Keep The Faith: Time to Invest Again
Companies are poised to do better, bankers are opening the money spigot, consumer wallets are opening up. It’s time to invest again
by Pravin Palande, T Surendar | Jul 1, 2009
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J im Rogers, “investment biker” and fund manager, still prefers China over India. But wait. India has just wrested a star defector from the Chinese camp. Stephen Roach, one of the few guys who still retain a job and a reputation on Wall Street, believes that “for the first time, India looks [to be] ahead of China as the investment destination in Asia.” He is in growing company. When Roach said this in the first week of June in Mumbai at a Morgan Stanley conference, there were 150 fund managers and stock brokers from across the world listening to him. Just a month earlier, the same conference had found it hard to get 75 people to attend. The rise in attendance was symbolic of the optimism pervading the investment community. It is due in no small measure to the decisive mandate returned by the Lok Sabha elections. A strong government in India and a robust rally across all emerging markets, particularly in Asia, over the previous 10 weeks brought the masters of the Universe sweeping in from over the Himalayas.
Those are vexing questions and market analysts are divided on the answers. Not good enough. A careful reading of company balance sheets and conversations with company executives are quite in order.  INPUT COSTS HEADED SOUTH, PROFITS RISE Falling commodity prices have brought down input costs of companies by 37 percent. This helped a 60 percent rise in their net profits. Sales had been flat between December 2008 and March 2009, but now demand is picking up And here’s the upshot. For the first time, operating margins are creeping up after five straight quarters of decline. Global commodity prices have fallen and working capital has become cheaper. That has helped companies shave off a hefty chunk of their costs. So far, sales have remained stagnant. And indications suggest that the demand for core sectors like steel, cement and even commercial vehicles has already begun to pick up, signalling a broader economic recovery. Smart money is already moving in. After a lull of nearly six months, foreign investors are pumping money into Indian stocks. As much as $3.5 billion came in the three months to May 16, the day election results were announced. During this period, the Sensex had risen 34 percent compared with a 42 percent rise in all the emerging markets put together. After the results, India forged ahead, becoming the best performing market in Asia. It doesn’t end here. The market has risen on the back of higher expectations of both corporate performance and a stable, growth-oriented policy of the government. Much will now depend on whether demand conditions continue to improve and that translates into higher sales growth for companies. Their earnings per share is also set to rise. The EPS for Sensex-30 companies could grow from Rs. 820 now to Rs. 950 in the year ending March 2010, Rajeev Thakkar, CEO and director of Parag Parikh Financial Advisory Services (PPFAS), says. Then there’s one more crucial factor: Will Asia eventually decouple from the rest of the world? When the economic collapse blew a hole in the theory that Asian growth markets would stay insulated from the turmoil. Now, as the crisis abates, will a resurgent Asia pull away from the rest of the world?  COMPANIES BOOST ABILITY TO SERVICE DEBT Interest cover- the ability of companies to pay their interests costs from their profits- is improving after five quarters of a free fall. The operating and net profit margins are also coming back to December 2007 levels Siting on a large exercise ball inside his small office on Lan Kwai Fong, a popular locality dotted with pubs in Hong Kong, Robert Howe is clear that Asia is out of the crisis. Howe, a former chief investment officer at AIG, started Akamai Asia Pacific fund, a hedge fund that invests in India, Australia and South Korea. “Asia will have nothing to do with what happens in the US henceforth,” says Howe. Last week, after India’s statistical office reported better-than-anticipated economic growth numbers, analysts have begun changing their outlook for the country and the stock market. A Citigroup Global Markets report on June 10 raised India’s GDP growth estimates to 6.8 percent for financial year 2009-10 and 7.8 percent for financial year 2010-11. Clearly, this isn’t the time for any recklessness. The worst is not yet over. And the risks need to be carefully gauged. But the big monkey — declining consumer demand — seems to be coming off the economy’s back. |
Find this article in Forbes India Magazine of 03 July, 2009
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Recent Comments
Shekhar :
July 2, 2009
The input costs of most of the base materials are rising and possibility of further going up. I don't see those are going down in near future and margins will be under tremendous pressure
July 2, 2009
The input costs of most of the base materials are rising and possibility of further going up. I don't see those are going down in near future and margins will be under tremendous pressure
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