Opinion: Russian junk bonds and the weakness in Yuan

All three rating agencies have cut the ratings of Russian bonds to junk status with a negative outlook. A Ruble does not even fetch 2 cents of American currency now. It appears Putin underestimated the impact of economic sanctions. His tankers and missiles were battle ready but his economists failed him. Well, it is not just Russian currency and economy under attack, there are so many who are licking their wounds too including a strong contender to USD, the Euro. With crude oil prices being halved, all oil producing nations will have to re balance their budgets else they run the risk of depleting their reserves. Currencies of emerging countries are struggling to come out of the well they have fallen into, including the Indian Rupee, though the damage is not severe.

Ruble vs. USD Source: Investing.com

We know all currency valuations are relative and fluctuations are against another currency. For every loser, there has to be a winner in a zero-sum game. And there is only one gainer, USD. Was this bound to happen, or was it a conspiracy or a mystery? It cannot be mystery for sure as it cannot be explained. If it was bound to happen, how long this will continue and who will be the next victim? That is a better question to ask. It seems Chinese currency is the one next in line of fire.

Why China? It is Crimea and Oil which did the damage to Russia. But China did not attack any of its neighbors (though it has desires) and it is not an oil exporter. Right, but we need to approach it differently. When dollar was strengthening, China had to earn additional dollars to keep up its currency with it but China’s trade figures with US does not show any change. So gains in dollar would not spillover to Yuan. Unlike in yesteryear's, China cannot print its currency to buy those dollars as it would cause inflation in a low growth year. For this reason, Yuan which was pegged to dollar could not maintain its exchange rate with dollar and it lost some of its value in the last two months. You may observe the losses are not significant. But the crack can propagate for multiple reasons. Dollar is set become even stronger when Fed raises interest rates in US. That will weaken Yuan in the same proportion. When yields on US treasuries rise (probably by end of this year), it may trigger outflow of capital from China which can do serious damage to its currency. As domestic growth is slowing down in China, new investments do not come in like before. And on those trillions dollar worth US treasuries China is holding, it will suffer capital loss as bond prices will drop when yields rise. It will be like an interest free loan from China to US. China may start liquidating those treasury bills to prevent any serious damage to its currency. But it has to do it slowly in order to prevent inflation. The damage to its currency may not be severe as Ruble. But any damage is still damage. Economic theory suggests there are no long term benefits in engineering exchange rates.

Chinese Yuan vs USD Source: Investing.com

As long as US maintain its trade figures with China, there are no serious threats to valuation of Yuan despite any set-backs. But US is building its factories too and filling them with robots to achieve cost benefits, so the trade figures may not remain the same. Until there is one currency for the whole world or equality in GDP among many countries, big brother will continue to rule and enjoy at someone’s expense.

Opinion: One business is getting back to profits and another waiting for next victim

Two businesses are in news. They have gone through the up-down cycles. They attracted investor interest in the beginning but turned out to be nightmares. They almost went out of business but there is revived interest in them. One is moving back towards profits after several years of losses (Suzlon) and another (Spice Jet) is waiting for its next victim.

Suzlon wind turbine maker had left a deep scar in many retail investors. Its debut and the run after IPO in the initial years made it an index stock but an acquisition mistake proved too expensive for it. Its stock performance made investors lose most of their capital, do not mention the gains. But it is getting back to business of making profits and turning out to be an investment grade stock again after a gap of many years for the following reasons.

• It could not hold to its acquisition of Germany's REpower (later renamed Senvion). When things looked bright for Suzlon, it had ambitions to become a top global player and REpower was expected to add to its prowess with its offshore wind turbines business expanding the portfolio of Suzlon. But the aftermath of global financial crisis in 2008, Suzlon could not arrange long term finance at lower costs, and the interest costs were more than operational profits Suzlon was making, so it could not service its debt and had to default on FCCB’s and to refinance with most banks losing its credibility as a profitable business. Last month, it exited from REpower in a distress sale. Along with it, the debt load on Suzlon too had come down. Had this decision been made a few years ago, it would have prevented its promoter Tulsi Tanti from the embarrassment of pledging all his holdings.
• Dilip Shanghvi, a prudent business man (who runs Sun Pharma) taking a stake in Suzlon and infusing much needed capital into the business is a big boost to Suzlon. It always had a good top-line but the borrowings made the business suffer. This money coming from a drug-maker as equity will free Suzlon from the fever it had suffered for long time.
• Improving business environment: With the new Govt. set to boost spending in renewable energy, Suzlon’ revenue is set go higher. And the recent move from RBI in reducing the policy interest rate has indicated that interest rates are set to come down from here. With its revenue going up and finance cost coming down, Suzlon seems all set to show profits in next financial year.

Spice Jet too went through a rough period and many were guessing it will go out of business like Kingfisher Airlines but it is finding new investors. Unlike Suzlon, there are no hopes of it getting back to profits because the structure of the business. It was not financing that is the issue here. Though there are exceptions, very few airline businesses generate profits. Competition is intense and margins are thin.  More the sops they offer to customers, higher are the losses. More flights they

operate, quicker is the cash burn rate. If you had bought those discount tickets and flew with Spice Jet, you too had helped Spice Jet in burning their money.

Income statement of Spice Jet. Source: Moneycontrol.com

Take a look at their income statement and their operational profit; it appears they do not make money no matter what. So the Marans had it enough, and got out of this expensive fancy business. But there are new suitors to give it a fresh lease of life. Will they be able to change the structure of the business? Competition will not let it do. And if they operate in the same fashion, fresh capital won’t last long. What will happen then? Another new investor may walk-in. If not, Spice Jet will have to learnt to live within its means and not worry about its market share. If it does not, it has to follow the ‘king of good times’ for whom good times seem to be over.

Opinion: Apple-onomics

Source: Apple company site

Last quarter (Q1’2015) results for Apple broke records. A profit of $18B made it Apple’s most profitable ever quarter and also the biggest quarter of any public company in history.

Source: Wikipedia

If we extrapolate quarterly revenue of $74,500 M into one full year and consider Apple as a country and compare it with GDP of countries, Apple would displace Singapore and take 37^th place in the list. Phew!!!

Source: Data from Apple company site

If you take a look at geographic distribution of its revenue, 59% ($44 B) of it comes from outside of US. All of that are exports for US. Apple's products were approx. 13% of all of US’s exports for that quarter. Since most of the manufacturing for Apple happens outside US, we can exclude direct material and labor costs from that $44 B, it would still amount to $17 B of net contributions to trade. And considering domestic impact, it adds $30 B of economic value to US economy for that quarter.

So it might be clear now. Apple is not just making money for its shareholders but boosting the economics its parent country too.

If Apple was an Indian company, India would be a trade surplus country (India's trade deficit is less than Apple's exports) with a strong current account. And Rupee would have been a currency to seek after!

You will say stop dreaming and I would agree. But those who are making noise with ‘Make in India’ need to take a look at what Apple is doing for US despite the absence of manufacturing facilities for it in US as it sources most of components from Taiwan and South Korea and gets the assembly & testing done in China. Apple has proved it. It is not manufacturing what matters. What makes a difference is innovation, IP rights, marketing and delighting the consumer.

Are we thinking about it? Do we need Foxconn or Apple in India?

Opinion: Ambani and Adani will run India (and make most of India’s fortune)

Two articles in today’s newspapers made me think two business houses (or rather families) will be the biggest beneficiaries of the upcoming policies and Govt. spending.

First news item is, Anil Ambani getting into defense manufacturing - http://economictimes.indiatimes.com/industry/indl-goods/svs/engineering/anil-ambanis-reliance-group-forays-into-defence-manufacturing-sector/articleshow/46206018.cms?imageid=45757525#slide9

Ambani’s always meant business – the senior Ambani built the empire from oil to textiles, and his sons took it further getting into Telecom, Retail, Energy, Infra, and you name it. They always knew next big what and made sure they are there. But see that they are quick to cut loss and exit when their new businesses do not make money (like Reliance Timeout). Now Anil is keen to enter into defense manufacturing. Do they have experience in that – you may ask but it does not matter is what you will realize quickly. The biggest challenge in India is to work with Govt. and its bureaucracy, they can beat competition there and the lack of experience is made up by hiring the experienced from industry. Anil hired a former managing director from Lockheed Martin to lead this business. You can see he will make this happen.

And another news item is, Adani’s plan to get into Airport sector via Ahmedabad - http://timesofindia.indiatimes.com/business/india-business/Adani-eyes-airport-foray-via-Ahmedabad/articleshow/46207279.cms

Gutam Adani already runs Infrastructure business. His company operates ports in Gujarat – so why not operate Airport too? Again the success here depends on ability to work with Govt., and securing long term finance at low costs as rest of the project related skills including technology can be hired or bought and some of the works can be outsourced through contract works. It is how he transformed his small scale businessman into billions worth enterprise.

With the ‘Make in India’ initiative, both Govt. spending and private investment are expected to go up significantly in the manufacturing and infrastructure sectors. And you know who is set to ride that wave. They already made news today and you will see their fortunes rise too in the coming years.

Book Review: Shattered Dreams - Ramayana-The Game of Life by Shubha Vilas

Most of us would have heard the story of Ramayana early in our lives from our grandmothers (even before we learn to read or went to school). Thanks to Ramanand Sagar, his TV serial filled the gaps in those homes where grandmas were absent. At schools, it was teachers who retold it. At dramas, our elders enacted the scenes from it. After one learns to read, it opens up the bigger world as there are numerous books on Ramayana written over many centuries. Each author had put forward his or her views though the central plot and the subject matter remained the same, it was the style and the focus on certain characters made them unique. So it became an epic as it had the strength to survive many generations and remain relevant.

I too had read many versions of it with different perspectives and kept wondering each time about the capability of the story to be retold but still holding readers interest. And I had my set of questions too. If the purpose of Rama’s birth was to kill Ravana and if it was all destiny, why Sita was made the ignorant victim as Rama would have found any other reason to kill Ravana? I always found Rama too ideal for a human being (is that the reason they term him God?) and wondered how such a person who did not lose his tranquil in many odd circumstances but lost his serene when one of his countrymen accused his wife. It was strange for me to see Lakshmana losing importance in the story after the war gets over and wondered why nobody thought of his wife. As a fellow human being, Lakshmana’s wife would also have craved for her husband’s love but she gets little attention than she had deserved and so on.

When I had received the book “Shattered Dreams - Ramayana-The Game of Life” from BlogAdda, I begin with an impression that I am reading another version of the great mythology but soon I realized that the footnotes are making it more than a novel like read. For fictional/novel readers, footnotes are a distraction as they break the flow and continuity. But in non-fiction books, they are a must to provide references and other notes from the author. This book is full of footnotes almost in every page which are sharp and full of wisdom which gave me a feeling of reading a case study and the take away from case study captured in the form of foot notes. As you read a page from the book, the footnotes below it offer an explanation and reasoning why the characters behaved that way. That helps us understand the characters in depth and dissect the situation.

If one reads this book like a novel, I suppose the objective of the author will not be met. It is the synthesis of Ramayana and how we can improve our lives reading it is the significance of this book. So this book appeals to me more of a personality development/leadership guide book, and a good one at it as it has the backing of the great epic. The story of it everyone knows but what we can learn from each character and the situation from Ramayana, this book shows it. So it cannot be read in one go but need to be used like a study guide and I feel it is worth the time invested. It helps to clarify one’s understanding of life, transform himself and elevate to next level of understanding and produce a tolerant leader out of the reader. It helps the readers understand the importance of character and integrity. 

I am sure to come back to this book again in time.

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