FII investments reach all-time high in September 2010

Foreign Institutional Investors are betting heavily on the India growth story. By the end of September, 2010, the FII investment in calendar year 2010 stood at US $ 28.5 bn, out of which US $ 18.4 bn were in equity while US $ 10.1 bn were in debt instruments.

Figure 1: FII Investments in Equity and Debt (Source: SEBI)

During 2010 the cumulative investments by FIIs in India, has already crossed the highest investments India has ever received in any calendar year. FIIs are the driving force in the market. During the month of September, Nifty has risen by 11.62%.

Figure 2: Total FII Investments (Source: SEBI)

2008 was the only year in which there was a net FII outflow. Inflows rebounded during 2009, almost reaching the 2007 levels. Inflows in 2010 are already 50% more than that received in the whole of 2009. The cap on FII investment in government & corporate debt was recently increased from US$ 20bn to US$ 30bn. A hike in the investment limit was necessary, as FIIs have already reached close to the existing limit of US$ 5bn in government securities & US$ 15bn in corporate debt. Net FII inflow into the debt market has grown over eight times from a little over US$ 1bn in 2009 to a more than US$ 10bn during the first nine months of this year. 

At the current rate FIIs inflows are on track to exceed US$ 40bn by the end of 2010.

Wal-Mart's $4.2 billion bet on Africa

Wal-Mart Stores, Inc. the world's biggest retailer has made a preliminary, non-binding cash offer to acquire Massmart Holdings Limited, South Africa's third-largest store operator by value for South African Rand 148 per share. Massmart, headquartered in Johannesburg, is one of the largest retailers in Africa. The company runs 232 stores in South Africa which account for 92% of its total sales.

Location of Massmart's stores in South Africa (Source: Company Website)

The company operates 24 additional stores in other sub-Saharan African countries. In most countries it has just 1 or 2 stores. The largest presence outside Africa is in Botswana where it has 9 stores. However, sales outside South Africa account for only 8% of its sales.

Location of Massmart's stores outside South Africa (Source: Company Website)

Massmart was founded in 1990 and has grown rapidly through acquisitions - 20 Dion stores in 1993, 14 CCW stores and 26 Game stores in 1998. By the time the company listed on the Johannesburg Stock Exchange in July 2000, it had grown 10 times in 10 years.

Rapid Growth in Earnings (Source: Author analysis, Company Data)

Massmart reported sales of US$ 6.8 billion in its fiscal year, ended in June 2010, up 10 percent from the previous year. While that's a large figure, it will just about move the needle for Wal-Mart which reported sales of US$405 billion in its most recent financial year.

What are the strategic reasons for the deal?

• Wal-Mart is struggling in its home market U.S. where revenues have declined for five straight quarters because of the weak U.S. economy.
• Wal-Mart's overseas business is performing better with sales of US$100 billion accounting for 25 per cent of its total revenue. 
• The company has a strong presence in China, Brazil and Mexico
• The Indian market remains largely closed due to the Government's restrictions on Foreign Direct Investment (FDI) in retail. 
• The deal gives Wal-Mart's a strong position in South Africa a fast-growing market and a foothold in Africa for growth and expansion in other African countries.

What are the risks?

• While South Africa has a fast-growing economy the crime level is high 
• The country has a 24% unemployment rate and high inflation
• Massmart has a heavily unionized work force
• Massmart's same stores sales growth is less than South Africa's rate of inflation. Thus there is pressure of volume growth
• The boost provided by the Soccer World Cup is over.
• The PE multiple for the deal is nearly 26 times. Compared to this, Shoprite, South Africa's biggest listed retailer trades at 21 times. So, this is an expensive deal. There is also the potential of a counter offer which could drive the price even higher.

However, Wal-Mart seems to betting not on the short-term impact of the deal, but on the long-term potential of Africa. The IMF estimates that growth in Sub-Saharan Africa will reach 5% in 2010 and 5.9% in 2011. While that's less than the 9% growth in China and India, it compares well with the average 2% growth expected in advanced economies. After the stunning rise of China and India investors are betting on Africa as the next and possibly last untapped market.

However hype and hoopla aside, returns will take time. South Africa, which is the best economy in Africa has good penetration of modern retail, so Wal-Mart would need to grow business in the other countries. This might be easier said than done because for every relatively stable country like Botswana, there is a disaster like Zimbabwe.

Asphyxiation By Forex

India's phenomenal growth of the last five years was powered in large part by huge injections of cash and investment. Investment accounted for about 39% of the country's gross domestic product in the 2008 fiscal, up from 25% five years ago. At its peak, more than a third of investment came from abroad. At its peak, more than a third of investment came from abroad.

But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years.

Source: Reserve Bank of India

The decline in foreign investment has taken a big toll on sectors like real estate, manufacturing and infrastructure. In the last quarter of 2008, the economy's growth rate plummeted to about 5.3%, the lowest in five years.

For 8-9% growth rate, private investment and low cost of capital is essential. The Government's Fiscal Deficit has ballooned to 10% of GDP. The Government is expected to borrow Rs 300000 crore this year compared to Rs 120000 few years ago. Such large borrowings will crowd-out the private sector and lead to an increase in interest rates.

Cutting subsidies, reducing the fiscal deficit and attracting foreign investment should be top of the 'To Do' list for the Government.