Discounting India

The country upgrades also celebrate cash transfers, which would loosen the control of the ruling party on government finances

By Mohan Sule

Current stock prices are supposed to factor in about a year’s forward earning. A stock that may look expensive on trailing 12-month earning could be a bargain pick based on next fiscal’s outlook. Yet this conventional wisdom is being severely tested of late. Guidance by companies acts as a trigger to accumulate or exit from the counter without waiting for the actual figures to roll in. Meeting the forecast or exceeding expectation is a signal to book profit. The opposite is considered a signal for value buying. Consider the current run-up of the market despite the stubborn persistence of inflation, plummeting GDP, slowing industrial production and a weakening currency on the inevitably of cut in policy rates. Companies would be able to borrow cheaply and restructure their debt, kick-start stalled projects or undertake fresh expansion. Besides, the rabi crop is also supposed to blunt food-supply shortages. All this could cool price indices in the medium to long run. In the short run, however, softer rates could inflame prices, whose recent rise has been contributed by delayed southwest monsoon and slashing of fuel subsidies. This means the market is running ahead by discounting the imminent tamping of inflation. There could be a sell-off when the central bank actually comes out with data showing the good results of its tight money policy. Similarly, a series of measures by the government to bolster capital inflow has triggered re-rating of India despite the frightening obstacles in execution and percolation.

The increase in the FDI cap in the capital-intensive multi-brand retail to 51% and aviation to 49% was long overdue. Organised retail creates jobs and eliminates tax evasion. Suppliers get assured market. Consumers benefit, too: the responsibility of stocking quality goods at bargin prices is shared by the retailer as well as the producers. Nonetheless, MNCs are worried about issues of dilution of brand equity due to quota for local sourcing. Most states ruled by non-Congress parties are not cooperating in order to protect mom-and-pop shops. The aviation industry is making losses worldwide. If at all a foreign investor shows interest in the Indian space, he will require patience to navigate bureaucracy and negotiating skills to make the airline shed staff. The restructuring package for state electricity boards and distribution companies calls for tariff hikes, when free electricity is the norm. Besides, the transmission and distribution sector will need many years to shake off its debt. Even if the National Investment Board, another remedy to fast-track big-ticket infra projects, does its job speedily, getting environment clearance and acquiring land face formidable hurdles including approval of parliament to make the process painless. The 2-G spectrum auction, which could have made a major impact on fiscal reduction, collected only 25% of its objective. PSU stake sell-off also makes foreign investors happy. The amount mopped up through the offer for sale of Hindustan Copper’s equity, however, is not even 3% of this financial year’s target. The problem is with the low floating stock, which make efficient price discovery difficult. The lukewarm reception is no deterrence due to the cushion of financial institutions. In short, shares of one state-owned entity are transferred to another at a hefty price.

The cash transfer scheme is another move that has impressed foreign investors. The move could indeed be a game-changer but not in the sense the UPA II government is hoping. It is not a giveaway like other welfare schemes, the most significant being the rural employment scheme guaranteeing 100 days of wages to one member of every family. Subsidy will be credited to the account of the beneficiary to buy the product at market rate. So far, PSU oil exploration and marketing companies had to bear the bill. In return, the government compensated them with bonds, which did not fully bridge the gap between production cost and selling price. Now the government has to take the entire burden on its balance sheet. With their bleeding staunched, PSU upstream and downstream oil companies will be able to raise funds to expand, benefiting their shareholders, employers and customers. On the other hand, the higher subsidy bill may force the finance minister to cut down on expenditure. For instance, the proposed food security bill and other welfare measures could be watered down, if not axed. By backing cash transfers, the ruling dynasty has unwittingly, or on fear of getting the country dubbed as junk, let go its hold on government’s finances, used to consolidate its reign. No wonder, rating agency Moody’s and investment banks Goldman Sachs and Morgan Stanley are bullish on India. The next upgrade would be on loosening of government control over bank lending.

Disruptive force

Companies should engage with anti-corruption activists as both depend on the same constituency: the middle class

By Mohan Sule

Countries, industries and companies often have to confront with disruptive forces that challenge the existing equation. Outsourcing has wiped out thousands of blue- and white-collar jobs in the developed world, especially in the US. Brick-and-mortar businesses are fighting the onslaught of e-commerce as the penetration of Internet becomes pervasive. The CEO of Nokia, which till recently was the world’s largest seller of mobile phones, likened the situation his company is facing to an oil rig up in flames as smartphones and tablets upended its dominance. Closer home, Bajaj Auto had to jettison assembling scooters as new entrant Hero Honda’s motorcycles cornered a larger market share. The automobile industry in the US is in a decline since the 1973 oil shock after it did not embrace buyers’ preference for fuel-efficient imports. The labor-intensive textile sector in India is still on life support for failing to adapt to new technology and tastes. Once-upon-a-time leader in the watch segment PSU HMT was slow in responding to changes in consumer preference to viewing watches as feel-good accessories from merely functional timepieces. On the other side, some companies are displaying flexibility to catch the tailwinds. IBM got out of personal computing to focus on the big picture. The domestic drug industry is tapping the outsourcing segment to bypass stiff domestic regulations. The HCL group has successfully made the transition from a computer hardware producer to a leading software services provider.

A typical reaction to disruptive forces is to hunker down, hoping the storm will pass. In the aftermath, companies undergo the three classical symptoms of loss: denial, anger and, finally, acceptance. At the global level, the changes are more profound with the entire edifice of capitalism, of choice, of personal well being put on the block for review. The US electorate has cautiously but surely backed government’s role in determining the way healthcare is going to reach patients, in bailing out sick units like General Motors and Chrysler and Wall Street banks, and in responding to natural disasters like hurricanes. Right now, the Indian political class is in the second stage, after realising that their denial of charges of corruption and crony capitalism leveled by the civil society, led by Arvind Kejriwal, is not convincing the electorate to shrug off the muck-raking as inconsequential. The current strategy seems to discredit the accusers as unreliable and accusations as without substance, and credit unnamed ‘vested interests’ for the campaign of calumny. After pointing to the rot at the top of Congress and BJP, the anti-graft activists’ target of late has encompassed companies, too. Reliance Industries Chairman Mukesh Ambani is supposed to be holding the levers of power in India to the extent of influencing gas pricing and cabinet posts and HSBC is alleged to have acted as a conduit for black money into Swiss accounts. Both the companies predictably have dismissed the charges as baseless. What is surprising is the reaction of some other corporate bosses. Infosys co-founder-turned-philanthropist N R Narayan Murthy sought to put himself at arm’s length from the widening scope of the agitation by noting his charitable giveaway was to help Kejriwal’s apolitical NGO to raise awareness about the Right to Information Act. Contrary to Murthy’s assertion, the Tata group has denied that its social welfare trust gave any donation.

The attempt of Corporate India to distance itself from the anti-corruption campaign demonstrates that company bosses still believe caution is the best defence. It is essential that they engage with Kejriwal as his soon-to-be-formed political party might even hold the balance of power after the next election. Promoters should impress upon him the difficulties of doing business in an environment that encourages party leaders and their relatives to act as facilitators. They should probe the crusader-turn-politician’s views on the economy. Does he want to go back to the past when everything was rationed and subsidised and PSUs were the major job creators? Companies have to recognise that he represents the same constituency that they woo to sell products and services and raise funds: the middle class, whose size is going to explode as India rapidly urbanises. The contradiction should be emphasised: the middle class, which is propelling the ongoing wave of anger against the politician-business nexus, is the biggest beneficiary of the opening of the economy by gradual elimination of the role of government. At the same time, Kejriwal should heed to the advice Secretary of State Colin Powell gave to President George W Bush in 2001 on why the US should not invade Iraq: “You break (the system), you own it.”