Thursday, November 29, 2007

Corporate Governance...? Mr.Damodaran, you must be kidding...

Remember Swaraj Paul…? The raider that stalked companies like Escorts and DCM in 1983…? It has indeed been the first such event that shook up the staid Indian promoters from their slumber, made them review their marginal holdings and think up defenses including issue of warrants.

Now Lord Paul’s then broker, Harish Bhasin is back in the game. He has taken the CLB route, alleging that the promoters of DCM Shriram Industries Ltd. are issuing warrants to themselves at (Rs.52) steep discounts without offering them to other shareholders. Each warrant entitles the holder to buy 3 equity shares. The advantage for the promoters is that they can just remit 10% of the price of the warrants and pay the rest over 18 months. If they find the share prices have zoomed, they will happily subscribe to the warrants at the earlier discounted price. ( Scope for raising debt to pay the remaining 90% by pledging the warrants that are in-the-money is easy, especially in these ultra liquidity times.) If they don’t, they just let the offer lapse. Is this corporate governance, Mr.SEBI chief…?

Mr.Bhasin, eyeing the huge land bank the company has at various locations, have challenged this and has come up with an Open offer to other shareholders (at Rs.70/-). This had prompted DCM promoters to react by raising the warrant prices (to Rs.90/-) by 75% at once (and extending subscription period by another 18 months, of course), meaning their still exists tremendous upside to the stock’s intrinsic value. Here's HB's latest counter offer (at Rs.120/-). The game is heating up... Given the fact that sugar industry is facing a mix of bad fortunes (supply glut, state administered prices, cane costs are higher than market price of sugar etc.), the stock prices have slipped a lot and what best time to shore up and consolidate? They know, bad times don’t last forever and for sugar, it's lasted long enough…

Dear Mr.Damodaran, if you are serious about enforcing corporate governance, let SEBI focus on the warrants game. That’s where there’s no transparency. The promoters issue warrants after passing a resolution u/s 81(1A) of the Companies Act, 1956 (notice that year…good lord !) which is a farce. Hardly 1% of the shareholders (in numbers) attend AGM and even postal ballots, nobody bothers to mail in. That’s clearly not working. I have a suggestion. Make it compulsory for warrant holders to pay up 50% of the issue price of warrants upfront and shrink the overlay period from 18 months to just 3 months. This would let in only serious players to take this route and will not permit share price arbitrage game.

Dear shareholders, I’ve been telling you guys to buy sugar stocks, now. Sugar business is cyclical and it’s on the cheap now. Most of the sugar mills carry large swathes of land that could be sold / developed in the current real estate boom. From hereon, I can see only upside for sugar industry since all things that can get worse, already has.
Warren Buffet said, when others are fearful, you be greedy. In sugar stocks, you've a good reason to be greedy. Buy it. Buy it all… It’s not lost on you, just yet… Why let only promoters or a takeover raiders to make a killing? It'll be too late once the raid is launched. Be there, before the event....Will ya...? (Full disclosure : I and my family hold KCP Sugar Industries shares).
[Update : Reader Dnyanesh has sent this link to an excellent article by Anil Singhvi on corporate governance. Thanks Dnyanesh.... Hat Tip !]

Wednesday, November 28, 2007

CCI - another legless joke?

Ok. So the Competition Act is here.

The Act says any company with assets of Rs 10 billion ($253 M) or more and a turnover of Rs 30 billion ($759 M) or more has to seek CCI approval for any “combination” (merger, acquisition or amalgamation) within 30 days of signing the deal.

Any company of a smaller size that belongs to a group with assets of Rs 40 billion ($1 billion) or a turnover of Rs 120 billion ( $3 billion) will have to go through the same process if it decides on an M&A.

Given that there are about 341 companies exceeding that asset limit and 106 companies meeting the sales cut-off, imagine the kind of paperwork that it implies ! What will CCI make of it all? Going through the pile of papers in itself will take months, then it has to digest and debate it internally before giving its verdict. What kind of database it has to make an informed judgment on whether a particular transaction will result in market dominance or will smother competition? Rely on the data provided by the applicant? Has it got another choice?

To me, it sounds like a charade. If you are serious about promoting competition and destroying anti-competitive moves by the big players that seek to consolidate, first establish a reliable network of market intelligence and set up a database. I don’t mean people coming on deputation from Ministry of Law, Justice and Company Affairs or Ministry of Commerce or retired judges sticking their legs into the grave. They will infect it with the bribe culture – the only thing they did all their lives. Those are couch potatoes. Hire CEO material, real caliber, people with stuff. Pay them well. Sniff out monopolies even if they exist by any other name or in splinter, disparate groups. When you find one, bring them to book, break it up. That’s how you control monopolies.

Tuesday, November 27, 2007

Marking up on earnings guidance

In the US, increasingly companies are doing away with earnings guidance. The volatile times for business, a crashing dollar, market uncertainties, growing competition makes it increasingly difficult for CEOs to come up with reliable earnings forecasts.

The difficulty of predicting earnings accurately, for example, can lead to the often painful result of missing quarterly forecasts. That, in turn, can be a powerful incentive for management to focus excessive attention on the short term; to sacrifice longer-term, value-creating investments in favor of short-term results; and, in some cases, to manage earnings inappropriately from quarter to quarter to create the illusion of stability.

Instead of providing frequent earnings guidance, companies can help the market to understand their business, the underlying value drivers, the expected business climate, and their strategy—in short, to understand their long-term health as well as their short-term performance. Analysts and investors would then be better equipped to forecast the financial performance of these companies and to reach conclusions about their value.

Do you think the benefits of earnings guidance justify devoting precious management attention…?

Would you buy the GDP?

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

Those arguments always make me feel this is one indicator that can’t be trusted at all. My work life has taken me to some of our Government market intelligence gathering departments and I would put their data collection methods, at best, as archaic. There’s no way that one can vouch the veracity of the data they had collected through dubious means (sending a query card to a few upcountry wholesalers and accepting whatever they fill in) and generating reports on the basis of such data. When these reports form the basis of computing GDP numbers, you know how reliable that could be.

We all know bulk of India’s property transactions go under-reported if not unreported forcing even the Government to acknowledge it. Is the world so short of talented mathematicians, statisticians and economists that they can’t suggest an alternative? I fret because central banks set/reset interest rates on the back of these numbers and put out inflation rates that form the basis for reining in or letting loose money supply, DCF analysis in major M&A deals etc.

Anyone has a better idea…?

Monday, November 26, 2007

On my other blogs

All go-rhythmic

Detroit would love this
That sinking feeling
Look who is shorting the dollar

Tech trends and business ideas

Now how do you counter that?
Looks like UN meeting
A phone is a phone is a phone
Shedding P in API

Angel 4 Angels

Get a load of “The New Normal”
Are you sure?
Early Stage Boards

Saturday, November 24, 2007

But they are exporting it all…

Kerala based PSU Hindustan Latex (HLL) today became the world's largest condom manufacturer with the commissioning of a new plant that boasts of an annual production capacity of 1 billion condoms.

The company, which posted a turnover of Rs 2.44 billion and a net profit of Rs 195 million during the past year, exports condoms to over 70 countries around the world. Exports revenue stood at over Rs 270 million during 2006-07. The company aims to boost its turnover become a Rs 10 billion company by year 2010.

Look, they are exporting it all while our guys don't get enough to wrap around while they're goin' in... Now you know why we are 1.1 billion and counting !!!

Tuesday, November 20, 2007

It's like yesterday once more...

Remember that sweet song by carpenters "it's yesterday once more"?....
Most of my leads come from my friends in Investment Banking circles. I guess it’s got to do with their internal policies that do not allow cold calling. Freelancers like me are always game if there’s a deal at the other end, we’ll only be too happy to go the extra mile and kick some butt. The deal eventually will flow to those who gave me the lead and I get paid for the lead conversion into a paying client. Cool.

A couple of weeks back I got a whiff of Subhash Chandra’s ICL developing cracks and is hurriedly looking for Private Equity infusion. I couldn’t believe what I heard. ICL is a nascent concept, has a good format that when priced optimally will give BCCI a run for the money. Where did they screw up?

Today I find, ICL has been facing trouble raising team, ground and on-air sponsorships with several companies – Bisleri and Axis Bank among them – pulling out. As a result, ICL hasn't yet been able to sign any sponsorship deals yet. But for God’s sake, why can’t ICL host its matches from say, Australia or England and beam it into Asian subcontinent…? It can beat BCCI wrath and win the sponsors as well…can’t it? ICL stands a better chance of roping in overseas brands as well…

Subhash Chandra, in the past has had mixed luck. He had hit it off with Zee TV, Citi Cable and slightly off track Essel Packaging but failed in a slew of ambitious ventures like Agrani Satellite program after poaching a few scientists from ISRO. Those were my early days in the business and were almost open source case studies. They gave me some early perspectives into big business that no B-School faculty could ever have imbibed.

I might thank all those experiences for bringing me to where I stand now. It saved me that gouge of a B-School fee in the process…. :)

Thursday, November 15, 2007

Who wants to change...?

Read this.
Don’t you notice how patient, caring, open and honest our politicians and bureaucrats at RBI and MoF are with this guy, Raghuram Rajan, Finance professor at U/Chicago and till recently, Chief Economist at IMF, despite his absolutely horrible and utterly embarrassing behavior?

Haven’t we heard it – what’s-wrong-with-Indian economy rant – before from others that matter? Jagdish Bhagwati, Amartya Sen and almost every Indian/India born personality that had the view from 30,000 miles up have talked about it. But have we ever changed? Nah… That’s how we maintain our culture and heritage, even at the cost of growth.

We don’t need these guys to tell us how to do things right. We know it all. We are so broad minded that we ask for and accept all in-the-face rip-ins and heed none. That’s our magnanimity, you know. If America is land of the free, we are a land of free-for-all. We would invite people the moment they become famous, occupy the highest seat of a global institution or a corporation and seek out their opinion. How proactive, you see? They come, shower their views, present it all in a platter and we archive them all – religiously. That means it can be opened only on auspicious occasions, after an elaborate puja and tuck it back in to retrieve it only in another auspicious year and hour.

Execution…? Forget it. That’s none of our business. Who wants to rectify the situation and restore the natural order of the universe… Not us, at least…

Here's my wish list, your honor...

This is friggin' great. Courts tell the state of U.P to go to hell and directs sugar mills to pay Rs.110/- per quintal. The state wanted the mills to pay Rs.125/- per quintal to the cane farmers when in the open market, the finished product was going for Rs.85/-. Some respite this.

I have an idea. Why not put up my own wish list… The courts can take it up suo motu

a) Allow 50% ethanol doping and allow the mills to make it directly from sugar cane (no need to produce sugar and then ethanol). Besides reducing consumption of fossil fuel, it would make us least dependent on crude oil that’s tipping at $100 a barrel. Who wants to be an oil slave? (I’ve bought sugar stocks cheap; I want to make some money, goddammit !)

b) Impose sectoral rotation of stocks to be bought by FIIs and domestic MFs. Give other stocks a fuckin’ chance to run up. (Not just Reliance, Infrastructure, Banks and power stocks. I forgot to buy them.) Give an order that says something like, “no stock should run up by more than 25% unless at least 50% of the stocks arranged in the order of their market cap catches up”. [One more time I read about the Ambani wealth, I’ll choke to death; I hold tech, auto components and sugar stocks and the fuckin’ scrips stay frozen like Ice sheets on the poles! Rate of global warming is too slow at least for me…)

c) Long term capital gains tax can never be reimposed [until I book my profits that is. Go tax wherever I don’t have an interest in. All my investments are long term (by default, stupid !)]

d) If Rupee appreciates any further, there should be a blackout and all satellite links should be automatically down. Allow people to exit investments in technology stocks before the currency trading screens light up. [I need a cell phone alert during the trading hours the day before, bokay?]

e) My mother tells me, onion prices are way up. Take a look at that too. Do something about it.

That’s my wish list for this week, your honor… Will you oblige…? Namaste Ji...!

Wednesday, November 14, 2007

GSM lottery for landline operators

News – GSM add 5.7 million users in October. Competition says "Congratulations" - and they mean it.

How about putting up some cell infrastructure and attending to call drops…? If they don’t do that soon, the mass user buildup will soon lead to a windfall for landline operators like BSNL / MTNL. This will be that odd instance when wireline telcos feel happy even as mobile competition notches up number of subscribers.

I’ve had a pretty bad experience throughout last week. None of my upcountry calls went through. Finally I made it through my wireline phone. I am sure this is the experience for most others too.

Get your act together GSM guys… Otherwise all those stratosphering valuation numbers you’ve notched would just be vapor in no time…! Can you afford that…?

Tuesday, November 13, 2007

"Debt is bad". You must be nuts...

Just saw this report. It says Indians seem to be living beyond their means. We are fast absorbing a consumerist culture and debt isn’t stigmatic to us no longer. Not at all surprising given the Airport congestions, upsurge in the number of cars, traffic problem and parking pains. Everyone is in debt to have everything.

At first, my instincts prodded me to shrug it off. It being a survey sponsored in part by an Insurance company, the findings will have to be something like this to instill fear, a sense of financial insecurity, in the minds of people so that they flock en masse to buy more insurance.

But if it were to be true, I will shudder.

Sunday, November 11, 2007

Got answers, thank you Ravi...

Ravimohan hits it on the head…. Here he kind of answers my question (that ended my previous post) “where are we going wrong or is it just me?”

“Therein lies the fragility in our growth story. Given rapid increase in demand, and the slower response to capacity in select yet vital sectors, asset prices have now become unattractive and, in some cases, limiting. Real estate, as an example, is seriously over-priced. It is taking housing out of the reach of a large section of population and is making business, especially in the services industry, uncompetitive to be conducted from major centres in India. The crumbling city infrastructure is adding to the urban population’s woes by presenting a paradox of inhuman living conditions at a world-class premium.”
Thank you, Ravi...

Cloven left off the centre

I hate being a killjoy but every once in a while I have no choice. The stock market surge that India has been witnessing of late, the frequent babble of decoupling and *this time it’s different* theory graven in stone notwithstanding, there are the hundreds of millions that are left out of it all.

Here are two disparate reports I found this morning that tempted me to make this post.

According to the Economic and Hiring Outlook survey by McKinsey for the latest quarter, 77% Indian business executives said they think the economy would get ‘better’ in six months. This is the highest for the executives from any other region including China, Europe, North America and other Asia-Pacific nations.

And then, this. India ranks way down at 96 among 119 developing countries included in the Global Hunger Index (GHI) compiled by IFPRI. This rank is well below all its neighbours, barring Bangladesh, and falls in the category in which the hunger situation is deemed “alarming”. Even Nepal is four notches higher than India at number 92 and Pakistan eight points above India at number 88.

So where does that leave us? Cloven right down the middle? Oops, I can’t say that just yet, since business executives that feel buoyant about India form less than 3% of our 1.1 billion population. It’s slit far left off the centre, one could say. I too am perplexed like any average Indian (“what the hell’s going on?”), feeling totally left out of the so-called joy ride that so few that I-don’t-know-who got to enjoy. Who are those few? Past few months run on the stock markets were so very narrow, restricted to just a few stocks from Reliance group, Power and Infrastructure pack. Breadth of the market has just been the width of the screen and the quarterly numbers have been so good for several stocks that never saw the limelight.

Where are we going wrong or is it just me? Something’s gotta’ give… soon !

Friday, November 09, 2007

Getting religion

“Money’s something you need in case you don't die tomorrow” – could soon be the credo with startups in India. Looking at the relative unease between VCs and startups, the mutual booing of shortcomings that each of them sees in the other’s process, there’s hardly the evidence of the ecosystem thriving. Skepticism is writ large on their wall (ah, the `wall’ thing is because of FaceBook!).

Here’s one from a startup entrepreneur - "Many VCs in India are still not strategic partners, but more like moneylenders who make start-ups perform with a gun to the head. The proprietary attitude they bring to the incubatee's premises is not encouraging.
When it comes to money, everybody's of the same religion I guess.