Friday, August 28, 2009


With every passing day I think when will the recession take back its curse. When will the potential candidates get employed without having to behave like beggers on street. Those who spent huge amount of money to enhance their skills and knowledge so as to beat the other competitors fighting for the same positions.

A small example of how the clubs of the business schools have been affected by Sub Prime( a sneak into the club discussions in our business school):

Be it the Finance Club (FinCoP) where we discuss the Sub prime crisis, Lehman Bros. case, Great depression,Balance Sheet Reviews of companies etc. etc., be it the Strategy club (StratForward) where we discuss which are the companies who were recession proof and what strategy they had applied to do the same. Be it directly related to the topic or not finally we derive the Sub prime effect on the topics.

Leaving apart these trivial issues lets focus on the impact of the same on Global Economy.

Just a small peak in one of the most hit sectors of the world:

Infrastructure Development have been falling in countries like US and UK since the economic bubble burst in the last year. This in return is affecting the steel industry in an adverse way. The steel manufacturers are thus forced to contract their supply in the current fiscal year. We can see reduced growth prospects for the steel manufacturers all over the world. This in turn is leading to fall in steel price.Steel manufacturers are recording losses in their first quarter results.

Lets see which nation looks most prone to face the hit. In order to have a clear picture of the same let us see the steel production scenario globally in the last fiscal.

The following figures are derived from Iron And Steel Statistics Bureau's monthly reports as published in the month August 2009.

The five main steel producing countries of the Far East showed varying production with both China and India showing an increase.
1. China's June steel production showed an increase of 6% to 49.4 million tonnes which contribute to 49.5% of the world's total steel production.
2. Crude steel production in Japan declined by a third in June with the year to date total down 40.7% to 36.7 million tonnes.
3. India has now become the third largest steel producing country in the world with June production up 5.7%, bringing the year to date total to 27.6 million tonnes, an increase of 1.3%.
4. South Korean steel production was down 14.4% in June, and by 17.3% in the year to date to 22.8 million tonnes.
5. Taiwanese production decreased by 29.5% in June and by 39% in the six months to 6.6 million tonnes.
Australian crude steel production dropped by 52% in the first six months to 1.9 million tonnes.

An overview on the past steel production dips:

The biggest fall in demand over one year for the steel industry since the end of the second World War was the 8.7 per cent drop in 1982, towards the end of a downturn in global industry. That was the third consecutive year in which steel industry output fell. There have been only three occasions since 1900 when output has declined for three years in a row. Similar slump periods for the industry were 1930-32, 1944-46 and 1990-92.

Production of crude steel for the countries reporting to the World Steel Association in June 2009 was estimated to be 99.8 million tonnes, a decrease of 16% over June 2008. China accounted for almost half of the global production of steel in 2009, the year to date total fell by 35%. All regions showed a drop in both June and the year to date totals except for that of Middle East.

On the other hand if we compare the steel production contraction we will see a decline in the contraction rate. The contraction rate were as follows:

China followed by India are seen to be the most sensitive in this sector at this point of time. This can be very well validated by the first news I came through in the newspaper on the morning of 28th August:


The company recorded a consolidated loss of Rs. 2209 Crores in the first quarter of the fiscal. If you carefully see the balance sheet of the Company for the quarter ended June 2009 we will see Raw Material cost contributing 38% of the total expense of Tata Steel Ltd. alone and when we look at the consolidated Balance Sheet it is around 29% of the total expense. The consolidated figure gives us the raw material contribution to the business of both Tata Steel Ltd. and Corus. So if we try to arrive at the percetange that Raw material contributes to only Corus it will be around 20%. This means that the rotation of stock is very low due to fall in demand for the finished product in Tata Steel. Even though you say it might be the distance coverage expenses that is high in case of Tata Steel while procuring raw materials I would say it cant throw up such a high difference.

Mr. Laxmi Narayan Mittal is still optimistic about the growth in steel sector in the current fiscal.

Friday, August 21, 2009

Sub prime effect - is it over or still there??

Subprime PPT

UBS which was one of the front row investment banks who faced the credit crisis in the last year. It had written down $ 44.2bn following Citi Group and Merill Lynch which wrote off $55.1 bn and $51.8 bn respectively. It had regained its existence with the Swiss Govt. pumping in $ 5.16 bn. Today we saw GOvt. of Switzerland selling off its 9% stake in the bank making a profit of 1.2 billion franc from last year's rescue package. This shows the bank has had a strong footing again and this led to increase in stock price by 4.6% at 17.5 francs and closed at 16.74 francs.

Thursday, July 9, 2009

Educomp at a growing spree

The leading private player in Education Sector in India has been growing with help of its two verticles: ICT( Information & Communications Technology) and SMART class. Both of these verticles have helped it grow and become the eighth player on the global list. Educomp's success can be mapped with the 4 Cs required to judge a business:

Credibility: Its revenue growth has established credibility in the Indian Education Sector and its affects can be seen in the stock price hike from a mere 1k level in January 2009 to cross 4.5k in the month of July
Capital: Educomp has allocated Qualified Institutional Placement(QIPs) in order to raise capital for the purpose of raising growth capital and it has announced that it has no plans to buy back its existing FCCBs
Creativity: Its Smart Class initiative backs its creative skills
Content: The increase in the number of schools it tapped in the past few years proves the spread of effective education in the country

Wednesday, July 8, 2009

Why is Insurance sector Sensitive??

Let me highlight few of the happenings during sub prime crisis in insurance sector:

Remember how the CDOs were re-insured by the credit agencies in order to boost up investment even though these CDOs lacked the credibility due to the fact that the high risk securitites were being hidden under the tranches??

That was the main reason for the crash because the sectoral performance was highly over estimated. So bringing in more FDI in this sector at the current point would mean a high chance of the same happening in the Indian Market.

If FDI is brought into this sector at this point of time and the projected growth of the sectors is estimated to be higher than the actual level then we will see speculations growing and bringing a crash in India as well leading to a fall even before India rises to overtake the so called economic leaders at this interesting time of recession.

Rate the Budget 2009- 10

I give it a 7 out of 10 considering the following factors:

It is not the time to look at the budget being sector specific at this point of time. It is necessary to understand the overall state of the nation which needs to follow inclusive policies at this juncture. The recession has still not loosened its grip and hence the following factors needs to be looked at, at this point of time and I am happy it has been taken care of my by our honourable minister:

1. Bring up the sectors which have been hit the most like infrastructure and IT.
2. To bring up the standards of our economy in sectors like education and healthcare to be ready to be a high potential Investment platform in the near future( when recession looses its grip).
3. And to remain a partially closed economy when it comes to sensitive sectors like insurance and banking.

Please provide your rating rationales

Monday, July 6, 2009

Budget 2009-10

Market sentiments hit the stock market badly today. It was because of the hype created by media and "Experts" who gave an unrealistic view of budget this year. Too many expectations had cropped up and made the market rally up above 15K in the morning but as soon as our honouable Finance Minister presented the budget and made some realistic announcements the market slipped to 14k. It is said to be the biggest market fall since 2001 on budget day. It is really sad to see such reaction on such a steady and potentially growing budget. Few of my friends had bought call in the morning of as high as 180 and it went down to 18 at the end of the market hour... To add to their wounds I said "you should have bought put" [;)]

Good Luck Infra!!

Sunday, July 5, 2009

Deflation- Prices must be going down.......

India facing a negative inflation for three consecutive weeks. But we cant see any decrease in commodity prices. Why so??

The reason is very simple : Last year we saw inflation rising at high rates and this year the base effect has led to Deflationary figures.

And of course the slackening of demand has effected the same.

What does this mean for future ??

It means we will see high inflation figures next year due to the base effect again and re-vitalisation of demand affects....

WPI over CPI - But why???

Why is WPI used in our country while all other use CPI??

Indian market is unorganised in nature. A single commodity costs different at may be two side by side located shops. Hence to avoid this disparity and to decide on the price to be considered India takes the wholesale price of the commodities in order to produce the inflation figures. Thus the wholesale prices are considered to be a benchmark price of any commodity in India.

Wholesale price would mean the price at which a commodity is traded in its wholesale market.

Cause of RECESSION well defined??

Charles Calomiris, professor of financial institutions at Columbia University Graduate School of Business, said the crisis is only the worst episode of what he described as "the most destructive 30 years of finance in world history". He further said: "As soon as prices flattened — long before they declined — the game was up. If you understood the securities you knew this . . . I don't think I was the only one who recognized this" in 2006, when the housing bubble imploded, he said.

Compounding the problem was a lack of corporate governance in the major bank holding companies in the U.S., where managers purposely underestimated the risk of the financial instruments they were buying, thereby ignoring shareholders' interests, Calomiris said.

Pension funds, mutual funds, insurance companies and the like were barred from owning more than 1 or 2 percent of any single public company, allowing bank holding companies to fragment and weaken their ownership structure by regulatory design.

"There were no retail investors . . . They were all sophisticated institutional investors who were buying these securitized instruments," he said. "You have to be honest — there was a problem here on the buy side. People were consciously doing what they were doing to underestimate the risk and pretend that the risks were less than they were."

A Parody I found in this time of Recession!!

Original Song Title: "Its The End Of The World As We Know It "
Original Performer: R.E.M.

Parody Song Title: "We're Deep In Recession And They Knew It"
Parody Written by: Mark Scotti

It's here, have some fear...
Too late, we saw the housing fake.
Lender snakes, over extend - Fannie Mae was not afraid.
Buyers start packing in, listen to defaults churn -
Yards start growing weeds,
Banks stuck with their deeds.
Look at your watch,
Kick in the crotch, plead, jobs go, gas blows.
Living structure splatter no hope in sight, things tight.
Liars on a wire, disputing mistakes made by our government for retired and safer life.
Big blur, never coming in a hurry with the resources to save our necks.
Scheme and scheme, new order look like chumps, weathered flop.
Look at that bank's blame! Fine them.
Oh no, savings go, bankrupt nation, chicken coop, what'll we do.
Lend oneself, help oneself.
Banks serve their own needs, listen to sounds of greed.
Had us so enraptured that the downfall left our sight - right.
It's symbolic, melancholic, damn, fright, no light, feeling very disliked.

We're deep in recession and they knew it.
We're deep in recession and they blew it.
We're deep in recession and they knew it, we're out of time.

Set your clocks - Bitching hour. Didn't pay bill got no power.
Read and learn, concern, try to make yourself yearn.
Don't just be uniform and disconcerning, unforgetting.
Every effort escalates. Voices now improve our fate.
Light a candle, save the voltage. Don't clown, don't clown.
Don't get dreams crushed, crush.
Oh yeah, this seems so clear - new frontiers. Fight for aid with no fear!
They should regret, they should regret, they should regret, those lies.
Re-offer some solutions; re-offer us alternatives, a new design.

We're deep in recession and they knew it.
We're deep in recession and they blew it.
We're deep in recession and they knew it, we're out of time.
(It's time we got thrown a bone)

We have our rights, don't skip an instrumental plan to provide.
What will give delight? Calm, like fine wine.
Recover from the dead, stimulus, and safer banks.
Unite parties, no fakes, money back, soon!
Not alcoholic, patriotic, scams, in check, right? Fight!

We're deep in recession and they knew it.
We're deep in recession and they blew it.
We're deep in recession and they knew it, we're out of time

Will floating freely hurt us after a while????

The decision of changing the market cap based index calculation to free float index is a good one considering the objectives of having a stock Index in any country.

The main objective if we define is to capture the overall market picture that is to say an ideal index would be one whose movement would be highly correlated to all possible portfolios in the market.

SO to have a correct picture of the MARKET the shares which are traded in actual market should be taken into consideration and not those which include shares held by promoters, strategic holders, government, etc.

Even though the change in process might hurt some stocks due to low weightage but it will give us the true picture and transparent results in future.