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Thursday, June 13, 2013

Cooper Tire and Rubber Company...sign of Indian appetite?

...Now bought by Apollo Tyres in the largest M&A of India's automotive history.The all cash transaction valued at $2.5 billion would leave the Ohio headquartered firm in Indian hands.
 
At a time when global risk appetite is low,this deal signifies a bold new initiative for a company that is familiar to Indians but not that big an international 'face'.The leverage will substantially increase the debt:equity ratio of Apolloto 1:4 on consolidated basis,  which currently stands at 1:1.In times of strained cash flows and high interest rates its a risky move.
 
Banking solely on opening doors to the mature American market where Cooper Tire get 70%  of their revenue from,as well as providing a base for the entire South Americas.It makes the Apollo+Cooper entity 7th on the global list of biggies behind leader Bridgestone and just behind Pirelli.
 
The bold move of the Tata Motors  buy of Jaguar-Landrover has show on balance sheet of the parent company this year.Less hyped was the Hindalco buy of Novelis for $6 billion and two smaller buys in Australia to secure supplies for its copper smelters.
 
Is it more important to find new markets or secure the raw materials or supply pipeline?The Chinese have been very clear about finding new markets for their products after having sewn up 30% of the raw materials from across the world.


Indian businesses have been generally risk averse and conservative.The few exceptions eg.Bharti,Tatas etc have faced shareholder pressure,bad press and regulatory hurdles.Assuming the Indian economy growing around 5% will still leave substantial cash flows on company books for them to leverage their balance sheets and buy profitable assets.
 
No other Indian behemoth signifies this conundrum more than Infosys.Holding a  mamoth 22000 Crores in cash without seeking options to deploy has left the Infosys stock down 35% from its peak,a high attrition rate and the need for a former star to try a comeback.
 
Do comebacks works?Thats another story.
 
But the Infosys example should guide perception of business leaders in india to seek new ground.Sometimes the risks are worthwhile.
 
As for Apollo,hindsight will be the best judge.

 

Wednesday, June 5, 2013

Rupee vs Dollar....The Big Rumble

The journey of the Indian rupee has been fascinating.Not just for those who follow money,but everyone who has been born and uses value of measurement for the exchange of goods and services.Since Harappans of the Indus Valley Civilization minted coins.The Rupee has not just changed in value but also in appearance.
 
 
A student of economics thus describes the various factors that influence a currency,"The value of a currency depends on factors that affect the economy such as imports and exports, inflation, employment,interest rates, growth rate, trade deficit, performance of equity markets, foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking capital and geopolitical factors".
 
An Indophile tracking the tracking in the last decade would have seen two major cycles of depreciation.While inflationary pressures started the slide in the Rupee,the deficit in balance of payments and the Current Account deficit(CAD) of 6.7% have been an additional burden.
 
The rupee fall has been scary.Given the noises by Mr Bernanke of tapering off QE and a strengthening of the US dollar versus other currencies,yet the way the Indian currency has reacted negatively points to a deeper reason.While we were looking at the GDP and PMI and inflation,global commodity prices etc to deflate,the positives for the economy from falling crude and base metal prices has been undone.
 
In a way the South Asian equity markets hold a small clue.Thailand,Indonesia,Vietnam which were the top performing equity markets in Asia have turned out the 3 bottom nations as part of the carry trade was unwound by FIIs on news of the QE tap being turned off sometime in the near future.
 
I have always been a proponent of the the theory that US investments at some point will flow back to their own country on assets becoming seriously cheaper than their Book Value(BV).The recent uptick in real estate prices in US seems to back my view.Will growth hold?
 
This is not the time or place to mention the many strong US listed companies trading below BV having good fundamentals,product cycles and market share globally.
 
I have also in previous blogs stated that a fall in Gold prices will lead to increased demand in India.Headlines in The Economic Times dated 4th June have borne my view.
 
Yes May and June are seasonally the worst months for trade deficit because  the monsoon sowing season increases import demand for fertilizers,chemicals and crude.Gold and silver imports surged 138% on falling prices last month.That does not do a lot for the trade deficit!
 
Although I am still bullish on the rupee,my target for december end is around 52-54 rather than the earlier 47.In the short to medium term there will be more pressure and the rupee breaching 60 against the dollar is quite likely.The RBI tried to deregulate NRI interest rates such as the FCNR,NRE rates and despite record NRI inflows the balance of payments situation is still critical.The rate of 55-57 is here to stay for some time.
 
I expect the US $ to strengthen further when the Fed announces a timetable for withdrawing QE.The Government decision to cut withholding tax by15% will boost demand for Indian Bonds and we may also see a rate cut.Weighed against this is the CAD,Trade deficit and lack of resolve on the political side to push through reforms in the insurance sector.The various scams are not helping.
 
If the Monsoon is 98% of normal rains,especially in water starved Maharasthra and Karnataka as predicted by the Meteorological Survey of India,the fall in pulse and vegetable prices will check inflation.How much that will impact the Rupee is an open question.
 
All the currency bulls out there should be prepared for a hairy ride...!!