Investors learn that entry point is crucial, a theme can go out of favor, and identifiable promoters can be a mixed blessing
By Mohan Sule
Do not time the market, investors are repeatedly warned. Yet the gains made by an investor who jumped into the ring after the euphoria generated by the Lok Sabha election results and who entered before the polls would have varied vastly despite the difference of a few days. And, of course, those who invested during the policy paralysis years of 2012 and 2013 would have reaped a bumper harvest compared with the latecomers fired up by the Make-in-India initiative. The market touched a historic high last year but has come off since then. Perhaps investors fishing for stocks late last year, when some of the mid-year optimism had vanished, might earn better return than those who wait end February 2015 for the Budget, which is expected to take another step in reforming the economy and provide a new trigger for the market. If indeed interest rates come down as anticipated, fixed income instruments will lose their luster and there will be no substitute to beat equity to create wealth. The main takeaway of 2014, therefore, is the entry point is crucial for the degree of appreciation. A dramatic change can alter the market’s likes and dislikes. During the UPA rule, companies with promoters close to the ruling dispensation were sought due to their ability to circumvent regulations and influence law makers to write legislation favorable to them.
Nothing symbolised the rampant crony capitalism better than the commodity producers. Their stratospheric valuations partly reflected the hunger for steel, iron, coal, aluminum, and copper in a growing economy and also factored the reality that the high entry barriers in the form of proximity to the ruling elite, passed down from generation to generation, would insulate the domestic sector from any competition. This remained true till the globe was not integrated. After the World Trade Organization’s Marrakesh treaty became effective 1995, the sector’s return ratios started fluctuating in tune with the global cycles of boom and bust instead of displaying a secular trend. Another reason was the increasing court interventions. Cancellation by the Supreme Court of the coal blocks assigned since 1993 has turned the commodity sector a hot potato. With most of the market cap shared by big houses in the private sector and inefficient public sector, investors had to turn to defensives like the domestic-oriented FMCG sector and the outward-looking pharmaceutical makers in 2014. The result was a rise and rise in their valuations in the absence of the next big idea as tech services providers confronted currency volatility and a lukewarm US market and the infrastructure players needed more time for the hazy policy overhang to disperse. So despite the optimism about India’s potential, investors found safety in the known.
However, there can be an exception. The refinery sector was very near to qualify for the honor as even diesel was deregulated, taking advantage of the falling crude oil prices. Though the measure will reduce the government’s subsidy burden and has the capacity to do wonders to India’s fiscal deficit, oil marketing companies are far from being the toast of the economy. Of what good are lower prices if industrial activity slows down, as was evident late in the year? Instead of dimming the attraction, falling gold prices have spurred buying of the metal, but not of related stocks. The increasing imports strained the current account deficit. The joker in the pack in 2014 was the banking sector. How a supposedly bright outlook can numb investors to forget historical performance is clearly on show here. Banks are caught between mounting non-performing loans and the need to disburse credit for industrial activity to pick up. The market believes cut in interest rates, around the corner, is the solution. Besides increase in offtake, there will be treasury income by dint of a portfolio of high coupon debt instruments. Indications of the government reducing its stake to 51% provide comfort that banks will be given the freedom to address shareholders’ concerns. Not surprisingly, beaten-down PSU banks were in demand. This leads to the final lesson. Is an identifiable promoter a good thing? Mukesh Ambani placing his wife and children on the boards of his group companies is taken as a sign of confidence in his businesses and eyebrows are raised when Infosys’s founders sell stake. The travails of the Sahara group, the FTIL group, Kingfisher Airlines and now SpiceJet led market participants to wonder how they got charmed by larger-than-life promoters just as by self-styled investor activists, who have dismissed the losers in the NSEL default crisis as bad investors.
Wednesday, January 14, 2015
Tuesday, December 30, 2014
Forward earning
2014 provided clues if India should cling to the time-tested model of state benevolence or look forward to uncertainty
By Mohan Sule
It is not only investors who face the classic dilemma of choosing between a glorious past and a hazy outlook while zeroing in on a stock In the fading year, even the Grand Old Party had to confront this existential dilemma. Nothing brought the turmoil in sharp focus than the celebration of the 125th birth anniversary of our first prime minister. The giveaway was the jaded overseas dignitaries gracing the occasion as the great man’s great grandson without an iota of charisma of his illustrious lineage gave an angry speech about the angry new rulers of India that was becoming not recognizable day by day from the era of royals dipping into the public coffers to write off loans, subsidize essential items and distribute freebies. In return they got unquestioned loyalty from the common man, believing that remaining poor and deprived was an un-escapable fate, brushing aside any doubts of a cynical ploy to nurture vote bank politics. It was left to the worldwide web to chip at this wall of resistance, tweet by tweet. Acerbic and irreverent, Indians at last found a platform to listen to others’ opinionated voices and give vent to the innermost and often seditious thoughts about the serial scandals of the UPA government. So there was a strange spectacle of the silent troika of mother-son-and-loyal retainer being downgraded to ordinary politicians from their sanctimonious pedestal by a raucous citizenry discovering its new power to effect change. And India took a U turn.
No one understood the power of communication better than the vendor selling hot brew on a railway platform in Gujarat. If an ordinary commodity like tea could be packaged and marketed with the promise of a shakeout from the slumber of pessimism, then surely the country was ready to buy a dream of electricity on tap, smooth roads, low-cost houses and jobs aplenty. The capitalization of the demographic dividend paid off in May, at least for the investors. After the scare of food inflation going out of hand due to below-normal southwest monsoon, the market surged on expectation of bumper earning going forward. Steps to open up to more FDI were seen as transformational, never mind the small issue of retail. The surest sign of a bull market is when tech company incubators switch to dishing out stock tips guised as investor services startups offering clarity on macro mumbo jumbo. Like the mesmerizing babas, some of them now ensconced behind bars after revelation of their human foibles, how many corpses are littered behind the barricade of pay walls built by these Internet investment gurus, with their attention spanning intra-day, will be known only after a Sebi crackdown. Serendipitously, oil prices nearly halved from the peak and the wholesale price index growth dropped to zero by mid December. The taunts of missing-in-action acche din by the opposition soon lost resonance as bond buyers made merry at the expense of a stubborn central bank. Instead the attention of the nation was riveted by celebrities taking the broom for a Swachh Bharat. The Digital India, smart cities and Make-in-India campaigns reverberated around the globe despite no breakthrough on land acquisitions, environmental clearances and labor laws. Yet, the social inclusion program of Jan Dhan Yojana, without a rupee of giveaway, proved to be a smashing success, shutting up the nitpickers, and throwing up the nation’s first Teflon head of the government and second only to the US president of the Good-Morning-America fame.
But every dream has to end. Even after six months of an energized establishment, Corporate India is still awaiting a trickle, leave alone the anticipated gush, of infra orders. The market that seemed unconcerned about the US central bank raising interest rates next year and the resultant slowing of foreign inflows into emerging economies, got panicky on Chinese blues and Russia’s rouble rout and skidded along with the currency. Eruptions in the euro region fuelled anxiety about how oil exporting countries would cope as their revenues shrink. A low-cost airline appeared to be grounded soon after the aborted takeoff a high-cost one. Hardly had one PSU sale flagged off than the market looked poised to upend, raising worries about fiscal deficit, on the mend due to the commodity price crash, if the divestment target is not met and if the exercise is jinxed. Once coveted, then becoming a laughing stock, the global turbulence hinted of a comeback of gold as a safe haven just as the dollar was post-2008 credit crunch. Why stocks are tumbling despite low inflation and loss-making digital businesses getting cash infusion, while offline entities are not sure if the primary market will be enticed by historical performance, perhaps answers the question nagging investors whether to cling to the past or look forward to an uncertain future.
By Mohan Sule
It is not only investors who face the classic dilemma of choosing between a glorious past and a hazy outlook while zeroing in on a stock In the fading year, even the Grand Old Party had to confront this existential dilemma. Nothing brought the turmoil in sharp focus than the celebration of the 125th birth anniversary of our first prime minister. The giveaway was the jaded overseas dignitaries gracing the occasion as the great man’s great grandson without an iota of charisma of his illustrious lineage gave an angry speech about the angry new rulers of India that was becoming not recognizable day by day from the era of royals dipping into the public coffers to write off loans, subsidize essential items and distribute freebies. In return they got unquestioned loyalty from the common man, believing that remaining poor and deprived was an un-escapable fate, brushing aside any doubts of a cynical ploy to nurture vote bank politics. It was left to the worldwide web to chip at this wall of resistance, tweet by tweet. Acerbic and irreverent, Indians at last found a platform to listen to others’ opinionated voices and give vent to the innermost and often seditious thoughts about the serial scandals of the UPA government. So there was a strange spectacle of the silent troika of mother-son-and-loyal retainer being downgraded to ordinary politicians from their sanctimonious pedestal by a raucous citizenry discovering its new power to effect change. And India took a U turn.
No one understood the power of communication better than the vendor selling hot brew on a railway platform in Gujarat. If an ordinary commodity like tea could be packaged and marketed with the promise of a shakeout from the slumber of pessimism, then surely the country was ready to buy a dream of electricity on tap, smooth roads, low-cost houses and jobs aplenty. The capitalization of the demographic dividend paid off in May, at least for the investors. After the scare of food inflation going out of hand due to below-normal southwest monsoon, the market surged on expectation of bumper earning going forward. Steps to open up to more FDI were seen as transformational, never mind the small issue of retail. The surest sign of a bull market is when tech company incubators switch to dishing out stock tips guised as investor services startups offering clarity on macro mumbo jumbo. Like the mesmerizing babas, some of them now ensconced behind bars after revelation of their human foibles, how many corpses are littered behind the barricade of pay walls built by these Internet investment gurus, with their attention spanning intra-day, will be known only after a Sebi crackdown. Serendipitously, oil prices nearly halved from the peak and the wholesale price index growth dropped to zero by mid December. The taunts of missing-in-action acche din by the opposition soon lost resonance as bond buyers made merry at the expense of a stubborn central bank. Instead the attention of the nation was riveted by celebrities taking the broom for a Swachh Bharat. The Digital India, smart cities and Make-in-India campaigns reverberated around the globe despite no breakthrough on land acquisitions, environmental clearances and labor laws. Yet, the social inclusion program of Jan Dhan Yojana, without a rupee of giveaway, proved to be a smashing success, shutting up the nitpickers, and throwing up the nation’s first Teflon head of the government and second only to the US president of the Good-Morning-America fame.
But every dream has to end. Even after six months of an energized establishment, Corporate India is still awaiting a trickle, leave alone the anticipated gush, of infra orders. The market that seemed unconcerned about the US central bank raising interest rates next year and the resultant slowing of foreign inflows into emerging economies, got panicky on Chinese blues and Russia’s rouble rout and skidded along with the currency. Eruptions in the euro region fuelled anxiety about how oil exporting countries would cope as their revenues shrink. A low-cost airline appeared to be grounded soon after the aborted takeoff a high-cost one. Hardly had one PSU sale flagged off than the market looked poised to upend, raising worries about fiscal deficit, on the mend due to the commodity price crash, if the divestment target is not met and if the exercise is jinxed. Once coveted, then becoming a laughing stock, the global turbulence hinted of a comeback of gold as a safe haven just as the dollar was post-2008 credit crunch. Why stocks are tumbling despite low inflation and loss-making digital businesses getting cash infusion, while offline entities are not sure if the primary market will be enticed by historical performance, perhaps answers the question nagging investors whether to cling to the past or look forward to an uncertain future.
Tuesday, December 2, 2014
Botched up
Regulators, companies and investment bankers have to share the blame for the crumbling of M&A deals
By Mohan Sule
Besides injecting life into the primary market, a bull market triggers mergers and acquisitions. After a demand slump, companies dust off plans to expand to capture the buoyant economic mood. Most primary market offerings are to raise funds for organic growth. Friendly and hostile takeovers cut short the incubation period of a grassroots venture. For investors, both routes offer exciting opportunities for wealth creation. A reasonably valued public offering gives ample scope for appreciation on listing as well as a few years later. The inorganic route provides an exit window for the shareholders of a weak prey or an entry into a strong company. The market is happy that cash is being utilized by the predator-company to grow its share, helping improve the return ratios. Yet there is a downside, too. There could be a sudden change in the business environment and delays in execution. A target that seemed apt could prove to be a cumbersome burden due to difficulties in enmeshing different work cultures. Depletion of reserves would mean insufficient spare change to exploit new trends. In addition to all these obstacles, some new problems have cropped up going by a few recent cases. Take the unraveling of the Rs 700-crore Bharti Airtel-Loop deal. Bharti would have consolidated its leadership position in the telecom space, with the Mumbai-based services provider’s three-crore subscriber base. Users of the struggling Loop would have got better services. Despite the obvious advantages, the agreement failed to get regulatory approval. The hitch? Loss of revenue to the Department of Telecommunications as Loop subscribers would be ported to Airtel numbers without paying the mandatory Rs 19 fee.
During the wait, Loop’s subscribers dwindled to 1.2 lakh. Bharti’s stock ended the day of the announcement with a loss of nearly 3%. Loop’s licence is set to expire end November and DoT might not get the Rs 800 crore that the services provider owes it. This is not the first time that Bharti’s shareholders have seen a botched up acquisition. India’s largest telecom company by subscribers gave up the idea of taking over MTN in September 2009 as the South African government wanted India to permit dual listing. This would have allowed sharing of revenue and profit by the two. The cash-cum-stock deal gave Bharti a 49% stake in MTN in return for the latter getting a 36% economic interest in the Indian carrier. However, the Reserve Bank of India refused to concede as the arrangement implied capital account convertibility. So the US$24-billion alliance that would have created the world’s fourth largest telcom services provider covering 24 countries with 200 million subscribers crumbled after eight months of complex negotiations. Trading in the MTN stock had to be suspended for the day by the Johannesburg Stock Exchange after slumping more than 5% on hearing the news. These two cases do not show regulators in a positive light. Many times, the market throws up new situations. Regulators have to act speedily and find a via media till the guidelines are amended to reflect reality.
DoT and the RBI could have shown some flexibility. Bharti could have been told to deposit the portability charges with the regulator till the resolution of the issue and the RBI could have asked Bharti to invest the profit share of MTN in India for the time being. Apart from the regulators, the eagerness of companies to grab opportunities to expand market share without reading the fine print is disturbing. Apollo Tyres’s $2.5-billion (Rs14400-crore) deal to acquire Cooper Tire was called off after the US tyre maker sought judicial intervention to expeditiously close the merger. The Indian company termed Cooper’s decision as “inexplicable” and “a diversionary smokescreen, an unfortunate acknowledgement” of the inability to meet the obligations necessary to complete the transaction. These instances of ambition and impatience overtaking prudence demostrate sloppy due-diligence by investment bankers. The Sahara-Jet Airways acrimony over the deal price after the merger took effect and the bitter experience of Daiichi Sankyo following the takeover of Ranbaxy illustrate that inorganic growth is much as a risk factor as a wealth multiplier. The shareholders of Apollo were saved from a bigger disaster had the Cooper acquisition gone through. Ranbaxy shareholders were bought out at a hefty premium by the Japanese drug maker. Those that remained found a new parent in Sun Pharma. Not everyone is so fortunate. May be the regulator should insist that acquirers contribute a certain percentage of the deal amount to an escrow account with a three-year lock-in to compensate for the loss in market value due to costly missteps.
By Mohan Sule
Besides injecting life into the primary market, a bull market triggers mergers and acquisitions. After a demand slump, companies dust off plans to expand to capture the buoyant economic mood. Most primary market offerings are to raise funds for organic growth. Friendly and hostile takeovers cut short the incubation period of a grassroots venture. For investors, both routes offer exciting opportunities for wealth creation. A reasonably valued public offering gives ample scope for appreciation on listing as well as a few years later. The inorganic route provides an exit window for the shareholders of a weak prey or an entry into a strong company. The market is happy that cash is being utilized by the predator-company to grow its share, helping improve the return ratios. Yet there is a downside, too. There could be a sudden change in the business environment and delays in execution. A target that seemed apt could prove to be a cumbersome burden due to difficulties in enmeshing different work cultures. Depletion of reserves would mean insufficient spare change to exploit new trends. In addition to all these obstacles, some new problems have cropped up going by a few recent cases. Take the unraveling of the Rs 700-crore Bharti Airtel-Loop deal. Bharti would have consolidated its leadership position in the telecom space, with the Mumbai-based services provider’s three-crore subscriber base. Users of the struggling Loop would have got better services. Despite the obvious advantages, the agreement failed to get regulatory approval. The hitch? Loss of revenue to the Department of Telecommunications as Loop subscribers would be ported to Airtel numbers without paying the mandatory Rs 19 fee.
During the wait, Loop’s subscribers dwindled to 1.2 lakh. Bharti’s stock ended the day of the announcement with a loss of nearly 3%. Loop’s licence is set to expire end November and DoT might not get the Rs 800 crore that the services provider owes it. This is not the first time that Bharti’s shareholders have seen a botched up acquisition. India’s largest telecom company by subscribers gave up the idea of taking over MTN in September 2009 as the South African government wanted India to permit dual listing. This would have allowed sharing of revenue and profit by the two. The cash-cum-stock deal gave Bharti a 49% stake in MTN in return for the latter getting a 36% economic interest in the Indian carrier. However, the Reserve Bank of India refused to concede as the arrangement implied capital account convertibility. So the US$24-billion alliance that would have created the world’s fourth largest telcom services provider covering 24 countries with 200 million subscribers crumbled after eight months of complex negotiations. Trading in the MTN stock had to be suspended for the day by the Johannesburg Stock Exchange after slumping more than 5% on hearing the news. These two cases do not show regulators in a positive light. Many times, the market throws up new situations. Regulators have to act speedily and find a via media till the guidelines are amended to reflect reality.
DoT and the RBI could have shown some flexibility. Bharti could have been told to deposit the portability charges with the regulator till the resolution of the issue and the RBI could have asked Bharti to invest the profit share of MTN in India for the time being. Apart from the regulators, the eagerness of companies to grab opportunities to expand market share without reading the fine print is disturbing. Apollo Tyres’s $2.5-billion (Rs14400-crore) deal to acquire Cooper Tire was called off after the US tyre maker sought judicial intervention to expeditiously close the merger. The Indian company termed Cooper’s decision as “inexplicable” and “a diversionary smokescreen, an unfortunate acknowledgement” of the inability to meet the obligations necessary to complete the transaction. These instances of ambition and impatience overtaking prudence demostrate sloppy due-diligence by investment bankers. The Sahara-Jet Airways acrimony over the deal price after the merger took effect and the bitter experience of Daiichi Sankyo following the takeover of Ranbaxy illustrate that inorganic growth is much as a risk factor as a wealth multiplier. The shareholders of Apollo were saved from a bigger disaster had the Cooper acquisition gone through. Ranbaxy shareholders were bought out at a hefty premium by the Japanese drug maker. Those that remained found a new parent in Sun Pharma. Not everyone is so fortunate. May be the regulator should insist that acquirers contribute a certain percentage of the deal amount to an escrow account with a three-year lock-in to compensate for the loss in market value due to costly missteps.
Wednesday, November 19, 2014
Mixed signals
The NDA government is caught between the need for market- oriented reforms and desire to fulfill social obligations
By Mohan Sule
There is growing impatience among foreign investors at the slow pace of reforms in India. Many assumed that Prime Minister Narendra Modi would undertake some radical steps to attract investments after assuming charge end May 2014. Perhaps they had not listened carefully. In his address to the new MPs of his party, he had wondered: If the government does not take care of the poor, who will? In the euphoria of the defeat of the corrupt UPA II government, the market chose to be selective in its understanding about the flexibility of the government in carrying out reforms. The issue is if reforms should be in one sweep or in installments. Diesel pricing has been deregulated but not LPG. The Big Bang reforms of Margaret Thatcher in 1986 transformed London into a global financial hub but also triggered criticism in the aftermath of the collapse of Lehman Brothers in September 2008 that banks embarked on risks not proportionate to their capital adequacy. The P V Narasimha Rao regime in India launched the most comprehensive restructuring exercise India had ever seen. The impact on the economy was equivalent to nationalization of banks and abolition of privy purses. In the era of coalition politics that followed, there was lack of consensus on how much to open up but not on the reforms process. Instability at the Centre, with successive governments lasting for a few months and even days, the foreign exchange crisis that tamed the SouthEast AsiaTigers, and the dotcom bust at the turn of the century ensured that policy makers did not have to do much to discourage foreign inflows. The 2012 verdict of the Supreme Court calling the January 2008 distribution of 122 licences for 2G spectrum on the basis of the first to comply with the conditions as “arbitrary” and “unconstitutional” and the recent cancellation of all coal blocks save four allocated since 1993 was a wakeup call.
The adverse fallout of the telecom scam was the policy paralysis for the remaining two years of the UPA II government. The positive outcome is that the activism of the apex court has given rise to the debate on the best possible way to dispose of natural resources. So far, the rulers had used their discretionary powers to reward cronies. There is a welcome realization that this method discourages entrepreneurship, thereby blocking the creation of jobs as well as innovation, so necessary for growth. At the same time, there is acknowledgement that auctioning, though transparent and fair, does not benefit the end users as the government tries to keep the base price high so as not be criticized later for selling the family silver cheaply. Winners try to recoup their investment through high pricing. Also, it fosters status quo. Only those with established deep pockets are in a position to tap the emerging opportunities. The 3G spectrum auction in 2010 saw participation of only seven private bidders. There were a mere five players bidding for just 102 of the 140 blocks in the GSM band in 2013. In fact, the presence of a large number of players in the 2G space earlier had resulted in fierce competition, leading to low voice usage rates. The outcome was deeper penetration of mobile services. After the shakeout, tariffs are once again on the rise. Service providers are happy but not consumers, who are facing less choice.
The decision to keep prices of coal controlled and Coal India intact, while auctioning the cancelled blocks for captive consumption, too, signals a cautious appoach. This could perhaps be to avoid trouble from trade unions on the eve of elections in Jharkand, which has the highest coals reserves in the country. The message is the government views PSUs as a vehicle to ensure cheap goods and services to poor. This is contradiction to Modi’s declaration in the US that the government has no business to be in business. The power generation sector is an example of half-baked reforms. Generators can produce power but pricing is subject to the regulator’s approval. Yet, they have to import coal at market-oriented rates as CIL is unable to meet demand. The government intends to lower its stake in PSU banks to 51% but wants them to be at the forefront of social programmes such as Jan Dhan Yojana, which is a high-cost operation due to the zero-balance requirement. This social outreach will make borrowers happy but not their shareholders just like those of CIL. Should investors stay with PSUs? With the example of the benign neglect of Air India following the entry of private operators and rising NPAs of PSUs even as private banks are proving to be nimble, investors would not be wrong to fear erosion in the value of their holding as the sectors in which state-owned enterprises are monopolies are thrown open to competition.
By Mohan Sule
There is growing impatience among foreign investors at the slow pace of reforms in India. Many assumed that Prime Minister Narendra Modi would undertake some radical steps to attract investments after assuming charge end May 2014. Perhaps they had not listened carefully. In his address to the new MPs of his party, he had wondered: If the government does not take care of the poor, who will? In the euphoria of the defeat of the corrupt UPA II government, the market chose to be selective in its understanding about the flexibility of the government in carrying out reforms. The issue is if reforms should be in one sweep or in installments. Diesel pricing has been deregulated but not LPG. The Big Bang reforms of Margaret Thatcher in 1986 transformed London into a global financial hub but also triggered criticism in the aftermath of the collapse of Lehman Brothers in September 2008 that banks embarked on risks not proportionate to their capital adequacy. The P V Narasimha Rao regime in India launched the most comprehensive restructuring exercise India had ever seen. The impact on the economy was equivalent to nationalization of banks and abolition of privy purses. In the era of coalition politics that followed, there was lack of consensus on how much to open up but not on the reforms process. Instability at the Centre, with successive governments lasting for a few months and even days, the foreign exchange crisis that tamed the SouthEast AsiaTigers, and the dotcom bust at the turn of the century ensured that policy makers did not have to do much to discourage foreign inflows. The 2012 verdict of the Supreme Court calling the January 2008 distribution of 122 licences for 2G spectrum on the basis of the first to comply with the conditions as “arbitrary” and “unconstitutional” and the recent cancellation of all coal blocks save four allocated since 1993 was a wakeup call.
The adverse fallout of the telecom scam was the policy paralysis for the remaining two years of the UPA II government. The positive outcome is that the activism of the apex court has given rise to the debate on the best possible way to dispose of natural resources. So far, the rulers had used their discretionary powers to reward cronies. There is a welcome realization that this method discourages entrepreneurship, thereby blocking the creation of jobs as well as innovation, so necessary for growth. At the same time, there is acknowledgement that auctioning, though transparent and fair, does not benefit the end users as the government tries to keep the base price high so as not be criticized later for selling the family silver cheaply. Winners try to recoup their investment through high pricing. Also, it fosters status quo. Only those with established deep pockets are in a position to tap the emerging opportunities. The 3G spectrum auction in 2010 saw participation of only seven private bidders. There were a mere five players bidding for just 102 of the 140 blocks in the GSM band in 2013. In fact, the presence of a large number of players in the 2G space earlier had resulted in fierce competition, leading to low voice usage rates. The outcome was deeper penetration of mobile services. After the shakeout, tariffs are once again on the rise. Service providers are happy but not consumers, who are facing less choice.
The decision to keep prices of coal controlled and Coal India intact, while auctioning the cancelled blocks for captive consumption, too, signals a cautious appoach. This could perhaps be to avoid trouble from trade unions on the eve of elections in Jharkand, which has the highest coals reserves in the country. The message is the government views PSUs as a vehicle to ensure cheap goods and services to poor. This is contradiction to Modi’s declaration in the US that the government has no business to be in business. The power generation sector is an example of half-baked reforms. Generators can produce power but pricing is subject to the regulator’s approval. Yet, they have to import coal at market-oriented rates as CIL is unable to meet demand. The government intends to lower its stake in PSU banks to 51% but wants them to be at the forefront of social programmes such as Jan Dhan Yojana, which is a high-cost operation due to the zero-balance requirement. This social outreach will make borrowers happy but not their shareholders just like those of CIL. Should investors stay with PSUs? With the example of the benign neglect of Air India following the entry of private operators and rising NPAs of PSUs even as private banks are proving to be nimble, investors would not be wrong to fear erosion in the value of their holding as the sectors in which state-owned enterprises are monopolies are thrown open to competition.
Thursday, November 6, 2014
Big deals
Strategies adopted by issuers of capital and e-commerce sites
to attract buyers have many similarities
By Mohan Sule
Very few companies can claim to earn US$100 million (Rs 600 crore) in 10 hours. The success becomes even more noteworthy if the entity has been in existence for slightly more than a half-a-dozen years. There have been instances of trailblazing companies burning out later, particular in the telecom, aviation and consumer durables space. The reasons include inability to manage the sudden growth, going off the course with wrong calls or the consumers losing attention and latching on to the next promising idea. Therefore, the latest phenomenon of user-visits bringing an e-commerce site to a standstill due to the inability to cope up with the rush, not surprisingly, has triggered opposing views. On one side are those who feel vindicated that India is taking to e-ecommerce rapidly, with falling prices of smart phones and charges for data downloading fueling the habit. The other argument is that the novelty factor of online shopping could wear out soon. Technical glitches and complaints about pricing are signs of buyers’ disappointment and disillusionment. Both opinions, nonetheless, signal that there is much in common in the way companies woo consumers and investors. The first is that it is not necessary to think out of the box to set the cash register ringing. The practice of offering hefty discounts is not new. Several business-to-consumer companies do it all the time. Law enforcing agencies have had to be called to control crowds at huge sales organised on national holidays. In the US, buyers queue up in freezing winter to rush in at midnight to grab goods of throwaway prices on Black Friday, which flags off the Christmas shopping season. What is required is packaging and marketing. The surest way for issuers of capital to create a buzz is by placement of shares with qualified institutional investors on the eve of primary-market debut. Presence of big-ticket investors is taken as a confirmation that the company is on the right track.
The second similarity is the value-for-money offers. Many offline outlets have protested that often items are sold online at less than the landed cost of imports. Pricing becomes a deciding factor during a slowdown. Reasonably priced IPOs have succeeded even in a dull market. Getting the pricing correct means issuers do not have to depend schemes such as safety nets and market making to pull in subscribers. It is important for digital malls to stay away from tricks such as bumping up prices and undertake a token gesture of slashing them later. A distinguishing feature between two companies in an industry is the degree of confidence that they can instill in the stakeholders. Consumers come to equate quality and after-sales service with the brand. Those with transparent corporate governance practices will find it easy to raise funds at attractive valuations in the market. At the same time, adventurism can prove fatal. E-supermarkets in the US are accused of deploying algorithms to alter prices depending on the visitor’s shopping history, which reflects their purchasing power. Indian companies diversifying into unrelated areas such as aviation and telecom have had to suffer massive erosion in value. Window-dressing of accounts, changing accounting policy and reluctance to share setbacks with investors have also cost companies dearly.
Earmarking special days is also an exercise in brand building. This is observed in the capital market, too. Stocks tend to go up on the eve of board meetings called to mull corporate actions. Listed companies have to utilise cash prudently, either capitalising it through a bonus issue or funneling it for capex, to communicate to the market that the company is in good health. Discounting also reveals if a company is relying on volumes to gain share. Many of them have to turn to debt or dilute capital to crank up production without any buffer for a slowdown. The market rewards those with a good operating profit margin. Companies have to streamline processes to make and sell products with a minimal mark-up or convince investors that the premium justifies the outlook. The success of big-deal days also implies that sellers have to create opportunities. Commodity producers, in particular, have to protect from cyclical downturns by widening the customer base. Asset-light stocks are preferred during slowdowns. Another important inference is that there can be different classes of consumers for the same product. Small investors are in for the long haul and are concerned about dividend payout, while institutional investors would look for capital appreciation. Balancing the different pulls of the market is indeed a tough call for companies looking for buyers of goods and equity.
to attract buyers have many similarities
By Mohan Sule
Very few companies can claim to earn US$100 million (Rs 600 crore) in 10 hours. The success becomes even more noteworthy if the entity has been in existence for slightly more than a half-a-dozen years. There have been instances of trailblazing companies burning out later, particular in the telecom, aviation and consumer durables space. The reasons include inability to manage the sudden growth, going off the course with wrong calls or the consumers losing attention and latching on to the next promising idea. Therefore, the latest phenomenon of user-visits bringing an e-commerce site to a standstill due to the inability to cope up with the rush, not surprisingly, has triggered opposing views. On one side are those who feel vindicated that India is taking to e-ecommerce rapidly, with falling prices of smart phones and charges for data downloading fueling the habit. The other argument is that the novelty factor of online shopping could wear out soon. Technical glitches and complaints about pricing are signs of buyers’ disappointment and disillusionment. Both opinions, nonetheless, signal that there is much in common in the way companies woo consumers and investors. The first is that it is not necessary to think out of the box to set the cash register ringing. The practice of offering hefty discounts is not new. Several business-to-consumer companies do it all the time. Law enforcing agencies have had to be called to control crowds at huge sales organised on national holidays. In the US, buyers queue up in freezing winter to rush in at midnight to grab goods of throwaway prices on Black Friday, which flags off the Christmas shopping season. What is required is packaging and marketing. The surest way for issuers of capital to create a buzz is by placement of shares with qualified institutional investors on the eve of primary-market debut. Presence of big-ticket investors is taken as a confirmation that the company is on the right track.
The second similarity is the value-for-money offers. Many offline outlets have protested that often items are sold online at less than the landed cost of imports. Pricing becomes a deciding factor during a slowdown. Reasonably priced IPOs have succeeded even in a dull market. Getting the pricing correct means issuers do not have to depend schemes such as safety nets and market making to pull in subscribers. It is important for digital malls to stay away from tricks such as bumping up prices and undertake a token gesture of slashing them later. A distinguishing feature between two companies in an industry is the degree of confidence that they can instill in the stakeholders. Consumers come to equate quality and after-sales service with the brand. Those with transparent corporate governance practices will find it easy to raise funds at attractive valuations in the market. At the same time, adventurism can prove fatal. E-supermarkets in the US are accused of deploying algorithms to alter prices depending on the visitor’s shopping history, which reflects their purchasing power. Indian companies diversifying into unrelated areas such as aviation and telecom have had to suffer massive erosion in value. Window-dressing of accounts, changing accounting policy and reluctance to share setbacks with investors have also cost companies dearly.
Earmarking special days is also an exercise in brand building. This is observed in the capital market, too. Stocks tend to go up on the eve of board meetings called to mull corporate actions. Listed companies have to utilise cash prudently, either capitalising it through a bonus issue or funneling it for capex, to communicate to the market that the company is in good health. Discounting also reveals if a company is relying on volumes to gain share. Many of them have to turn to debt or dilute capital to crank up production without any buffer for a slowdown. The market rewards those with a good operating profit margin. Companies have to streamline processes to make and sell products with a minimal mark-up or convince investors that the premium justifies the outlook. The success of big-deal days also implies that sellers have to create opportunities. Commodity producers, in particular, have to protect from cyclical downturns by widening the customer base. Asset-light stocks are preferred during slowdowns. Another important inference is that there can be different classes of consumers for the same product. Small investors are in for the long haul and are concerned about dividend payout, while institutional investors would look for capital appreciation. Balancing the different pulls of the market is indeed a tough call for companies looking for buyers of goods and equity.
Monday, October 27, 2014
Building confidence
Eliminating the trust deficit between government and industry and companies and investors cannot be selective
By Mohan Sule
While flagging off the Make-in-India curtain raiser, Prime Minister Narendra Modi rightly said there is a trust deficit in the country. For the common man, the government is a pervasive and obstructive force, with rules and regulations. For the government, there is a radical lurking round the corner, trying to circumvent authority. The various regulatory bodies empowered with oversight powers would become redundant if companies were to become transparent. Users would not face quality issues or deficient services. Consumers of injectibles and capsules would not be puzzled over the silence of the domestic watchdog even as some of our topnotch pharmaceutical companies are targeted by the US Food and Drug Administration. Investors would not become agitated over commodity producers diverting a hefty amount as royalty to the holding company or MNC associates to their parents irrespective of the bottom line and asset management companies charging a fixed fee without any link to performance. Indian shareholders would not view with scepticism PSU banks for whom social obligations override business sense, with loan writeoffs encompassing the small borrower to the mighty industrialist having the right connections. Imagine how easy life would be if everyone filed correct returns. An entire industry devoted to monitoring tax payers would be rendered jobless.
Modi needs to be credited for not singling out any section of the society for the state of affairs unlike the previous socialist regimes, which blamed the business community for profiteering and keeping the country in a perpetual state of poverty. Yet the remark threw up four ironies. The first was unsaid but understood. The prominent casualty of the lack of confidence between industry and government is manufacturing. The problem of joblessness cannot be solved by software companies alone. No wonder, the prime minister’s preferred composition of growth is equitable contribution of the three segments of the economy: agriculture, manufacturing and services. This is at odds with the traditional understanding that, as the country develops, the share of services overtakes farm and brick-and-mortar output. The second takeout is that investors have to be wooed with the attraction of quick clearance and stable taxation in spite of the advantages of democracy, demographic dividend and demand. Crony capitalism, unfortunately, has not only drained the country’s resources but also clogged the investment pipeline. The Supreme Court’s judgment cancelling all but four coal blocks allotted since 1993 is an opportunity to clear the cobwebs of entrenched interests. Clear-cut policies on awarding contracts, straightening of ambiguous tax laws that are open to interpretation, ensuring an import taxation structure that is fair to producers of raw materials, intermediates as well as end products, and eliminating the role of middlemen by switching over to e-commerce could perhaps encourage fair business practices.
The third contradiction became apparent during Modi’s US tour. Apart from the issue of liability of nuclear plants, the other thorny issue was protection of intellectual property rights. Besides the tech and entertainment industries, global drug producers face billions of dollars of lost revenue due to copy cats in India. The government’s crackdown on spurious products or even infringement of patents in the local market has been half-hearted so far due to the desire to keep medicine prices low. A sign of the changing times is the stripping of the National Pharmaceutical Pricing Authority from capping prices of non-essentials on the eve of the prime minister’s departure to the US. The fourth dissonance cropped up during Modi’s speech to the United Nations General Assembly, when he exhorted members not to distinguish between good and bad terrorism, not realizing that he had laid himself open to similar criticism by branding FDI in retail as inimical to the country’s mom-and-pop shops while welcoming it in Railways and defence. Protecting one segment of the business comes at the expense of another: farmers, who would get better pricing and a captive market. Better storage and distribution would contribute to lowering of food inflation. The consumer durables industry is an examples of Indian players being swamped by foreign competition yet receiving hardly any sympathy from the policy makers. If employment creation is the focus, it would be better achieved by large malls rather than family-run holes in the wall. Similarly, issuers are able to raise funds quickly by providing privileged access to institutional investors. However, by ignoring the small investors, these companies are blocking the exit routes of these big-ticket investors.
By Mohan Sule
While flagging off the Make-in-India curtain raiser, Prime Minister Narendra Modi rightly said there is a trust deficit in the country. For the common man, the government is a pervasive and obstructive force, with rules and regulations. For the government, there is a radical lurking round the corner, trying to circumvent authority. The various regulatory bodies empowered with oversight powers would become redundant if companies were to become transparent. Users would not face quality issues or deficient services. Consumers of injectibles and capsules would not be puzzled over the silence of the domestic watchdog even as some of our topnotch pharmaceutical companies are targeted by the US Food and Drug Administration. Investors would not become agitated over commodity producers diverting a hefty amount as royalty to the holding company or MNC associates to their parents irrespective of the bottom line and asset management companies charging a fixed fee without any link to performance. Indian shareholders would not view with scepticism PSU banks for whom social obligations override business sense, with loan writeoffs encompassing the small borrower to the mighty industrialist having the right connections. Imagine how easy life would be if everyone filed correct returns. An entire industry devoted to monitoring tax payers would be rendered jobless.
Modi needs to be credited for not singling out any section of the society for the state of affairs unlike the previous socialist regimes, which blamed the business community for profiteering and keeping the country in a perpetual state of poverty. Yet the remark threw up four ironies. The first was unsaid but understood. The prominent casualty of the lack of confidence between industry and government is manufacturing. The problem of joblessness cannot be solved by software companies alone. No wonder, the prime minister’s preferred composition of growth is equitable contribution of the three segments of the economy: agriculture, manufacturing and services. This is at odds with the traditional understanding that, as the country develops, the share of services overtakes farm and brick-and-mortar output. The second takeout is that investors have to be wooed with the attraction of quick clearance and stable taxation in spite of the advantages of democracy, demographic dividend and demand. Crony capitalism, unfortunately, has not only drained the country’s resources but also clogged the investment pipeline. The Supreme Court’s judgment cancelling all but four coal blocks allotted since 1993 is an opportunity to clear the cobwebs of entrenched interests. Clear-cut policies on awarding contracts, straightening of ambiguous tax laws that are open to interpretation, ensuring an import taxation structure that is fair to producers of raw materials, intermediates as well as end products, and eliminating the role of middlemen by switching over to e-commerce could perhaps encourage fair business practices.
The third contradiction became apparent during Modi’s US tour. Apart from the issue of liability of nuclear plants, the other thorny issue was protection of intellectual property rights. Besides the tech and entertainment industries, global drug producers face billions of dollars of lost revenue due to copy cats in India. The government’s crackdown on spurious products or even infringement of patents in the local market has been half-hearted so far due to the desire to keep medicine prices low. A sign of the changing times is the stripping of the National Pharmaceutical Pricing Authority from capping prices of non-essentials on the eve of the prime minister’s departure to the US. The fourth dissonance cropped up during Modi’s speech to the United Nations General Assembly, when he exhorted members not to distinguish between good and bad terrorism, not realizing that he had laid himself open to similar criticism by branding FDI in retail as inimical to the country’s mom-and-pop shops while welcoming it in Railways and defence. Protecting one segment of the business comes at the expense of another: farmers, who would get better pricing and a captive market. Better storage and distribution would contribute to lowering of food inflation. The consumer durables industry is an examples of Indian players being swamped by foreign competition yet receiving hardly any sympathy from the policy makers. If employment creation is the focus, it would be better achieved by large malls rather than family-run holes in the wall. Similarly, issuers are able to raise funds quickly by providing privileged access to institutional investors. However, by ignoring the small investors, these companies are blocking the exit routes of these big-ticket investors.
Wednesday, October 8, 2014
The chaos theory
The safe-haven status of the dollar and food inflation in India have disrupted linkages between stocks and currency
By Mohan Sule
Once upon a time not far ago, there was a perfect world. The prosperity at the beginning of this century did not come out of the blue but was the result of different stages of evolution. Opportunity for a better life mutated into greed and transcended into lust. A dot transformed into a decimal, bloating into a balloon. Eventually, there was a bust. It took a few years for rays of hope to pierce the gloom that enveloped the globe, which had become closely entwined. Parts of a machine were produced in different corners and assembled in another location and sold someplace else. There was no false sense of nationalism. Instead the race was to build on the core strengths of demography, technology and market. For instance, an exporter of back-office services could be a voracious consumer of fast foods and luxury labels. A nuts-and-bolts hub of the world could have insatiable appetite for commodities. Money was cheap and plenty and sloshed around wherever it was needed. It looked like good times were here forever. Alas, it was not to be. Once again, living beyond means got the better of a prudent lifestyle. Money ran out even as debt piled up. The monetary earthquake shook the foundations of blue-chipped institutions. Some crumbled into dust. September 2008 was the turning point for the financial history of the world just as BC and AD are pegs to chart the age of the globe. A pre-Lehman Brothers has become a lexicon to conjure images of debauchery. It has become a marker for future generations to know that the world would never be the same again.
Going by textbooks, low interest rates encourage risk-taking. The US stock market is hitting record highs on near-bottom interest rates. But instead of plummeting because the US Federal Reserve still doubts the strength of the economic recovery and refuses to raise interest rates, the Dow Jones continues to surge. The picture in India is the reverse. Stocks are sprinting despite high cost of money. Reserve Bank of India Governor Raghuram Rajan has warned of outflow from India on a US bounce-back. The question that will arise on this possibility is: will the S&P 500 benchmark retreat because of competition from debt? And, in such a situation, will the RBI remain on course of lowering interest rates once food inflation falls? The interesting takeout is that India’s central bank will have to second-guess the Fed rather than follow a course dictated by India’s economic indicators. So there could be a strange paradox of the US playing by the rule book of keeping interest rates down to trigger growth and India’s central bank refraining from lowering interest rates on fear of exit of foreign money. The burden of preventing a major disruption in the market will be on the Indian government by ensuring that foreign investors earn return in excess of that back home. Take the comeback of bank stocks despite high non-performing loans. The market is re-rating them in the belief credit offtake will increase as thrust sectors such as infrastructure will have to rely on debt to fund capital expenditure. On the other side, a bubbly stock market is enabling highly-leveraged companies to become light by raising equity to retire debt.
Another lesson that has turned topsy-turvy is that the strength of the currency reflects the economy. Despite near-recessionary condition, the US dollar continues to rule. The acquisition of a safe-haven status means a bear attack drives investors to hoard the greenback and so also a bull-run. The Indian currency, confirming to textbook behavior, turned weak during the slump. Yet it also exhibits a contrary trend. High interest rates should bolster the rupee. Instead, a strong dollar is keeping it suppressed as also RBI’s mop-up from the market to fend of repercussions of any stampede. Now the question is will the rupee depreciate further if interest rates are pared? The Indian currency should gain due to the resultant acceleration in foreign investment on growth prospects getting a boost. If this does not fox traditionalists, then the recent phenomenon of narrowing trade deficit should. Growing imports signal industrial acitivity. A soft rupee, therefore, should widen the gap as India’s imports, particularly those of energy (US$ 450 million in FY 2014), exceed exports (US$ 312 million). Ironically, the chasm is shrinking because of squeeze in gold imports and cooling of oil prices despite tensions in the Middle East. The cause is the slowdown in China, whose FDI hit a four-year low in August. In fact, China, a major exporter of cheap goods, should be cranking up its wheels with consumption in the US poised to look up. Meanwhile, rising food intake, rather than the growing hunger for oil, on the back of economic expansion is keeping consumer inflation afloat in India. Indeed these crosscurrents are the new challenges for central banks and governments as age-old equations are giving way to a new chaotic order.
By Mohan Sule
Once upon a time not far ago, there was a perfect world. The prosperity at the beginning of this century did not come out of the blue but was the result of different stages of evolution. Opportunity for a better life mutated into greed and transcended into lust. A dot transformed into a decimal, bloating into a balloon. Eventually, there was a bust. It took a few years for rays of hope to pierce the gloom that enveloped the globe, which had become closely entwined. Parts of a machine were produced in different corners and assembled in another location and sold someplace else. There was no false sense of nationalism. Instead the race was to build on the core strengths of demography, technology and market. For instance, an exporter of back-office services could be a voracious consumer of fast foods and luxury labels. A nuts-and-bolts hub of the world could have insatiable appetite for commodities. Money was cheap and plenty and sloshed around wherever it was needed. It looked like good times were here forever. Alas, it was not to be. Once again, living beyond means got the better of a prudent lifestyle. Money ran out even as debt piled up. The monetary earthquake shook the foundations of blue-chipped institutions. Some crumbled into dust. September 2008 was the turning point for the financial history of the world just as BC and AD are pegs to chart the age of the globe. A pre-Lehman Brothers has become a lexicon to conjure images of debauchery. It has become a marker for future generations to know that the world would never be the same again.
Going by textbooks, low interest rates encourage risk-taking. The US stock market is hitting record highs on near-bottom interest rates. But instead of plummeting because the US Federal Reserve still doubts the strength of the economic recovery and refuses to raise interest rates, the Dow Jones continues to surge. The picture in India is the reverse. Stocks are sprinting despite high cost of money. Reserve Bank of India Governor Raghuram Rajan has warned of outflow from India on a US bounce-back. The question that will arise on this possibility is: will the S&P 500 benchmark retreat because of competition from debt? And, in such a situation, will the RBI remain on course of lowering interest rates once food inflation falls? The interesting takeout is that India’s central bank will have to second-guess the Fed rather than follow a course dictated by India’s economic indicators. So there could be a strange paradox of the US playing by the rule book of keeping interest rates down to trigger growth and India’s central bank refraining from lowering interest rates on fear of exit of foreign money. The burden of preventing a major disruption in the market will be on the Indian government by ensuring that foreign investors earn return in excess of that back home. Take the comeback of bank stocks despite high non-performing loans. The market is re-rating them in the belief credit offtake will increase as thrust sectors such as infrastructure will have to rely on debt to fund capital expenditure. On the other side, a bubbly stock market is enabling highly-leveraged companies to become light by raising equity to retire debt.
Another lesson that has turned topsy-turvy is that the strength of the currency reflects the economy. Despite near-recessionary condition, the US dollar continues to rule. The acquisition of a safe-haven status means a bear attack drives investors to hoard the greenback and so also a bull-run. The Indian currency, confirming to textbook behavior, turned weak during the slump. Yet it also exhibits a contrary trend. High interest rates should bolster the rupee. Instead, a strong dollar is keeping it suppressed as also RBI’s mop-up from the market to fend of repercussions of any stampede. Now the question is will the rupee depreciate further if interest rates are pared? The Indian currency should gain due to the resultant acceleration in foreign investment on growth prospects getting a boost. If this does not fox traditionalists, then the recent phenomenon of narrowing trade deficit should. Growing imports signal industrial acitivity. A soft rupee, therefore, should widen the gap as India’s imports, particularly those of energy (US$ 450 million in FY 2014), exceed exports (US$ 312 million). Ironically, the chasm is shrinking because of squeeze in gold imports and cooling of oil prices despite tensions in the Middle East. The cause is the slowdown in China, whose FDI hit a four-year low in August. In fact, China, a major exporter of cheap goods, should be cranking up its wheels with consumption in the US poised to look up. Meanwhile, rising food intake, rather than the growing hunger for oil, on the back of economic expansion is keeping consumer inflation afloat in India. Indeed these crosscurrents are the new challenges for central banks and governments as age-old equations are giving way to a new chaotic order.
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