Investing Reflections On India

Jayabharat Credit is a non-banking finance company (NBFC) in the hire purchase/leasing business in the transport segment. It is allowed to accept public deposits in its business. The balance sheet is financed with approximately 30% equity and 70% debt of which, half consists of short-term funding and balance consists of inter-corporate deposits.  This was used to finance loans and advances of about 57cr (constituting net current assets of 13cr) and government securities of about 5cr as at 31 st March, 2011. The debt was rated ‘C’ by a reputed credit rating agency and hence, is now required by the RBI to reduce the level of public deposits from the 19cr (as at 31 st March, 2011) to under 10cr, thereby requiring a material reduction in business activities, which will reduce expectable future profits.  This is already reflected in a drop in income from about 10cr to 6cr (in the trailing twelve months) and net losses in place of profits in the past. The business is spe

Gowra Leasing is a 19-year old NBFC providing largely secured lending to the private sector.  It is classified as a ‘loan’ company under RBI regulations and not allowed to accept public deposits for financing. The company had 12cr in loans and advances as at 30 th September, 2011 and net current assets of about 10cr.  It had practically no net debt as at that date to finance its operations.  The company reported steady growth in income and profits – reporting about 2.5cr of pre-tax profits on income of 3.4cr in the last financial year and took a slight dip on both aspects in the six months to 30 th September, 2011. The business is exposed to general risks of non-performing assets, interest rate hikes, intense competition etc.

Investors around the world were greeted today with larger-than-usual headline news about S&P’s downgrade of the US sovereign credit rating from its gold-standard ‘AAA’ status to ‘AA+’. Although the fundamental drivers of this decision have been in play for a while now, the S&P report does serve as a trigger to contemplate the implications for Indian business and financial markets in general. The factors driving the decline in value of the US$ were accelerated when the QE programs were initiated by the US Federal Reserve as a response to the economic crisis of 2008.  This downgrade may further speed up the process as capital is pulled out of US Treasuries and perhaps, the US altogether.  This would result in wholesale selling of US$ and declines in its exchange rates. Let’s think about some of the longer-term implications for India: BUSINESS IMPLICATIONS The implications mentioned below are likely to play out IF the US$ weakens substantially relative to the INR (as I expec