Globalisation_ Global Issues, Local Problems

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Globalisation: Global issues, localproblems

R Balakrishnan 27 February 2014 0

A year ago, we were all sitting pretty, projecting increasing corporate profits

assuming that the dollar would be at around Rs45. We assumed that our economy

would continue to be an attractive destination for foreign capital and that inflation

would perhaps get tamed. The huge import bill did not appear a serious factor. But

suddenly, the exchange rate has jumped from Rs45 to Rs54 (an increase of 20%)

and I am not sure whether we should start looking at Rs60 over the next few years.

Suddenly, Indian companies with global exposure look vulnerable. Tata Steel had

gobbled the much larger Corus. Now, we need special skills to forecast Tata Steel’s

prospects because its operations, thanks to the acquisition, look complex. Borrowing

in global currencies throws up another dimension. When we looked at IT companies,

we were critical of companies with single-country exposure. Now, the entire globe

seems to be contracting. A few companies are also staring at maturing foreign

currency convertible bonds (FCCBs), which have no hope of getting converted into

equity at the current low prices. This will push up their borrowing cost. Add to this,the efforts of the Reserve Bank of India (RBI) and the Institute of Chartered

Accountants of India (ICAI) to ‘help’ Indian companies by diluting accounting

standards, and it becomes impossible to decipher the accounts of many companies

and banks. RBI seems to be doing its bit by putting ‘limits’ on foreign exchange

dealings, laying the blame for the falling rupee on ‘speculators’.

In the era leading to the 1990s, as an analyst, one of the important factors for me in

selecting companies was their vulnerability to imports and their ability to pass on

imported inflation either through a weakening rupee or sheer domestic inflation. At

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e same me, we a o worry a ou mpor u es, mpor su s u on, e a y

of the promoter to ‘manage’ customs duty and tariffs, etc.

Gradually, we knocked the balance-of-payments issue out of our heads as the

economy opened up, inflation started to moderate and tariffs started to come down.

We also believed that, over time, the Indian rupee would perhaps stabilise, if not

appreciate. A growing economy with increasing prosperity made us assume that the

rupee would strengthen, but a look at the trade deficit tempered the optimism.

Now, we are faced with moderating growth, stubborn inflation and a global crisis

that threatens to bring our foreign exchange problems to the forefront. Sure, we

have $300 billion of reserves; but we also have a huge debt. What have been our

saviours are the ‘remittances’ of Indians working overseas and ‘portfolio’ flows that

(at various points in time) seemed inexhaustible and irreversible.

The old worries have resurfaced once again. In picking companies, I am worried

about their global exposure. I am worried about the country’s foreign currency

obligations. Surely, if there is a global contraction, Indian companies that are global

are going to be hit. We also seem to think that a falling rupee is great for exporters.

In reality, competition and bargaining power (of customers) bring down any super-

normal gains. I am once again wary of companies (like infrastructure companies)

that look to fund managers of FIIs (foreign institutional investors) to keep providing

cheap equity.

So, for now, my preference in stock-picks is going desi. I would stick to companies

that have low import intensity and cater primarily to domestic markets. Also, these

are not great times for commodity stocks. If global trade shrinks, commodity prices

will decline and inventory profits will vanish. I would look at companies with no- to

low-leverage, fairly high return on net worth (RoNW) getting almost all their

revenues from within the country. If a company does not meet these conditions, I

will look at them only if I can get them at bargain prices. Bargain would mean

dividend history, good businesses and available at maybe half of their book value. In

good times, they should be able to deliver at least a 25% return on shareholder

money. That is a must.


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Globalisation_ Global Issues, Local Problems