SATYAM is up for grabs, pal

Ok. Enough is said about SATYAM COMPUTERS in the last one week. I come straight to the point. Dice begins to roll on who gets to buy SATYAM now that it is a sitting duck for a strategic investor / a PE raider. Want proof? Check out the huge volume of 90 million shares changing hands in the Indian stock exchanges (NSE and BSE) even as we still have a good 2 hours of trading left!!

I stuck my neck out and wanted a piece of action. Bought some SATYAM stock today. Here is some perspective on the India Offshoring scenario that I checked out before buying it. Feels good, buddy... the stock is already up by 5% from the price I bought...

So....I am already in-the-money :-) on my SATYAM buy of this morning. Aren't you too?

.

See how they squeal

I was at the Reuters India Investment Summit last week. The usual suspects were in full attendance – Akhil Gupta of Blackstone, K.V.Kamat, ICICI Bank, Manisha Girotra of UBS besides some irregulars like Arun Shourie of BJP, Arvind Virmani the chief economic adviser to MoF, Suresh Senapati of Wipro, G.V.Prasad of Dr.Reddy’s etc.

Here is the report from ET. I tuned my ears to Akhil Gupta of Blackstone who wanted more policy freedom as it was facilitating “crooks” and not strategists. He found support from the investment fraternity as well. "The flow price rule is a stumbling block," said Vedika Bhandarkar, of JPMorgan. "In a falling market like India, if you have a six month rule you can't do a deal. That rule, we expect to be relaxed soon."

I allowed myself a smirk. Aren’t these the same guys that clamored for the rule to stay when prices were soaring? They enjoyed the flow price rule and were valuing on the basis of last 6 months average price and forcing company management to accept it because the regulations said so. Now when the prices have caved in, it hurts them. Now Akhil Gupta worries the rules favor a crook, while he goofed up on his choice of investment in Gokaldas exports and (Ushodaya enterprises that went see-saw) the like. Blackstone, Gupta’s employer is famous for big time goofing up. Remember their $36 billion acquisition of Equity Office Properties Trust from Sam Zell way back in Nov.2006 when mortgage prices were peaking? In less than a year, they realized their blunder and started stripping it off its priced assets. But its CEO Stephen Schwarzman smartly went public and cashed out before the serial guffaw took its toll on his personal holdings. And Gupta is squealing about crooks outside!

.

Mr.Bernard Shaw has been perceptive

"If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience" – George Bernard Shaw

So I read Sandeep Singhal, MD, Nexus India Capital ( PE fund) and Pankaj Dhandaria, Director, Transaction Advisory of E&Y, reaffirming India as an attractive Investment destination for PE funds as it has robust financial, legal and regulatory framework, mature markets and although moderated, still being reckoned as a growth economy. The long-term perspects of funds, with 7-10 year lock-ins, is aligned with India’s medium- to long-term growth potential. So isn't it time for all the old rhetoric to make a comeback? You bet -on india’s long term prospects, an aspirational young population, the entrepreneurial spirit, resilience, perseverance and innovativeness of Indian promoters that promises great returns to patient PE investors or so it begins to go.

So I ask, why did they run away…? Have something changed in between…?

Pankaj argues Indian infrastructure and Industrials offer great opportunity since there are several projects now reasonably valued, yet to achieve financial closure. They all need capital.

So it’s been always… They found it so and that’s why they came here… What made them dump it all and run…?

.
According to Bain & Co, a consultancy, private equity funds invested a total of $1.4bn in 2006, and $3.6bn last year. However, in the year to date aggregate, Pipe investments have totalled $1.4bn.

.
They had better recognize the problem is with the PE investor mindset. Especially the foreign ones. They chased projects madly when valuations were ridiculously high, deals I thought should never happen, happened. But they haggle for downside protection and guaranteed returns now when demand has slumped and a recession looms. I hear them say as FT quotes it “Private equity firms will no longer invest in straight public equity. If we do these investments, we want some kind of structured protection.” Here’s another from Sri Rajan, Head - PE practice, Bain & Co, India: “Given the current investment climate, the existing Pipe model has lost favor among private equity funds operating in India. Understandably, firms are now looking to invest in ways that offer them downside protection.”

.
O.k, some late wisdom that. It dawns only when PE investments go deep under water (Blackstone’s $165 M in Gokaldas Exports now down by 51%, it's $150 M exposure in Nagarjuna Construction is down by 69%). So is PIPE investments made by Warburg Pincus, Apax Partners and General Atlantic. Recently one of my clients in infrastructure space sought a valuation of 15x multiple (it used to be valued at 35x earlier which it felt was too low), the PE fund didn’t budge. They insisted the project be valued at 5x. But when market had been at its peak and PE multiples of 50x were offered for companies yet to find as much as a name, they hardly batted an eyelid and emptied their coffers.

.
So it’s a strange kind of logic, PE investors follow. [Mr. Bernard Shaw has been perceptive, ain’t he?]. Blame it on their B-Schools and chill out...
.

"Hire, but sterilize"

Ok. So the global financial meltdown offers a very good opportunity for Indian Investment Banks and Brokerages to poach back talent from global peers.

As the hirers seem to reason, the investment bankers with global experience could win some bulk institutional clients for their masters and will be adept at selling exotic derivative instruments etc. as they have a better understanding of such products.

But hey, wait a minute… Is it not the same tribe that brought their clients (and Masters) down by inventing toxic `Yen Carry’, `MBS’, `CDO’ and `CLO’s that finally did them in? Who will want a re-run...?

.

So I mangle the old signature phrase Ron Reagan used while warming upto Soviet Union - "Trust, but verify"..... I go "hire, but sterilize"

.

No more band-aid; Need bold fixes

Just got back after a vacation to Mussoorie hills for over a week. Had a great time driving around the hills and eating choicest Punjabi, Tibetan, Chinese and South Indian food. It had been more of a `getaway’ - unless someone truly wanted to witness the market mayhem.

Now back to work. The first thing that strikes me in the morning is the now almost daily paean from Mint Street. They have done it several times in the recent past. Tell me – does it really matter?

If RBI is serious about liquidity reinfusion, it should by now have realized that the cuts of 50 basis points or 100 bps are loose change in these times of massive financial drought. Cash flows of businesses are fast drying up; the ones that have cash to spend are fearful of counter party risk. No one is trusting the other. There is no real economic exchange.

So I have a one line agenda for this crucial Monday meet, if it is meant to be that – facilitate Economic Exchange. Let's call it EE.

If the meet were ever to yield a positive outcome, it has to be by way of drastic measures. I for one think post cut repo rate at 7.5% is still a bomb. It has to be around 5% levels so that banks that borrow can make some meaningful credit forward. Why do I say this? I am glad my bank deposits earn me 11% if I park it in my mother’s (a senior citizen) name, but I am equally wary that the bank has fewer avenues to deploy that high cost money. How many takers will lift credit at rates higher than 14% (assuming that bank will have an administrative cost of 2% leaving it a margin of just 1%)? If ever they do, what business will earn still higher return so that they are able to pay it back to the bank? So I worry about the sustainability of that higher return that I get before moving on to worry about the probability of retrieving my capital.

So this is what I suggest to D.Subbarao, RBI guv. He shouldn’t just stop at cutting rates, he should inspire the banks to lower their lending rates and deliver EE. Money flow has to resume. Liquidity is the current that can drive the economy forward. We’ve all experienced it during the bull years April 2003 – Sept 2007 and we know the difference now. I would even go FM and SEBI should be infected by RBI’s bold moves. It should leave the doors open for every serious investor to walk in with his money and do business on our markets. That's EE for you. Short term measures and band-aid type fits and starts don’t mean much in these hellish times.

.

How about tax exemptions for equity investments for the next two years? Cut Dividend distribution tax? Lower income tax rates leaving more money in the hands of the investors? Think on these lines and surprise us on Tuesday morning bozzos... and see the markets giving a thumps up to that ;-)

.

Sack all our economists and refund all my taxes

Life isn’t getting any easier for us in India. Try telling me we’re living in one of the fastest growing emerging economies. This blog has been particularly skeptical of the inflation figures (7.82%) put out by our economists, promptly echoed in parliament by Finance Minister. All in a country headed by a veteran economist Dr.Manmhoan Singh. Now The Economist – may not be the last word, but is one journal that carries some shred of credibility amongst its vast reader base spread across the world – stands by me as it says "delays in data collection in India can mean big revisions to inflation... The latest wholesale price rate inflation rate might therefore be pushed up to 9-10 per cent," reports Business Standard.

There is no dearth for basic computing skills in India. India is a net exporter of IT services. Still our data collection methods are so archaic, full of holes and make believe. Could it be intentional to avoid being grilled in parliament by opposition benches? Or worse, do they believe what they say?

Hardly does it bode well in a country where 70% of people’s savings are through state run savings such as Provident Funds, Savings Bank, Term deposits, Post Office MIS yielding 8% returns. And a 10% inflation means they lose 2% of their savings with every passing year. In India, prices are rising much faster partly because food accounts for a bigger chunk of our Consumer Price Index and so the hit is felt way below the belt more by the poor millions. Banning futures trading in several commodities may help cap inflation and public rant. But letting prices rise is a far better way to reward farmers than waiving loans of $16 billion owed by the rich among them to the banks.

The least the government can do is, I repeat, refund all my taxes. Last thing I want is my money going to enrich another loan dodging farmer :-)

.

How to get LBOs in...?

Remember how we buy homes taking the mortgage route? We spot a good house, negotiate with the seller, lock the deal down by paying some token advance and finance the deal by mortgaging that property. Simple enough? But ever tried buying a company that way? No, you can't in India. After all, companies have a steady cashflow, substantial assets and if sellers are willing, why should regulators say No? Perplexed?

The regulations bar you from mortgaging the assets of the target company to buy it. Their interpretation - the company can’t raise debt pledging assets that it *wants to* buy. Ok, fair enough. It's like seeking to use your credit card to pay its past dues. What if a foreign company floats a specific SPV to do this acquisition? Can that SPV raise debt to buy the assets of this Indian company? The answer is NO again. Here the reason is foreign companies should bring in fresh capital from abroad to pay Indian sellers. I think this rules were drafted at a time when the country badly needed foreign exchange. Today, we are in a surplus situation. Should this law stand? Indian companies are permitted to borrow from domestic banks for purchasing equity in foreign JVs, wholly-owned subsidiaries and other companies as strategic investments. Indian companies also have the option of funding overseas acquisitions through ECBs. Recently they’ve been allowed to invest up to 4 times their networth abroad.

So what are the typical buyout structures that are allowed? Gaurav Taneja of E&Y says -

a) Foreign holding company – raises the debt overseas for acquiring the Indian company. The hurdle is the assets are in India and may not be allowed to be collateralized against the foreign debt. Another area is exchange rate. The loan is in foreign currency but the earnings are in Indian Rupees. Adverse movements in exchange rates can kill.

b) Asset buyout structure – Foreign buyer floats an Indian arm and injects equity and debt, sufficient enough to finance the asset by asset buyout of Indian companies. There could be issues of stamp duty and VAT but the major hurdle here is it works best only in a 100% buyout situation. Not in a partial acquisition of majority controlling stake.

But I suggest it is a far better alternative than using own equity by companies to buy other companies. At a time when costs of borrowing overseas are going up, we must put our vast forex resources to good use by allowing LBOs in India. Imagine some of the world’s best companies operating from Indian soil! I think that would be wonderful. Exxon, Shell, GM, Chysler, Harvard, Stanford – what if these companies/Institutions were subs of Indian companies/Institutions? In fact, their assets are a much more valuable than that of the borrower. A safe bet for the banks to lend.

So, SEBI – you’ve pretty little time left to get your act right. Play it wise. Anyway you are not extremely bothered about Food Stock or inflation. At lease work with the government and be a flexible, understanding and practical regulator.

.

Why PEs are benign in India

So as I read the views of lawyers, I-bankers and consulting firms, I am convinced that the PE has dug its roots deeply into Indian soil. More importantly, why they are not the usual monsters they are feared to be elsewhere.

Some astonishing numbers before we go further. PE firms numbering 255 at the last count have pumped in over $25 billion into Indian companies over the last four years, with around $17.5 billion being invested in last 15 months in 487 companies. Their nominees fill the boards of over 1000 companies in India now. So far their growing clout has not been perceived as that of a wild beast (remember the book "barbarians at the gate" on KKR-RJR Nabisco deal?) as they’ve been monikered in the west. Perhaps they’ve just been careful or are saying to themselves “it’s a long road. Let’s not get a flat tire early on”.

But I see a few other reasons why PE firms are benign in India –

a) PE buyouts abroad were characterized by high leveraging (raising huge debts on target company’s assets) in the west; mind boggling debt/equity ratios of 50:1 literally did them in. Then PE firms recoup their own investment soon by way of dividend recaps. That reduces their risk to near zero from the start. This is not possible in India because Indian regulations do not permit a dividend recap so easily; neither do banks allow ludicrous leverage levels of the above kind. That makes take-private type buyouts less attractive.

b) Most companies in India are family managed and would like the family shareholding to pass over to the next gen as heirloom. They don’t let go off their holdings so easily. They are not easily lured by valuations. It’ll take a while for them to get there. It’s because most sellouts have a non-compete clause. The family has such a deep grasp of the domain, the intelligence gathered over the generations are irreplaceable. The PE firms that buy in invariably count on that domain expertise to get to their target returns. The pedigree rules in the end. [Update : here is the proof]

c) Asian values of business conservatism are so different from Western values of risk indulgence. That circumspection explains the relatively slow pace of businesses scaling up in India. The businesses having been seeded in tough regulatory environments, a slight easing up of regulations or easier access to bulk capital is all it takes them to leap into the big league as we are experiencing now. I think of ESSAR group – it was almost done to death in late 90’s when steel industry was down in the dumps (it defaulted on its foreign debt obligations) and when the fortunes of steel industry turned in its favor, it leapt back to glory. Its later foray into telecom paid off pretty handsomely in the recent Vodafone buyout of Hutch-ESSAR ($19b) and now it is a major player in a few other sectors like Shipping, Oil exploration and Heavy Engineering.

d) Political affiliations of business families are known to be deep set. Any new investor would view that as a great plus. Though it could be argued that business should flourish independent of politics, it’s always intertwined everywhere. May be to a lesser degree in the west, but it’s a force to reckon with. Remember the forces that came together against L.N.Mittal in the $43 billion Arcelor-Mittal deal? Their fear - Asian managements do not recognize European sensibilities. But it’s politics all the same if not downright racism.

e) General political / judicial dislike for raiders. I would put it as lack of instances of a raider doing a company and all its stakeholders substantial good. If a few buyouts result in explosive growth in shareholder returns, this perspective may change. But you can’t be a PE fund manager and not exit in a hurry. Chrys Capital realized it painfully. It got out of Bharti Televentures investment with almost 5X plus returns on its $300 million investment six years back. As soon as it got out, the sector fortunes turned and in another couple years, the market cap of the company rose eight fold. Chrys Capital is still licking its wounds. So did ICICI Venture exited Air Deccan in a hurry, at a loss. Soon came Vijay Mallya and Capt.Gopinath the Air Deccan founder got a lucrative exit within an year of ICICI Venture’s hurried exit.

So PE firms, it’s a mixed bag here in India. Tread carefully and you could be in for big gains. Try to be a smart ass, you’re in trouble deep. Know why? Entries are the easiest part in investment game; it's the exits that tell men from the boys.

.

Too much for a single day?

Business Standard cites M/o Commerce release and reports FDI equity inflows in the month were more than the entire annual inflows from 1991-92 to 2004-05. Inflows into India in February stood at $5.67 billion, the highest-ever during any month since 1991. On a year-on-year basis, the Feb inflows were 712 per cent higher than the $698 million inflows in February 2007.

So you took it to mean investment outlook in India remains strong since FDI is usually slapped with lock-in terms. With more money pumped into the system, can inflation be far behind?

So I get to read this and this. Both the key stock indices, the BSE Sensex (down 500 points) and the S&P CNX Nifty (down 124 points), lost some ground yesterday as the government announced a record inflation rate of 7 per cent, a three-year high. The latest surge is partly on account of a jump in metallic mineral prices. The primary articles sub-index, which has a weight of 22.02 per cent in the WPI, rose 1.8 per cent over the previous week on account of a steep 38.2 per cent rise in metallic minerals, a 4.9 per cent surge in vegetable prices and a 1 per cent increase in oilseeds.

It means “expect turbulence till you fly out of inflation headwind” – well that could be about 12-18 months till you get the full impact of all clamp down measures?

Burning question – what do we do? Left to myself, I would rather go fishing in style, if I get lucky like this guy, David Sneath !

.

Get your skin in the game

So I read this McKinsey report.

During the past two years, the flood of money into infrastructure funds has been an astonishing $130 billion. Take into account leverage, a billion dollars of equity funding could, in some situations, pay for up to $10 billion in projects. "Where will all the money go?” It asks. I am tempted to add an extension – “[with shrinking margins]”. The need for infrastructure investments in the emerging markets at present is about $1 trillion. I am at ground zero here in India. I can share a few insights.

PE funds here need a new approach – different from typical value creation through financial engineering and rising user demand. So far, they have acted less aggressively to improve operations; indeed, many financial investors still leave such issues to contractors and focus their governance efforts on financial metrics. This model is broken; it’s so yesterday.

So what should PE fund managers do today? I suggest -

a) Lay down norms of good governance. It helps assess risk in a structured way, avoiding unwarranted focus on a single category, such as technical delivery or regulatory compliance.

b) Brief project owners about the complexities by way of foot note to RFP itself. When they see reason, they might even expand their allocated budget. If you’d quoted thin, you’ll come to grief later.

c) Build alliances with Infrastructure specialists. Get some strategic skin in the game. Here’s the twin upside - a better chance of winning traditional deals and turn them around; and the ability to bid for operationally complex and less competitive projects. That’s how you learn to walk away from overpriced deals.

I quote an example. Macquarie and Ferrovial’s co-investment in the UK’s Bristol International Airport, for example, involved upgrading signage systems; renewing check-in, baggage reclaim, and catering facilities; rerouting foot traffic; and installing all-weather landing equipment. The investors also rejuvenated the airport’s retail offering, strengthened the management and sales teams, and even tweaked the system for booking parking spaces. In the four years after the acquisition, the number of passengers using the airport doubled—as did its EBITDA.

I find financial engineering can help PE returns only up to a point. With strategic competence added in, you can man up before the whole world, not just LPs. What do you think…?

.

Be the Stand-up guy at the gate

Ted Forstmann, a corporate raider immortalized in Barbarians at the Gates for his unsuccessful 1988 bid for RJR Nabisco, flew in on his private jet, presented his offer, and gave Reiman about 30 minutes to make up his mind, without bothering to spend any time with his family.

Now those guys (KKR, Blackstone, Carlyle et al) are here, will that stuff work in India? I say no. Here you have to please even the nannies in the household before you buy some stake. It’s not just easy to pump in excessive leverage, dividend recaps and ripping fees into their Indian portfolio companies and ask them to wilt and watch. Devise new methods. Innovate. I go for a successful PE fund to get going here, it has to have a greater strategic involvement than pureplay financial. Use some hand to spin that wheel of fortune. You can have a killer instinct alright, but have some heart as well. Of the few PE business models that came close, Madison Dearborn scores.

.

India M&A deal book

Orit Gadiesh, Chairman of Bain & Co., co-authors a piece in today’s ET after taking a look at Indian M&A deal book. He looks at it from three perspectives.

Deal size & volume - From Jan-Oct 2007, Indian companies closed outbound deals totaling $34 billion, exceeded China ($13 b) and Russia ($15b) combined. During 2003-07, the annual deal sizes grew at a CAGR of 108%.

Success rate – Too early to tell. But one-third seems to be a fair guess keeping in line with US and Europe.

Domestic M&A – Inbound deals by companies in India was only 8% of outbound deals, or $2.6 billion in the first ten months of 2007. Why so? a) lack of access to leveraged financing b) Firms are mostly family managed and are reluctant to sell.

Sounds good… But don’t make these mistakes.

.

The box needs fixing

So Deloitte runs a survey on the potential return for PE firms in India, going forward. It says Global private equity firms are expecting lower returns from India in the next six months as a booming economy and stock market drive up valuations. The basis ? Callow statements like this - “There is no more low-hanging fruit. India has been discovered. We will see more moderate – 20-25 per cent – returns going forward.”

The PE firms can do with a bit of open mind and flexibility. They have to innovate and adapt. You can’t make money in India by just transposing the same business process that are followed in the US or Europe. Result – they keep whining on their clichéd gripes (a) ban on leveraged buyouts (b) families that own businesses are reluctant to sell (c) restriction on issue of convertible preference shares and other regulatory impediments.

That puts me in a mood to quip.

Take gripe (a) – leveraged buyouts are banned. So what? That's why we didn’t have a credit crisis and points to a credible lending process that insulates Indian banks from global crises. The fact that doubtful debt can’t be bundled with a good credit risk and palmed off to unsuspecting bond investors is a sign of systemic maturity. [Indian banks faced a crisis 10 years back when most of our PSU banks had high NPAs because major borrowers didn’t repay. They siphoned the funds to build their personal assets even as their companies were going broke. Now that's plugged].

On gripe (b) families don’t sell out - because they feel one of them will be shortchanged in the process by the dominant share owning family member. Search for recent scuffle at Patni (computers) and Bajaj (Auto) families. The strategy here for PE firms is to get upclose with the family and broach the subject thro an investment banker that is close to the management. Choose the wrong messenger and you lose the deal. For that you need someone that is pretty much clued in… Why not me? Yeah, You can try.

The gripe (c) is on choice of instruments. Yes, convertible preference shares have been banned in construction and real estate since PE firms took that route to breach the FDI limits prescribed for the sector. PE firms lent against convertibles and the money was never repaid. In effect it was indirect infusion of equity since the loans were convertible into common stock. They used that to jack up their stakes in real estate companies that had huge land banks. You try to break a law and you're sure to be canned. But they can pitch for specific projects. Use a strategic investor, that is a professional consulting / EPC firm that can capitalize (thereby part-fund) the project cost. There are several other ways but then I can't blog everything here. I need to make a living too, pal....

If you are creative enough, there are ways to have the cake and eat it too… I’ll tell you what’s the problem. Investment banks don’t innovate. They just want to ride the coat-tails of their colleagues in the west. No, I am not asking you to start thinking out of the box. If one has to do that often, then the box needs fixing. It's a bit like walking between raindrops, agreed. Or a closer parallel will be learning to drive on a pot-holed road without getting a flat tire way too often. The day you get it right, you'll sight opportunities here all the more.

.

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…

.

"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.

.

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 !

Slap on the face of banking reforms

60 years of independence; Even more years of Indian Banking. But reforms have done little to save our folks from the clutches of loan sharks.

Each time a farmer commits suicide, there is the obligatory reference to high interest rates charged by the usurious moneylender. Predictably, two standard courses of action follow. First, public sector banks are asked to increase their footprint (after the usual ex gratia payments are made to the bereaved families) and two, demands are made to monitor (it used to be ‘regulate’) moneylenders and their activities. While the first is a good thing, it is irrelevant in the current context; the second would be disastrous, given how many households in the country are dependent on moneylenders.

IIMS Dataworks’ Invest India Incomes and Savings Survey 2007 throws up some interesting findings in this context. Of every 100 persons who have taken loans in the country over the last two years, 31 per cent have got loans from moneylenders, compared to 20 per cent from banks.

The short point is that, until institutional mechanisms develop to meet the credit needs of people with different needs (including subprime category) the moneylender is meeting very real needs.

.

Wake up to reality

In an IT competitiveness study commissioned by software industry association Business Software Alliance (BSA) and conducted by the Economist Intelligence Unit, the US, Japan, South Korea and the UK ranked the highest among 64 countries in terms of IT competitiveness. The study evaluated countries on factors like skill availability, pro-innovation culture, world class technology infrastructure, a robust legal infrastructure, government support and a competition friendly business environment.

India gets slotted at 46. Don’t tell me you are surprised. I’ve been crying hoarse about India’s IT illusion here, here and here.

To stay ahead in knowledge industry, of which IT is a force to reckon with, significant investments will have to be made in R&D. Indian companies and the government have conveniently ignored strong signals coming from several quarters that cried for innovation. Low end BPO vendors were painting a picturesque landscape as much as labor arbitrage and a weak Rupee would permit and a smug industry got even more arrogated. When the tide turned and both wage cost and Rupee appreciated, the mask got brutally lifted and the naked reality that hid behind the scenes began to look ugly; very, very ugly.

With tax benefits too on their way out and global majors already settling in, Indian Government and its IT industry should quit blowing sunshine up its ass and get its act together. Not for growth, for survival that is. What do you think?

.

Deal scouting calls for passion

Global private equity giant Blackstone Group is acquiring majority control in Gokaldas Exports for nearly Rs 6.6 billion ($160 m), in the country’s largest management buyout in the textiles industry.

This is Blackstone’s third major deal this year, the other two being a $275 million investment in Ushodaya Enterprises, which runs the Eenadu newspaper and ETV franchise, and a management buy-out of BPO firm Intelenet from Barclays and HDFC for Rs 8.4 b ($ 203 m).

The PE shop known for its appetite for large global deals (Hilton Hotels - $26 b, EOP - $ 36 billion including debt of $16.5 b) appears to have tweaked its strategy in India, settling for a lot smaller deals. I wonder the viability of this strategy since it could eventually lead to problems of scale or even oversight. The string-of-pearls strategy is quite cumbersome for an 11 people strong PE firm to manage on the trot given the bureaucracy it may have to deal with in India.

.

Of course, one can’t find many companies of the size of a Hilton or EOP in India easily but if they can look closely, they might as well zero in on some real sweetspots. I have earlier written about one here. If approached rightly, it’s a terrific deal at $1.2 billion. There are a few more available if looked at closely, not like a professional investment banker who does it for a fee, but by a committed PE fund manager driven by pure passion for such deals.

If you need help Mr.Akhil Gupta, you know whom to hire :)

.