Wake Up And Smell The Coffee
Coffee prices have been going up recently, largely because of a drought in Brazil. I spoke about how Coffee is a promising sector, and like a company (CCL Products) which is in the space. Note that CCL Products is a company we own as part of the Capital Mind Premium portfolio.
Coffee Prices have slightly corrected but if the news on the drought is correct, we are going to see a continued rise in the price of coffee.
The Crude Oil Hedge
And then I spoke of how India should hedge some of its Crude Oil exposure. At $80 or below, Brent Crude may be low enough for us to set up longer term hedges, if available. This should be the realm of oil refiners, but most of them do not hedge, and they are government owned etc. In a purely competitive market, they should have been hedging and reducing the cost of fuels if the hedge worked and so on, but this is not a proper market. In fact, they end up buying dollars directly from the RBI whenever RBI feels that their buying will distort the actual market.
This needs a broader approach because India imports a lot of crude. Just oil imports are more than 30% of India’s overall imports (last year: $160 billion out of the total imports of $480 bn). That means it should be of interest to reduce the overall impact of oil imports. However, the market may not really allow for long term hedges (what if the 2 year or 3 year futures are only available for a much higher price?), which means the question is moot.
It could be that oil prices fall even further. Some analysis of the recent crude fall is that it is from oversupply, since US shale oil manufacturers have reduced demand from the US. The shale folks can stay competitive as long as oil is above $40 to $60. Remember also that the oil glut of the 1980s – caused by lower demand and high supply too – is fresh on the mind of the Middle Eastern oil producers, who had then cut production to try and curb prices. If the Saudi’s don’t cut production and shale oil continues to add to supply, prices are only going to come down from here. In which case, the need for a hedge is lower.
What we could also do is to build a strategic petroleum reserve in India, but with certain rules. Every reserve has the potential of never using it (like our forex reserves) because oh-if-we-use-it-we’ll-have-nothing-left kind of stupidity. Such reserves are useless as reserves, like that gold you own which you will never sell. But if there are strict rules to maintain that every month, the country will set a narrow price range (say 3% above and below market); at prices above the upper end, we will first exhaust our reserve and only then buy further from the market. Below the lower limit, we buy to maintain a one month reserve. (Which can be increased over time)
However we do it, the act of hedging or building a petroleum reserve should be handled by a government fund, not by the oil companies. If it’s at the oil companies, it can only be when the market is really competitive and they are allowed to have different rates at different times.
The Inflexion Point for IT
I mention also the IT is going into an inflexion point in India.
One of the problems cropping up in this space is how much some of these players are going to be relevant in the longer term and this may be a longer term theory rather than a short term one. So, Wipro for instance announcing that its headcount will come down by 33 per cent is the first time I have seen a IT big player like Wipro talk about reducing headcount and increasing efficiencies. Our players have largely been darlings of inefficiencies rather than of efficiencies. Technology has taken over a lot of the functions that people use. So a lot of the IT space changes will have to be adopted by our players.
While the BPO boom has come and gone, India still retains a huge advantage in the software outsourcing space. However the traditional business lines such as application maintenance and development may look to be overshadowed by cloud based services and products – where a company may have been had “implementations” of Peoplesoft or such, today they could get the entire configuration managed on a private cloud, which will have a fraction of the cost and for far fewer people.
Our IT companies will have to move to these kinds of technologies. It would be best if they actually owned the Rackspaces of the world, but otherwise, they’ll have to adjust to a different world – smaller teams and more efficient delivery. Our startups have shown that we have the talent and the skill, but the IT services space is a behemoth and will need to adapt. The question really is – will the big players change, or will there be smaller, more nimple companies that will replace them?