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Monday, April 21, 2008

India, My Friends

Before I go back to high finance, I want to take a short tour of India. (And by the way, hope you all had a Happy Passover if you observe it).

India's economy is way more strapped right now than most observers realize. The inflation is hitting relatively hard, with 2007 sales of soap, for example, dropping by five percent. The disappointing performance of the newer retail chains is probably being influenced by the trend.

In India, the equivalent of our new car sales metric is sales of motorbikes. Check out this article about both price increases due to input costs, and the types of sales drops that some companies are experiencing:
Bajaj Auto, that saw sales falling as much as 20% in the domestic market in the last financial year, has gone for a hike of Rs 500-600 .
R Chandramouli, marketing head for TVS Motor, said the company has also raised prices of some of its models. “Overall, the hike is between Rs 200 and Rs 1,000,’’ Chandramouli said.
Sales of TVS had dropped 40% in the domestic market last fiscal. In the scenario of a high level of interest rate and not-so-easy retail financing , Chandramouli said, “We feel that sales would be better than last year and there would be marginal growth,’’ he said.
The latest hike in input prices came as a big blow for the bike industry that has been struggling to prop up sales growth.

Motyorcycles sales fell 12% last fiscal and companies have been spending a lot on promotional schemes to attract buyers.
They are not depressive types. It's a pretty darned good bet that sales aren't going to be rising this year due to credit and inflation issues. Note the pace of overall decline.

Valuations of property companies are collapsing in multiple Asian countries, and India is no exception:
The meltdown in property firms’ valuations in other economies, including India, China, Japan and the UK, has surpassed that of the US with Indian real estate companies witnessing one of the biggest falls. Some leading Indian real estate firms are trading at about 34% discount to their net asset values (NAVs), which implies that property firms are being valued at just two-thirds of the assets they hold.

This makes India the second-most affected nation after Malaysia in the first quarter of 2008 among key property markets, according to a Citigroup report. Interestingly, in the US, the property market index is trading at just 12% discount to its NAV. Its performance is even better than the global index, which is ruling at an 18% discount.
The bubble was relatively bigger in many of the Asian countries and will deflate far more.
Indian property stock prices have dropped as much as 50-67% and underperformed the Sensex by 23% in the first quarter of 2008. Such a sharp fall has widened the discount to their NAVs, which was just 1-2% in November ’07. This is despite the fact that Citigroup has lowered the NAVs of Indian property firms by 9-27% in its analysis. Real estate consultancy firm Cushman & Wakefield joint managing director Sanjay Dutt says high interest rates have made property firms with high debt exposure prone to rapid erosion of corporate valuations.

He added that each segment of the domestic real estate sector is facing problems: “With the exit of speculators from the residential market, the transaction volume is down by almost 40%. Secondly, a large part of the IT & ITES space is occupied by US and Europe-based MNCs, but in the first quarter of this year, a majority of them didn’t commit to any space and we don’t expect it to change in the second quarter either.
Ah. The peak was in January 2008. I recommend reading the entire article. Note that comment about the high-tech segment's changing demands.

So what is going on in IT firms? They're cutting back spending:

You may find this article about the cuts in IT firm spending quite interesting:
With fears of a possible recession in the US spreading to India, IT and ITeS companies in Hyderabad have begun to cut costs to remain competitive. But this round is not about retrenching staff and reducing wages. Rather, the focus is on cutting out the frills.
Several companies are also making employees work more by extending the hours, albeit they pay an extra allowance. Yet on the balance the companies are saving money.

The logic is that most IT companies use licenced software which is charged based on the number of systems they are put on. "So, by switching off some systems and using only a few, we are able to save on the licensing fee," an IT operations head revealed.
Words just kinda escape me. If you are making some employees work more, other employees will be working less. It is a truism in the software industry that some good employees will produce 4 to 5 times the effective output of the bottom rank of employees. I think this is what they are really doing.

The article assures us that it's just about cheaper coffee and so forth, but Tata has begun to cut:
After cutting down on variable pay across the board, Tata Consultancy Services has shown the door to 500 employees, citing poor performances as the reason.
TCS, in an internal communication to its employees, has said that though the company has met the revenue targets, it has not met the internal economic value added (EVA) targets. EVA is the difference between net profit and the cost of capital. Because of this, it is cutting the variable component of salaries across all levels.
There has been a severe shortage of good, experienced IT personnel, so this is quite a revolutionary move that must indicate a decline of demand for employees.

The Indian government is currently in some turmoil over inflation, which has recently moved to around 7% and appears unlikely to reduce much in the near future. The debate is now focusing on internal cost controls a la Jimmy Carter:
Warning that the battle against inflation will fail if states do not join hands with the Centre, commerce and industry Minister Kamal Nath on Sunday said the fresh offensive on price control may include a ban on forward trading and bringing steel under Essential Commodities Act.
Asked whether the government would ban futures trading, Nath replied, "If forward trading is the reason of inflation, why would not we do it. We want to contain inflation." The government informed Parliament last week that it was awaiting the report of the Abhijit Sen Committee on the impact of futures market on prices and would take a decision if the report is received within 10 days.

As for steel, which has seen a price rise of 49% in the last one year, Nath said if the states failed to rein in inflation, the Centre was prepared to take stern action.
If you are a middle-aged American, you remember just what happened when good ol' Jimmy tried this.

I think the WTO's prediction for 4.5% growth in 2008 world trade is near the high side (it was 5.5% in 2007, and 8.5% in 2006), and I think in particular they discount the accelerating risk of internal trade problems influenced by currency valuation changes within the SE Asian block. The riproaring pace of investment in some of these countries has been fueled by ROW investments, and could prove to be a significant source of instability later in 2008.

** One final note - the impact of inflation on Japan's consumer sector is mounting. The supermarkets are feeling pressure and consumer confidence is dropping rapidly. Demand for real estate dropped 4.8%.

"Because of this, it is cutting the variable component of salaries across all levels.
There has been a severe shortage of good, experienced IT personnel, so this is quite a revolutionary move that must indicate a decline of demand for employees.

Yes, your conclusion rings true to me. Also, it seems to me that they are inherently discounting quality impact on their market position. That is, variable comp is usually offered to help tie employee work quality (good results) to their employment/employee.

By reducing variable comp, they seem to be saying that "good enough" is better than "the best" (if they have to pay a bit more for the best). I am not sure what to read in that -- what do you think? Is it purely survival as they look at their sales book? For example, if outsourced IT (and almost all probably is), then is it responding to severe cost containment moves originating from Multinationals doing business there (e.g., Dell, IBM, etc.)? Which in turn springs from US-side economic weakness?
Frank, experienced Indian IT personnel have been getting raises greatly in excess of inflation for years now, and have been in very short supply. You do not necessarily raise productivity in IT by adding marginal and inexperienced workers. Often you get the reverse. I think this is a reflection of that; it is often far more efficient to get your experienced and productive workers to work another 10 hours a week than to hire two or three more workers who are not nearly of the same quality.

There is deep worry about the US economy and the effects of an IT slowdown.
Food inflation is a problem for the Fed. Understand, the Fed does not care about inflation and has said so many times. Its concern is inflation expectations. 47¢ six-packs. 25¢ per egg. Rice and flour. These put us back into the Volker era. What Chindia, et al, do not understand is they can be outbid for food many times over. They also don't understand that they "need" the food and the rich western nations would actually be better off with higher prices for necessities.

Snarky but "oil for food" is a two way street.
I just returned from my Indian grocer and bought my usual rice. I bought two bags and both bags had gone up almost $3.00 since the last time I was there. The gentleman working there said they saw this same thing about 3 years ago and then the import restrictions were lifted again. He suspects that a lot of this is politically driven but he was not really sure.
Viola - how long was it since you were last there?

Rob - I think the entire global economy will shift more to filling needs for basics. Biofuels are sucking up too much ag capacity.

Imagine how different the world could be right now if the west had responded to the CO2 concerns by investing heavily in nuclear power. Imagine all the people who would be doing better.

That's the difference between good and bad policies.
Rob - I think the entire global economy will shift more to filling needs for basics.

Umm. I don't understand. Near most of us need food, energy and shelter. We have lots of all those just not locational where demand meets supply.
Rob - well, most of us will be spending more money for those items. The multipliers just get bigger and bigger in less wealthy economies.
I was there about 3 month ago, perhaps a bit longer. We buy large bags of rice so they last a while.
From what Mark Perry over on Carpe Diem has posted in the last week about Russia, you should find a way to visit there, too...

They appear to have a future, as long as they don't slip back into Communism.

Supposedly, there are places in the northeast where they've limited rice and flour purchases as a result of limited availability.

There is a "food shortage" currently, largely due to misguided Fed policies (is there really any other kind?) regarding ethanol production from "excess" food.

Gotta be the lamest, stupidest idea floated in recent memory. Ag uses a lot of energy to produce its excess, and cannibalizing the results is a negative sum game if there ever was one. The only ethanol idea which has ever made any rational sense is the recycling of ag waste (such as corn husks) -- if ethanol makes any sense in any way, mind you.

The net result is that land is cleared worldwide to produce "food" which isn't. This reduces forest land, which decreases natural CO2 recycling, to produce a fuel which is of limited cost effectiveness in the first place even with subsidies.

In the meantime, people around the world go hungry, and America is in the position of late 1800s Germany under the Junkers... Plenty of food, but none of it actually feeding anyone.

Remember this imbecility when someone advocates "more government" in response to a problem. Governments only screw things up.
Why America can not think of Straight forward methobd by cultivating Jatropa trees in the waste & open spaces where ever available in Railway yards,oil fields,offices for producing Bio-fuel for their captive use,using Fertigation technique(Fertilising and irrigating the plants with Drip nozzles),instead of converting Edible oils in a round about way,causing environmemt in equilibrium.
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