Three transformations that investors will have to prepare for as the market undergoes another evolution
By Mohan Sule
The way of doing business has gone a dramatic change since last May. Transparency and rule-based governance are the buzz words. Natural resources are being auctioned. There are no phone calls or chits from the PMO or extra-constitutional authorities to bank CEOs to grant loans to cronies. Company bosses and lobbyists no longer have to make frequent trips to New Delhi with suitcases to tweak policies to suit them. The transformation is welcome and is another pointer that India is slowly graduating to a demand-based market from a supply-controlled economy. Investors have to prepare for the next phase in the evolution, where a company’s value will be determined by cost-efficiency and competitive policies rather than due to the monopoly status acquired by bagging licences based on proximity to the policy makers. The rise and fall of Naveen Jindal’s JSP should be an apt illustration and so also the wealth creation by the Adanis through acquisitions. Instead of SBI, the group is scouting finance from Russian and Chinese banks for its Australian mining project. The earlier stages saw the scrapping of the Controller of Capital Issues, which was vested with powers to decide not only the entry but also the size and price of the offering. The opening up resulted in a flood of fixed-price issues from the established to the shady. To solve the problem of hefty premium, the power of deciding pricing has been transferred to the market through book building. Another difference is the motive of the IPOs. Initially, they were to raise funds for expansion. Now shares are listed to allow early stage incubators to exit. The issue of expensive offerings, thus, continues.
The next stage is crucial. It can either propel the stock market’s wealth or discharge the third shock. The first was the period when fishery and aqua culture growers and timeshare promoters ripped investors, followed by the bursting of the dot-com bubble blown by eyeballs. Two types of issues will dominate. The first, of course, will be from the infrastructure sectors as stalled projects spurt to life. The not-so-pleasant past experience with these companies in the frontline of benefiting or losing due to government’s wise or whimsical policies might prompt caution. The second lot will be emerging companies, predominantly from the services sector. This is natural. The share of the services sector in a developed economy overwhelms manufacturing and agriculture. Pinning down valuations will be difficult due to their unique business models. Investors grappled with a similar dilemma when fast-food chains and telephony- and web-based aggregators of information ranging from general to wannabe brides and grooms and jobs entered the market. Is the valuation expensive based on trailing 12 months or cheap discounting the enormous forward earning potential? Lately, theme parks have sought funds and going forward there could be those setting up digital platforms to exchange used goods, sell furniture or find suitable houses not to exclude e-supermarkets. Should the market compare them with tech companies? Many of them may not even have comparable brick-and-mortar peers. More than these wonders, perhaps below-the-radar back-office and last-mile services providers are likely to be the winners, just as our tech companies remained immune from the crash of Internet companies.
The second challenge for investors will be to spot when a generational change takes place. Usually, the recast of indices is a good guide to notice the shift. Despite the first-mover advantage, Nokia and Blackberry have lost market share to the disruptive Apple. Traditional business houses have been shaken to the core by the net revolution, which has flattened the globe. Not surprisingly, they are in the forefront of the campaign to discourage zero rate arrangements between Internet service providers and e-commerce companies. The worry is that an agile upstart can neutralize the high-entry barrier in the real world by diverting traffic to its site by tying up with an ISP. Investors are already in the midst of the third wave of change. As the government pulls out from the business of running businesses, monetary rather than fiscal policies are having a far greater impact on the market. The US Federal Reserve’s moves are closely monitored. China’s softening of interest rates created ripples and so also liquidity injection by the European Central Bank to pull the euro zone out of recession. The policies to control the flow and the cost of money will affect the health of the market more than the budget as tax rates become stable and the government runs a system without many shocks to attract investors. Just as the Fed chairman is the most powerful person in the world, the Reserve Bank of India governor will be the man to watch out for.
Saturday, June 27, 2015
Wednesday, June 3, 2015
Clash of conventions
Is volatility good? Can you trust promoters pledging their shares? Do cash-rich companies need investors?
By Mohan Sule
Stocks have been volatile of late, rising and falling with the flow of news. A sudden development interrupts consecutive days of unilateral direction of the market. On some other occasions, equities plunge or surge with equal ferocity on alternate trading sessions or even intra day. Events influencing investing are not necessarily confined to India. Stalling of key bills in the Rajya Sabha pulls down the market and so also improvement in US jobs data, sparking fears of US Federal Reserve sticking to its course of hiking interest rates from June. Similarly, cut in lending rates by China’s central bank casts a gloom on worries that the move will increase consumption of commodities by the largest manufacturer in the world and thereby boost prices as well as on concerns that the issue of retrospective collection of minimum alternative tax will drag on in courts. Besides the softening of the position of Greece on payment of debt instalments, putting on block a couple more PSUs for stake-sale and reworking the urea subsidy mechanism to kick start fertilizer production induce optimism. In short, the market is jumping from one issue to another without letting the resolution of earlier problems to percolate. This is because valuations have raced so much ahead, taking for granted that the NDA government will be bombarding the economy by one reform after another. Earlier, the delay by parliament in approving increase in FDI in the insurance sector to 49% was painted as the ultimate reform on which the well being of the economy hinged. Now it appears that the passage of the amended Land Acquisition Bill is the final frontier for India to conquer.
It should be evident by now that the Narendra Modi government wants to take one step at a time, covering its tracks even if it means delays, so it cannot be accused of carrying out reforms at the behest of certain sections of industry or to appease some other segment. In the process, however, it is the retail investor who is left wondering if the market flux is here to stay or temporary. Yet, realization in emerging that volatility may not be bad after all. For every foreign institutional investor fed up with the dodgy interpretation of tax rules in India, there might be a mutual fund familiar with the grinding speed with which the bureaucracy functions but still believes in the India growth story. The wild fluctuations are more likely to be a clash of opposing views rather than a reflection of a shallow market. The correction and recovery ensure valuations do not enter bubble territory or a downturn. A secular trend is more dangerous as it exemplifies unwarranted pessimism or irrational exuberance. The severe market gyrations should lead to rethinking of the vanilla concept of bull and bear phases. The other is of pledging of shares by promoters, which triggers a reflex ` sell’ action by investors, conjecturing all sorts of dark scenarios ranging from extravagant lifestyle of the owners to mismanagement.
Not all companies operate in ever-green sectors such as FMCG, pharmaceuticals and tech. A developing country needs capital-intensive industries. These companies have lots of debt, low promoter holding and ongoing capital expenditure. Shares are mortgaged to fulfil promoters’ contribution or to buy more shares to retain controlling interest after equity dilution. Better a promoter who publicly pledges his shares and invites focus on his company than who liquidates his holding in trickles and dribbles while the going is good. An extreme view is that it is only a matter of time before such inefficient promoters are dislodged in favour of an agile management. Another traditional position is being threatened in the face-off between companies preferring to keep investors happy with liberal dividends and those that are undertaking expansion and diversification for capital appreciation. Investor activists demand cash-rich companies to go for buybacks or increase the dividend rate and, in the process, further boost their valuations. The problem is that the perceived tax-free status of dividends despite the dividend distribution tax attracts risk-averse investors to dividend-yielding scrips over taxable fixed deposits or growth stocks. The fear is that acquisitions will result in leveraging of the balance sheet and sometimes turn out to be bad fits. Capacity expansion can go horribly wrong if anticipated demand does not materialise or there is disruption in the market. Yet, dividend yield too varies depending on the mood of the market. Just as interest rates recede, premium on companies with generous payouts also shoots up in a bull run. So if equity investing is providing risk capital, why chase overvalued companies not in need of cash?
By Mohan Sule
Stocks have been volatile of late, rising and falling with the flow of news. A sudden development interrupts consecutive days of unilateral direction of the market. On some other occasions, equities plunge or surge with equal ferocity on alternate trading sessions or even intra day. Events influencing investing are not necessarily confined to India. Stalling of key bills in the Rajya Sabha pulls down the market and so also improvement in US jobs data, sparking fears of US Federal Reserve sticking to its course of hiking interest rates from June. Similarly, cut in lending rates by China’s central bank casts a gloom on worries that the move will increase consumption of commodities by the largest manufacturer in the world and thereby boost prices as well as on concerns that the issue of retrospective collection of minimum alternative tax will drag on in courts. Besides the softening of the position of Greece on payment of debt instalments, putting on block a couple more PSUs for stake-sale and reworking the urea subsidy mechanism to kick start fertilizer production induce optimism. In short, the market is jumping from one issue to another without letting the resolution of earlier problems to percolate. This is because valuations have raced so much ahead, taking for granted that the NDA government will be bombarding the economy by one reform after another. Earlier, the delay by parliament in approving increase in FDI in the insurance sector to 49% was painted as the ultimate reform on which the well being of the economy hinged. Now it appears that the passage of the amended Land Acquisition Bill is the final frontier for India to conquer.
It should be evident by now that the Narendra Modi government wants to take one step at a time, covering its tracks even if it means delays, so it cannot be accused of carrying out reforms at the behest of certain sections of industry or to appease some other segment. In the process, however, it is the retail investor who is left wondering if the market flux is here to stay or temporary. Yet, realization in emerging that volatility may not be bad after all. For every foreign institutional investor fed up with the dodgy interpretation of tax rules in India, there might be a mutual fund familiar with the grinding speed with which the bureaucracy functions but still believes in the India growth story. The wild fluctuations are more likely to be a clash of opposing views rather than a reflection of a shallow market. The correction and recovery ensure valuations do not enter bubble territory or a downturn. A secular trend is more dangerous as it exemplifies unwarranted pessimism or irrational exuberance. The severe market gyrations should lead to rethinking of the vanilla concept of bull and bear phases. The other is of pledging of shares by promoters, which triggers a reflex ` sell’ action by investors, conjecturing all sorts of dark scenarios ranging from extravagant lifestyle of the owners to mismanagement.
Not all companies operate in ever-green sectors such as FMCG, pharmaceuticals and tech. A developing country needs capital-intensive industries. These companies have lots of debt, low promoter holding and ongoing capital expenditure. Shares are mortgaged to fulfil promoters’ contribution or to buy more shares to retain controlling interest after equity dilution. Better a promoter who publicly pledges his shares and invites focus on his company than who liquidates his holding in trickles and dribbles while the going is good. An extreme view is that it is only a matter of time before such inefficient promoters are dislodged in favour of an agile management. Another traditional position is being threatened in the face-off between companies preferring to keep investors happy with liberal dividends and those that are undertaking expansion and diversification for capital appreciation. Investor activists demand cash-rich companies to go for buybacks or increase the dividend rate and, in the process, further boost their valuations. The problem is that the perceived tax-free status of dividends despite the dividend distribution tax attracts risk-averse investors to dividend-yielding scrips over taxable fixed deposits or growth stocks. The fear is that acquisitions will result in leveraging of the balance sheet and sometimes turn out to be bad fits. Capacity expansion can go horribly wrong if anticipated demand does not materialise or there is disruption in the market. Yet, dividend yield too varies depending on the mood of the market. Just as interest rates recede, premium on companies with generous payouts also shoots up in a bull run. So if equity investing is providing risk capital, why chase overvalued companies not in need of cash?
Wednesday, May 20, 2015
Well done!
After a decade of pessimism, Prime Minister Narendra Modi has instilled optimism that India will have a better future
By Mohan Sule
When is the right time to assess a government's performance? Immediately after swearing in? After 100 days? Six months? Most new governments around the world enjoy a 100-day honeymoon. Unfortunately, the Narendra Modi government has been not shown any such courtesy. Precipitating the problem was the mess he inherited: policy paralysis, mounting bad loans of banks and a huge subsidy bill. Initially, surging consumer prices were the focus of the attack. Later, parliament proceedings were disrupted on the issue of return of black money. Now it is the alleged anti-agrarian bias of the government that has become the rallying point. The flirting from issue to issue is due to the lack of stickiness of any. With wholesale inflation below zero and consumer inflation below the 6% comfort level targeted for the current fiscal by the Reserve Bank of India, price rise is no longer an emotive topic. Unaccounted money resonates during times of economic hardships and not when the stock markets are buoyant. Scaling down of the rural employment guarantee scheme and the minimum support price are being blamed for farmers' woes caused by unseasonal rains. This is a 180-degree reversal from attributing the deployment of funds to dole out wages for digging holes for widening the fiscal deficit and causing rural inflation. A moderate increase in MSP against the background of plentiful of crop was praised for capping food inflation, which is allowing the RBI to begin its rate cut cycle. Currency volatility affecting imports as well exports and preoccupation with shedding debt and high-cost inventory contracted when oil prices were high are responsible for the corporate sector yet to see achche din.
As it completes a year in office, the Modi government should have reasons to feel satisfied. The increase in FDI in the insurance sector to 49% has become a reality. The initiation of e-auction to sell mines will mean that henceforth natural resources will never ever be assigned arbitrarily. There were concerns that the high price to secure mines and spectrum will result in pass-through of costs. In the present circumstances, however, transparent allocation of resources is the best possible way. The cost-benefit equation will get sorted over in the coming years, with players keeping their bids reasonable. Besides these visible reforms, behind-the-scenes triggers have been pulled. Many projects got stalled after the 2G spectrum allocation scandal followed by the cancellation by the Supreme Court of the coal blocks allocated since 1993.Promoters, too, did not display any urgency because of the global economic slump. Some projects were starved off coal and other critical inputs such as natural gas. Environmental clearances are coming without any `tax'. The high price of natural gas approved by the previous government was revised to offer a modest increase. Pooling of domestic and imported LNG will even out prices. Taking advantage of falling crude prices, diesel was deregulated. The appeal by the prime minister to the well-off to give up their subsidized LPG cylinders is Kennedysque: Ask what you can do for the country.
Bankers now can sanction loans based on commercial viability. There is consensus among multilateral and credit rating agencies that India is the growth story to watch out for. The upward revision in the outlook for the country from junk status on improving macro indicators will lower the cost of overseas borrowings. Make-in-India and Digital India have the capacity to stimulate the economy. Foreign investors are being treated on par with ordinary tax payers, whose previous seven years' tax returns can be opened for scrutiny. The Jan DhanYojna is set to be a game-changer in the goal of financial inclusion. The amendment to the land acquisition bill is a result of the prime minister's experience as Gujarat chief minister when activists stalled the Narmada dam. The mark of a leader is being firm in his convictions unlike the Gandhi scion who pandered to every section and sub-segment of the society on the eve of Lok Sabha elections. By labeling the NDA government as suit-boot ki sarkar, the Congress leader who aspires to be the next prime minister humiliated the aspiring India and the migrants who come to cities to better their and the next generation's standard of living. Mikhail Gorbachev’s perestroika triggered the fall of the Berlin Wall, freeing former Communist bloc countries from the tyranny of the Soviet Union. The heir to the dynasty of former prime ministers, who kept the animal spirits of two generations of its citizens shackled, perhaps anticipates that Modi will occupy a place in history for freeing India from cronyism, corruption and feudalism after P V Narasimha Rao in 1991 freed India from the licence raj regime.
By Mohan Sule
When is the right time to assess a government's performance? Immediately after swearing in? After 100 days? Six months? Most new governments around the world enjoy a 100-day honeymoon. Unfortunately, the Narendra Modi government has been not shown any such courtesy. Precipitating the problem was the mess he inherited: policy paralysis, mounting bad loans of banks and a huge subsidy bill. Initially, surging consumer prices were the focus of the attack. Later, parliament proceedings were disrupted on the issue of return of black money. Now it is the alleged anti-agrarian bias of the government that has become the rallying point. The flirting from issue to issue is due to the lack of stickiness of any. With wholesale inflation below zero and consumer inflation below the 6% comfort level targeted for the current fiscal by the Reserve Bank of India, price rise is no longer an emotive topic. Unaccounted money resonates during times of economic hardships and not when the stock markets are buoyant. Scaling down of the rural employment guarantee scheme and the minimum support price are being blamed for farmers' woes caused by unseasonal rains. This is a 180-degree reversal from attributing the deployment of funds to dole out wages for digging holes for widening the fiscal deficit and causing rural inflation. A moderate increase in MSP against the background of plentiful of crop was praised for capping food inflation, which is allowing the RBI to begin its rate cut cycle. Currency volatility affecting imports as well exports and preoccupation with shedding debt and high-cost inventory contracted when oil prices were high are responsible for the corporate sector yet to see achche din.
As it completes a year in office, the Modi government should have reasons to feel satisfied. The increase in FDI in the insurance sector to 49% has become a reality. The initiation of e-auction to sell mines will mean that henceforth natural resources will never ever be assigned arbitrarily. There were concerns that the high price to secure mines and spectrum will result in pass-through of costs. In the present circumstances, however, transparent allocation of resources is the best possible way. The cost-benefit equation will get sorted over in the coming years, with players keeping their bids reasonable. Besides these visible reforms, behind-the-scenes triggers have been pulled. Many projects got stalled after the 2G spectrum allocation scandal followed by the cancellation by the Supreme Court of the coal blocks allocated since 1993.Promoters, too, did not display any urgency because of the global economic slump. Some projects were starved off coal and other critical inputs such as natural gas. Environmental clearances are coming without any `tax'. The high price of natural gas approved by the previous government was revised to offer a modest increase. Pooling of domestic and imported LNG will even out prices. Taking advantage of falling crude prices, diesel was deregulated. The appeal by the prime minister to the well-off to give up their subsidized LPG cylinders is Kennedysque: Ask what you can do for the country.
Bankers now can sanction loans based on commercial viability. There is consensus among multilateral and credit rating agencies that India is the growth story to watch out for. The upward revision in the outlook for the country from junk status on improving macro indicators will lower the cost of overseas borrowings. Make-in-India and Digital India have the capacity to stimulate the economy. Foreign investors are being treated on par with ordinary tax payers, whose previous seven years' tax returns can be opened for scrutiny. The Jan DhanYojna is set to be a game-changer in the goal of financial inclusion. The amendment to the land acquisition bill is a result of the prime minister's experience as Gujarat chief minister when activists stalled the Narmada dam. The mark of a leader is being firm in his convictions unlike the Gandhi scion who pandered to every section and sub-segment of the society on the eve of Lok Sabha elections. By labeling the NDA government as suit-boot ki sarkar, the Congress leader who aspires to be the next prime minister humiliated the aspiring India and the migrants who come to cities to better their and the next generation's standard of living. Mikhail Gorbachev’s perestroika triggered the fall of the Berlin Wall, freeing former Communist bloc countries from the tyranny of the Soviet Union. The heir to the dynasty of former prime ministers, who kept the animal spirits of two generations of its citizens shackled, perhaps anticipates that Modi will occupy a place in history for freeing India from cronyism, corruption and feudalism after P V Narasimha Rao in 1991 freed India from the licence raj regime.
Wednesday, May 6, 2015
Bogus outrage
Attempts to create a level playing field can have limited success going by the experience in the stock market
By Mohan Sule
The trigger for the outrage was innocuous. An Internet service provider offered zero rates to users clicking on the app of an e-tailer. Instead, the merchant paid the ISP for not counting the usage of data by the visitors. Competitors contended the agreement gave an unfair advantage to the trader. A grim scenario was painted of ISPs blocking sites on behalf of government or slowing access to those of smaller players who are unable to afford this extra cost. The argument is that as gatekeepers to the Internet, ISPs have to be neutral in providing access to the net and not help divert traffic to certain sites by providing exclusive lanes to speed up download. The proposition is compelling. Imagine, for instance, a hospital charging differential rates for the same treatment, depending on the economic status of the patients. Civic services like supply of water are billed as per usage and not the purchasing power of the user. Power bills and telecom tariffs are generated as per consumption. Yet, leveling the field is easier said than done. Applicants to private educational institutions can jump the queue by paying donations, disregarding scholastic achievements. Corporate hospitals hike fees to ensure that their resources are not comprised by heavy demand or to enlist specialists. Multiplexes price tickets depending on the popularity of films and screening slots. Credit card issuers routinely offer discounts for visiting certain retail outlets or fine dining restaurants. Brands woo super markets and even mom-and-pop outlets with higher margins for better display and push. This means unless some sort of discrimination is practiced, it will be impossible for many organizations set up to make profit to justify their existence.
The Securities and Exchange Board of India’s experiments to flatten the playing ground for issuers and subscribers have produced more misses than hits. The stock market regulator has strengthened norms against insider trading by enlarging the definition of who fits the bill. Deliberations of board meeting have to be conveyed to stock exchanges within minutes. Transcripts of analysts’ meets have to be posted on the company’s web site for symmetrical dissemination of information. The efforts to protect minority shareholders have been matched by easing of resource-raising. As long as they make full disclosures, companies do not need permission of any authority to list on stock exchanges. This has opened the floodgates for even dubious promoters, many of whom have subsequently vanished from the scene. On complaints about the cost of floating shares to the public and for staying listed, Sebi carved out quotas for institutional investors, throwing in a carrot of retail discount. Shares can be placed with qualified institutional investors, bypassing the small investors. Book building gives big-ticket investors influence to determine pricing as they are informally polled to find the appetite for the offer. Grading of public issues indirectly helped established companies and so will the move to cap the commission of mutual fund distributors, an avenue for small players to gain visibility.
In the debate on net neutrality, a crucial issue has been lost sight of: except for sites put up by governments and multilateral institutions, everyone is out to make money or peddle influence. B2B presence is to gain access to a wider market and B2C properties eliminate the cost of building a brick-and-mortar set-up. Blogs eventually hope to self-sustain through ads. Free content is giving way to paid subscription to meet costs if not to etch out a profit. If there is still an echo of the disastrous eyeball parameter to assign valuations to dot-coms without any cash flows reverberating across the net, it is due to startups, many put up by con artistes out to snag venture capital or private equity. The shrill follow-the-herd cries for net neutrality should recognize that telecom companies have to pay for spectrum. They are answerable to their shareholders. The choice for them is between increasing voice and data tariffs and exploring other options to lighten the pricing burden to stay competitive. Internet retailers, on the other hand, are hobbled by server breakdowns in their quest to expand market share. The result is an arrangement beneficial to all the stakeholders. It is a pity that Flipkart buckled under pressure and backed out of the zero rate plan of Bharti Airtel, which though has stayed firm in going ahead with the program. No doubt, a company has to operate in an ethical environment. But surrendering to populism at the cost of the bottom line reveals to the shareholders where its priorities are. Hopefully, investors will not forget this when the e-commerce pioneer in India comes out with an IPO.
By Mohan Sule
The trigger for the outrage was innocuous. An Internet service provider offered zero rates to users clicking on the app of an e-tailer. Instead, the merchant paid the ISP for not counting the usage of data by the visitors. Competitors contended the agreement gave an unfair advantage to the trader. A grim scenario was painted of ISPs blocking sites on behalf of government or slowing access to those of smaller players who are unable to afford this extra cost. The argument is that as gatekeepers to the Internet, ISPs have to be neutral in providing access to the net and not help divert traffic to certain sites by providing exclusive lanes to speed up download. The proposition is compelling. Imagine, for instance, a hospital charging differential rates for the same treatment, depending on the economic status of the patients. Civic services like supply of water are billed as per usage and not the purchasing power of the user. Power bills and telecom tariffs are generated as per consumption. Yet, leveling the field is easier said than done. Applicants to private educational institutions can jump the queue by paying donations, disregarding scholastic achievements. Corporate hospitals hike fees to ensure that their resources are not comprised by heavy demand or to enlist specialists. Multiplexes price tickets depending on the popularity of films and screening slots. Credit card issuers routinely offer discounts for visiting certain retail outlets or fine dining restaurants. Brands woo super markets and even mom-and-pop outlets with higher margins for better display and push. This means unless some sort of discrimination is practiced, it will be impossible for many organizations set up to make profit to justify their existence.
The Securities and Exchange Board of India’s experiments to flatten the playing ground for issuers and subscribers have produced more misses than hits. The stock market regulator has strengthened norms against insider trading by enlarging the definition of who fits the bill. Deliberations of board meeting have to be conveyed to stock exchanges within minutes. Transcripts of analysts’ meets have to be posted on the company’s web site for symmetrical dissemination of information. The efforts to protect minority shareholders have been matched by easing of resource-raising. As long as they make full disclosures, companies do not need permission of any authority to list on stock exchanges. This has opened the floodgates for even dubious promoters, many of whom have subsequently vanished from the scene. On complaints about the cost of floating shares to the public and for staying listed, Sebi carved out quotas for institutional investors, throwing in a carrot of retail discount. Shares can be placed with qualified institutional investors, bypassing the small investors. Book building gives big-ticket investors influence to determine pricing as they are informally polled to find the appetite for the offer. Grading of public issues indirectly helped established companies and so will the move to cap the commission of mutual fund distributors, an avenue for small players to gain visibility.
In the debate on net neutrality, a crucial issue has been lost sight of: except for sites put up by governments and multilateral institutions, everyone is out to make money or peddle influence. B2B presence is to gain access to a wider market and B2C properties eliminate the cost of building a brick-and-mortar set-up. Blogs eventually hope to self-sustain through ads. Free content is giving way to paid subscription to meet costs if not to etch out a profit. If there is still an echo of the disastrous eyeball parameter to assign valuations to dot-coms without any cash flows reverberating across the net, it is due to startups, many put up by con artistes out to snag venture capital or private equity. The shrill follow-the-herd cries for net neutrality should recognize that telecom companies have to pay for spectrum. They are answerable to their shareholders. The choice for them is between increasing voice and data tariffs and exploring other options to lighten the pricing burden to stay competitive. Internet retailers, on the other hand, are hobbled by server breakdowns in their quest to expand market share. The result is an arrangement beneficial to all the stakeholders. It is a pity that Flipkart buckled under pressure and backed out of the zero rate plan of Bharti Airtel, which though has stayed firm in going ahead with the program. No doubt, a company has to operate in an ethical environment. But surrendering to populism at the cost of the bottom line reveals to the shareholders where its priorities are. Hopefully, investors will not forget this when the e-commerce pioneer in India comes out with an IPO.
Wednesday, April 22, 2015
In the crossfire
Currency crosswinds due to liquidity injection and withdrawal and differing interest rate policies are complicating stock selection
By Mohan Sule
Those who were disappointed that the Union Budget 2015-16 did not produce a Big Bang will find plenty of fodder in the new fiscal to stock up the cannon. The moot question is whether the explosions will light up the landscape or trigger a bush fire. The era of a market throwing up only gainers, with all the stocks across the spectrum turning gold, during a bull phase is perhaps past us. This is because of crosscurrents of monetary policies as each region struggles to tailor the environment to suit local requirement. Even as the US Federal Reserve phased out its bond-buying and is poised to increase interest rates on signs of a recovering economy, the European Central Bank has embarked on a euro1-trillion liquidity infusion to revive confidence in the euro region. China, too, is expected to follow Japan’s example of loose money policy to stem the slowing of its GDP growth. India is on the path of low interest rates and massive infrastructure spending. Unfortunately, the fallout is not confined to the borders. The ripples are felt across the globe in differing magnitude. A prominent casualty of the declining consumption of energy by the euro zone and China is crude oil, which slide below US$50 a barrel at one point. Instead of cheering, most developed countries are worried how to stop the spiral of disinflation. The fallout is a slippery gold, a comfort investment to fend off inflation.
Withdrawal of foreign funds from the emerging markets when yields on US bonds become more attractive than dollar returns from equities could be a blessing as stocks cool down and the rupee weakens. For the Reserve Bank of India, however, this is a recipe for disaster: how to shore up the currency and at the same time keep interest rates low to keep the liquidity tap open. A strong dollar is a prominent manifestation of the complex global scenario. Nothing seems to soften the Teflon currency, even fears of recession in its home market. On the contrary, signs of uncertainty boost the greenback for its safe haven status. The mighty dollar is neutralizing the slide in oil prices for emerging markets. The net result is that neither fuel prices have fallen to the level they should have nor are the wobbly export markets bringing relief. Not surprisingly, the RBI is under increasing pressure to reduce interest rates and thereby let the rupee depreciate further to provide the winning edge to Indian exporters. The prevailing uncertainty has not dampened global markets, which are hitting highs in the belief that the problems in different corners of the world are not insurmountable. After the success of the US Fed, pump-priming is viewed as a solution to all economic ills. This is in contrast to the view last century, when distressed borrowers were bluntly told by multilateral institutions to tighten their belts. The rebellion by Greece and the cold caught by markets around the world subsequently has reconfirmed the premise that the penalty for splurging is injecting more money rather than imposition of fiscal discipline though it was living beyond means that was responsible for the mess in the euro zone.
If the inflows from the US slow down, the floodgates of the euro zone have been thrown open. If China is no longer attractive, there is India, despite no noticeable ground level change in the ease of doing business. The drumbeats heralding the country as the next financial hotspot has already begun, with the ADB and the IMF joining the chorus of various foreign brokers and rating agencies in revising up the growth forecast. Yet no one has been able to assert with any degree of finality that not only foreign money will stay but the inflows will continue in spite of the ramping up of interest rates by the US. As a result, tech stocks roar every time a Fed official reiterates sticking to its roadmap of hiking interest rates from June and falter on weak US job data. In the same way, banks and auto shares’ fortunes fluctuate with the unpredictable consumer price index as the RBI takes one slow step at a time to slash domestic rates. Evergreen FMCG scrips are no longer oases, wilting and blooming with the monsoon’s mood. Pharmaceutical stocks’ health depends on US regulatory approvals and crackdowns. Power and capital goods counters with plenty of potential are yet to share the enthusiasm for Make-in-India due to the overbearing public sector’s influence on their orders and bottom lines but cement companies, projected to be the beneficiaries of government-sponsored low-cost housing and infrastructure projects, race ahead of earnings. No wonder the market is looking like a game of Russian roulette more and more.
By Mohan Sule
Those who were disappointed that the Union Budget 2015-16 did not produce a Big Bang will find plenty of fodder in the new fiscal to stock up the cannon. The moot question is whether the explosions will light up the landscape or trigger a bush fire. The era of a market throwing up only gainers, with all the stocks across the spectrum turning gold, during a bull phase is perhaps past us. This is because of crosscurrents of monetary policies as each region struggles to tailor the environment to suit local requirement. Even as the US Federal Reserve phased out its bond-buying and is poised to increase interest rates on signs of a recovering economy, the European Central Bank has embarked on a euro1-trillion liquidity infusion to revive confidence in the euro region. China, too, is expected to follow Japan’s example of loose money policy to stem the slowing of its GDP growth. India is on the path of low interest rates and massive infrastructure spending. Unfortunately, the fallout is not confined to the borders. The ripples are felt across the globe in differing magnitude. A prominent casualty of the declining consumption of energy by the euro zone and China is crude oil, which slide below US$50 a barrel at one point. Instead of cheering, most developed countries are worried how to stop the spiral of disinflation. The fallout is a slippery gold, a comfort investment to fend off inflation.
Withdrawal of foreign funds from the emerging markets when yields on US bonds become more attractive than dollar returns from equities could be a blessing as stocks cool down and the rupee weakens. For the Reserve Bank of India, however, this is a recipe for disaster: how to shore up the currency and at the same time keep interest rates low to keep the liquidity tap open. A strong dollar is a prominent manifestation of the complex global scenario. Nothing seems to soften the Teflon currency, even fears of recession in its home market. On the contrary, signs of uncertainty boost the greenback for its safe haven status. The mighty dollar is neutralizing the slide in oil prices for emerging markets. The net result is that neither fuel prices have fallen to the level they should have nor are the wobbly export markets bringing relief. Not surprisingly, the RBI is under increasing pressure to reduce interest rates and thereby let the rupee depreciate further to provide the winning edge to Indian exporters. The prevailing uncertainty has not dampened global markets, which are hitting highs in the belief that the problems in different corners of the world are not insurmountable. After the success of the US Fed, pump-priming is viewed as a solution to all economic ills. This is in contrast to the view last century, when distressed borrowers were bluntly told by multilateral institutions to tighten their belts. The rebellion by Greece and the cold caught by markets around the world subsequently has reconfirmed the premise that the penalty for splurging is injecting more money rather than imposition of fiscal discipline though it was living beyond means that was responsible for the mess in the euro zone.
If the inflows from the US slow down, the floodgates of the euro zone have been thrown open. If China is no longer attractive, there is India, despite no noticeable ground level change in the ease of doing business. The drumbeats heralding the country as the next financial hotspot has already begun, with the ADB and the IMF joining the chorus of various foreign brokers and rating agencies in revising up the growth forecast. Yet no one has been able to assert with any degree of finality that not only foreign money will stay but the inflows will continue in spite of the ramping up of interest rates by the US. As a result, tech stocks roar every time a Fed official reiterates sticking to its roadmap of hiking interest rates from June and falter on weak US job data. In the same way, banks and auto shares’ fortunes fluctuate with the unpredictable consumer price index as the RBI takes one slow step at a time to slash domestic rates. Evergreen FMCG scrips are no longer oases, wilting and blooming with the monsoon’s mood. Pharmaceutical stocks’ health depends on US regulatory approvals and crackdowns. Power and capital goods counters with plenty of potential are yet to share the enthusiasm for Make-in-India due to the overbearing public sector’s influence on their orders and bottom lines but cement companies, projected to be the beneficiaries of government-sponsored low-cost housing and infrastructure projects, race ahead of earnings. No wonder the market is looking like a game of Russian roulette more and more.
Wednesday, April 8, 2015
Breaking away
Lessons from the ex-PM's summons, the land bill, the Sebi-Sat spat on DLF and the resistance to the FTIL-NSEL merger
By Mohan Sule
Out-of-season rains is one of the banes a farmer faces in his long journey from tilling his field to reaping the crops and selling them to the government or private distributors. Yet the disruption in pattern underscores the importance of rules, be they made by nature or man. The heat generated over the summons to Manmohan Singh by a Central Bureau of Investigation court in the coal allotment scam demonstrates India's reluctance to break from the past of differential treatment to the rulers and the ruled. Congress president Sonia Gandhi marched to his residence to announce that the entire world knows of the former prime minister's honesty and integrity. The argument offered in his support is that he did not make any money from the process. In the earlier age of innocence, railway ministers were known to resign, owning up moral responsibility for any major train accidents on their watch. Home ministers have been shunted out for terrorist attacks or due to law-and-order situation spinning out of control during their tenure. If bureaucrats can be questioned and a minister and a beneficiary who happened to be a member of parliament could be sent to jail for their roles in the second-generation spectrum allotment case, then surely a former head of the government can appear before a judge. The opportunity should be used by Singh to clear the air if he assigned coal blocks because of his belief in the end use or he was helpless because someone even more powerful than him had a say in the arbitrary allotment.
The outrage instead should be reserved for the action of those who have tried to influence the due course of law by applying covert populist pressure. Thankfully, our judiciary is made of sterner stuff as seen from the woes of Subrata Roy, who was in the habit of issuing full-page ads in the newspapers in response to the Supreme Court's summons in the case filed by the Securities and Exchange Board of India for misappropriating more than Rs 30000 crore of investors' funds. His attempts to try his case in the court of public opinion flopped. The Sahara kingdom provides employment to thousands of people and sponsors sporting events. That, as the firmness of the SC has shown, should not be the criteria for leniently dealing with a law-breaker. Even after a year in jail and employing the best legal eagles, the boss has not been able to raise Rs 10000 crore for bail. The rallying of opposition to the land acquisition bill is similarly an attempt to mislead: it is not so much to ensure fair compensation to farmers as to try to protect Rahul Gandhi's ownership of the Act. As per the consensus of chief ministers, including those ruled by Congress, the law in its present form is not practical. The prime minister noted the fact during the bill's introduction in the budget session of the parliament. Instead of modifying a harebrained legislation, propaganda that the bill is anti-farmer has been whipped out despite spelling out the kind of projects including defense and infrastructure projects in the public sector and education institutions and hospitals in the private sector for which the consent of the land owner will not be acquired, while maintaining the level of compensation.
Along with a country’s development, the level of urbanization increases. Those in agricultural jobs shift to manufacturing because the number of hands required to farm fall due to genetic modification, mechanization and improvement in yield on deployment of pesticides. Many farmers are keen to switch to another profession as their land's productivity decreases over the years. Breakup of families means fragmentation of the land parcel. Not all members might want to continue with farming. The most convincing argument against allowing status quo is that no investment has come in due to this shabby legislation. In the same wayy, there is an urgent need to change the mechanics to resolve regulatory tussles in the capital markets. Sebi banned DLF from issuance of capital for three years for inadequate disclosures in the IPO document seven years ago. The Securities Appellate Tribunal found the punishment harsh. This is not the first time that Sat has overturned the market regulator. This back and forth should be increasingly replaced by consent decrees. The promoters save face but pay monetary fines. Banning fund raising can scotch genuine attempts to turn around the company just as delisting blocks investors' exit route. The disclosure of payment of penalty in the offer document should alert investors as should the fact that a major portion of the revenue of the flagship is derived from a subsidiary with opaque business practices. If the shareholders of the parent can partake in the good times, surely they should be willing to make good the Rs 5600-crore hole in the balance sheet of a wholly-owned subsidiary. The division over the FTIL-NSEL merger should prompt investors to pay attention to consolidated accounts, which provide a window to corporate governance and how revenues are earned or siphoned off.
By Mohan Sule
Out-of-season rains is one of the banes a farmer faces in his long journey from tilling his field to reaping the crops and selling them to the government or private distributors. Yet the disruption in pattern underscores the importance of rules, be they made by nature or man. The heat generated over the summons to Manmohan Singh by a Central Bureau of Investigation court in the coal allotment scam demonstrates India's reluctance to break from the past of differential treatment to the rulers and the ruled. Congress president Sonia Gandhi marched to his residence to announce that the entire world knows of the former prime minister's honesty and integrity. The argument offered in his support is that he did not make any money from the process. In the earlier age of innocence, railway ministers were known to resign, owning up moral responsibility for any major train accidents on their watch. Home ministers have been shunted out for terrorist attacks or due to law-and-order situation spinning out of control during their tenure. If bureaucrats can be questioned and a minister and a beneficiary who happened to be a member of parliament could be sent to jail for their roles in the second-generation spectrum allotment case, then surely a former head of the government can appear before a judge. The opportunity should be used by Singh to clear the air if he assigned coal blocks because of his belief in the end use or he was helpless because someone even more powerful than him had a say in the arbitrary allotment.
The outrage instead should be reserved for the action of those who have tried to influence the due course of law by applying covert populist pressure. Thankfully, our judiciary is made of sterner stuff as seen from the woes of Subrata Roy, who was in the habit of issuing full-page ads in the newspapers in response to the Supreme Court's summons in the case filed by the Securities and Exchange Board of India for misappropriating more than Rs 30000 crore of investors' funds. His attempts to try his case in the court of public opinion flopped. The Sahara kingdom provides employment to thousands of people and sponsors sporting events. That, as the firmness of the SC has shown, should not be the criteria for leniently dealing with a law-breaker. Even after a year in jail and employing the best legal eagles, the boss has not been able to raise Rs 10000 crore for bail. The rallying of opposition to the land acquisition bill is similarly an attempt to mislead: it is not so much to ensure fair compensation to farmers as to try to protect Rahul Gandhi's ownership of the Act. As per the consensus of chief ministers, including those ruled by Congress, the law in its present form is not practical. The prime minister noted the fact during the bill's introduction in the budget session of the parliament. Instead of modifying a harebrained legislation, propaganda that the bill is anti-farmer has been whipped out despite spelling out the kind of projects including defense and infrastructure projects in the public sector and education institutions and hospitals in the private sector for which the consent of the land owner will not be acquired, while maintaining the level of compensation.
Along with a country’s development, the level of urbanization increases. Those in agricultural jobs shift to manufacturing because the number of hands required to farm fall due to genetic modification, mechanization and improvement in yield on deployment of pesticides. Many farmers are keen to switch to another profession as their land's productivity decreases over the years. Breakup of families means fragmentation of the land parcel. Not all members might want to continue with farming. The most convincing argument against allowing status quo is that no investment has come in due to this shabby legislation. In the same wayy, there is an urgent need to change the mechanics to resolve regulatory tussles in the capital markets. Sebi banned DLF from issuance of capital for three years for inadequate disclosures in the IPO document seven years ago. The Securities Appellate Tribunal found the punishment harsh. This is not the first time that Sat has overturned the market regulator. This back and forth should be increasingly replaced by consent decrees. The promoters save face but pay monetary fines. Banning fund raising can scotch genuine attempts to turn around the company just as delisting blocks investors' exit route. The disclosure of payment of penalty in the offer document should alert investors as should the fact that a major portion of the revenue of the flagship is derived from a subsidiary with opaque business practices. If the shareholders of the parent can partake in the good times, surely they should be willing to make good the Rs 5600-crore hole in the balance sheet of a wholly-owned subsidiary. The division over the FTIL-NSEL merger should prompt investors to pay attention to consolidated accounts, which provide a window to corporate governance and how revenues are earned or siphoned off.
Wednesday, March 25, 2015
Lighting a fuse
By Mohan Sule
Ever since the deregulation of the London financial markets by Margaret Thatcher in October 1987, every reform is expected to produce a Big Bang. Following the opening up India’s economy by the P V Narasimha Rao-Manmohan Singh duo in 1991, every budget since then is viewed as a make-or-break occurrence. The urge for lofty deliverables stems from the fact that the country is always in a crisis mode. The causes may vary, ranging from lack of rainfall, runaway public expenditure, galloping inflation to the after-effects of global catastrophes. Consequently, the collective will of the nation imposes on those at the helm mythical powers to bring order to the chaos, not one day at a time but at the stroke of a pen, unmindful that magnificent edifices that can withstand time are built brick by brick. There has to be a reason to undertake destruction to raise a new architecture. Britain was losing its preeminence as a global hub for doing business due to the outcry system for executing trades and fixed brokerage. India was on the verge of default and had to pawn its gold for foreign exchange to meet its import requirement. In present times, the corruption and the populist policies of the UPA government had turned off investors, plunging the currency to a new low. Hence, the hopes of a quick turnaround by those who had lost more than two years of their lives fighting price rise and stagnation had reached unrealistic proportions by the time Narendra Modi ascended to power. The report card so far: the Wholesale Price Index near zero, bidding for natural resources, infra projects on the fast-track, and initiatives such as Make in India, Digital India and Swatch Bharat launched to make India an attractive destination.
If the first budget of the new government in July 2014 was crammed with good intentions like cleaning the Ganga, setting up smart cities, running bullet trains and making India a magnet for religious tourism, this budget’s four cornerstones are financial inclusion, creation of jobs, building up of infrastructure to improve the quality of life, and tax transparency. The approach is to treat the root cause of inequality rather than the symptoms by offering curatives such as subsidies and guaranteed wages for digging holes leading to nowhere. The rural employment scheme has not been abandoned. In fact, the allocation to it has been increased, probably necessitated not only due to wider coverage of road and irrigation projects but also to make up for the deficient rainfall last year, which had led to slump in sales of consumer durables. As such, the pumping of more liquidity in rural areas could act as quantitative easing for FMCG, automobile, cement and steel makers and telecom services providers. An indirect fiscal stimulus will be cash transfers in lieu of subsidies and providing health, medical and pension benefits for a nominal premium. The idea of universal insurance coverage is path breaking like the Jan Dhan Yojna, the universal banking system. Similarly, the intention to bring in a bankruptcy code is a historic development. It will aid in creative destruction and evolution of new opportunities, so vital for a dynamic economy.
Clearly influenced by the role of venture capitalists in nurturing and sustaining Silicon Valley ideas, the Mudra Bank is a concept whose time had come. Despite the inroads by microfinance agencies, unorganized businesses have very few bankable avenues to rely on. The pampering of the poor and the marginalized is not at the expense of big companies. Another game changer is the offer of five 4,000-MW ultra mega power plants, with all clearances in place, to bidders. Other infra projects, usually victims of the crossfire between the industry and environmental ministries, too, can benefit from this novel concept. The scrapping of wealth tax and replacing it with surcharge on the income tax of the super rich will result in better compliance. An important step towards stability of the tax regime is the cut in corporate tax by 5% over four years in return of elimination of tax exemptions and doing away with retrospective taxation. The 2% increase in service tax along with higher freight for coal, cement and steel, will be inflationary in the short term but is a transition to the era of goods and service tax, which is 14%, from April 2016. Besides, GST will replace all other existing Central and state levies. If a realistic roadmap is drawn to nip benami transactions, it will indeed be one more visionary feature of the budget. The stock market, comfortable with cold numbers, appeared confused at a vision statement instead. It need not. The fallout from the budget will gradually gather momentum to create a transformational change in the way we are governed.
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