE can do investments in farm land buying them up and later on leasing them to the farmers and reaping the long term gains.

SLOWDOWN IN OTHER SECTORS
We have become too much dependent on service sector and manufacturing sector. Industrial growth slowed down sharply during 2011-12, led by contraction in mining and poor performance of the manufacturing sub-sector. Industrial activity lost steam on account of weak demand for consumer durables, reflecting interest rate sensitivity, deceleration in external demand and subdued investment demand due to decline in business confidence. If one makes an quick look towards the IIP numbers from April 2009 to February 2012 we find 3.3 for IIP excluding capital goods compared with 4.7 for the overall IIP during the period April 2009 to February 2012. Manufacturing sector growth remained volatile and highly concentrated, with seven out of the twenty two industry groups showing negative growth during April-February 2011-12.

Moreover in 2012 we will find slowdown in global economy backed by slowdown in Europe Indian manufacturing will find difficulty to dump its manufacturing. Export market will remain tight hence growth from manufacturing will be difficult in 2012-13. The eight core industries grew at a subdued pace of 4.4% during April- February 2011-12 compared to 5.8% during the corresponding period of the previous year. This is mainly on account of contraction in natural gas and poor performance of coal and fertilizer industries.

In the recent finding by RBI it has been found that the Order Books, Inventory and Capacity Utilization Survey indicates that the y-o-y growth in new orders in Q3 of 2011-12 was lower than in Q3 of the previous two years. In simple terms new order formation for the manufacturing sector remained slump compared to the peak of 2010-11.Capacity utilization dropped resulting surplus productivity in cement and thermal power.

Service sector managed to maintain the growth but shows signs of plummeting due to decline in construction activity in India. Decline in new investments has resulted drop in construction activity. A revival in domestic industrial activity and improving prospects can improve the service sector growth prospects in 2012-13. The quarterly quick surveys of employment situation conducted by the Labour Bureau in select sectors of the economy indicate that employment generation slowed in Q3 of 2011-12 compared to Q2. Further salary growth remained in comfortable levels.

Led by engineering services sector, the projected jump of 12.9% in salaries for this year is higher than the actual increase of 11.7% seen in 2010.It is being expected that once investment cycles come into full swing service sector is expected to touch the peak levels of 2010-11.

Hence keeping all the three sectors in mind it is being found that agriculture sector needs PE investments since other sectors are prune to global macro factors matched with domestic factors. But consumption of food products and commodity prices will continue its upward rally. Where western economies are printing money based on the Asian economies agricultural slowdown. If and when private equity investments in agriculture become more common, several impacts from the influx of capital could take shape. Substantial private equity investments would also likely result in an intensification of mechanization and escalation in the trend toward larger-scale, more vertically integrated operations developing the Indian agricultural sector.PE and IB needs to come up to grow the Indian agricultural growth.

Tuesday, April 17, 2012

PHARMA NEEDS PE & IB FOCUS.

THE YEAR OF DECLINE.
Investment bankers across the nations are biting nails to find investments opportunities in 2011.It has become quite difficult for the investment bankers to find feasible projects where return on investments can be achieved with an big jump. The year 2011 was quite difficult year for the IB segment. The objective of this article is to dig out the opportunities in Indian pharmacy business over the next decade.The revenue of investment banks in India has declined to $515 million in 2011, down 30% from the $741 million generated last year, according to data from Dealogic Holdings Plc. The decline is revenue in backed by poor performance of the Stock market and stringent interest rate policy imposed by RBI affecting the margins and overall performance of the Indian companies. Equity capital market transactions slumped 67.26% to $9.76 billion this year and debt capital market volume fell 13% to $39.48 billion. Domestic M&A volume stands at $13.8 billion this year, down significantly from the record $45.9 billon announced in 2010, Dealogic data shows.

This is also the lowest level since 2005, when domestic deal volume was $12 billion. Inbound M&A volume has reached $30 billion, slightly behind the record volume of $34 billion announced in 2007.Macro economic situation has damaged the prospects of the Investment Bankers. In fact last time I covered a brief note on the performance of the PE in Indian economy and their pains of struggle. Please click here to read the previous article on PE in Indian economy.http://ianalysis.blogspot.in/2011/12/indian-pe-funds-consolidationbegins.html

THE GEN-NEXT PAINS.
Despite of these pains for the investment bankers I find one sector which will continue its growth journey despite of all tremors. India is having a population size 3 times of the US population. Hectic life schedule followed with modernized living styles has increased the complexity of the diseases resulting more stringent problems for the doctors to find remedy. Indian pharmacy sector is poised for an huge growth where within the next 8 years from now (2020) Indian pharmacy sector will grow to an will grow to an US$ 74 billion sales by 2020 from US$ 11 billion now.

In my research I went through few hospitals where I interacted with many doctors to find the real growth areas and the possible avenues which will attract the flow of capital. Cancer has become one of the most common disease among the gen-next. The real pain of cancer is much less as compared to the price of the medicines required for treatment of the same. The price of one of the cancer drug manufactured by Bayer's is Rs 2.8 lakh. Well now one can understand the pain of the treatment. Rising inflation along with an jumping health cost is eradicating the wealth of middle class and making the poor more poor.India is not an cash rich wealthy citizens country.60% of the population of India still struggles to have a full fledged meal twice a day.There is another most common and increasing disease called Liver cancer (hepatocellular carcinoma). According to the patent office if the drug department there would be about 20,000 such cases in the country.

Most of them are in the age group of 45 to 50 years who are suffering with the disease and moreover many of them the sole bread winners for their families. The more common cancers in India are oral, cervical, breast, blood and colon. There are many diseases for which, just like cancer, you have to be on expensive, long-term medication. Low cost treatment and medicines are the demand of the situation. The price of medicines has rose due to flow of foreign medicines. Indian pharma sector has failed to identify the potential growth opportunity in India. The US, which has a cancer registry segment, built under its government reports 1.5 million new cases of cancer each year. India does not have a national cancer registry.

The need for low-cost treatment is seen not just in cancer care but also in liver diseases like Hepatitis B and C. Pegylated Interferon, a medicine used to treat Hepatitis, costs Rs 16,500 a dose. Biotech-based breast cancer drug Herceptin, made by Swiss company Roche, the world's largest maker of cancer drugs, is sold for close to Rs 1 lakh a vial. The total treatment, depending on the severity and dose, could cost up to Rs 15 lakh. How costly is treatment is now well clear.India needs not only good numbers of hospitals. They need medicines and that at an low cost. In many cases, even generic versions, while cheaper than their patented counterparts, cost thousands of rupees for a dosage. Recently the Indian government has changed the policy for drug patents. Under the new National Pharmaceutical Pricing Policy 2011, by the Department of Pharmaceuticals (DoP), which see the government fixing and regulating prices of all 348 essential drugs and their combinations, included those on the new National List of Essential Medicines. These include 33 anti-cancer drugs. Further Indian pharmacy will find within the next two years, launching Herceptin and Avastin-like drugs in India at a low cost. But in order to make this dream come true Indian pharmacy needs PE and IB attentions.I have such details of medicines in order to enable the PE and IB to identify the areas of the real pains where investments needs to be made.
GLOBAL POSITION OF INDIA
Data from World Bank confirm that among the comparable BRICS nations, which have similar socio, political and economic influence in the globe, India spends the least on public healthcare. The Government's expenditure on healthcare as a percentage of GDP between 2004 and 2009 was well below that of other BRICS nations. While healthcare spends of BRICS were at less than 3% of their overall expenditure, corresponding values for US and the UK were 15% and 8.5%, respectively. While the yearly average between 2004 and 2009 for BRICS nations as a whole is 2.4% in India it was a meager 1.3%. The chart above shows the health spending.

PE & IB FOCUSING OPPORTUNITIES
This difference in spending is even more daunting against the background of growth rate of population during the period which was 1.36% for India, but only 0.7% for the BRICS group as a whole. India's per capita out-of-pocket expenditure to pay for health care costs has gone up from Rs 41.83 in 2005 to Rs 68.63 in 2010. Hospitalization costs, which rose 11.20% in 2004/05, rose 22.47% in 2009/10. At Rs 30,702 crore, the health allocation in the Budget for 2012/13 is 15% higher than the previous year's. But as a proportion of the GDP it has been stagnant at 0.3% for several years. Hence PE and IB can understand very clearly about the investment opportunities in Indian healthcare. Now don’t expect robust growth in 2 or 3 years. Good things take time hence one should stay invested to reap the growth from growing Indian economy. A balanced path" between discovery [research] and "regular" business will continue to draw the interest of private equity firms. Hospital chains will attract capital, as well as niche and therapeutic area-focused players. The growth in tier 2 and 3 cities will provide large opportunities. PE and IB should focus on long-term growth projects by focusing in specialized therapeutic areas and/or more complex molecules.

SMALL THOUGHT.We often find that US companies imposes many restrictions and raises voices over the Indian companies related to medicines patent and copy right issues. I would like to ask one question to my readers that when the business deal is being executed across the globe for Weapons of mass destruction then we spend thousand billions of funds but why can’t we apply the same theory for the Drug segment across the globe. Why joint collaboration research projects are not being executed to develop low cost medicines. Well this might sound like a philosophical thought but I request to think over.

Saturday, April 14, 2012

CRUDE PRICES UNFORESEEN SHOCK


UNFORESEEN CRUDE SHOCK.

The crude price prediction is not an astrologers work neither I have tried to do so in my article. We all know that once the crude price rises above and sustains to $120/barrel. The recent developments in world crude market it seems that we are heading for a hard landing and inflation will rise abnormally across the globe specially affecting the emerging economies. Crude might rise back to the level of $140/barrel and its minimum base price will be not below $120/barrel in the coming next 1 year time frame. Further there are no vast, new supplies of oil that will come online in 2013, 2014, and 2015 at the scale to negate existing global declines. Major of the blows will come in this 2012 where the economies will face the heat of rising crude prices and increasing the gap between fiscal deficit. In my article I have depicted the some of the strategies being adopted by few economies regarding to fight as well as make commercial advantages from the unforeseen danger of high oil price.

Crude is being stocked across all the major economies as well as by the producing countries. This stockpile is being made on record quantum just not to take advantage of the low price of crude but to sell it to consuming countries once the price rises beyond to $120/barrel. Over and above these economies can foresee the huge upside jump in crude pieces in coming years. These economies who are doing stock pile will be taking advantage of high oil prices to reduce their fiscal imbalances against trade of exchange of business and negotiate in exchange of trade and commerce. The price and demand of crude depends upon geo-political impact but now it stands beyond that limit. Since US and Europe seems to be fewer contributors to price rise in crude backed by their demand prospects the game of demand and supply will have negligible impact on crude price in 2012 and 2013.

CHINA OPEN’S WIDE MOUTH.

China's crude-oil imports jumped to near-record levels in March. China oil imports reached 5.57 million barrels a day in March, the third-highest month on record and a rise of 8.7% from the year-ago month. China's crude imports rose 11% from the year-ago quarter, a much stronger pace than full-year 2011's increase of 6% .China is in the process of gradually filling the reserves" before reaching the goal of having 90 days of supply. China has brought new storage facilities online in recent months and is in the continuous process of building new reserve facilities. China estimates that its crude-oil imports will average 5.77 million barrels a day in 2012, up 13% from a year ago. Among this about 150,000 barrels a day could find their way into storage. In the recent turmoil with Iran and other economies china has gained a substantial crude oil supply from Iran. Iran supplied 11% of China's total imports in 2011.China ha built two more storage sites which became operational in Dushanzi and Lanzhou, in the Western part of the country, late last year of which each can hold 18.9 million barrels. Six more are expected to come online by early next year, adding another 131 million barrels.

This reflects that China is simply making a huge stock pile of Black Gold and later on will meet its own demand as well as earn forex reserves by selling to other economies. China International Capital Corp. estimates that 10.6 million barrels of oil had flowed into storage, both strategic and commercial purpose and this commercial purpose excludes domestic consumption. China’s long term plans regarding storage facilities are massive. China has planned to expand capacity to more than 500 million barrels by 2020, according to China Oil, Gas & Petrochemicals.

IRAN ADAVANTAGE

It is not china alone who is doing stock pile for commercial purpose. With the recent turmoil with Iran the country itself has planned up massive oil storage facilities. Managing director of the National Iranian Oil Terminals Company has stated recently that the National Iranian Oil Company plans to start using a new storage facility at the Kharg Island oil terminal in the northern Persian Gulf and this facility is ready. storage capacity at Kharg Island, which is Iran’s largest oil export terminal, was reported to be 16 million barrels as of mid-2008 and now that stands around 20 million barrels.

Iran will expand it to 31 million barrels. Recently Iran has disabled tracking systems aboard its tanker fleet, making it difficult to assess how much crude Tehran is storing and exporting to other economies against the Western economies restrictions. Most of Iran's 39-strong fleet of tankers is now "off-radar" after Tehran ordered captains in the National Iranian Tanker Co (NITC) to switch off the black box transponders that are used in the shipping industry to monitor vessel movements. Hence the crude market is quite in dark and it is casting shadows of a major crisis and high prices in coming years. The restriction on Iran by Western economies has given immense opportunity to other economies as well as domestic oil producing nations to increase their storage facilities. According to the International Energy Agency Saudi Arabia has increased its oil production to a 30-year high to storing millions of barrels of its oil at home and in its major markets.

According to the research findings it has been found that the Organization of Petroleum Exporting Countries (OPEC) has raised its output by almost 1.4 million barrels a day over the last six months. Around 40% of this increase comes from Saudi Arabia’s spare production capacity, with improvements in Iraq and Libya’s oil industry delivering most of the rest. In fact Saudi Arabia flexed its muscles of oil production immediately after EU ban on Iran oil. This production is being stored and later on will be sold once the price rises to beyond $120/barrel. All these storages are being developed just to make appropriate gains once the crude hits the floor of 2008 level. Well now we have to wait for the prices to rise once July 2012 calendar opens up.

Wednesday, April 11, 2012

CHINA NEW INVESTMENT OPPORTUNITIES


An economy which has shown the world that it can grow despite of any one dreamt about its success can never fail in the long term. Its base is made of strong policies and moreover policies derived from historic mistakes of others. I am hearing from the last 2 months about the recent downslide of Chinese economy and criticizers mainly from the US and European economy throwing pots and pans towards Chinese economic growth prospects. I find they are trying to draw major attraction from downsizing the Chinese growth and uplifting their own economic prosperity. China has always found new areas of investments and is keenly developing relations for trade and investments at a time when the US and Europe is busy to handle their economic stability.

New Investments.China is doing another huge turnaround for its domestic industry. Under the 12th plan Chinese Aviation industry will undergo a huge turn around boosting investment opportunity and flow of capital to China’s mainland streets. By 2015, China will construct 70 new airports, relocate and construct 15 airports and re-construct 101 airports, and China will import more than 300 planes every year. Well all these promises are not Indian promises. China knows where the growth lies. It has earned forex reserves through extensive export and earned the crown of World No.1 exporting country now that same economy is going to chase its dream to build its domestic economy.

Well one cannot build himself unless one has enough liquidity in his own hand. China has earned that liquidity through export and now its going to attract again the flow of capital back to its own economy via development of the domestic economy. By the end of the 12th Five-Year Plan, China will convert its major base airline companies in Shanghai into large-scale network airline companies with international competitiveness. This will further lead to a central operation network taking Shanghai as the core hub. China will turn the Shanghai Pudong Airport into an international airline hub with quite strong competitiveness and also the core airline hub of the Asia-Pacific Region, and the number one international air freight hub in the world.

Well one can simply calculate the volume of capital that will flow into china for building this dream and china never fails in its growth plans, hence the chances of faltering are less in Chinese Aviation investment. I don’t need to discuss about the other related industrial growth that will come from this one singular industry of China. Neither I gave any figures of historic investments growths being achieved by China. History has nothing to do with the upcoming new investments and GDP growth.Hence one can clearly envisage the growth prospects and flow of capital China will get in the coming years. Now I think my readers can understand why US and Europe is busy in down grading the growth prospects of Chinese economy. Nothing but to stop the flow of capital for China which US and Europe need in their own breeding.

New Trade Relations.
Among all these china is continuously exploding new relations to diversify its forex reserves. China very recently is going to do huge investments in Turkey. China has changed its taste of investments from the past 2o years old proven industrial base of investments. China is exploring new investments areas where US and Europe have failed or neither have identified. The new areas where China is doing investments in Turkey are emerging fields like new energy, space exploration, energy conservation and environmental protection. Nuclear energy is also one of the strongest investment areas of China’s trade pact with Turkey. Two agreements, including a letter of intent between China's National Energy Administration and the Turkish Energy Ministry for further nuclear cooperation, were signed. China is edging ahead in the international contest to build a nuclear power station on Turkey's Black Sea coast.

China is Turkey's third-largest trade partner. Data from China's Ministry of Commerce show that bilateral trade increased by 24.2 percent to $18.74 billion in 2011.One of the prime reason for doing such an massive investment plans and deals in Turkey is to bring out Turkey from the trade deficit it has on its economy. The trade deficit stood at $19.23 billion in 2011, up 28.9 percent year-on-year. Hence China find immense opportunity to turn that trade deficit into an trade surplus over the next decade.

Economic Cooperation and New Upcoming Chinese Investment Areas.
We read books about economic cooperation and we even find many notes lectures being given on this topic. But the real application is being adopted by china and now we don’t need to look into historic examples of economic cooperation and development. Before I end up I would like to reveal one truth about China economic growth. Dont expect china to deliver astronomical GDP growth in the next decade. Slow but Steady should never be forgotten. Last year, China’s Premier Wen Jiabao told the country that the government’s target for growth over the next five years was 7.5%. China’s economy grew over 10% throughout the mid 1980s to mid 1990s before suffering from the Asia Tiger crisis in 1997, when smaller southeast Asian nations faced massive debt burdens that caused entire economies to crumble. China then spent another six years growing between 7.6% and 9% before taking a new leap in 2003.Hence slow but steady is good enough than an double digit jumps every time.

China’s next destination of investments will be health care products since china is facing the problem of huge aging population and this gives it an immense opportunity of investments and development of its health care system. China is no longer the cheap labour economy. Incomes are rising, with average incomes equal to that of the U.S. back in the 1970s, and on the east coast, per capita incomes are over $20,000, making China’s chief urban centers like Shanghai more of a middle income European country than a poor one. Investors be ready for investments into Chinese health care. Once the gate opens up it might be too late to start off.

Tuesday, April 10, 2012

China offers no Surprise.

No Sudden Surprise.
China reported last month trade deficit which was recorded after 20 years in the Chinese economy. The trade deficit of China was worth $31.5 billion in February, the largest since 1990.Today the latest figures came up where china has shocked the world economy with a trade surplus. China swung back to trade surplus in March from February's deficit of $31.48 billion, posting $670 million trade surplus in the first quarter according to the General Administration of Customs (GAC).Exports amounted to $165.66 billion in March, up 8.9 percent year-on-year, while imports reached $160.31 billion, the GAC data showed.The amount of foreign trade in china surged March by 7.1 % year-on-year to reach $325.97 billion, with a trade surplus of $5.35 billion. The trade surplus indicates money is flowing back to chinese streets again.

Well it was not an surprising number for me as the last month number of trade deficit was backed the Chinese lunar New Year which fell in January this year, the year-on-year growth rates for Chinese exports and imports were distorted, and combined figures for the January-February period were could have better reflected the numbers of growth. Moreover china is being acclaimed that its economy is facing a hard landing. Well according to me Asian economies are facing the heat of high inflation and slow growth for the past 6 months or more. India,China and other Asian economies are facing the slowdown of the European market. From January to February, China's exports to the EU dropped by 1.1%, pulled down by the crisis in Italy, where imports from China fell by 31.1%.Further china has been able to swung into trade surplus due to China replacing European countries from exporting countries map. China despite of the hurdles in European economy has exploded emerging markets which helped Chinese exports. Sales to Russia and Brazil gained 10.3% and 10.9%, respectively.

High Inflation Replacing Export short fall.

China is facing the heat of high inflation which has spooked up the price of living in China. This sudden abnormal price hike in living cost is made to adjust the shortfall in export income for the Chinese companies who are heavily dependent on export. In simple words inflation is china is small time frame matter and will last till it finds its domestic demand and export markets to strengthen back its low cost living back bone. Rising prices in china has impacted the low income families are grappling with the food cost which surged by 7.5% which spooked the CPI to 3.6% year-on-year in March, according to the National Bureau of Statistics.CPI went up since food prices accounts for nearly one-third of the weighting in the calculation of China's CPI.

China Real Estate Offers no Tension.
China has being more keenly watched about its policies for the real estate market. China is not going to change any polices related to boost up the real estate market unless China finds the price proportion to income of buyers coming down. It has been found in research that many developed countries indicates that reasonable home prices are usually three to six times a yearly household income. The ratio in some of China's first-tier cities, such as Beijing, Shanghai and Shenzhen, however, has reached more than 15 and even 20 times yearly incomes. This simply means prices will come down by 50 to 60% in order to relax norms for Chinese government for the real estate market.

Despite of restriction on the Chinese real estate market China has found substantial growth in the property market. In the first 10 days of March, the sales area of newly built commercial houses in Shanghai reached 417,000 square meters, an increase of 165.6% on the same period in February. There was also substantial demand of second hand home sales. Developers have made efforts to boost sales, by reducing or even waiving down-payments and offering big discounts.

Even the China's central bank, recently changed its structure of housing loan, that commercial banks should guarantee lending to first-time home buyers and ensure they enjoy a differentiated preferential interest rate. This further has spooked the demand in Chinese property market. In fact, some banks in Beijing has already began offering the benchmark interest rate to homebuyers instead of the higher rates adopted from the start of this year. China has shifted to affordable housing segment and hence growth will come from only affordable housing segment and not from the large sized historic sales deal which used to be heard in the past decade. China is going to achieve growth from its domestic middle income population and not from the cash rich segment. India also adopted similar stances but its big question of how much success has been achieved in affordable housing market in India.

For china land-sale revenues are a large contributor to local fiscal coffers and hence there is less chances of major price correction over the period of time followed with smaller declines compared to Indian economic culture. In my research I have drilled further and found that with the rise of property prices over the past decade, the proportion of land sales income to local fiscal revenues has increased from 16.6% in 2001 to 48.9% in 2009.Hence any chances of price decline in Chinese real estate market is an question of big doubt. Over and above china should not be taken as a looser economy. It has outshined most of the economies through its policies and it will continue its journey of economic growth of 9% depending upon the domestic driven demand replacing the export market. This transition is ought to bring volatility and slow down for the Chinese economy.

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