Intellectual Thoughts by Sanjay Panda: September 2008

Uncle Sam's effect's

Even as the US economy grapples with a financial crisis, the developing Asian economies continue to be watched with growing apprehension. Last week, the Asian Development Bank (ADB) downscaled the growth expectations of many Asian economies — including India’s — in its half-yearly report, Asian Development Outlook 2008.

ADB attributes this to the worsening conditions in major industrial economies. “The myth of uncoupling has been exploded,” the report says. Among the other factors are the slowdown in Asia due to inflation; high borrowing costs; dampening investment and low consumer spending.

India’s gross domestic product (GDP) growth estimate for the current financial year (FY08-09) has been downgraded from 8 per cent to 7.4 per cent, and, for the next financial year (FY09-10), from 8.5 per cent to 7 per cent. ADB bluntly states that “Very large fiscal imbalance created by the current level of subsidisation of oil, fertiliser and food, as well as other off-budget items, sets a daunting task for economic management.”

Last month, a Citigroup research note had also revised its own estimates of India’s GDP from 7.7 per cent to 7.5 per cent for FY08-09 and from 7.9 per cent to 7.4 per cent for FY09-10.

Local economists, however, are not as pessimistic. “An 8 per cent GDP growth is possible thanks to growth in consumption (which will get a boost from the Sixth Pay Commission recommendations) as well as services and capital goods,

The debate continues.

Ranbaxy expresses disappointment over US FDA action

In response to the US Food and Drug Administration (US FDA)'s warning letters and import alert for drugs issued to Ranbaxy Laboratories Ltd regarding drug products produced in two Ranbaxy plants at Dewas and Paonta Sahib in India, the company said that it is very disappointed by the action taken by the US FDA.

In a press release, it said, "Ranbaxy is very disappointed in the action FDA has taken. The company has responded to each concern FDA has raised during the past two years and had thought that progress was being made. We are, however, pleased that FDA's testing and review led the agency to conclude that there is no reason to question the safety or effectiveness of Ranbaxy's drugs. The company has just received the warning letters that FDA has issued and has not had the opportunity to review those concerns that FDA has determined are unresolved. Once it has had an opportunity to review the issues, the company looks forward to continuing to cooperate with FDA to resolve the remaining issues."

According to the FDA announcement, the warning letters and import alert do not apply to Ranbaxy's other facilities including its three manufacturing facilities in the US, Ohm's Laboratories facilities in New Brunswick, North Brunswick, New Jersey, and Gloversville, New York, from which Ranbaxy delivers some 59 drug products to the US healthcare system, including: Simvastatin, Acyclovir, Minocycline, Clindamycin, Lorazepam, Loratadine-D, Cetirizine, Acetaminophen Extended release tablets, Lisinopril and Zolpidem.


Indian economy slowing down

For last years or three years from 2005-07, the Indian economy touched new highs. The gross domestic product (GDP) grew at an average rate of 9% during the period, with India becoming the second fastest-growing major economy of the world. This was the result of unprecedented growth in investments triggered by low interest rates, as well as high growth in demand. These low interest rates were, in turn, possible on account of a low inflation rate. However, the entire cycle seems to have turned.

India's growth engine is now showing signs of deceleration. The trouble started with the rise in inflation. The Indian economy, which was getting used to 5% inflation, is now having to deal with prices rising at the rate of more than 12%. The fact that the Reserve Bank of India (RBI) has started increasing the repo rate and cash reserve ratio (CRR) clearly indicates that the central bank can sacrifice a few basis points in GDP growth to contain inflation.

As a result of high inflation and a spate of interest rates hikes, there has been a slowdown in investment plans announced by industries. Analysis of data released by CMIE clearly indicates that the rate of implementation of corporate capital expenditure (capex) plan has slowed down. On an average, the rate of implementation for India Inc had come down to 44.8% as of end June '08, from 52.7% as of December '06. Simply put, Corporate India is implementing lesser investment plans these days.

The bigger worry is that as much as Rs 43,000 crore worth of investment plans (across industries) were shelved during the quarter ended June '08. The situation is unprecedented as this is the first time that the current bull run is witnessing such a colossal abandonment of investment plans. In fact, even capacity additions have been low, which is evident from the slowdown in completed projects. However, despite all this, what is astonishing is the pace at which India Inc is announcing its investment plans. This can be attributed to the fact that often, the stock market reacts positively to mega expansions plans by companies. But whether these plans materialise is another story. Nonetheless, even amidst concerns of an economic slowdown, corporates continue to announce new projects.

Broadly, the industry is divided into five categories - manufacturing, electricity, services, mining and construction. Of these, only manufacturing has not seen a slowdown in implementation of investment plans. Mining projects have seen one of the worst slowdown in implementation, with the rate crashing to 37% in June '08 from around 50% in December '06.

As for specific industries, ferrous metals, construction, electricity generation, transport services and petroleum products have been the highest gainers of investments that have been announced. However, in terms of implementation of these plans, some of them seem to have lost ground. Ferrous metals and organic chemicals have seen the highest rate of implementation vis-à-vis plans that were announced earlier. At a 52% rate of implementation, the organic chemicals sector was among the top few gainers. In case of ferrous metals, particularly steel, India has enough iron ore - a major raw material for steel. Steel prices - which are expected to remain bullish in the international market in the near term - are apparently providing a strong impetus for capacity expansion in the industry. As demand continues to outpace supply, the rate of implementation of steel projects remains high.

However, the list of losers is longer. Despite big announcements, many projects in the infrastructure sector, including petroleum, transport services (highways, rail projects, airports and ports) and electricity generation seem to have hit hurdles. For instance, the power sector saw a 720-basis point decline in project implementation: only 40% of the projects were under implementation at the end of June '08, against 47% in December '06. Similarly, transport services, which include roads and flyovers, have also fared poorly in terms of implementation of investment plans. The implementation rate in the sector has fallen to just 44.9% as on June '08 from 62.4% as of December '06.

However, a slowdown in infrastructure should not be surprising. Even when investments in other sectors were rising at a breathtaking pace till the end of FY08, infrastructure investment was rising at a much slower pace. For instance, private corporate investments rose to 16.1% of the GDP in FY08 from 5.4% of the GDP FY02. But infrastructure investments accounted for only 5.3% of the GDP in FY08. This shows that even when interest rates were low, enough money was not being invested in basic infrastructure like roads, ports and airports. Whatever little funds were flowing into the sector have further slowed down. Sectors like transport and power form the backbone of the economy and a slowdown in investments in these sectors will have a deeper impact on the entire economy.

Free Cash flow. Is it free after all?????????

The best things in life are said to be free and the same holds true for cash flow! Investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to repay debt, pay dividends, buy back stock and facilitate the growth of business all important undertakings from an investor's point of view.

How and what of FCF
The formula for calculating Free Cash Flow (FCF) is as:

Net Profit + Depreciation - Capital expenditure - Changes in working capital - Dividend

FCF takes into account not only the earnings of the company but also the past (depreciation) and present capital expenditures, capital inflows and investment in working capital. Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distribution (from subsidiaries) or debt elimination can reward investors in the future. Better free cash flows are therefore a reason for the investment community to cherish. On the other hand, an insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business

From a companys point of view
A better FCF definitely indicates better efficiency on the part of the company. But what is pertinent for investors to note is that simply assessing the FCF on the basis of its absolute value is not prudent. It is imperative to also assess as to what components have contributed to the same.

Let us take a hypothetical example of two companies, A and B, both of which have garnered the same FCF for the current financial year.

Estimated free cash flow
(Rs) Company A Company B
Net profit 75 120
Add: depreciation / amortisation 20 5
Less: Capital expenditure 5 15
Add/ (Less): Decrease /(Increase)
in wkg capital
10 (10)
Less: Dividend 20 20
Free cash flow 80 80

Prima facie although appearing similar, if you delve a little deeper there is a stark difference in their performances. While company A, despite having lower earnings has benefited by adding back depreciation and decrease in working capital, company B has invested in capex and working capital. This indicates that while company B is investing for future growth, company A is not sufficiently geared up for the impending challenges. This also means that investors in company B can expect rewards in future while those in company A should sit up and take notice of what is ailing it.

From a sectors point of view
As explained earlier, cash flows are dependant on the capital expenditure and working capital liabilities borne by the company. This however, differs as per the dynamics of the sector in which the company is operating and should be seen in that light. While sectors like banking require minimum expenditure on capex (as a % of their turnover) those in pharma, engineering, FMCG or commodity sectors require to invest a substantial amount in R&D and capacity expansions.
To conclude...
FCF is not only a mirror image of the present but also a sneak preview into the future. The implications of the components of cash flow may not be explained in the annual reports, but is left to the investors prudence to diligently scrutinize the same and try to read between the lines. The legendry investor Benjamin Graham once said, The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase.

Free cash flow, is not free after all!

Googles. new browser : CHROME

Google has introduced a new Web browser, called Chrome, aimed at wresting dominance of the browser market from Microsoft’s Internet Explorer. The move takes the Google-Microsoft rivalry to a whole new level. If Google succeeds, it will be a big deal, with major ramifications for the future of the Web. But just how good is Chrome? How does it differ from IE and from less popular, but still important, browsers like Mozilla’s Firefox and Apple’s Safari?
Google’s Chrome browser displays thumbnails of a user’s most-visited pages when a new tab is opened, rather than a blank page.Chrome is a smart, innovative browser that, in many common scenarios, will make using the Web faster, easier and less frustrating. But this first version—which is just a beta, or test, release—is rough around the edges and lacks some common browser features Google plans to add later. These omissions include a way to manage bookmarks, a command for emailing links and pages directly from the browser, and even a progress bar to show how much of a Web page has loaded.

Chrome’s interface has some bold changes from the standard browser design. These new features enhance the Web experience, but they will require some adjustment on the part of users. For instance, Chrome does away with most menus and toolbar icons to give maximum screen space for the Web pages themselves. Also, Google has merged the address bar, where you type in Web addresses, with the search box, where you type in search terms. This unified feature is called the Omnibox.
One striking difference in Chrome is how it handles tabs, which display a single Web page. In Chrome, each tab behaves as a separate browser. The bookmarks bar, Omnibox, menus and toolbar icons are located inside the tab, rather than atop the entire browser. The tabs appear at the top of the computer screen. Chrome also groups related tabs. If you open a new tab from a link in a page that’s already open, that new tab appears next to the originating page, rather than at the end of the row of tabs.

Google’s claims that Chrome is fast. The second beta version of IE8 is the best edition of Internet Explorer in years. It is packed with new features of its own, some of which are similar to those in Chrome, and some of which, in my view, top Chrome’s features.
For example, while IE8 also groups related tabs, it assigns a different color to each such tab group and allows you to close them all with one click. It has a “smart” address box of its own, that drops down a list of suggestions as you type, though it retains a separate search box.

IE8 also has breakthrough privacy features that exceed Chrome’s, and includes a new technology called Accelerators, which allows you to take rapid action on any selected word or phrase on a Web page, such as generating a map for a place name, without switching to a new page.

Microsoft’s IE8 has an \”Accelerator\” feature that lets users select any Web text and then map, translate, search or email their selection without leaving the page.Chrome and IE8 are far more advanced than Apple’s Safari. Safari is speedy on both Mac and Windows platforms, but lacks many of the key intelligent features of its newer Google and Microsoft rivals.

Why is Google igniting a new browser war? There are two main reasons, and both involve competing with Microsoft. First, the search giant fears that because its search engine and other major products depend on the browser, Microsoft—with its rival online products—might be able to gain an advantage by altering the design of IE, which has roughly a 75% market share.

Second, and more important, Google sees the Web as a platform for the software programs, or applications, that currently run directly on computer operating systems, notably Microsoft’s Windows. It says current browsers lack the underlying architecture to enable future, more powerful Web applications that will rely more heavily on a common Web programming language called JavaScript. Chrome was designed to be the world’s speediest browser at handling JavaScript.

That move might one day make Chrome a sort of online operating system that competes with Windows. “Think of Chrome as more than a simple Web browser,” Google declares. “It’s a platform for running Web applications.”

Google claims that future, more sophisticated Web applications relying more heavily on JavaScript than today’s sites do would run faster on Chrome.
IE8 also has some compatibility issues, for different reasons. It’s the first version of Internet Explorer to hew closely to Web standards. Earlier versions used some nonstandard ways of rendering Web sites, prompting some site designers to adopt techniques that made their pages work in IE, but look odd in Firefox and Safari. Now, ironically, these pages also look strange in IE8. So Microsoft was forced to build in a special Compatibility View button that users must click to see the sites properly.

Chrome is built on three core design principles. The first is its spare user interface. There are only two menus and a handful of toolbar icons. Internet Explorer introduced a similar approach in its version 7, but with a difference. Microsoft allows users to restore a traditional menu bar; Google omits that option. And the only toolbar icon you can add in Chrome is a Home button.

The second big principle behind Chrome is that a user can type anything he or she wishes into a single place, the Omnibox, and instantly receive suggestions on where to go, gleaned from the user’s own browsing history and Google’s rankings of popular sites. Whether you type in a Web address or a search term, the Omnibox is very smart. In some cases, in my tests, it came up with the right destination after I had typed only one or two letters of the name of a site I frequently visited.

The Omnibox has another cool feature, called Tab-to-Search. If you type in the name of another site that includes its own search feature, like, the Omnibox allows you to simply press the tab key to search within just that site, without opening it first. Chrome, through its Options settings, also lets you change the default search engine used by the Omnibox. Instead of Google’s own search service, you can use Microsoft’s Live search, Yahoo search, or others.

The third big principle behind Chrome is that each tab runs, under the hood, as a separate browser. Tabs can be dragged off the main browser and turned into separate windows. If one tab crashes, the rest of the browser keeps running. But this doesn’t work perfectly. In my tests, all of Chrome died on me when I tried watching an Olympics video on the NBC site.

You can even turn any tab into a standalone application that can be run from the Start Menu, or the desktop, as if it was a separate program.

Chrome has a few other key features. When you open a new tab, you don’t get a blank page, but a set of thumbnails for your most-visited pages, plus lists of recent search engines you’ve used, recently used bookmarks and recently closed tabs.

Like other browsers, Chrome puts up a warning when you try to visit a malicious or phony Web site, and it has a private browsing mode, called Incognito, which allows you to browse without leaving any history on your computer—a feature popularized in Safari.

Chrome also has a pop-up blocker, but it’s annoying, because it flashes a notice that a pop-up has been blocked. IE also does this, but unlike in Chrome, it allows the warnings to be made much less intrusive.

Internet Explorer 8 has some new features Chrome lacks. Its private browsing mode, called InPrivate, is the first I’ve seen that not only leaves no traces on your own computer, but also bars Web sites from collecting some types of information on where you’ve previously been surfing.

While IE8’s address box and search box remain separate, each also offers rapid suggestions; and both are organized better than Chrome’s. For instance, the suggestions that drop down from its address bar are divided neatly into categories drawn from the browser’s own guess, your history and your favorites. One downside: For this to work in Windows XP, you must first install Microsoft’s desktop search product.

Like Chrome, IE8 lets you switch your default search provider, but it also allows you to switch search engines on the fly. When you type in a search term, icons for alternate search engines appear at the bottom of the suggestion list, and you need only click on these to see search results from, say, Google, instead of Microsoft’s own Live search engine.

IE8’s Accelerators feature presents a blue-arrow icon above any text on a Web page that you have selected. Clicking on the icon brings up a list of actions you can take using the selected text, such as posting it to a blog, emailing it, mapping it or searching it. While these actions are set by default to use Microsoft’s own Web services, you can change them to use Google’s, Yahoo’s, or those from other companies.

Microsoft has also built in a feature called Web Slices. These are portions of a Web site that a site developer can designate to appear in the IE8 Favorites bar and to constantly update themselves. An example might be the bidding for an item on Chrome, IE8 also displays useful information whenever you create a new tab, including a list of recently closed tabs and a list of Accelerators.

With the emergence of Chrome, consumers have a new and innovative browser choice, and with IE8, the new browser war is sure to be a worthy contest.