BackThe globalized Sensex
The globalized Sensex
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The three blockbuster global acquisitions by Indian companies seem to be finally paying off. Tata Steel, Tata Motors and Hindalco took huge risks immediately before the global meltdown, borrowing far beyond what seemed prudent at the time, to buy Corus, Jaguar Land Rover (JLR) and Novelis, respectively. There are now early signs that the acquired companies are hobbling back to good health. The global operations of these three large Indian companies will become important drivers of sales and profit growth in the future, if the turnarounds at JLR, Corus and Novelis eventually prove to be more than fleeting.
Much of the discussion about these acquisitions and others like them has focused on issues such as financing and strategic intent. But the growing importance of the overseas operations of Indian companies will have important implications for investors. Benchmark indices such as the Nifty and the Sensex could become even more dependent on global economic conditions than they are now.
Also Read Niranjan Rajadhyaksha’s previous columns
It has happened elsewhere in the world as well. An example: Forty per cent of the profits of the S&P 500 companies in the US come from outside the country; 12% of this comes from the emerging markets, according to David Bianco, US equities strategist for Bank of America Merrill Lynch. He estimates that the contribution of China to the profits of the S&P 500 companies could double to 10% by 2015. Something similar may happen to our own indices and hence to the extent they are correlated with global stock prices. Decoupling, anyone?
As financial journalists, we have made it a habit during the earnings season to keep an eye on what the managements of companies such as Standard Chartered Bank, Suzuki Motors, Lafarge and Daiichi Sankyo are telling their shareholders, because there are often important announcements about the Indian operations that are now a key part of the business mix of these foreign companies.
Globalized companies have globalized cash flows. This basic truth will sooner or later apply to Indian companies and their share prices as well.
Global deals have resurfaced in the past few months, though the path has been strewn with challenges as well. Reliance Industries failed to purchase ailing petrochemicals company LlyondellBasell after its $14.5 billion bid was rejected, though the Mukesh Ambani firm is now seeking oil shale assets abroad. Bharti Airtel had better luck in its $10.7 billion deal to acquire the African business of Kuwaiti telco Zain.
The immediate concerns about most of these acquisitions are how they will be funded and whether they make strategic sense; but in the long run these moves will change the way investors assess the quarterly and annual prospects of large Indian companies and the equity indices they populate.
There is a lot of macroeconomic data to illustrate the increasing globalization of the Indian economy over the past two decades. The most significant impact has been in terms of the size of trade flows between India and the rest of the world. The size of India’s current account has more than trebled, from 19% of its gross domestic product (GDP) in 1990-91 to 61% of GDP in 2008-09.
But exports of goods and services are only possible for companies that produce tradable goods and services. Investment outflows allow even companies peddling non-tradables such as financial services or housing to build large global exposures.
Fortis Healthcare is a good example. Its core product is not traded across international borders, but it will yet have a sizeable foreign business in case it emerges victorious in the battle for Singapore firm Parkway Holdings. Foreign direct investments by India companies in the five years since FY07 could have topped $75 billion.
Global shocks have till now been transmitted to the Indian financial markets through the confidence channel. Either a wave of euphoria or panic leads to the global repricing of risk, and thus the local prices of shares and bonds. We saw this during the asset bubble of 2007 and the global meltdown of 2008. Local investors also know how the global commodity cycle affects the profits of local steel and aluminium companies, because low import tariffs have ensured that local metal prices track global ones. But if the rush to buy foreign assets continues, the transmission of global shocks— positive or negative— through company balance sheets could also become more important.
Investors would do well to prepare for a day when the contribution of global earnings to our national stock market indices can no longer be dismissed as a minor affair.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at cafeeconomics@livemint.com
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