Realty and Retail

Though India’s GDP projections look good as made by World Economic Outlook (WEO) released recently by the IMF, India is likely to register a Gross Domestic Product (GDP) growth of 7.9 per cent in 2008-09, which may slip to 6.9 per cent in 2009-10; the effect of inflation and credit crunch is now highly visible in two sectors; realty and retail.

In Mumbai most of the developers have discovered credit route from private financiers at a very high cost of borrowing varies from 36 to 48% in last one to two months. This is in anticipation of better comeback of property demand. However the recent property expo was disappointing for such developers. The prices depend on demand which is most uncertain. Bangalore and Gurgaon prices have seen significant corrections and Mumbai it is expected soon by a minimum 20 to 30%.

The other sector affected by inflation and market volatility is retail. Several stores are closed down in last few months. Most of the expansion plans of major group are either delayed, postponed or partially done. The procurement model from low cost manufacturers like china is also getting big hit by rising dollar prices, making situation even more worsen. Downsizing in employment is also become highly visible in this sector now.

Some RBI intervention in the form of rate cut and a good recovery of market today is news to think positive. However; on the claims of decoupling Indian economy from global players, sentiments are still coupled. And so the global direction of financial and equity markets can not be ignored to asses our equity market’s health.

Santosh Srivastava

Why fundamentals of Indian economy is in question?

One financial crisis in US and the equity market in the whole world shaken up with significant decline. Fundamental equations of various industries are questioned and depression took over. How safe is Indian market? All analysis indicates no fundamental error but global depression and rumors have sufficient potential to prove these analysis wrong. I should be positive but negatives can not be ignored in sudden panic environment all across.

Can you estimate how much a panic environment may create a damage? Recent rumors on ICICI bank followed by crash of its stock price is just one of the several such examples. Deposit ratios and leverage of Indian banks are much healthier than that of several top performing banks of US and Europe and still the prices are falling. Again fundamentally nothing is that bad as it is reflected in falling stock prices. Another potential damage is redemption pressure on mutual funds creating a negative cycle of further depression by killing the option of Indian MFs to use their liquidity to invest in declining market.

Let us park rumors and depression aside for a moment and try to analyze some of the fundamental issues of Indian equity market which may affect future of market after stabilizing from current turmoil.

1. First and foremost is the question of decoupling of Indian economy from US. Is it really possible? In one of the interview with Uday Kotak, director of Kotak Mahindra bank recommends that India should stop depending on global flows and start relying more on its domestic savings and domestic ability. The only question to address is the future of globalised Indian industry like IT which triggered Indian GDP growth to more than 8% in past few years and attracted most of global inflows.
2. Second is actual estimate of GDP growth. If the current situation stays for some more time, it will affect the demand. Maintaining more than 7.5% growth will be a challenge. If it drops below 6.5% which is very unlikely as the fundamentals are still okay, the global inflows will be affected.
3. Third is competition with other emerging economies especially China for preferred investment destination. Both economies are having various strengths. The differences to asses are types of governance, service vs. manufacturing capabilities and fiscal deficit vs. fiscal surplus.
4. Fourth is monetary policy. On one hand; RBI announcing further rate cut by 150 basis point, on the other inflation is still above 11%. Further cut in CRR and SLR is expected to manage the current liquidity crisis with some boost to GDP. Monetary policy will be interesting to watch if the objective is to decouple Indian economies from developed countries as I discussed in point no one above. The challenge for the policy makers is how to address issues of both Inflation and growth together.
5. And finally Upcoming union elections and the result.

Santosh Srivastava

Performance Indicators of FMCG Industry

Tons of technical analysis is available online on ways to pick a stock. I considered few and got confused. Why investment decisions are supported with too many technical analysis and forecasts? Interesting thing is that the rules of the game are variable and so it is not so simple. Still I dare to find some simple ways and try to understand rules of the game. To start with I’ve taken one of the largest industries, the FMCG industry. The basic question I tried to answer about the variables affecting the industry performance. Stock pick would be automatically in place if the performance indicators are known.

First and foremost is changing market dynamics with fluctuating crude oil prices and inflation. Last few months were terrible. On one side input prices are increasing resulting in thinner margin to manufacturers. On the other side the share of wallet of consumer is decreasing. Overall decrease in category demand is now become visible. Companies with better brand equity are successful in transferring this burden to consumers. However with high competition already in place every time price increase will not be a viable solution.

Second emerging market dynamics is the emergence of organized retail. In this new format, relatively weaker brands also get equal opportunity to place their products and offerings along side a stronger brand. Two things will distinctly visible in such situation. Either exclusively differentiated product or the most cost effective product will get lead in the battle. In high inflationary situation consumer would tend to choose second option in order to control the outflow from their wallets. So brand loyalty earned by various major players will be at stake. Product with very high brand equity could maintain their position till the situation improves. Weaker or moderate brands will be the target of new cost effective products or brands.

Third is the cost leadership. A company’s pro activeness towards innovation, rationalization of cost structure, capabilities in manufacturing and in outsourcing gives a long term perspective of their approach towards cost leadership.Take the example of shampoo in which a crude oil derivative is used in packaging shampoos, while PET, a petroleum-based plastic product, is employed in manufacturing hair oil bottles and packaged water bottles. Crude oil derivatives account for almost 17 per cent of the total cost of corrugated boxes. Which company is working towards other innovative solutions? Another cost iscost of distribution which is very high in FMCG sector. So efficiency of supply chain and logistics adds significant value to cost leadership.

Fourth is competition with unorganized sector and regional players. Their overhead costs are much lower than a company with national presence. Being ‘local’ gives them a very cost effective advantage of distribution and logistics. Their presence can be felt at remote rural level. But since they are small the effect of inflation are even bigger for them. Poor management and poor cash flows are other prominent concerns. So a comprehensive consolidation can also be seen in next 2 to 5 years. The companies with better cash will take this.

Let me summaries the performance indicators to address health of a FMCG company in following parameters:

1. Brand equity with competitive advantage
2. Operating profit margin to understand cost advantage
3. Distribution efficiency by evaluating rural presence
4. Proportion of outsourced manufacturing
5. Cash in hand

I personally feel Marico and ITC as good buy. However; feelings apart, I will post my next blog on qualitative analysis of various FMCG companies on above parameter coupled with some technical analysis to recommend my picks in FMCG sector

By Santosh Srivastava

First blog from my last week diary

Recently there was a report on change in employment structure in Mumbai. And it was a surprise to know that though there was a moderate increase in public sector job, there was a considerable drop in private sector jobs in last two decades. In 1981, 6.45 lakh people were employed in the public sector and 6.29 lakh in the private sector. By 2007, while the public sector employment rose marginally to 6.6 lakh, the number of those with private sector jobs dropped sharply to 3.39 lakh. Report also says that Self-employment is clearly becoming a dominant form of employment. Self-employment (age group 15-59) in city has increased from 15% in 1993-94 to 19% in 2004-05.

This significant drop in private sector jobs can be understood with fall of textile industry which used to be one of the largest employers during 80’s. The fall was ignited political revolution in the name of labor reforms. The win- win situation could have been a healthy textile industry with reformed living conditions of labor. Neither of these happened. Maharashtra government policies, tax structured aggravated the problem to an extent where closing down the textile mills become more viable than to running it. Ultimately who benefited? This happened for several other manufacturing industries as well.

When an industry develops, multiple allied industries get opportunity to develop in its surrounding. This helps in creating multiple jobs. Take Tata motors’ nano case. If it moves out of Singur, opportunity for multiple allied industries in periphery of Singur and in west Bengal will be killed. The problem is we can not expect the protester to be visionary enough to set the direction for their future. Can we expect our politicians to be? I am doubtful.

Coming back to labor reforms, I can think of few of my favorite movies devoted to labor issues in bollywood language and style during 70’s and 80’s. One of those which left some impression on me was “Namak Haram”. The story of the movie revolves around two friends representing two class of society; rich and poor and living conditions of labors.

Shockingly this generation’s politician’s focus is on division of society and not the uplifting poor. That is why Hindu vs Muslims, Hindi vs Marathi seems to be more prominent than employment, health, education, infrastructure, poverty etc in their agenda. According to another report published in TOI a strong correlation is observed between communal riots and terrorist attacks in any state. Between 2001 and 2007, over 71% of all communal incidents in the country took place in the very same states where these terrorists hail—that are Gujarat, Karnataka, Maharashtra, MP and UP. Who will take responsibilities of damage already done?

Santosh Srivastava