Archive for June 25th, 2009

Can India run ahead of China?

Can India run ahead of China?

Can India run ahead of China?

Indians have for long suffered from an advanced case of China envy. It has never been just a question of higher growth rates in China. Visitors from India have also inevitably come back with breathless tales about the new downtown Shanghai, the magnetic levitation trains or the new highways being built across that country.

However, the World Bank said on Monday that India is expected to grow at a slightly faster pace than China in 2010. And the two economies will expand at around the same rate in 2011.

Is this a turning point in the long race between the hare and the tortoise?

There is little doubt that the gap between the rates at which the two emerging giants are growing has started narrowing.

China used to grow around 3 percentage points faster than India earlier this decade. That gap has now narrowed to the point of insignificance in the past couple of years, even without discounting China’s dodgy macroeconomic numbers.

This change is likely to be enduring for several reasons.

First, China is more exposed to the vagaries of the world market because of its high trade intensity. A Japan-style secular slowdown in the US and Europe over the next decade will hurt China more than India unless China moved beyond its admittedly successful mercantilism.

Second, the foreign direct investment boom in China since the mid-1990s pushed up its investment rate, enabled technology transfer and plugged the nation into global supply chains. All this took China closer to the global efficiency frontier, but it now seems that diminishing returns are setting in. Future growth will have to depend more on domestic demand and local innovation, which means that China will have to change its growth model.

Third, China is a fast ageing society, thanks to a one-child policy. This demographic change will increase dependency ratios and social costs.

India seems to be on a stronger wicket right now, thanks to its higher dependence on domestic demand, its vibrant entrepreneurial culture and a young population. But that should not mean that catching up or overtaking China is inevitable.

The joker in the pack is the quality of national leadership.

India needs to do several things if it has to realistically overtake China in the next decade: economic reforms, better infrastructure, internal security check, less bureaucracy and intensive skill development, for example.

Companies Go Slow on Share Buy-Backs.

Companies go slow on share buy-backs

Companies go slow on share buy-backs

In a tight money market, companies that have moved to buy back their shares are going slow on these efforts either because they do not have the money or are saving it for a better use, according to analysts and executives at some of the firms.

Currently, 22 companies have ongoing offers to buy back their own shares and, according to SMC Capitals Ltd, the merchant banking arm of New Delhi-based financial services house SMC Global Securities Ltd, they have spent less than 25% of the aggregate Rs 4,559.47 crore they would have to spend if they bought back all the shares they set out to at the maximum buy-back price.

To be sure, buy-back offers are typically open for several months and many of the 22 companies still have time to repurchase their shares.

Companies buy back shares in an effort to boost investor sentiment and prop up the share price, and increase the return on equity (money for the buy-back usually comes from reserves which is part of the shareholders’ funds or equity) and earnings per share (the shares bought back are destroyed, leaving fewer shares among which the earnings have to be shared).

No companies launched buy-back programmes in 2007, when the equity markets were on a roll. Several companies, however, announced such programmes as the markets started melting last year.

India’s benchmark equity index, Sensex, has lost nearly 50% of its value since January 2008, in the wake of the global credit crunch and an economic slowdown.

Delhi-based real estate firm DLF Ltd, which had announced one of the biggest buy-back plans last year at a total maximum cost of Rs1,100 crore, has thus far repurchased shares worth only Rs 51.3 crore, according to SMC. The offer closes on 9 July.

“The money we have deployed in the buy-back is a reflection of the general market conditions and the liquidity crisis worldwide,” said Saurabh Chawla, executive director, finance, DLF.

Similarly, Reliance Infrastructure Ltd, owned by the Reliance Anil Dhirubhai Ambani Group (R-Adag), has bought back shares worth Rs806 crore in an offer capped at Rs2,000 crore, according to SMC data.

“At a time when cash is king, many companies may not be as committed to their buy-backs as they would have been otherwise,” said Jagannadham Thunuguntla, head of equity at SMC Capitals.

Jagannadham Thunuguntla, head of equity at SMC Capitals

Usually, a firm specifies a maximum price for the buy-back and a maximum amount it will utilize for the buy-back.

But it doesn’t necessarily use this amount, and the buy-back happens at the prevailing market price.

“If the maximum buy-back price is Rs600, but the current market price is only Rs 300, the firm will naturally buy back at Rs 300,” said Thunuguntla of SMC Capitals.

A buy-back gives investors the option of liquidating their position in a market that doesn’t have too many buyers.
More read on SMC Capitals : http://www.smccapitals.com/index.htm