Tuesday, May 22, 2012

Heads I win, Tails you lose theory of Mutual Funds

"..India's top asset management companies (AMCs) have continued to remain profitable, nomatter whether mutual fund investors made money or not in the tough market conditions. Rather, top players have posted growth in their profitability during financial year 2011-12..." 
I was suspecting this all along and exactly the reason why I hardly ever invest in mutual funds.  To those who solicited my custom (especially the executives at ICICI and HDFC Mutual Funds whom I had to sadly turn down each time they cold call me) I pop the question "will you charge me even if  my portfolio created by you wilts under water...?"  Their reply has always been in the affirmative and that was something that I could never digest. This spurred me on to quit my job and start my own investment management business  with a spunky slogan "...We wouldn't charge you unless we help make enough for yourself..."   I can proudly claim that I'd been keeping up that promise.
All my clients will swear by that, something that helps me effortlessly wean away clients that got creamed by portfolio managers and mutual funds and sincerely hope they keep going down that one way street so that my business is in tact, ethically miles ahead of them...!!!

Why Rupee weakening isn't helping our IT vendors...

That was the question I got from a client yesterday.

Her question wasn't out of place.  A weak Rupee should help Indian exporters as much as it dents our importers.  But she has been constantly hearing a weak Rupee will worsen India's fiscal deficit since it will go to fatten our oil import bill. And she is worried why this double whammy.

IT vendors like Infosys and TCS have negotiated price increases at a time when Rupee was appreciating. Now the trend has reversed, now it's their clients turn to ask for a wind down. Under normal circumstances, it should cancel each other out but it doesn't since 70% of their revenues come from US and Europe where there is a major social, economic and fiscal crisis.  Also the general weakening of demand is felt more in their major bread-winning vertical i.e. Financial Services.

Another reason is, during low demand situations, companies will hedge their revenues to protect their margins by booking forward covers for their forex exposure.  As a result, our IT vendors would have booked these covers (sold Dollars forward) when the Rupee was Rs.44-46 against the Dollar.  Not many would have expected Rupee to weaken so dramatically (20% in 3 months) and throw a spanner in their works.  Now Rupee is weakened to a low of Rs.55 against the Dollar, they are left to lick their wounds.

Nobody said Life is easy, after all.

Wednesday, May 09, 2012

Escorts merger - sleight of hand...?

Kudos to investor activism in Escorts merger...

Let me elucidate it with an easier example.  Let's say I, you and 48 others own a company -XY Farms Ltd.  Imagine I and you hold 5% shares each and 48 others own the remaining 90%.  Some time later,  to help sell the products of the company, we set up a retail store - XY  Retail Pvt. Ltd -  in a nearby city, using the company funds.  In this case, XY Retail is a subsidiary of XY Farms ( Parent Co. or Holding Co.).  As such, I, you and 48 other shareholders have identical interests in both the companies.

A few years later, I and you feel that our shareholding in XY Farms Ltd. is only 10% put together and worry that if a few shareholders from the minority get together, they can throw us out of the management control using their collective voting power far in excess of 10% that I and you hold.. So the option before us is to buy out some of those shareholders and boost our stake in the company.  But what if nobody wants to sell..?

So we storm our brains and come up with an idea. Since XY Retail is a subsidiary of XY Farms, why keep both companies as distinct entities...?  Let's merge the two and run the business of XY Retail as a division of XY Farms instead of as a separate company, with a separate management.  It helps reduce  many functional overlaps in accounting, inventory, sales etc., that consume capital. 

All corporate actions should be seen in the light of how it helps increase the shareholder value.  Here since XY Retail is 100% owned by XY Farms, the parent company need not `pay' any consideration to merge it back with it. Only regulatory approvals need be obtained and accounting entries passed to validate the transaction.

Here is where Escorts Ltd., tried to play foul.  While it seeks to merge its 100% subsidiary with itself, it wants to allot shares as "consideration" to its subsidiary that will eventually merge with itself and cease to exist. And then it wants to transfer those shares (treasury stock) into some company owned Trust, controlled by Trustees that include CFO of the parent company.  This arrangement is a foul since it leaves out the minority shareholders (who are also part owners of the subsidiary and therefore entitled to the proportionate treasury stock) without any say on how to administer the treasury stock. 

Proxy advisory firm IIAS has called the bluff... Let's hope the institutions vote against this proposal in the interest of upholding shareholder democracy.