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India Has Serious Problems

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January 07, 2009 – Comments (6) | RELATED TICKERS: SAYCY.DL

 

I have never been as big a fan of Indian stocks and the country's economy as I am of China's.  I have really only owned stock in one company from the country, HDFC Bank (HDB) and I sold it a long time ago. 

Even though the Indian stock market fell more than 55% in 2008, I wasn't surprised in the least when Barron's published a bearish article on the country in this week's issue, Why India Won't Rebound Soon.


The piece makes a persuasive argument for why despite already falling 55% from its high the Indian stock market won't rebound in the near future. In short, it was and still is overvalued.

- India's forward P/E is 60% higher than that of emerging markets as a group.

- India's price-to-book ratio is 72% higher than that of emerging markets as a group.

- The Sensex's 2% dividend yield is much lower than that of other emerging markets, which typically are at around 5%.

While there is obviously a lot to like about India, the Indian stock market had gotten way ahead of itself. Just a year ago in January 2008 the market cap of Indian stocks had soared to 180% of the country's GDP. In comparison, the market cap / GDP ratio for the U.S. market at the top of the dot com bubble was only 131% and the ratio at the peak of the Japanese market years ago was only 150%.

Many analysts believe that the Indian stock market will retest its recent lows at some point in the next fifteen months before it begins any sort of new bull run.

Certain analysts who were interviewed for the article were bearish on India's currency as well. The country's current-account deficit and its debt repayments amount to 18% of its foreign-exchange reserves. The rupee has already fallen by more than 20% this year versus the U.S. dollar (though much of that can probably be attributed to irrational dollar strength than anything). In any event, a weaker rupee leaves Indian companies that have borrowed money abroad vulnerable. Having said this, I personally am less worried about weakness in the rupee because I think that the recent dollar strength is nuts.

As if India didn't have enough problems already, this piece of terrible news just came out this morning:  Satyam chief quits, fraud scandal hammers shares.

The head of Indian outsourcing firm Satyam (SAY) resigned this morning after admitting to falsely inflating the company's profits over the past several years.  Talk about some cooking of the books, supposedly about $1 billion or 94% of the cash that has on the company's books is fictitious.

They're calling this the Indian Enron. The news is so big that it dragged down the entire Indian stock market by a whopping 7.3%. Ouch. Analysts are now questioning entire corporate governance system. Here's a quote from R.K. Gupta, managing director at Taurus Asset Management in New Delhi (not to be confused with the possible new U.S. Surgeon General :)) "If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India."

Ironically, only three short months ago Satyam received a "Golden Peacock" award from a group of Indian directors for excellence in corporate governance. Perhaps they should have received the "Golden Turkey" or "Golden File Baked Into a Cake" award. Sheesh.

Unfortunately, this is yet another blow for India's stock market, which was already headed in the wrong direction.

The coveted Golden Peacock

Deej
Thankfully no position in SAY

6 Comments – Post Your Own

#1) On January 07, 2009 at 8:38 AM, JakilaTheHun (99.93) wrote:

Wow, the sheer extent of that fraud is frightening for India.  Great write-up. 

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#2) On January 07, 2009 at 8:45 AM, JakilaTheHun (99.93) wrote:

I think this also exposes some of the dangers with investing overseas.  Different countries have different accounting guidelines and different regulatory structures.  If you're not familiar with how things differ in [country x] from the US, it's always possible to get burned at some point in time. 

Sure, we had Enron here back in the early part of the decade, but that's the exception rather than the rule in the United States and since then, accounting standards have been tightened even more here (some argue that they're even too cumbersome at this point).

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#3) On January 07, 2009 at 9:06 AM, JakilaTheHun (99.93) wrote:

And just in case anyone was wondering ...

"In our opinion, the consolidated financial statements listed in the index appearing under Item 18 present fairly, in all material respects, the financial position of Satyam Computer Services Limited and its subsidiaries at March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2008 in conformity with accounting principles generally accepted in the United States of America."

/s/ Price Waterhouse

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#4) On January 07, 2009 at 9:20 AM, TMFDeej (99.32) wrote:

Thanks TheHuney.

Here's the most ironic part of the whole Sataym story, even more so than it receiving India's award for corporate governance this year, is that "Sataym" is a Sanskrit word which translates to "Truth" HAHAHAHAHA.  As if the fraud wasn't bad enough, the company is mocking investors with its name.

Deej

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#5) On January 07, 2009 at 10:52 AM, sanbat (< 20) wrote:

Satyam can hardly be called an Indian company.

> It was 55% owned by foreign institutional investors (Promoter family owning only 3.6% at last count!!)

> Auditor is a reputed international firm called Price Water house!!. 

> 75% of clients are in the U.S

> The stock is listed in the U.S!

> All the unsecured taken by the company are from international banks (Not one Indian bank!!)

We need to see this a collective failure of the star analysts, auditors and bankers and not any one country!!

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#6) On January 13, 2009 at 9:44 AM, Andyman (94.65) wrote:

Agree with Deej. Some good India ETFs to short include PIN, ICN, EPI, FNI.

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