Domestic Investments -- The latest Trends

With the economy growing consistently well over 9 per cent for the past two years and consumer spending touching new heights, many Indian firms have been busy lining up massive investment plans (to expand production capacities to meet the higher demand levels) for the next few years.

The massive demand for the products of Indian firms is reflected in the whopping 68.6 per cent rise in the order books of India Inc during the first ten months of 2007 compared to corresponding period last year. The total orders received by Indian firms was worth US$ 32.57 billion (January-October 2007) as against US$ 19.31 billion in the same period a year ago.
Simultaneously, the rising consumer demand has provided a further growth avenue for Indian firms. In fact, according to McKinsey, Indian consumer is likely to quadruple US$ 1.77 trillion by 2025, spurred by the ten fold increase in middle-class population and three-fold rise in household income.

Consequently, firms are making investments to ramp up production capacity to reap economies of scale. Also, this increase in investments is across varied industrial sectors like retail, real estate, steel, infrastructure, automobile, telecommunication among others.

The increase in the domestic investment levels can be gauged from the continuous rise in gross domestic capital formation (GDCF) as a percentage of GDP. GDCF (at constant prices) as a per cent of GDP has increased from 27.2 per cent in 2003-04 to 33.8 per cent in 2005-06 and further to 36.77 per cent in 2006-07.

Private Capital Investment
The continuous improvement in the investment scenario and business confidence of India Inc is also reflected in the increase in both the number of companies making/planning capital investments and the extent of such investment. The turnaround in corporate investment, which began in 2002-03 and peaked in 2004-05, is expected to be sustained in 2007-08.

A report prepared by RBI analyses the corporate investment scenario based on the companies covered by institutional finance. According to it, the total cost of projects sanctioned assistance by banks/financial institutions (FI) in 2006-07 amounted to US$. 71.12 billion, as against US$ 32.94 billion in 2005-06.

Significantly, there has been increase in the scale of projects taken up the by the corporate sector. While there were 49 projects amounting to US$ 18.81 billion in 2005-06 with a projected cost of over US$ 125.43 million, in 2006-07 there were 88 large projects amounting to US$ 50.51 billion (accounting for over two-thirds of the total project cost) in 2006-07.

In fact, if we include the proposed investment of companies contracting external commercial borrowings (ECBs) and those issuing domestic equity capital, then total investment proposals for 2006-07 works out to US$ 86.69 billion spread over 2004-05 to 2011-12.

In 2006-07 alone, the capital expenditure envisaged amounted to US$ 38.89 billion, as against US$ 24.27 billion envisaged in 2005-06. Significantly, the 60.2 per cent rise in capital expenditure comes on the back of 23.1 per cent increase in 2005-06.

Industry-wise, infrastructure has the highest share of 35.9 per cent of total cost of projects, followed by coke and petroleum products (15.5 per cent), metal and metal products (14.1 per cent) and textiles (9.2 per cent).

State-wise, Gujarat ranks first with the proposed investment of US$ 18.6 billion in 86 projects accounting for 25.8 per cent of total investment in the country followed by Andhra Pradesh (8.9 per cent), Maharashtra (8.6 per cent) and Tamil Nadu (8.6 per cent).

Corporate Performance
The impressive performance of the domestic companies has also been playing a major role in the steady rise in the investment plans of these companies. For example, the sales of non-governmental non-financial companies rose by 26.2 per cent in 2006-07. Similarly, gross and net profits increased by 41.5 per cent and 45.2 per cent, respectively.

In fact, the top 500 companies (including public sector) aggregate total income grew by 28.4 per cent to US$ 485.07 billion in 2006-07, says a report by leading global business information provider Dun & Bradstreet.

In the current fiscal too, the performance of the corporate sector has been quite encouraging. While sales grew by 17.4 per cent in the first half of 2007-08, gross and net profits rose by 28.1 per cent and 31.1 per cent, respectively. Similarly, other income from non-core activities registered a 63.6 per cent.

Another factor reflecting the confidence of the Indian Inc on the prospects of the domestic economy is the massive increase in the number of companies being incorporated. About 55,000 companies have been incorporated annually in the last two years, taking the total number of incorporated companies to 865,000 from 712,000 companies at the end of 2005.

Some Investment Highlights
Some of major investments that have been lined up for the next few years include:
NTPC plans to invest US$ 40 billion in the next five years to transform itself into an integrated player.

The Anil Dhirubhai Ambani Group (ADAG) plans to invest US$ 37.63 billion in power and transport sectors in five years.

Real estate major, Parsvnath Developers, plans to invest US$ 15.05 billion to diversify their business.

Vedanta Resources will invest US$ 6.02 billion to set up a 5 million tone steel plant.

Infrastructure major GMR Group has planned to invest more than US$ 15.05 billion over the next five-six years to enhance its power generation capacity.

Indian Oil Corporation (IOC) plans to spend US$ 10.99 billion over the next five years to carry out its expansion programmes.

Special Economic Zones
Special Economic Zones (SEZs) are being developed to attract huge inflow of domestic (and foreign) investment in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.

To achieve this government has announced many fiscal incentives like: duty free import of capital goods; income tax exemptions; exemption from Central Sales Tax, Minimum Alternate Tax, State Sales Taxes and other levies; simplified compliance procedure among others.

Consequently, many producers and developers have evinced a keen interest in setting up SEZs. Ever since SEZ Act has come into force, the number of SEZs notified has already reached 195 (as on January 24, 2008). In addition, formal and in-principle approvals have been given to 439 and 138 SEZs, respectively. These are in addition to the 19 functional SEZs that have been set up prior to SEZ Act, 2005.

The rapid pace of activity in these zones can be gauged from the fact that, in the two years since the SEZ Act 2005 has come into force, they have facilitated a rise of 200 per cent in exports from these zones. They have also been instrumental in an incremental investment of US$ 17.66 billion.

Free ATM Withdrawals..

Customers will not be charged for ATM withdrawals from April 1, Reserve Bank of India deputy governor V Leeladhar announced in Mumbai on Monday.

Addressing a function to mark the Union Bank of India's 2001st branch under its core banking solution, Leeladhar said that at present many banks are levying a charge on withdrawal of cash from their ATMs by customers of other banks with which they have no tie up.

"These costs are at times ridiculous as even for withdrawal of a paltry sum of Rs 500 from ATM the customer has to shell out as much as Rs 250," he observed.

He said before moving to a system of cash withdrawal from ATM without cost, as was prevalent in the United Kingdom and many other countries, from financial year 2009-10, the RBI has decided to allow only Rs 20 per transaction for such withdrawal from April 1 next.

"The commercial banks are racing against each other to post hundreds of crores of rupees (billions) as profits and therefore they must not be fussy about meagre costs involved in cash withdrawal from their ATM by customers of other banks," he said, adding that even the cost involved in installing an ATM has come down from Rs 30 lakh (Rs 3 million) to Rs 6 lakh (Rs 600,000).

Reliance IPO money refunded!!

With the Reliance Power IPO money being refunded to QIBs (Qualified Institutional Buyers) and non-institutional buyers on February 1, I expect the markets to rise in the coming week due to increased liquidity and the cheap levels the markets are at the moment. Additionally, global sentiments seem positive at the moment and with the U.S. markets closing in the green in yet another session on Friday, chances of the Indian market opening higher are pretty high on Monday!

I would like to advise those investors with a bit of a risk appetite to buy a Call option (Strike price 5500, expiry 28 Feb 2008) on Nifty (lot size: 50 Nifty). The call option was trading at a price of Rs. 170 - Rs. 180 on Friday, towards the close of trading. It is likely to go higher on monday on the back of psoitive global sentiments. Still, I expect the market to move higher because 1) Refund of the Reliance power IPO money has provided investors with a lot of cash, 2) FII buying could provide a boost to the market. Historically, the FIIs have made 20% of their annual investment in Feb and FIIs were back in the thick of action on Friday. 3) Global sentiments coupled with average to positive Q3 results should help the markets stage a rally now, and finally, 4) Sentiments remain positive ahead of the 2008 Budget and with the Fed cutting rates by another 50 bps, I strongly believe that RBI too will have to follow suit, albeit with a lower rate cut.

So while you are busy reading this latest entry and analysing/digesting what I've said, I'll sneak across and warm myself with a hot cup of coffee!! Anyone interested in 1??

N.B.; Take whatever profits you get, the market may surprise negatively in the near-term and a lot of these so-called support levels will be tested if the markets face a down-turn.. Every rally is a time to book profits; currently not the ideal time to buy! Hey, also invest in the Reliance Natural Resources Fund. I apologise for the delay in bringing across this mutual fund to your attention! Risk-avoiding people should look to invest in Mutual fund schemes!