India shining

In the early 1990s, just post-liberalisation, investors often remarked on the disconnection between the corporate sector and the macro-economy. At that time, private capital and management contributed a very small share of manufacturing and services.

Earnings trends were often out-of-synch with the gross domestic product (GDP) trend. The private contribution is much larger now. As the ratio of private contribution has arisen, corporate performance has aligned with GDP. If it's a good year for macro-economic growth, it's a good year for India Inc.

There is a handsome premium. In the past five years, GDP has grown at somewhere between 6-8 per cent per annum with inflation at about 6-7 per cent. The Nifty's averaged earnings have grown at an annualised rate of 27 per cent and the major market index has offered a price-return of about 40 per cent per annum. So there's been an earnings premium of about 10 per cent over the sum of GDP plus inflation and of course, a further premium of 13 per cent in price-returns over earnings.

Can this happy state of affairs continue? Well, there does seem to be a premium for corporate performance in every healthy market. US GDP has moved at somewhere between 2-3 per cent since 2002, with inflation in the 2-3 per cent region. Corporate earnings have grown at nearer 10 per cent and the Dow Jones Industrial Average has returned over 13 per cent compounded annual growth rate (CAGR) in the past five years.

The next five years will see enormous investments. The Planning Commission hopes that during 2007-12 (the period of the XI Plan), over $500 billion will be pumped into new infrastructure projects. It assumes that at least 30 per cent of this will come from private sources. That means both FDI and FII and also Indian household savings channelled through IPOs and vehicles like mutual funds and insurance units.

It isn't farfetched. The rupee IPO market can easily raise Rs 100,000 crore per annum. That means eight DLF or ICICI-sized issues or perhaps 4 mega-issues and another 10-15 smaller ones. Good infrastructure IPOs will be lapped up, going by examples like NTPC, PowerGrid, PFC, GMR, Idea, RComm, Reliance Petro, etc.

Consider FDI and again, the money's surely there. China picks up over $50 billion FDI per annum India can surely absorb $20-30 billion without too much effort. If that money is gainfully employed, capacities would double across most bottleneck areas and perhaps for the first time since Sher Shah built the Grand Trunk Road in the 1550s, growth would not be hobbled by infrastructure constraints.

It should be possible to maintain 9 per cent GDP growth or even aspire to double-digits. The premium on corporate earnings may drop somewhat. But the Nifty's Earnings should still grow at 20 per cent or more. If the premium of price-returns to EPS growth holds, the indices should return better than 20 per cent per annum. Obviously infrastructure-sensitive sectors should return more.

It all seems very convincing in theory. In practice, the next 18 months will be fraught and the resolve of long-term investors will be tested. There will be a general election followed by another coalition government. Eventually some version of this broad vision will come through but there will be intervening uncertainty.

In September 2005, a technical analyst named Milind Karandikar made a bold prediction in this publication that caused some shock. He said that the Sensex (which was then at above 8,000) could be somewhere "between18,000-40,000 within the next five years." Also, that he expected a major rally to last till mid-2010 and then be followed by a five-year consolidation.

In the event, Karandikar's lower limit has been crossed within two years! From here to Sensex 40,000 (about Nifty 11,500) by mid-2010 implies an index return of 16 per cent per annum. That falls well within the bounds of rational probability since the long-term market return is higher than 16 per cent.

People often sneer at technical analysts. But Karandikar's predictions can be validated by broad macro-economic logic tied to GDP and earnings projections. Remember this and invest heavily if the market drops like a stone during the next general elections or during the lead-up. That is perfectly possible - remember May 17, 2004? For a long-term investor, every dip from now onwards should really be viewed as an opportunity.

Why India will continue to attract inflows

The finance minister said it all when he acknowledged that the Securities and Exchange Board of India’s move to phase out participatory notes (PNs) was part and parcel of the government’s attempt to moderate the pace of capital inflows. The steps against PNs have little to do with ascertaining their place of origin or to make the flows more transparent, but have everything to do with easing the inexorable upward pressure on the rupee caused by an avalanche of dollars landing on our shores.
It’s hurting exports, creating a big headache for the Reserve Bank of India, and threatens to throw people in the textiles industry and in small-scale industries out of their jobs; so the government will do everything possible to limit these inflows. First they tried lowering interest rates on non-resident Indian deposits, then they tried limiting external commercial borrowings and now they’re trying to plug inflows through PNs.
Will they succeed? They could, in the short run, because the move coincides with the tapering off of the first heady rush of capital fleeing the badlands of the US credit markets for a more salubrious home in emerging markets. Of course, if the US Federal Reserve goes in for another rate cut at the end of October, inflows may once again accelerate.
It’s no coincidence that the International Monetary Fund’s (IMF) World Economic Outlook contains lots of advice to developing nations on how to live with large capital inflows. Gross capital inflows to emerging markets, in dollar terms, are now higher than in the mid-1990s, just before the Asian crisis. The figure is not so high on a net basis, but it’s still pretty large. So what else can the government do to curb inflows? Well, it can learn from what Chile did in the 1990s or what Thailand, Colombia and Argentina have done more recently, and mandate setting aside a portion of short-term inflows in interest-free reserves, which basically amounts to a tax on inflows.
What’s the risk? IMF says: “Experience suggests that such measures tend to have a diminishing impact over time, as ways are found to elude the controls, and can, if sustained, also have negative consequences for financial system development.” Or the government could adopt measures aimed at cooling down overheated equity and property markets, such as China’s recent increase in stamp duty on stock market transactions and Singapore’s increased property redevelopment charge. IMF also points out that countries have used fiscal incentives to offset some of the implications of exchange rate appreciation, such as Brazil’s introduction of import tariffs on certain sectors. In India, the commerce ministry’s rather inadequate sops to exporters would also fall in this category.
The more important question is: why the rush of money to countries like India? There are several reasons. One of them is increased global liquidity. Now global liquidity can mean lots of different things, which is why the discussion about it in the World Economic Outlook report is very helpful. One way of looking at liquidity is to consider it as a function of monetary policy. It can then be measured by considering either real interest rates or by focusing on quantitative factors such as money supply or the build-up of foreign exchange reserves. Monetary policy, which had been very loose, was being slowly tightened until the credit crunch hit the developed markets. IMF says that “notwithstanding the reversion to a neutral monetary policy stance in the United States and the euro area, real long-term interest rates on government securities in advanced economies have remained low compared with their historical average”. If the money supply plus forex reserves measure is used, “global liquidity shows elevated growth rates until very recently”.
But the IMF report also talks of another kind of liquidity—market liquidity. It says that the liquidity of global equity markets has also increased substantially since the mid-1990s, with the rise in emerging markets being particularly impressive. True, this market liquidity is cyclical, with ebbs and flows, “but the cycle is only weakly related to movements in real policy rates and is unrelated to quantitative measures of the global monetary policy stance, suggesting that secular factors underlie improvements in global market liquidity”. In short, the improvement in global market liquidity is the result not just of cyclical factors, but also of structural ones. Globalization, securitization, derivatives and financial deepening have all contributed to this market liquidity. This, says IMF, is “strongly suggestive of an implied historical decrease in liquidity premiums, likely contributing to the overall decline in risk premium”. What this means is that higher market liquidity can reduce the risk associated with a given asset portfolio. As a result, a larger portion of investors’ wealth may be invested in “risky” assets, in spite of risk tolerance remaining at the same level. Put another way, the widening, maturing and deepening of capital markets has led to greater liquidity that has reduced the risk premium. This is particularly true of emerging markets and it has made them more attractive investments. The other reason for the huge inflows into the Indian market is best brought out by one statistic: India, China and Russia accounted for one-half of global growth in the past one year. Look at IMF’s forecasts of growth next year: the US is expected to grow 1.9% in 2008, the euro area 2.1%, Japan 1.7% and Britain 2.3%, while the forecast for China is 10% and India 8.4%. When you combine high growth and a reduced risk premium, the choice for investors couldn’t be clearer.

Via Mint

India Rolling In Rupees - BW

Even by the standards of Lonavala, a mountainous outpost 70 miles from Mumbai where India's nouveaux riches like to spend the weekend, Rakesh Jhunjhunwala's country home is extravagant. The 15,000-square-foot "bungalow" features a swimming pool, jacuzzi, karaoke studio, and gym, as well as party rooms and terraces where Jhunjhunwala entertains family, friends, and business associates. Meanwhile, back home in Mumbai, the chain-smoking, 47-year-old founder of investment house Rare Enterprises has just bought a $5.4 million, six-bedroom duplex apartment in the tony Malabar Hill neighborhood. "I have far more wealth than I need," says Jhunjhunwala, whose estimated net worth is just shy of $1 billion. "But it gives me the freedom to do what I enjoy and enjoy what I do."

Although hundreds of millions of Indians still live in grinding poverty, the economy is growing at an 8% annual clip, and the ranks of the well-off and just plain loaded are ballooning. Some 83,000 Indians today have liquid assets greater than $1 million, up from 71,000 two years ago, American Express Co. AXP estimates, and their numbers are increasing by 13% a year. By AmEx' math, in 2009 there will be 1.1 million individuals with $100,000 in assets, a princely sum in India--up from 700,000 today. "I'm amazed by the wealth in this country," says Sujay Chauhan, who in April quit his job at technology researcher Gartner Group to found Aquasale, a boat dealer in Mumbai that already has seven orders for yachts worth a total of $10 million.

A lot of this is new money, not legacy Indian wealth. Up-and-coming sectors such as software services, telecommunications, finance, and real estate are minting new millionaires every day. And the Bombay Stock Exchange has more than doubled in the past two years, handing many investors tremendous capital gains. "India is the fastest-growing market for wealth creation," says Nicholas Windsor, head of personal financial services at HSBC India HSBC, which last year set up a private banking unit to cater to clients investing upwards of $500,000. Adds Ravi Trivedy, head of Business Advisory Services at consulting firm KPMG, which helps banks tailor services for rich clients: "For us it's a fabulous time."

The first place the new moneyed class typically shows off its cash is with a big house or plush apartment. While demand for homes over 3,000 square feet--palatial by Indian standards--was once confined to Mumbai and Delhi, more and more Indians in smaller cities want big houses, according to real estate consulting firm Cushman & Wakefield Inc. In September, Ambience Builders & Developers Inc. plunked down $120 million for a 60-acre parcel in Hyderabad, with plans to turn it into high-end homes. And each of India's large cities boasts 400 to 500 houses listed at $2 million-plus, estimates Mumbai real estate agency Knight Frank. "It feels good giving your family a comfortable existence," says Rohit Roy, an actor and talk show host who last year moved into a four-bedroom apartment facing the sea in Juhu, a posh Mumbai suburb.

Cars, of course, are another great way to get mileage out of your millions. Despite duties that effectively double the price of imported autos, sales of super-luxury models are gathering speed. National Garage, a nationwide chain of dealerships selling an assortment of brands, including Ferraris, says demand for the $200,000-plus machines vastly outstrips supply. To bolster the Ferrari image, it has turned away 700 customers that "didn't suit our product profile," says marketing director Farhad Vijay Arora. Across town at Navnit Motors, customers last year snapped up 200 BMWs for as much as $150,000 and 10 Rolls-Royces topping out at $600,000-plus--about quadruple the number five years ago. "We see a sudden surge of interest in these high-end luxury cars," says Navnit's marketing director, Sharad Kachalia.

To satisfy exploding demand, BMW next year plans to open an assembly plant in Chennai and hopes to expand its sales to some 1,800 Bimmers annually. That goal won't likely be hard to reach: Rival Mercedes-Benz DCX, which already has a factory in Pune, sold more than 2,000 cars last year.

Although well-to-do Indians have traditionally been wary of flaunting their money, more are wearing their wealth on their sleeves. Louis Vuitton CDI, Hugo Boss, Valentino, Gucci, and Fendi have all opened Indian stores in the past couple of years. And Kimaya Fashions Ltd., a high-end shop in Juhu that has long sold Indian-designed clothes to society highfliers and Bollywood stars, is stocking more global brands such as Roberto Cavalli and Giorgio Armani. "The Indian story has just begun to unfold, and now we know this is for real," says Kimaya managing director Pradeep Hirani.

There's plenty of potential growth. All told, the market for high-end luxury clothing and accessories in India is worth some $434 million a year and is apt to hit $800 million by 2010, estimates consultant Technopak Advisors Ltd. Indians last year spent $141 million on pricey wristwatches, a figure that's growing by some 40% a year, according to Technopak. "I'm not a gizmo person, but I like cars and watches," says Arun Mansukhani, 37, head of human resources at cellular carrier Hutch. His collection includes a Tag Heuer, a Mont Blanc, a Cartier--and a Porsche and a BMW. Wine sales are taking off, too, with help from the likes of the Wine Society of India. The group, established in September, held a tasting at Mumbai's stately Taj Palace Hotel, where society divas and Bollywood stars nibbled on chicken tikka and sipped $160-a-bottle Château Latour à Pomerol.

Not all wealthy Indians are comfortable showing off their newfound riches. Umesh Chadha runs an oil and gas services company, Luminus Energy, based in Mumbai with offices in the U.S. and three other countries. He has three cars but is also happy to get around town in a rickety three-wheeled motorcycle taxi. Although Chadha likes to vacation in the U.S.--he's planning an Alaskan cruise next year--he swears he hasn't changed much from his childhood days in Mumbai's Shivaji Park, a comfortable but not extravagant neighborhood. "I have maintained my middle-class values," he says.

Others are even more reluctant to show off. Three years ago eye surgeon Burjor Banaji bought a Mercedes C-Class sedan for his commute. He liked the Benz but sold it in September "to escape the attention, which was a nightmare." Today he drives an Octavia sedan from Volkswagen's Czech subsidiary, Skoda. "I love it," says Banaji, "because it's completely anonymous."