India's current internet penetration

                                                       

India's Internet penetration in 2014 was where China was in 2008 and the U.S. was in 1996. If India's curve follows the same pattern, get ready for big things in the next five year. One thing India is lacking is the catalyst companies that will lead its internet revolution.

The PATEL way in BUSINESS and INVESTING

Here's a statistic that will fill your heart with pride. Did you know that a study done few years back had put the Indian origin Patels as owners of around 21,000 hotels and motels in the US? That's a staggering 42% of the US hospitality market and a combined worth of US$ 40 bn! 

However, it wasn't always like this. The so called 'Patelisation' of the US hospitality industry traces its roots to the 1970s when Patels in large numbers landed on US shores from Uganda, where a certain dictator stripped them of their enterprises and drove them out. 

When they finally landed in the US, their woes were far from over though. The US economy was undergoing its own bleak period on account of the oil crisis. The motels industry was one of its most damaged. But this is what the Patels set their sights on. Their game plan was simple. Get the banks to finance a chunk of the purchase price of motels and then move into them with their extended families. Doing this served two very important purposes. It not only eliminated the accommodation costs but the entire family could also double up as the motel staff. 

The end result was a potent mix of low cost operations and an asset base that was in place with almost negligible capital cost. Needless to say the competition found it hard to put up a sustained fight. And one by one, a lot of the motels came to be owned by the Patels, making them a dominant force in the industry. 

Perhaps oblivious to them, the Patels were using a time tested investment strategy. One where the focus is not on making huge gains but on trying to minimise the losses as much as possible. It was a classic case of what ace investor Mohnish Pabrai calls, 'Heads I win, Tails I don't lose much' approach to investing. 

By starting the enterprise with very little of their own capital, the Patels ensured that downside was as good as non-existent. Please note that they did not worry about the upside too much as in how much revenues they can make. Their only aim was to not lose much should things don't work out in their favour. 

If you thought the Patels were the only ones adept at this, let us tell you that as per Pabrai, even business leaders ranging from Richard Branson to L N Mittal have minted their billions using this very same approach. The approach of trying to minimise the downside so that the upside can take care of itself. 

Does this ring a bell? It does, isn't it? After all, this is the mantra that Warren Buffett also seems to live by. Remember his famous two rule quote for investing? Rule number 1, don't lose money and rule number 2, always remember rule number 1. 

In fact, a recent quote from a famous investor called Joel Greenblatt is pretty much along similar lines. In an interview, he offered the view that his largest positions are not the ones that he thinks he is going to make the most money from. Instead, his largest positions are the ones where he thinks he is not going to lose money in. 

Now this is something that certainly doesn't strike as natural to majority of investors out there. They are of the view that successful investing is all about finding stocks that literally hit it out of the park. In other words, successful investing is all about finding the next big multi bagger. 

However, as Greenblatt and the Patels and the Bransons we just highlighted show, the idea is to bet in such a way that even if one is wrong, one does not lose too much. Of course there's nothing wrong in trying to plunge headlong into trying to find that next multi bagger. 

However, if you are looking for market beating results from your investing with a lot less stress and risk taking, then your portfolio needs to consist mostly of stocks where even if you are wrong, you don't lose a great deal. 

Trust us, if history is any indication, there's very little chance you will walk away disappointed with this approach over the long term.

India projected to be third largest economy by 2030

                                                                          Source: US department of agriculture 

Get ready for a new economic order. In the world 15 years from now, the U.S. will be far less dominant, several emerging markets will catapult into prominence, and some of the largest European economies will be slipping behind.
That's according to the U.S. Department of Agriculture's latest macroeconomic projections that go out to 2030, displayed in the chart below. The U.S. will just barely remain the global leader, with $24.8 trillion in annual output. The gray bar represents the $16.8 trillion gross domestic product projected for 2015, and the green bar shows how much bigger the economy is expected to be 15 years from now. The country, worth 25 percent of the world economy in 2006 and 23 percent in 2015, will see its share decline to 20 percent.

India, ranked eighth for 2015, will climb past Brazil, the United Kingdom, France, Germany and Japan to take third place in the world ranking. The International Monetary Fund calls India "the bright spot in the global landscape." The country will have the largest workforce in the world within the next 15 years, the IMF notes, and among the youngest.

This billionaire's definition of success will surprise you

Generous side of Azim Permji of Wipro

Jealousy is a basic human instinct. It's not uncommon for jealousy to get stirred up by seeing roaring success in others. This is true for 90% of people of ordinary financial status. Jealousy starts rearing its head and expressing itself from early childhood when another child comes into the family. It has been seen that initially the older child shows traits of envy towards the younger, suffering from insecurity of parental love getting divided. This envy takes on another form in school and college, directing itself towards other students who are more successful. In the professional field, envy and jealousy takes on a more diplomatic form. People who are not so successful financially express their jealousy towards others who are. Their attitude towards the rich becomes extremely negative. “Rich people become richer while the poor get poorer”, “the rich make their money from the blood of the poor”, “rich people are dishonest”. These thoughts fill their minds constantly. These are popular myths, and are not necessarily close to the truth. In fact, if it was true that all rich men are dishonest, no one would have gone ahead and done business with them. To expand a business in a really big way, one needs to work with various associated companies, and thousands, and sometimes millions of customers. If one is dishonest, one would lose everyone's trust, putting abrupt brakes on the growing business. Thus, contrary to popular belief, the rich and the successful have to be more honest than anyone else, because that is the very basis of their career. Billionaires have golden hearts.
         
The following is an eye-opener that shows beyond doubt that the theory of dishonest rich people is a myth. Wipro chairman Azim Premji is one of the billionaires who are doing their utmost to shape the world. He is also described as “the billionaire with a heart”. Premji was just finishing his undergraduate engineering studies at Stanford University in 1966 at the age of 21 when he got word of his father's sudden death and was called upon to handle the family's vegetable oil business. Premji started Wipro with a simple vision - to build an organization on a foundation of values. Under his leadership, the fledgling hydrogenated cooking fat company has grown to a US$ 1.76 billion IT Services organization serving customers across the globe. Wipro is today ranked among the top 100 technology companies globally (by Business Week). Wipro's growth continues to be driven by its core values.

 Premji's net worth is estimated at US$6.7 billion, so some people call him the Indian Bill Gates. But if the anti-offshoring protestors wanted to find a bogeyman in him, they would have to look elsewhere. Premji is modest and reticent, not a belligerent business leader. This down-to-earth billionaire, whose achievement has not changed him as a person, is said to personally know and talk to every employee of Wipro.

 “The comparison to Gates doesn't end at software: Premji's charitable foundation works with that of Gates. Premji's foundation does more work for education in poor rural areas, giving US$5 million a year, while Gates' has made health a priority,” says the Financial Times. Premji firmly believes that ordinary people are capable of extraordinary things. He believes that the key to this is creating highly charged teams. In the year 2001, Premji established theAzim Premji Foundation, a non-profit organization with a vision to contribute significantly to quality universal education in order to build a just, equitable and humane society. This means every child would receive quality education. The financial resources to this foundation have been personally contributed by Premji. The current activities of the Azim Premji Foundation engage 1.8 million children under various programs.
         
The majority of financially ordinary men envy success in others and react with bitterness, however the people who are rich and financially successful and have a positive attitude do not react with envy to someone else's success. In fact, they appreciate success in others.
         

The bottom line to remember is that one should appreciate, not envy other successful people. 

Which asset class has performed the best over last one year?

                                                                      Is the time ripe to move to equities?

The last twelve months have been exceptional for the Indian stock markets. Not only have the benchmark indices scaled life highs, the broader market comprising mid and small caps has done very well for itself. As today's chart clearly shows, equities have been the place to be over the last one year. Returns from all other asset classes look quite puny compared to the returns from stocks over the last year. Even Gold seems to have lost its luster.

Does this mean that investors should jump on to the bandwagon and enter the markets now? We believe that it would be a very poor decision to abandon the principles of asset allocation and jump headlong into equities based on one year returns. Investment in equities should always be made for the long term, in companies with sound fundamentals. Also, one must always keep the valuations in mind before investing in stocks. We also believe that investors should hold about 5-10% of their assets in Gold at all times. The yellow metal is an effective portfolio diversifier and provides a good long-term hedge against inflation. 

Rigid labour laws have hampered India's growth

A leading daily has pointed out about India's agriculture share in GDP, which has declined from 40% in 1973-74 to 14% now. The service sector takes the large chunk in the pie now. But this paradigm shift does not seem to have helped in creating enough employment. Despite India moving away from agriculturally-oriented economy towards the service sector; agriculture still employs large chunk of population. Besides, inflexible labour laws, poor infrastructure and ample red tapism have pushed a lot of our workforce in the unorganized sector.

Clearly, the government has not made far-reaching efforts to bring about the change in this direction. The government needs to bring in massive reforms in labour lawstake measures to make the climate more conducive for capital investments by pushing through reforms and implementing them. This may seem like a considerable challenge however, it is left with no option but to take a tough stance in the longer term health and interest of the Indian economy
. It also needs to take a relook at its various policies. This in turn will push labour from the unorganized sector to organized ones. It is well acknowledged that ramp up in capital spending and infrastructure goes a long way in taking a country's growth to the next level. Thus ramp up in capital spending and infrastructure can help to address this issue. On a much macro level, to raise India's growth trajectory, a broader reform agenda is needed. Thus the government will have to

Service sector dominates list of top Indian brands

A strong brand is a powerful tool for any business as it attracts consumers; allowing it to place and price products and services differently. If a company is able to leverage on this aspect, then it would have a positive impact on its overall business valuation. As aptly put by Warren Buffett in one of his letters - "Businesses logically worth far more than net tangible assets when they can be expected to earn on such assets considerably more than market rates of return. The capitalized value of this excess return is economic Goodwill. "

Today's chart of the day shows some of biggest brands in the country. This list is released by BrandZ, a WPP property. HDFC Bank, Bharti Airtel and State Bank of India lead the list of the top brands in the country. What is also interesting is that - as per the survey - seven of the top ten brands and 30% of the top 50 brands in the country came from the services sector. Another interesting point is that only 7 of the top 50 brands belong to PSUs

The top 5 corporate brands in India

The upside and risks from oil sector reforms

Oil and gas sector that was stifled with regulations is now witnessing some hope. The much awaited diesel deregulation was introduced in a phased manner some time back. And the way crude prices are behaving now, it might not be too long when diesel prices become fully market determined. That might seem a compelling argument in favour of investing in state run oil companies. Infact, some of the well known brokerage reports believe that the upside in such stocks is as high as 100%.

However, there are some caveats that investors must keep in mind before getting carried away. The first is that a full deregulation will depend on whether crude prices can stay at low levels, something no one can bet on. And even if that happens, it will be no guarantee that diesel will be sold at market prices. It would be worth mentioning here that even after full deregulation; oil companies continued to sell petrol below the market prices and did not have complete freedom in pricing. And that was not even compensated later, being officially deregulated. Lastly, there is a threat of huge competition from private players. A lack of level playing field has kept them at bay so far. But once they become active in already overcrowded refining space, even price wars cannot be ruled out. In short, while upside due to the expected reforms are already getting reflected in valuations of oil companies, investors must be aware of potential pitfalls while making investing decisions in the oil and gas space. 

How Dr Raghuram Rajan is 'bullet-proofing' India

It will be an understatement to say the RBI has been blessed with governors who are men with foresight. Governors ranging from Dr Y.V Reddy to Dr Subbarao have shown poise in the manner in which they maneuvered Indian financial markets through the toughest of global financial crisis. It seems Dr Rajan is no different. He has been the most vocal central banker to criticize the selfish monetary policies of the West in recent times. Having predicted the 2008 crisis in the US, this time around he had predicted global crisis of bigger proportion. However, instead of leaving the fotune of the Indian economy and its currency at the mercy of the US policy makers, Dr Rajan is taking tangible safety measures. As oil prices relented over the past few months, Dr Rajan has been building India's forex reserves. A measure that will ensure even if the US Fed rocks global economy with its policies, India will remain resilient to a great extent.

Below chart shows how the RBI is literally bullet proofing the currency by building Forex reserves.

 

                                           RBI buys up Dollars to re-build Forex Reserves

Indian house holds: Minimal exposure to equities

The past few months have seen domestic investors express interest in the Indian markets. That explains why domestic money is finding its way into mutual funds which appear to have pumped in thrice as much as FIIs in the past one month. However, if you look at the trend over the last five years, retail participation in equities has been abysmally low. Indeed, as can be seen from today's chart of the day, equities accounted for just 8% of the total financial savings of Indian households. The favourite continued to be bank deposits which formed a massive 48% of the pie. This is despite the fact that an 8 to 9% return from FDs is hardly anything considering the high inflationary environment in the country 

                                          P&PF- Provident fund and Pension fund, NBD - Non banking deposits, Ins- Insurance

The reasons why participation in equities has remained low is largely a matter of perception. Many retail investors have burnt their fingers during the 2008-2009 meltdown and many consider investing in equities akin to gambling. But nothing could be further from the truth.Equity investing is all about following a disciplined approach. It means buying when prices are low and selling when they are high. The period post the 2008 crisis was the perfect time for retail investors to get into the market. But many had done so during the peak in early 2008 before the bubble burst and suffered losses. Now stock markets have once again begun to rise and this has seen more and more investors getting invested. But the point is that retail investors will need to remain selective about the kind of stocks they want to invest in and not rely solely on tips provided by brokers and friends. 

Another huge reduction in spectrum prices needed

The Indian government was counting on one major source of revenue to bridge the fiscal gap for the financial year 2013 (FY13). This source was the spectrum auction. It had a huge target of Rs 400 bn that it had planned to garner from this auction. This is why they had priced the 2G spectrum at the level that they did in November 2012. It is not news that the round of auction fell flat. So it decided to slash the rates by nearly 30% and tried again last week. Unfortunately this round fell through as well since only one operator participated in the auction. Now Goldman Sachs feels that the government needs to slash the spectrum rates by 50% if it plans to get close to its target of raising Rs 400 bn from the telecom sector. But the question is will a price cut of 50% excite the operators and get them to participate actively in the auction?

Given the troubles that the telecom sector is facing; even a 50% cut may not be enough to get the operators to participate. Their reluctance in shelling out large sums of cash comes from their stretched balance sheets and low margins. Thanks to the intense competition in the sector and rock bottom tariffs, operators have been suffering a loss of margins. Most of the new guys on the block are still bleeding. At the same time, the regulatory costs and one time payments have just been mounting up. This has forced most of them to take on huge quantum of debt to meet the payment requirements. Unless things improve for them, they are not very keen to shell out more cash. But they do need spectrum to continue or expand operations. So it is not that the demand is not there. The government needs to keep its targets on the back seat and instead sit down with the operators and listen to them. This will help it to arrive at a conducive pricing. Only then will the spectrum auctions be successful

Black money unearthed this fiscal

Black money has been the bane of the Indian government for quite some time now. Indeed, so serious is this issue that it speaks of a parallel economy in existence. For instance, searches conducted by IT department during 2011-12 led to the discovery of undisclosed income of about Rs 14,017 crore. The figure for 2012-13 (upto December 2012) stood at Rs 6,799 crore. More serious is the issue of the money stashed abroad. Here India has been renegotiating its Double Taxation Avoidance Agreements (DTAAs) with other countries. The idea is to bring its Article on Exchange of Information at par with international standards. It goes without saying flight of such capital has to be given the urgency it deserves. Efforts have to be made to stop it at all costs. These would mean undertaking some much nee ded financial reforms. For starters, the tax system needs to be made simpler. Further, the base needs to be probably widened. All of this to ensure that instances of tax evasion are reduced. The sooner the government does something meaningful on this front, the better off the country will be.

Sharp drop in interest coverage ratio of Indian companies

                                                               Data source: Mint

 It is believed that the financial health of Indian companies is not as vulnerable as that of their Western counterparts. But on certain parameters they fail to feature favourably even when compared to the subprime crisis era. Take interest coverage ratio -a measure of a company's ability to pay interest on outstanding debt, for instance. As per data from Mint, for the 3,500 companies listed on BSE, this ratio has dropped from 5.9 times in December 2007 to 2.7 times in the quarter ended December 2012. Plus the deterioration has been for stocks across market caps. For mid and small cap stocks in fact, the interest coverage ratios have been lower for about seven-eight quarters now. Investors therefore need to be rather watchful about the debt and cash flow position of companies.

What India should learn from the Rajat Gupta case?

A very famous quote by legendary value investor Warren Buffett goes thus: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." We were reminded of these lines when we read what former Goldman Sachs director and McKinsey & Company Managing Partner Mr Rajat Gupta said just before being sentenced: "I have lost my reputation that I have built over a lifetime."

Just day before yesterday, Mr Gupta was sentenced to two years in federal prison in one of the biggest insider trading cases in the US. His crime was that of leaking confidential information to a hedge fund manager at the height of the financial crisis.

An article in Business Today has pointed out some very pertinent lessons for India from this entire episode. Crime and corruption are universal. They are as rampant in the US as in India. But what differentiates the two is the robustness and efficiency of the judicial system. Take this insider trading case. The quickness with which he was tried, found guilty and sentenced is indeed commendable. To give you a gist of the timeline, the trial began on May 21, 2012. On June 15, the jury found him guilty. And on October 24, he was sentenced to 2 years of imprisonment and a US$ 5 million fine. Period.

What if Mr Rajat Gupta was facing a trial in India instead of the US? It would, without any doubt, drag on for years. Remember the Satyam scam? Mr B Ramalinga Raju, the former chairman of the company which is now Mahindra Satyam, had confessed to fudging its accounts back in January 2009. As per the magazine, the Central Bureau of Investigation (CBI) had taken up the issue in February 2009. All the 10 accused have served about 18 months in prison as undertrials. There are matters still pending with several regulatory bodies including the Securities and Exchange Board of India (SEBI). In all likelihood, it will take a long time before the final verdict is out. And this wou ld be no exception. Judicial cases in India are known to go on for years, sometimes decades. But does delayed justice have much value? As the legal maxim goes: "Justice delayed is justice denied."

Mukesh Ambani does it 5th time in a row

Attaining top slot is a difficult task. But after reaching the pedestal maintaining one's position over there is also equally challenging. Not if you are Mukesh Ambani. The Forbes richest Indians' list is out. And for the fifth time in a row, Mukesh Ambani has claimed the title of being the richest Indian on earth. His net worth stood at US$ 21 bn for the year under consideration. Second in the list was ArcelorMittal's Chairman, Lakshmi Mittal. However, Bharti's Chairman, Sunil Mittal and Adani Group's Chairman, Gautam Adani were out of the annual list of 10 richest Indians. The telecom scam and power woes saw share prices of their companies tumble which eroded their net worth. Dilip Shanghvi of Sun Pharma was a surprise entry into the list. In fact, he entered the top 5 for the first time.

It is interesting to note that the collective wealth of India's 100 richest Indians increased 3.7% to US$ 250 bn. And this increase in wealth is approximately 14% of the country's nominal GDP. In a country, where majority of the people live below poverty line, such a concentration of wealth in hands of few people is really astounding.

Only 26% of India's workforce have full-time jobs

Data source: Business Standard *% of entire population of employed full-time for an employer; **% of workforce which is looking for work or available for work

In a recent study, polling firm Gallup has revealed that only about 26% of Indians aged 15 years and above had full-time employment of at least 30 hours per week in the first half of 2012. It also suggests that workers between the age group of 15 to 30 years are five times more likely to remain unemployed and twice as likely to be under-employed compared to their older counterparts. This is indeed a shocking revelation at a time when the developed economies are struggling with dwindling growth rates and high unemployment concerns. The problem of youth unemployment and under-employment can assume monstrous proportions in a highly populated country like India and can lead to disastrous socio-economic consequences. Indian policymakers really need to find a way to unlock the so-called demographic dividend before it starts becoming a huge liability.

S&P warns India yet again

Ever since the government opened the floodgates of reforms, stock market investors rejoiced. Particularly the FIIs. They are now hoping for more 'announcements'. But it seems the rating agencies are once-bitten-twice-shy. They are no longer willing to be pacified by reforms on paper. Especially since the political consensus to see the reforms implemented is extremely weak. Moreover, it could be much longer than anticipated before the reforms actually facilitate higher GDP growth. Plus there are problems of inflation, fiscal deficit and corruption. These are not going away anytime soon.

As a result, rating agency Standard & Poor's has once again issued warning regarding India's sovereign rating. The threat this time is to relegate India's rating to 'junk'. This has mostly to do with the doubts about execution of reforms. S&P however promises a better rating if reforms get executed well. That is with improvement in investment climate. Particularly, if foreign direct investment in various sectors is implemented successfully.

Now given that global rating agencies have very little reputation of 'credible ratings', the threats need not panic investors. Having said that, any premature celebrations about the government's reformist attitude are also uncalled for.

Millionaires in India to keep swelling

As per Credit Suisse's Global Wealth Report, the number of millionaires in emerging economies is expected to jump over the next few years. In China the number could double to almost 2 m by 2017. And right home in India, as many as 84,000 Indians are expected to become millionaires by 2017.

This is a huge increase of 53%! While the Indian middle class is seeing rising wealth, there is still a great deal of poverty in the country. This is reflected by the following statistics. Almost everyone in India (around 95%) has wealth below US$ 10,000. Only a very small proportion of the population (just 0.3%) has a net worth over US$ 100,000. The falling GDP growth rate has seen India shedding US$ 700 bn from its household wealth during mid-2011 to mid-2012 period. This is the steepest fall seen in Asia. It totals 50% of the total erosion that the continent has seen over the period. Well, we just hope that this money has been spent towards productive purposes instead of conspicuous consumption. Anyway, the million dollar question is whether you will be in the top 0.3% by 2017.

IMF predicts a poor 2012 for global economy

                                                               Source: Business Standard

We recently read with great surprise about how IMF cut India's GDP growth forecast for 2012 to just 4.9%. In fact, India is not alone. As above chart highlights, the global financial institution expects all major nations to have a subdued 2012 than 2013. India though is certainly the worst off. We for one though won't read too much into this. Even if growth does turn out to be the way IMF predicts, it is just an aberration as per us and on a long term basis, India's GDP growth should rebound to its long term average of 6%-7%.