A YEAR OF U.S. DOWNGRADE: AND LIFE GOES ON

A YEAR OF WORRY: OR WAS IT ?

Exactly a year ago in August 2011...rating agency Standard and Poor's shocked the world by announcing a rating cut of the US of 'A', stripping away the coveted AAA bond rating. The downgrade, unprecedented in nature threatened to turn the world upside down, drive up U.S. interest rates, pushing the dollar down, driving bond yields to exorbitant levels and scaring investors away from stocks and into that traditional refuge for the fearful: gold. Atleast most economists expected this sort of a reaction, had we been living in a perfect world. Exactly a year has passed, long-term interest rates are sharply lower, the Dow industrials reversed course and is now firmly above 13000. The dollar has rallied, and gold prices are down from where they were when S&P lowered the rating. It is difficult to imagine a more decisive repudiation of S&P's warning that the U.S. government might not be able to pay its bills.

ASSET CLASS                  % CHANGE
Dow:                                  +14.4%
Gold:                                  -3.21%
Crude:                                -1%
Dollar:                               +6%

EMERGING MARKETS: NOT IN GREAT SHAPE

Equity experts propogated that with the developed world in turmoil, global funds and investment giants would have no option but to seek refuge in Emerging Market equities which offered relative value with slightly more risk. But the reality seems to be far apart. Emerging markets such as India and brazil have barely moved in these last 12 months with ahigh interest regime prohibiting any recovery coupled with steep interest burden for the corporate sector. China still faces the prospect of a hard landing despite the monetary authority pinpointing to more easing.

MARKET                         % CHANGE
India:                                +2.5% 
Brazil:                              -0.88%
China:                               -17.95%

THE NAME IS 'BOND'

Despite S&P's warnings and the political stalemate, investors still want U.S. Treasurys. Given economic turmoil in Europe and uncertainty elsewhere, U.S. government debt and U.S. dollars look like the safest bet around. That is why the interest rate, or yield, on 10-year Treasury notes has fallen from 2.58 on Aug. 5, 2011 to lows of 1.5 percent. At a recent auction of German bunds the two-year note yields fell below zero for the first time as the euro-region’s deepening crisis saw investors willing to sacrifice any return in exchange for holding the region’s safest assets.

BOND YIELDS                              % CHANGE
US 10 Year:                                     -39.5%      
German Bund 10 Year:                   -53.36%  
Spain 10 Year:                                 +8.03% 
Italy 10 Year:                                  -1.32% 
Greece 10 Year:                              +68.89%

WANT TO IMPROVE CORPORATE PERFORMANCE: INCLUDE MORE WOMEN ON BOARD

CORPORATE BOARDROOMS: NO MORE A MALE BASTION

For years women' rights groups have been arguing in favour of giving women more say and power in corporate boardrooms, and now a study has revealed that companies with women on their boards performed better in challenging markets than those with all-male boards suggesting that mixing genders may temper risky investment moves and increase return on equity.

FASCINATING RESULTS

Shares of companies with a market capitalization of more than $10 billion and with women board members outperformed comparable businesses with all-male boards by 26 percent worldwide over a period of six years, according to Credit Suisse Research Institute. The research, which includes data from 2,360 companies, shows a greater correlation between stock performance and the presence of women on the board after the financial crisis started four years ago. Net income growth for companies with women on their boards averaged 14 percent over the past six years, compared with 10 percent for those with no female director, according to the Credit Suisse study, which examined all the companies in the MSCI ACWI Index.

RISK AVERSION THE KEY

Stocks of companies with women on boards tend to be a little more risk averse and have on average a little less debt, which seems to be one of the key reasons why they’ve outperformed so strongly in this particular period.
The net-debt-to-equity ratio at companies with at least one female director was 48 percent, compared with 50 percent at all-male boards, and the study showed a faster reduction in debt at businesses with women on the board as the financial crisis and global economic slowdown unfolded.

WOMEN CALL THE SHOTS

While female representation increased to 59 percent last year from 41 percent at the end of 2005, countries such as Japan and South Korea are lagging behind the U.S. and Europe, which has added female representation the fastest over the six-year period. Larger companies have a higher proportion of women on their boards, as well as those in the health-care industry -- 73 percent have at least one female director -- and industries close to consumers, the study shows.

TIME TO BE MORE INCLUSIVE

The materials and information-technology sectors have the highest percentage of male-only boards, both at more than 52 percent, according the report. Traditionally some industries have just never really been seen as the domain of a woman, like some of the mining industries or heavy-capital goods industries, according to the report.
In the U.S., 36 percent of companies still have no women on their boards of directors, according to a report by researcher GMI Ratings on gender diversity released today. The average corporate board has about nine members.

INDIA AMONG WORST COUNTRIES FOR ENTREPRENEURS

Rampant corruption, lack of adequate capital and credit, and poor technology and training have impeded the creation of small businesses in India. Moreover the recent economic slump and capital constraints has impeded the creation of small businesses.

According to a Gallup poll India has been ranked last in Asia in promoting entrepreneurship. According to the survey, of 5,000 adults in India from January to March of this year, 16 percent of Indian adults own a business and half of those owners are solo operators. The survey found that business thinking, optimism and persistence – all important for entrepreneurs — are common traits among Indians. Small and medium-sized businesses contribute 8 percent of India’s gross domestic product and employ 60 million people in 26 million enterprises, according to a January 2010 government report. Nearly half of those surveyed by Gallup said that the government is a significant stumbling block to starting a business. Seven out of 10 Indians said that corruption is widespread in government and 60 percent said that corruption is common in business. Training and mentorship are also crucial for startups, but only 37 percent of current business owners and 28 percent of those seeking to start a business said that they know someone who can offer advice about business management, the Gallup poll found. A recent study by the World Bank ranked India at 166th rank among 183 countries in terms of the ease of starting a business.

The survey results were released just as India experienced the two worst blackouts in human history and as foreign investment in India has slowed in part because of concerns about changes in India’s tax policies.

A NEW PARADIGM IN SHAREHOLDER ACTIVISM

TCI TAKES COAL INDIA TO COURT: THREATENS TO SUE THE BOARD

TCI ON THE OFFENSIVE

The Children's Investment Fund (TCI) which owns about 1% stake in Coal India today threatened to sue the entire board of the public sector behemoth after filing a writ petition in the Delhi High Court alleging breach of fiduciary duties by Coal India. In its petition TCI has argued that coal prices are completely de-regulated and the Indian Coal Ministry does not have legal authority to interfere with the discretion with CIL as it has been doing on a regular basis. The petition also argues that the January revision in the price is also illegal being a direct consequence of the illegal and invalid instructions of the Ministry. In its petition TCI has also sought a direction by the High Court to the Ministry not to interfere with the pricing mechanism in any manner. TCI also believes that the FSA system of distributing coal has an inbuilt risk of engendering corruption and has drawn strong parallels between the corruption related to the allocation of the 2G spectrum and selling FSA (Fuel Supply Agreement) coal below market prices.

TCI THREATENS TO SUE THE BOARD

In addition to its writ action in the High Court TCI has also threatened to sue the Board of Coal India for breach of fiduciary duties and abuse of minority shareholders. It alleges that the directors' continued failure to expedite ramp up of coal washing  capacity and raising coal prices is further evidence of their unwilligness and inability to run Coal India to the best of shareholders' interests.

Q1 EARNINGS REVIEW: NET INCOME SURPRISES

SUMMARY

Deutsche Bank's analysis of fiscal first quarter earnings season shows profits for corporates well above estimates helped by a mix of FX gains, MTM gains on investments and higher other income.

NET INCOME (PROFIT AFTER TAX) SURPRISES
The Jun-qtr earnings season is more than midway through, and till date aggregate numbers under coverage have been broadly in line with estimates on Revenue and EBITDA (core earnings). However aggregate net income has come in 7% ahead of estiamtes on account of a favorable mix of FX gains/MAT credit entitlement (Cairn India), MTM gains on investments (Hindustan Zinc, Bank of India), dividend income from subsidiaries (L&T), lower interest costs (Sterlite) and higher other income (HUVR, Sterlite) across different companies. Positive surprises on net income have outnumbered negative surprises by a ratio of 62:38, while positive and negative surprises on EBITDA have been evenly distributed.

KEY TRENDS
(1) While Government owned public sector banks have been severely impacted by asset quality concerns, private sector banks have performed reasonably well.

(2) Pricing and mix have continued to improve for most car companies, even as margin has come under pressure due to rupee depreciation and SG&A costs.

(3) Oil companies have suffered from lower refining/petchem margins while the gas segment has been impacted from low volumes.

(4) Steel/Aluminium margins have been better than expected while copper producers has disappointed on TC/RC realizations.
(5) Cement realizations have been robust, rising by 12-14%.

(6) Capital goods continued to witness margin pressure and working capital stress.

(7) Utility companies have benefitted from better execution and better coal availability.

(8) Price competition has resumed in Telcos even as minutes of usage growth remain stable.

(9) INR depreciation of 17% yoy meaningfully supported numbers of IT and Pharma companies.
Source: Deutsche Bank Markets Research

WORKING CAPITAL CRUNCH FOR CAPITAL GOODS COMPANIES

DIFFICULT TIMES

A study conducted by credit rating agency CRISIL (subsidiary of Standard and Poor's) shows that the working capital requirement for the capital goods sector in India have surged at a 5 year high. The pressure on this sector is primarily due to the deferment of large capital investment plans since 2011-12 (refers to financial year, April 1 to March 31) by end user industries such as power utilities. The resultant build-up in inventory and delay in release of payments by customers has led to tight liquidity conditions within the sector. The reasons for deferment in projects include demand slowdown, increase in project costs and interest rates, and lower cash flows.

WORKING CAPITAL NEEDS SURGE

Working capital requirements have increased substantially; the gross current asset (GCA) days of a sample of 50 listed mid-sized players have increased to 370 as on March 31, 2012, from 280 as on March 31, 2009, the highest in the past five years. GCA days refer to gross working capital expressed as number of days of sales and the sample of 50 companies accounts for a-third of the revenues of all capital good entities covered by CRISIL.

HIGH COST DEBT PILING ON

A large portion of the incremental working capital needs has been funded either through delayed payments to suppliers or through high-cost short-term debt. Prevailing high interest rates for short term borrowings have led to a steep drop in  the interest coverage ratio (profit before depreciation, interest, and tax/interest, and finance charges) of companies covered by CRISIL. The ratio of cash flows from operations to total debt also declined sharply, to a negative 0.30 times from 0.07 times during the same period thereby indicating that the cash from operations is inadequate for servicing debt payments.


Source: CRISIL

INDIAN AUTO SECTOR PROFITS UNDER THREAT: FITCH

NOT IN AUTO MODE ANYMORE

Fitch ratings expects profitability for Indian auto suppliers in H2' fiscal 2012 to moderate significantly. According to the rating agency a fall in volumes in some sub-segments of the domestic auto industry could manifest into lower revenue growth for certain suppliers. Limited ability of original equipment manufacturers (OEMs) to fully absorb high raw material prices, caused partially by a weaker rupee, alongside an increase in other input costs is also cited as a significant headwind for the sector.

RATINGS UNDER THREAT ?

Fitch expects an easing of operating profitability along with a lengthening of credit cycle to necessitate the need for higher working capital. This is in addition to the long-term borrowings from previous capex plans or proposed projects, which would be likely to weaken the credit metrics of auto suppliers over H212. However, the limited exposure of Indian auto suppliers to foreign currency borrowings would help prevent any large alteration in their credit metrics in 2012 from rupee depreciation. A sharper and widespread fall in automotive volumes beyond 2012 could adversely impact OEM's operating cash flows and in turn lengthen their payable periods to auto suppliers. Auto suppliers' stressed liquidity through higher working capital borrowings could constrain their financial flexibility for completion of capex plans and may cause a revision in the outlook to negative.

Source: Fitch Ratings