It will rain cash for India Inc.


FY09 was an extremely tough year for Indian corporates. As if the global financial crisis and the adverse impact on the stockmarkets were not enough, Indian companies saw their performance deteriorate. Not just that, funding for business purposes also proved to be a problem. What however stood out the most was the excess debt on the books of most corporates which ate into profits as sales dwindled and raising resources became a challenge. Furthermore, increased volatility in currencies, adverse credit conditions globally and recession in the developed world particularly the US and Europe, all hit Indian companies hard.

FY10 is now about to conclude and the performance of India Inc. has certainly been much better. India's GDP has been growing nicely if the performance in the last two quarters is anything to go by. What is more, the free cash flows (FCFs) of Indian firms have turned positive for the first time after the financial crisis in fiscal 2009, with profits increasing and companies paring back on capital expenditure. And the icing on the cake is that these FCFs are expected to rise sharply over the next three years. This is important because sufficient free cash flows mean that the company has enough resources to pursue more opportunities to grow, even after accounting for various expenses that are required to either maintain or expand the asset base.

Little wonder then that the Indian stockmarkets have given a huge thumbs up to this fact as the rally in the past one year has indicated. However, the key to note here is that in the case of many companies, their stock prices have already run way ahead of fundamentals. Thus, at the end of the day, even if a particular company's management and cash flow prospects look good, what needs to be asked is whether the price is right enough.


Ever wondered why offices are increasingly looking to shift to other sites? The reason is obvious. Office rents are just getting steeper. As today's chart of the day shows, while London led the pack, Mumbai also figured among the top 5 having the highest office rent in Q4 2009. Infact, not just office rent, but prices of homes in India and particularly Mumbai, have witnessed an increase in recent times.

What is more, Ajit Dayal, our founder, in the recently held Equitymaster Investor Summit 2010 was of the view that prices in the long term are not expected to fall any lower as long as the nexus between the politicians and real estate firms remains intact.


It is quite well known that China enjoys one of the highest savings rates in the world. Robert Zoellick, the current World Bank president has a very interesting take on this. He believes that the Chinese savings rate is heavily skewed towards its public sector companies. These companies pay below par wages to their employees and also pay a paltry interest on their loans. Consequently, they retain a greater percentage of profits. This then bulks up their savings rate and makes it look out of whack as compared to other stake holders in the Chinese economy. However, the scene now needs to change a bit as per Zoellick. China should start putting more money in the hands of its consumers. This would then boost its consumer spending and make its companies less dependent on exports.

Zoellick also argues for a revaluation of the Yuan . He thus joins the long list of experts, who've shared a similar opinion. Zoellick believes that the Yuan revaluation will further increase the purchasing power of the Chinese and reduce inflationary pressures in the economy. It could also have a soothing effect on its real estate bubble, which many believe could set off a crisis in the dragon nation. Quite a cogent argument from the World Bank President we should say. Thus, the need of the hour seems to be the US improving its savings rate and China improving its consumer spending. The good point is that both these scenarios are a win-win situation for both the economies in the long run.



India Inc's pursuit to catch up with growth in China may not be as easy as it seems. For it requires investment of capital far more than that at present. Capital in terms of funds, human capital and infrastructure. Economist Nouriel Roubini who agrees with Mark Mobius on India's better long term potential over China, has cited this view on Bloomberg. He says "China has been a hare and India a tortoise but growth is accelerating in India". He also believes that China might be facing a greater challenge in maintaining its double-digit growth rate than India will face in achieving it. However, there is very little that India can do to accelerate its growth without having the capital requirements in place. We hope the government and corporate keep this in mind for their long term planning.



As per a Financial Times report, China's oil demand grew at 2% last month, a level the International Energy Agency (IEA) described as "astonishing." You may call it another sign of the shift in economic progress from the west to the east. However, the IEA counts as its members 28 countries of the OECD, which are mostly developed countries. For much of the group's 40-year existence, these countries were also the world's largest consumers of oil. But that is fast changing. Demand for oil from the OECD countries is waning as environmental policies and the recessionary climate reduce its demand for petroleum products. However, for China and the rest of Asia, consumption seems to have just begun. Infact, for the first time in history, Saudi Arabia, the world's largest oil exporter, now sends more oil to China than to the US. No wonder that the diplomats of the IEA's member countries have been courting Chinese officials off late. They want China to join the organization. Infact, they are now going to the extent of considering rewriting the organisation's constitution if necessary. Indeed! Most rules in the financial and economic world are being rewritten.



With the first signs of economic recovery, could the raiders be far behind? Mergers and acquisitions (M&S) deals in Asia-Pacific excluding Japan have almost doubled to US$ 89.4 bn during the last three months from the same period last year. This is in contrast to a fall of 5.7% in M&A deals in Europe and 25.6% in the US. While we are aware that M&A is correlated with the economic growth, the buyer needs to have confidence in not only the target's business but also its own. Given this fact, we believe that we would see more deals as the year progresses as companies in Europe and US shift their focus from sluggish domestic economies to faster growing markets.



There are many bad human habits and complacency is one of them. It has resulted in terrible disasters and huge debacles. And that's what Mr. Strauss-Kahn, the managing director of the IMF (International Monetary Fund) is worried about. He opines that the early green-shoots of global recovery have made policy makers complacent about financial reforms. The urge for reforming cross-border financial regulations that kick-started with the advent of global financial meltdown, is losing steam. He believes that it is high time countries pooled efforts towards strengthening the global financial systems so as to avert any immediate resurgence of recession. We could not agree with him more!



Indian stockmarkets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, the BSE-Sensex was trading higher by about 37 points (0.2%). While most Asian indices were trading in the red, the European indices had opened on a firm note. Gains were seen in auto, banking and healthcare stocks.

Today's investing mantra

"The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values." -
Warren Buffett

source;shri J Mulraj