India Strategy - Nov 21 2008
Saturday, November 22, 2008
Unitech Ltd. said on Nov 17 that it has repaid the entire financial assistance received from Indiabulls Financial Services Ltd. and its affiliates / associates. With this, neither the company nor its subsidiaries, affiliates, associates or promoters has any loan, debt or any other outstanding amount payable to Indiabulls Financial Services or its affiliates / associates, Unitech said. Separately reports stated that Unitech has put on the block all its six hotel projects under construction to
reduce its capital expenditure and raise cash to fund its other ongoing projects. The company is in talks with a few private equity investors to sell all its six properties, being constructed at Gurgaon and Kolkata, newspaper reports said.
Reliance Industries Ltd. (RIL) may reopen retail outlets to sell petrol and diesel following the decline in global crude oil prices, according to a financial daily. RIL is also seeking to sell diesel from its export-oriented refinery at Jamnagar to public sector oil companies and private retailers to help meet a shortfall, the report stated. RIL had shut its fuel stations partly because of the Government's decision to restrict fuel subsidy to public sector refiners that sell petrol and diesel below cost. The move comes soon after Essar, the other private oil company, who had restricted sales to just 100 retail stations to cut losses, approached the Government to expand fuel stations. It has begun selling fuel at about 400 outlets and is planning to expand it to 1,000 stations by December. A separate newspaper report said that IOC has tied up with RIL to form an equal joint venture for setting up city gas distribution networks across the country.
In the wake of the recent fall in the international prices of commodities and with a view to safeguard the interests of domestic producers, Government has carried out certain changes in the customs duty rates. The Government decided to withdraw the full exemption from customs duty granted earlier on specified iron and steel items such as pig iron, spiegeleisen, semi-finished products, flat products and long products. Consequently, they will be subject to a basic customs duty of 5% ad valorem. It also withdrew full exemption from customs duty granted earlier on crude soyabean. Consequently, crude soyabean oil will be subject to a basic customs duty of 20% ad valorem. There is no change in the import duty on refined soyabean oil. With a view to simplify the refund based service tax exemption scheme on taxable services attributable to exports, the time limit for filing refund claims has been extended from 60 days to six months. While bringing cheer to the industry, the move is also expected to give a marginal relief to the government revenues as well.
India's widely tracked benchmark inflation fell slightly in the first week of this month, the Government said on Nov 20, as the slump in global commodity prices along with the steep slowdown in the domestic economy started taking effect. The annual point-to-point inflation, based on the wholesale price index (WPI), stood at 8.90% in the week ended November 8 as against the previous week's figure of 8.98%, the Commerce & Industry Ministry said. Inflation was expected to remain nearly unchanged. It had touched a 16-year high of 12.91% in the week ended Aug. 2. The annual inflation rate was 3.2% during the corresponding week of the previous year. The WPI for "All Commodities" declined by 0.2% to 235.0 from 235.5 in the previous week. The index for Primary Articles rose by 0.4% to 250.0 due to higher prices of non-food items. The index for Fuel, Power, Light & Lubricants fell 0.9% to 353.3 due to lower prices of light diesel oil (11%), furnace oil (9%), aviation turbine fuel (5%) and naphtha (4%). However, the prices of bitumen (1%) moved up. The index for Manufactured Products declined by 0.2% to 203.4. Meanwhile, the Government revised the inflation rate for the week ended Sept. 13, to 12.42% from the provisional estimate of 12.14%, while the WPI for the same period was revised to 241.7 from 241.1. Inflation might fall further after the public sector oil marketing companies cut jet fuel prices by 12% last weekend - the first fortnightly price revision.
Will the world come to a spectacular and disastrous financial end? Credit markets across the globe, which were flush with liquidity not too long ago, are in a limbo as inter-bank borrowing stands frozen after a series of prominent write-downs, insolvencies and collapses.
Suddenly, it's clear that everyone and everything is connected. This connection is due to the frictionless flow of capital across the globe. But while a crisis in leading economies can spill over to the rest of the world, the bubble itself cannot be attributed to this 'connectedness'. What the bubble truly needed to 'inflate' beyond all expectations was the age-old artificial booster of purchasing power: leverage. And it is this leverage that lies at the root of most of the evils that threaten to disrupt the global financial system.
In many ways, India presented the globally leveraged punters with a near-perfect investment story. Here was a nation of a billion people. A nation that was always brimming with talent but had somehow not managed to find its place in the sun. A cheap and seemingly unlimited supply of talented labour, a huge hinterland and mega-cities hungry for the creation of physical and digital infrastructure. A consuming class larger than the population of the United States.
As if the wild swings are not enough we have an F&O expiry week to contend with. Inflation may flatten and so could indices, unless US markets stage a strong comeback on Friday. The second-quarter GDP numbers will be announced on Nov. 28. The data will be followed keenly to ascertain the impact of the financial turmoil and global economic slowdown on India. The Finance Minister will address the media and the second phase of J&K assembly polls will take place next week.
Over the weekend new developments could take place. Citi never sleeps and now people are losing sleep as the stock has shed over a quarter of its value in the last couple of days. Citi's board is scheduled to consider proposal for sale of part or whole of it amid increasing concerns over the New York bank's future prospects. As we write US stocks are up smartly while European shares have slipped into the red zone after rising earlier.
Goldman Sachs has increased its recession estimates for the US economy, saying GDP is declining at a 5% annual rate in the current quarter and will drop 3% and 1% in the next two quarters. Europe's manufacturing and service industries contracted in November at the fastest pace in at least a decade. Oil rose for the first time in six days. Crude oil for January delivery rose as much as US$1.23, or 2.5%, to US$50.65 a barrel on the New York Mercantile Exchange.
Any rise will remain a short term spectacle for now. The bad news continues to flow while any good news on liquidity and foreign fund inflows are conspicuous by their absence. Use the gains to lessen your pains. Avoid any aggressive buying as we still sees the October lows being tested in the weeks to come. Any bad news on Citi could dampen sentiment across the globe. On the flip side, lack of bad news might see stocks gaining slightly.
Shares of Citigroup got pounded as the US banking giant faced an increasingly gloomy future in the wake of a string of bad news. The stock lost 50% of its value in the first four days of trade this week, including a 26% hammering on Thursday, which was its biggest one-day fall on record. In Frankfurt's pre-market trade on Friday, Citi's stock rose to US$5.64, up 20% from Thursday's levels after the Wall Street Journal reported that Citi's board will consider selling part or whole of the bank at a meeting on Friday. The talks are only at a preliminary stage, the Journal said, adding that Citi officials were considering scenarios that would have been unthinkable a few weeks earlier. Citi CEO Vikram Pandit had scheduled a conference call with other executives for 8 a.m. Friday (UST) to discuss the situation, the Journal reported. Apart from considering a sale of the entire bank, Citi is looking at the possibility of selling units such as the Smith Barney retail brokerage, the global credit card division and the transaction services arm, according to the Journal. The news seem to have a positive effect on global equity markets, which rallied on hopes that the troubled New York bank would find a buyer or could be rescued by the government.
Cracks in the commercial real estate market, the Treasury's recent decision not to buy troubled assets from banks and Citi's own move to take on around US$17bn of assets from a subsidiary fund all hit the stock. Even a vote of support from Saudi Arabian investor Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, who said he will increase his holdings in Citi back to 5%, couldn't stem the decline in the stock price. Citi, along with other banks has been lobbying for further action from lawmakers, including asking the Securities and Exchange Commission (SEC) to reinstate a ban on the short-selling of financial stocks, the Journal reported. Citi has reported losses for four straight quarters, and has raised about US$75bn since December by selling assets and equity stakes, including a US$25bn injection from the US Treasury. Citi has lost about US$20bn in the past four quarters as bad loans increased and demand for banking services declined. CEO Vikram Pandit said this week the company will cut 52,000 jobs in the next year to lower costs.
At a time when most economists have scaled back their target for GDP growth in FY09, Finance Minister P. Chidambaram would have us believe otherwise. At the India Economic Summit in New Delhi, he said emphatically that the Indian economy will return to the 9% growth seen in the past three years after a setback this year. The Indian economy will bounce back India is facing the spillover effect of a global recession, caused by the collapse of the US housing market and the ensuing credit crisis, the Finance Minister said.
"We are not part of the problem, but we have been invited to be part of the solution," he said. The Finance Minister said that the Government would take steps to stimulate the Indian economy and the rupee would strengthen again once capital starts flowing in. Chidambaram added that the country could miss its annual export target of US$200bn for this fiscal year due to the slowdown in developed nations. The Government may consider cutting excise duties on some products as part of efforts to boost industrial output and lift economic growth, the Finance Minister said. He told companies in the real estate, airline, hotel and two-wheeler sectors to cut prices to boost demand.
But, India Inc. did not seem to agree with the Finance Minister, with most companies rejecting the idea of pride cuts to bolster consumption. In fact, the Indian industry renewed its demand for further rate cuts in order to revive lending and thus pump-prime the sluggish economic activity. K.V. Kamath, Managing Director and CEO, ICICI Bank and President, CII, said that further interest rates cut by 200-300 bps will help improve the liquidity situation in the economy. He pointed out that although access to credit is a constraint at the moment, investment plans for most companies for the existing pipeline of projects are still intact. He also called upon the Government to use the current crisis as an appropriate opportunity to speed up pending economic reforms.