Smaller local deals - way to go in 2008

I am not surprised after reading this. Going by the frenetic acquisitions in the Indian pharmaceuticals space, buyout fatigue is but natural. The strain on the resources of the acquirer post event is phenomenal. The integration of two distant, culturally disparate organizations taxes even the most competent management. You’ve miles to go before the intended benefits of the acquisition – global footprint, larger scale and added market share etc., are realized. Some estimates put the success rate of M&A deals during the last 5 years as low as just 18% globally.

But I think it’s far easier to integrate businesses in the same geographies. You can safely discount the cultural diversity element that rocks many deals. They are relatively inexpensive and you can trust your judgments since you’ve been active in the same realm. You can easily upsell your existing products. It’s a win-win and a surer and safer bet than a big ticket, overseas acquisition, where any one of the brands could suffer a dent depending upon the perceptions that surround the deal. If there is one sure winner in a big ticket deal, it’s the I-bankers and the advisers to the deal. The buyer rarely wins in overseas buyouts.

But the record is so much better in strategies that advocate acquiring local brands and strategic domestic investments. I see that trend in Indian Pharma space now - changing their tactics to concentrate on brand acquisitions and strategic investments rather than risky big ticket cross-border acquisitions. Some of my friends in I-banking circles tell me it’s the best time to buy businesses in the US since Rupee is on a record high against the dollar. But I don’t buy that line. You should buy a business only if it’s a sure value add in the long term, because it’s a one-off, game changing stuff. Not just because you have a favorable exchange rate, as matters to the import of raw material / capital goods.

But then my friends are I-Bankers and it suits them well to take that line. They have to get by :)
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Who will be India’s REITmeister..?

So, who will be India’s Sam Zell? Any guesses…?

SEBI has recently nodded in favor of setting up REITs in India. The much-awaited Real Estate Investment Trusts (REITs), which would invest directly in real estate projects after collecting funds from investors through the stock exchanges, are set to see their entry in Indian markets with SEBI putting out draft rules for such trusts. The conditions include –

What interests me most is that even though FDI in real estate is still a much debated issue, Private Equity firms will get an easier exit route. Private equity comes at the beginning and it takes 5 to 7 years for the projects to get ready. Since FDI is not allowed in finished projects, REITs will provide them a platform to exit. When we reckon that over $6 billion have been invested by PE funds in Indian realty companies, entry of REITs are most welcome – for the fund managers….:)

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Many hues of the world

Tom Friedman got it all wrong. Had the world been as flat as he thought it is, why do they scrimp at one end and splurge at the other? In the US and Europe, they worry recession, credit squeeze and speculate the impact of mortgage crisis. In Asia, it’s celebration time. They raise funds from public markets as if there are no tomorrows. Take a look at this data culled from a report from E&Y.

Indian bourses saw over $8 billion worth of initial public offers (IPOs) in 2007, but this is just a shade higher than the world's single-largest IPO by a Russia’s VTB Bank, which alone raised $8 billion. Largest Indian IPO was that of DLF that raised Rs.91.87 billion. ($2 billion plus).

Worldwide IPO activity raised a record capital of $255 billion till November in 2007, including $8.3 billion on Indian bourses. India was the fifth largest market in terms of number of IPOs and the seventh-largest in terms of the proceeds for the year. There were 95 IPOs till November 07 as against 78 IPOs raising $7.23 billion during 2006.

China came out on tops with total IPO proceeds of $54.4 billion through 222 issues. Globally, there were as many as 1,739 IPOs between January and November, while another 91 public issues are estimated to have hit the capital markets during December.

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All happening while US and Europe are wilting under mortgage mess. Did you say we are globalized...?

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Tata-JagRover bet - will it payoff...?

“It is dangerous to substitute return on equity with business hubris when doing deals, and the whole thing had better make business sense” – goes T.N.Ninan of Business Standard on the Tata-Jaguar/Land Rover deal.

Ninan is sceptical even though Ratan Tata is getting both brands for $2 billion, much less than $5 billion paid by Ford to acquire them back in 1989 and further $10 billion that went into Jaguar to refurbish it. Rover is profitable, but Jaguar reportedly lost over $700 million in 2006 and perhaps over $550 million in 2007; it is expected to lose $300 million more in 2008. Rover sells close to 200,000 vehicles a year, but Jaguar sales have been falling quite sharply in its main market, the United States. He wonders whether Tata has bitten off more than he can chew. I am also reminded of Mitchell Madison and Whitman Hart deal where two billion $$ companies merged only to find the combined revenues were far less than $2 billion.

While Ninan concedes – going by earlier Tata buyouts overseas including Corus - that “Tata seems to have a good head for corporate strategy”, he doubts whether Tata would be able to achieve what Ford could not. He cites the examples of recent Sovereign wealth fund investments in Citigroup and Morgan Stanley (there are UBS, Merryl Lynch and Bear Stearns too) where the investors remain passive and would not insist on management control - but Indian acquirers love control. I say they have the chutzpah.

May be Ninan feels Tata could be in for a jam in this deal because of dealer perceptions, as he says “the people whom Tata would want on its side are the dealers in the US, but they seem to think Indian ownership is poor branding”.

My sense is that Ninan’s comparison of Tata-Jag Rover acquisition with fund infusion into American banks by Asia’s Sovereign funds is not quite up. Those funds are basically financial investors that focus on maximising ROI on their forex surplus as a part of their portfolio management strategy. To that extent, it's their fiscal management strategy too. They are concerned more about returns and not where it comes from. They simply don’t have the strategic bandwidth to take control and run diverse businesses that they invest in. Moreover, the managements of American banks like Citi, Merryl Lynch, Morgan Stanley are not bad by themselves going by the size and scale they've notched up. Just that they took a few bad bets that backfired. But that is to be expected because banking is indeed a business of betting on credit risks of varying degrees. What if those bets had paid off? But Tatas (and Lenovo example that he cites) are strategic investors with a track record of running global businesses and it’s not right to put them in the same basket as pure financial investors like wealth funds. The rationale behind their investments are fundamentally different. Tata would have certainly done their math and if the experience of Corus acquisition and its on-going integration is anything to go by, they would make the most of Jaguar-Land Rover deal too.

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Private life insurers - another scam in the making?

The private life insurance industry has sought an additional four-year grace period to carry forward its losses since most insurers have failed to break even, even after eight years of operations. At present, losses can be carried forward only up to eight years. The industry has also sought a separate limit u/s.80-C of IT Act for long-term savings.

But I chuckle and split my gut over something else. They face a problem which LIC never had. Current provisions mandate that insurance companies must list within 10 years of operations. Under Section 6AA of the Insurance Act, 1938, Indian promoters have to scale down their stake to 26% within 10 years of operations. This amendment is being considered by the group of ministers (GoM) set up to examine the comprehensive insurance legislation.

It's catch 22. Insurance companies, which are into their eighth year of operations, might not be ready to go public yet, since they are yet to break even. SEBI mandates a company may list only after three years of registering profits. Insurance companies, however, are already being valued at skyrocketing levels. For instance, ICICI Financial Services — the proposed holding company — has been valued at more than $10 billion post-issue. But its earnings are still negative. How did they get such a lucrative valuation? Who valued them? No answers.

That’s the catch. They've taken the extension of time beyond eight years for granted. Their hand picked I-Bankers have arrived at a valuation based on fees they got. But they can't justify that valuation now since they continue to make losses. If they go public now, they may have to pay the investors to buy their shares. It’s going to be eight years now and they are yet to break the stranglehold that LIC has over its customers and turn cash flow positive. Meanwhile these guys spend millions on advertisements to spread insurance awareness. But clearly, it's LIC that's getting the mileage.

Going by the trend, they will not make a profit in another 10 years or so. So their strategy is, keep running to the government for extension of time. The question is, how long should the government forego its tax revenues to subsidise private insurers’ poor performance…? What public good do they stand for? Should the government wimp out just to enrich Indian promoters when they off-load their stakes? How else do you define a scam?

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Mr.Chidambaram, don't you see the bullshit meter turning red...?

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Never play a stock ; Play the analyst...

Ok, scumbags. You didn’t listen when I tipped you in on Sugar stocks. Now grieve. No, I don’t look at fundamentals. I don’t look at technicals. That’s for friggin’ chartists who make a living by staring at computer screens and fooling the world with their harebrained forecasts that never come true. They work for an end of month paycheck and commissions. You and I bet our hard earned money on the stocks that these guys `think’ would go up… If you do, you’ll be getting out soon. Out of this game.

In India, you bet on politics. I always do. I bet on the minister. More influential he is, more loyal his voters are. That's why I tipped sugar stocks. Look at this “sweet” guy Sharad Pawar, Agriculture Minister. He answers my wish list to the T. I know how his mind works. I’ll share it with you. This guy loves just two things - the sugar belt of Baramati and BCCI, one of world's richest sports (Cricket) bodies. Let’s keep cricket out for the time being. The folks over there at Baramati, eat sugarcane for breakfast and molasses for lunch. They sleep on mats made out of cane leaves and wear sugar coats for dinner. They don’t drink water, they feast on cane juice. They all die of diabetes and the chemists there have made their fortunes just by selling insulin. The only thing they know is to vote this guy Pawar back to power. That’s it – isn't it simple enough? Either they are at the cane fields or at the polling booth. That's how they lead their lives. He will give us more of good news on Sugar because he needs those sugar coated votes. The folks at Baramati don’t vote if it isn’t dude Pawar’s name on the ballot. So I say, buy sugar stocks. As much as you can. I do. Never sell your sugar stocks so long as you got this Sugar Daddy at the top and as long as analysts keep talking it down. Sell them only if pawar man leaves the deck or when analysts talk it up.

Now mill owners, keep a steady supply of Ethanol even during weak season. Daddy will hike the blending ceiling from 10% to as much as you can make. He’s struck a deal with that Deora guy at Petroleum ministry. They’re on phone all the time. When they meet in public, they wink and nod a lot. Export subsidy? Granted. Kamal Nath won’t object. A deal there too. Co-generation ? Go ahead. Life’s good. That's my fundamental and technical analysis for you. What say you...?

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Don’t believe a word those friggin' analysts say. They all will trash a sector while their broking bosses are stocking up on it. When they’ve had enough, they’ll talk as if that’s going to be the next big thing. That’s when you should dump your stocks and rip those suckers.

Don’t play the stock. Play the fuckin' analyst. You heard me….!

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IFCI Snafu

It's all badly fucked up at IFCI.

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If I were the FM, I would say this to IFCI management -- "Get that sand out of your cracks, guys. This stuff is hard work, now don't botch this up".... You should see the muck that gets raked over by our guys at IFCI that screwed up the Sterlite-Morgan deal. Let me put it this way. Some of its Board members aren't going to see such cushy jobs ever again. Too many perks for running a company aground. Then the government steps in with some concessions. As if by godsend, the real estate market too turned hot and suddenly the textile mills and other companies owning large swathes of land or belonging to sectors in the limelight (a la steel and cement) in IFCI's long NPA list became highly valued - by default. Now the jokers in IFCI board want to claim credit for turning it around when in fact, all they did was to try and turn it upside down – something that they almost accomplished. Someone in IFCI told me these guys pop a Viagra a day even to get up and walk straight....

Now they also want private investors to buy 26% but can’t let go off management control. If you add in the additional 20% public offer the investor will have to make, the new investor will end up holding 46% stake in the company for just 25% of management control (just two out of eight board seats) and no rights to appoint CEO. Now who will agree to that?

IFCI stock had lost 23% in the markets on Thursday. What if it were a Private sector management that announced the deal, named the bidder the day before and screws it up the next morning…? SEBI will be all over them for misleading investors for talking up and spooking the market intentionally.

Next time IFCI has a suitor, I suggest go put shock collars around its management. If they try to act up, they get through the invisible fence -- boom. Unconscious. They wake up in some casualty ward, never to be back at their desks again.

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Infrastructure revamp...? Plan for relocation too

Vinayak Chatterjee has a nice take on new measures required to catalyze badly needed infrastructure investments.

Chatterjee has cited several refreshingly fresh initiatives included in two special committee reports DPCR and SCR.

But aside of what is contained in that summation, not just the socialist in me, but the sensible capitalist also still don’t see how they are going to relocate those who get displaced when new infrastructure comes up. You invest billions of dollars in creation of new infrastructure and don’t plan for relocation of those that used to make a living out of the pre-displaced environs and that’s terrible. In China, they are facing a backlash because of this. Let’s not repeat it in India because here we don’t rule with an iron fist. Our governments live from election to election or worse till a mid-term poll in these times of coalition governments.

The short sighted acts like this breed Mayawatis and C.K.Janus here… The former wanted to build shopping malls around Taj Corridor (and gobbled up Rs.1.75 billion in the process) and the latter defiled the pavements of Kerala Secretariat. Haven’t we had enough of them and their antics…?

Please.

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The in and out economy

First we raced to globalize. Then we hurried to decouple. But did we…? If so, why this…?

Will someone please give me a new expression…?
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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.

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Friendly rip-off

So you’re puzzled why your trades in T segment always face “technical snags” and the shares never get delivered on the 3rd day. Here is why.

Every transaction in the ‘T’ group has to compulsorily result in deliveries; the buyer or seller cannot square off his position intra-day. Often, many sellers are unable to meet their delivery obligations for a variety of reasons. Unlike in other segments, T segment stocks are not auctioned. The seller’s positions are *closed out* by levying a 20% penalty on the seller that gets credited to the buyer, to make up for non-delivery. So if you buy a stock for Rs.100 on Monday and the seller fails to deliver, on Wednesday, you’ll get a credit equaling 20% of its Tuesday’s closing price. If that is Rs.90/-, you'll get a credit of Rs.108/- (120% of Rs.90)

Here is where the *friendly* broker rips you off. On the settlement day, the broker gets the details of his pay-in and pay-out obligations on his work station from the exchange at 1:30-2:00 pm. Occasionally he will find that some of the purchase positions of his clients in ‘T’ group shares have been closed out, and the prices of those shares are now trading at a price lower than what his client had bought them for. He then buys those shares at low prices and credits them to your account. In the process, he gets to pocket the Rs.18/- differential credit from closed out positions that originally belongs to you.

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Now you know how brokerages quickly get into billion $$ leagues....

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Controlled bleeding or cauterization...?

Agreed, not so upbeat title for an Economist story with no hemal touch. But as an opener, it isn’t entirely out of place either. The metaphor fits in water tight. Excerpts -

"That was the unappealing choice facing UBS, a Swiss bank which has been badly hurt by the carnage in America’s mortgage market. Today, the bank opted for the latter. First it opened the wound, by announcing a hefty $10 billion write-down on its exposure to subprime infected debt. UBS now expects a loss for the fourth quarter, which ends this month. It may end up in the red for the entire year. Then came the hot iron: news of a series of measures to shore up the bank’s capital base, among them investments from sovereign-wealth funds in Singapore and the Middle East."

[It started with Merryl Lynch, then Morgan Stanley and Citi Group bringing up the rear.] "Why then did this new batch of red ink still come as a shock? The answer lies not in the scale of the overall loss, more in UBS’s decision to take the hit in one go. The bank’s mark-to-model approach to valuing its subprime-related holdings had been based on payments data from the underlying mortgage loans. Although these data show a worsening in credit quality, the deterioration is slower than mark-to-market valuations, which have the effect of instantly crystallising all expected future losses."

Will this bloodbath end, ever…? Loss of reputation for a conservative bank like UBS is deep enough cut. What is worse is the impact that has exposed the fluidity of its capital adequacy ratios at the tier 1 level. Of course, it has rich friends ready to pitch in. The white knights include sovereign-wealth funds (GIC, Singapore) and rich middle east investors that have pledged support to shore up its bottomline by infusing SFr 19.4 billion. Marrying bigger-than-expected write-downs with bigger-than-expected boosts to capital looks like the right treatment in this environment. But UBS still cannot be sure that its problems are over.

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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.

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Back to gold standard...?

Here is a new insight into our swelling foreign exchange reserves.

The frenetic build-up of forex reserves has lost pace with reserves growing by only $1.2 billion during the week ended November 30 to $273.5 billion. Of the $1.2-billion increase in reserves, $546 million came from an increase in the value of gold. The increase in foreign currency assets was just only $694 million - according to the figures released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS).

The RBI has the challenge of maintaining the desired level of liquidity in the market, which it has been through sale of bonds. But this too entails a cost as these bonds need to be serviced at fairly high rates.

Should RBI dump the dollar and switch to good old gold standard, at least a part of its kitty…? If you look at the way the dollar is plunging against global currencies, it makes awesome sense….

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Don't hire an engineer when you need an accountant

Ashish K Bhattacharya rants on the poor accounting literacy of MBAs. He seems to be quite modest in that he restricts it to students not wanting to specialize in finance; but I go even the specialists are no better.

Map it to reality. It’s almost six months since MBA bankers in Wall Street began counting losses on CDO’s built into sub-prime mortgages. Heads roll, albeit with bumper payoff. Numbers fly. Here, here and here. But they’re still counting. Most of these MBAs have engineering background and they are supposed to be good, sorry; brilliant at math….!

But look at what these “financial engineers” have done to the credit markets. They invented the time bomb – subprime derivative time bombs I mean. The exotic derivatives that the MBA designed, called CDOs kept all liabilities off balance sheet and investors had no idea what they were letting themselves in for if borrowers go broke. They did and that’s why they are still counting.

This is the leitmotif of this whole thing: Half baked MBAs played havoc with mortgage banking. They write loans just to build the book, thinking they will worry about risks later. But now it's later.

Financial Risk management has long ceased to be the preserve of conscientious accountants that feared risks, knew the law, respected disclosure, and lost sleep over declining ROI. Now it’s the domain of MBAs that contrive fabulous stock options and packages for themselves. Or worse, it’s usurped by robots and algorithms. That’s how it becomes financial engineering. Shareholder who? They ask. Look at the exotic derivatives that hid more than they revealed. A shareholder is often the last to know the exact liabilities of the business, a piece of which he actually owns.

Hire MBAs by all means. But make sure they have their fundamentals right and their feet stays rooted to the ground.

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Bihar shows the way...

To attract investment in sugarcane-based industries, the state government amended the Bihar Sugarcane (Regulation of Supply and Purchase) Act, 1981, earlier this year, allowing sugarcane juice to be directly used to produce ethanol or rectified spirit and for co-generation of power. For sugarcane-based industries,the state is also offering a capital subsidy of 10 per cent of the investment, subject to a Rs 100 million ceiling.

Result –

Reliance Industries, Tata Chemicals, Bharti Enterprises’ Fieldfresh and Indian Oil are among several large companies that have evinced interest in leasing closed sugar mills that the Bihar government is offering, mainly to exploit opportunities to make ethanol to meet mandatory petrol blending norms that were introduced this year. Other companies that have acquired the request for qualification (RFQ) forms are public sector Bharat Petroleum and Hindustan Petroleum, and Renuka Sugars, Upper Ganges Sugar, Dhampur Sugar and India Glycols.

Closed for more than a decade, these mills together have a financial liability of Rs 700 crore under various heads and the funds raised by leasing them will be used to clear the liabilities. Last month, the Bihar government decided to offer 15 closed mills belonging to the Bihar State Sugar Corporation on a long-term lease of 60 years, extendable by 30 years, on the recommendation of SBI Capital Markets. Of the 15 mills, eight have been reserved for sugarcane-based industries such as sugar mills or distilleries for ethanol or alcohol production. The remaining seven can be used for industries that may not be sugarcane-based.

A pre-bid meeting is scheduled on December 8 in New Delhi.

Contrast this to what happened in UP that prompted me to send out a wish list. And we call Bihar backward…!
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Gisele Bundchen should stick with me

I am concerned for the stunning super model Gisele Bundchen - not that she’s losing any of her luscious curves. She’s sexy as ever. But just how wise has she been in switching to Euro?

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Even Central Banks, having spurned the chance to diversify out of dollars when a euro could be bought for 86 cents, are unlikely to want to switch now when the price is close to $1.50. Against conventional benchmarks like purchasing-power parity, the euro looks dear against the dollar. So it could be a bad time to swap from one horse to another.

The Economist concludes a full blown dollar collapse could be disastrous. What lends the dollar's decline an air of crisis is that the world's bloated currency reserves are crammed with depreciating dollar assets. Foreign-exchange stockpiles have almost tripled to $5.7 trillion since the beginning of the decade. China alone has $1.4 trillion of reserves. Japan's $1 trillion or so make it the second-largest holder. To the extent that dollar-holders act like an informal cartel, the biggest dollar-holders will set an example. Japan seems unlikely to start selling its huge dollar reserves—if anything it might intervene to prevent the dollar falling further against the yen. A crash might be averted if China holds fast too, because it recognizes how self-defeating dumping dollars would be to such a large owner of American assets.

In this period of swelling reserves, the dollar has retained its pre-eminence. It still accounts for nearly 65% of identifiable currency-stockpiles, according to the latest IMF data. This is broadly in line with its historical share. Factor in the dollars hoarded by China and Middle Eastern oil exporters (not included in the IMF breakdown) and the dollar's share may be higher still.

The dollar's place as a reserve currency always seems to be questioned when it falls. Weakness in 1977-79, 1985-88 and 1993-95 was each time met with predictions that governments were about to switch their reserves into another currency. A burst of high inflation, which undermined the dollar in the late 1970s, made that slide as serious as today's scare is. Between 1978 and 1980 the Treasury sold $6.4 billion of “Carter bonds”, mostly denominated in Deutschmarks, to raise funds to defend the dollar. In January 1980 the gold price reached a record $835 (around $2,250 in today's prices) as investors sought an alternative store of value. And when the dollar fell to ¥81 in 1995, many—including the Economist —saw it as the beginning of the end of its reserve-currency status.

So I lay my bets on the greenback still. Someone please ask Gisele to stick with me -)

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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.

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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).

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[Update : Reader Dnyanesh has sent this link to an excellent article by Anil Singhvi on corporate governance. Thanks Dnyanesh.... Hat Tip !]

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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.

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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…?

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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…?

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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
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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 !!!

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It's like yesterday once more...

Remember that sweet song by carpenters "it's yesterday once more"?....

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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…. :)

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Who wants to change...?

Read this.

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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…

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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...!

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…?

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"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.

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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.”

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Thank you, Ravi...

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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 !

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.

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When it comes to money, everybody's of the same religion I guess.

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Do away with P Notes - Give us infrastructure

Has the recent crackdown by SEBI on P Notes issued by FIIs been effective? Will it yield the desired fruit – that of controlling copious flows of capital from unidentified or least regulated entities? Well, time will tell.

But RBI still has to deal with its daunting problem. The surging capital inflows continue to pose a policy challenge for the Reserve Bank of India (RBI), as it undertakes its mid-term policy review tomorrow, despite some measures taken to contain unregulated inflows. The central bank is unlikely to signal any easing of monetary policy with surplus liquidity in the system, as any lowering of interest rates at this point, could hold upside risks to inflation.

The Prime Minister's Economic Advisory Council had estimated that an increase in the forex reserves of the RBI of $26 billion in 2007-08 could be consistent with the current real growth of the economy, moderate monetary expansion ( 17.5 per cent) and a tolerable inflation rate (4 per cent). "In the current financial year up to early October 2007 itself, forex reserves have increased by over $50 billion and tackling this problem is the most crucial policy dilemma," S S Tarapore, former deputy governor, RBI has said.

I often wonder – why not RBI absorb the excess liquidity thro infrastructure bonds and divert the entire corpus exclusively to address India’s appalling infrastructure needs – better Airports, Ports, Dams, Roads and the like… Given the pathetic state of our infrastructure, no sum of money would be found to be `excessive.’ We pay humungous sums anyway by way of Airport tax, fuel surcharge, toll etc. Is it not time we expect something in return…?

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Lend but don’t call back

Looks like India has its own subprime disaster in the making. ICICI Bank recently took the unprecedented step of paying Rs 15.5 lakh in the form of fixed deposit and insurance covers to the family members of a Mumbai borrower who committed suicide allegedly after being harassed by recovery agents of the bank, there was a case of recovery agents being beaten up when they approached a borrower to ask for payment against overdue amounts.

Until recently, personal loans were one of the most sought after segment by banks after they found that individual lenders default rates were far lesser than corporates and other organized borrowers. They relied on agents to press recovery from defaulters and mostly it worked. Now this segment has also crept up to `organized’ category – at least in beating up recovery agents that come calling – the threat of willful default looms large even by those who can afford to repay.

Time to short banks? ICICI, HDFC, Indusind, Centurion Bank of Punjab have all built up a good deal of personal loan books. Great shorting bets, I guess…

What do you think…?

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Strange things the Rupee does

The relentless run up of the Rupee has one major outcome. It drove xenophilic Indian companies like Infosys to focus on burgeoning Indian markets. Even as IBM, Accenture, Microsoft, Oracle, HP and other IT majors drove in to have a slice of the Indian market, Infosys was unmoved, stayed riveted westwards. It didn’t like the low margins. Sat smug under the illusion that juicy 25-30% margins that it kept gouging from overseas clients will remain forever.

I had written earlier about the short life of those obscene margins here and here and the folly of ignoring the domestic market. After getting dented in earnings and sensing a fast eroding market cap (and the worth of his own holding besides that of other co-founders), it looks like Kris Gopalakrishnan has heard me.

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It's another thing that he hardly had another choice...

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The art of getting FII accounts

The din is rising. The clamor from brokerages to get FII accounts. At every turn as I meet a head honcho of a brokerage, they have one question to ask – can you give us some FII account?

Now this puzzles me. I have a lot of friends that work for FIIs. I come across them when I meet them on business and at parties. They have the same interests as we have and they are ready to listen to all that talk that makes sense. No big deal. Why make them such “in-demand” exotic beings?

I made friends in FII circles because of just straight talk. Many of them started out as my blog readers, enjoyed or debated what I wrote. They became friends anyway. I don’t tell them what they’d like to hear or ask for their account. I just listen to them, digest their needs and share my personal philosophies about investing. Perhaps they enjoyed it, they’re still my friends.

But if you want those contacts, well, I suggest you do it the old fashioned way. Get your existing clients to make some money and have them walk the talk…. Or just let me do it for you…!!
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Review of PE / VC ecosystem in India

Here’s a great article and a review of PE / VC ecosystem in India... Nice read.

[ Hat Tip : Alok Mittal, VentureWoods ]

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A quick and clean surgery...?

He may not have gotten the coverage like a Chris Cox gets. But M.Damodaran, Chairman of SEBI is no less charismatic.

He stood his ground on restricting the use of participatory notes (P-notes) by foreign institutional investors, but made two important announcements.

The first is to allow proprietary sub-accounts of foreign institutional investors (FIIs) — i.e. sub-accounts that are formed to invest their own money — to issue P-notes provided they apply to register themselves with SEBI in the next 24 hours.

The second is to put registration of FIIs on the fast track. Addressing FII representatives from all over the world through a video conference, Damodaran, however, said the issue of offshore derivative instruments by other sub-accounts of FIIs will not be possible after the changes it proposed last week come into force.

Hope Damodran performed this surgery quick and clean, like he fixed the mess at UTI. Now will the market get back to its surge up north…?
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Can't buy a bank stock

I can never buy any bank stock; Public sector or Private Sector – no matter what a multibagger it may turn out to be.

All I can remember is sitting there all day tearing my hair out and screaming within (at the teller) why can’t she release a banker’s cheque quickly or trying to figure out how to get the lady to stop updating her colleague on her latest jewellery acquisition and wondering if you need to call an exorcist because maybe the bank is possessed by the devil. You need to be a bit psyched up too to buy the bank sock. I know it’s not very smart – but then you know I am only human.

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As long as it lasts

If you can't sleep, then get up and do something instead of lying there and worrying. It's the worry that gets you, not the loss of sleep. Don't worry about things that you have no control over, because you have no control over them. Don't worry about things that you have control over, because you have control over them. This seems to be the credo of global markets that are either behaving as if the worst is over for credit and housing problems or they remain convinced that the central banks can offset whatever bad news may unfold.

I say the credit squeeze is much centered around mortgage finance that resulted from subprime crisis in the US. Other sectors are pretty much insulated. After strenuous effort, banks have managed to find buyers for $9.4 billion of the $24 billion needed to finance the takeover of First Data, a payments processor, by Kohlberg Kravis Roberts, a private-equity firm. According to JPMorgan, even the structured products that caused so much disquiet during the summer are moving again—$6.2 billion of collateralized-debt obligations were issued in the last week of September.

Somehow that flies against other theories that float around. Who knows? Markets have their own logic.

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LIC in for a bounty

As bidders line up to buy 26 per cent equity in Industrial Finance Corporation of India (IFCI), they will have to keep an eye on the next move of Life Insurance Corporation of India (LIC), the domestic behemoth. IFCI owes nearly Rs 500 crore in debt to LIC, which has the option to convert it into equity and take its total stake from 8.4 per cent now to 49 per cent. IFCI’s proposed strategic sale has attracted expressions of interest from 10 entities, of which 8 have been shortlisted.

The successful bidder will also have to make an open offer for another 20 per cent to take its total holding to 46 per cent.

Companies interested in buying a stake in IFCI will be aware of LIC's option to convert its debt into equity at par (Rs.10/- that is, now the share price is Rs.96/-) value.

Talk about the advantage of being a (very) early investor…

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Nothing stops the deal frenzy

And you thought the liquidity squeeze following subprime fiasco has affected the PE appetite for leveraged buyouts… Hardly.

Bain Capital, a private equity firm, decided the 28-year-old Network equipment maker 3Com Corp. still has enough potential to justify a buyout carrying a hefty 44 percent premium to the stock's Thursday closing price of $3.68 per share. At one point in 2000, its shares briefly rose above $100 apiece. For 3Com the $2.2 billion buyout by Bain would mean giving up its independence, but it's gaining freedom from the whims of the market and a chance to expand in China. The cash deal announced on Friday also gives Huawei Technologies, China's largest manufacturer of telecommunications equipment, a minority stake in the technology pioneer - something that could improve its prospects in Asia and raise eyebrows in Washington. 3Com, which faces brutal competition from Cisco Systems Inc. and others, is now a shadow of the high-flying star it became in the late 1990s technology boom. 3Com now counts more than 6,000 employees in over 40 countries, and annual revenue of $1.3 billion.

Here’s yet another and bigger deal. Shareholders of communications and software company Avaya Inc. voted to take the company private Friday, selling it for $8.2 billion to two private equity groups - Silver Lake and TPG that valued its shares at $17.50 apiece. The deal is expected to close by end October. Avaya, based in Basking Ridge, N.J was spun off from the former Lucent Technologies Inc. in September 2000. Shares have jumped more than 25 percent since word of the deal leaked in late May. The deal comes with its set of strings too. The agreement also provides a 50-day "go-shop" provision for Avaya to solicit proposals from third parties. If it ends the merger agreement after receiving a superior proposal from a third party, Avaya must pay Silver Lake and TPG Capital an $80 million termination fee. Also, Silver Lake and TPG Capital must pay a $250 million fee to Avaya if the merger agreement is ended under certain circumstances.

So, la, la, la time for PE firms has not fizzled out. The party is on in the buyout street… Will it have an impact on Avaya Global connect, the Indian company…? Jury is still out.

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The Wipro way

Wipro, India's leading IT vendor, it seems have found a way to counter the Rupee appreciation threat to its bottomline. It is also aloof to all the noise around made by most others, in not rushing to the Ministry of Finance or RBI asking to rein in the surging Rupee. It maintains its cool and is moving straight ahead with its stated strategy of inorganic growth, by acquiring companies from diverse geographies.

I am talking about Wipro’s latest acquisition - Oki Techno Centre-Singapore (OTCS) in an all cash deal spread over a period of one year together with all its Intellectual Property Rights as well. The company will also establish a dedicated development centre for OKI to utilise design resource efficiently and enhance product development capabilities.

OTCS is focused on wireless design and has demonstrated innovative capabilities in RF (Radio Frequency) and baseband design. It has a 40 member center with SGD 8.8 M (USD 5.89 M) as the revenues of the fiscal year ended March 31, 2007. The company has key customers in Japan in product engineering space.

Way to go, Mr.Premji. The acquisition will give Wipro a footprint in the large market in Japan and East Asia. I go it’s way better than whining about exchange rates, something over which none has control.

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Clueless RBI opens flood gates

The rise of the mighty Rupee against a weak dollar has forced RBI to relax its currency regulations. It goes with the usual refrain - “one more step towards full capital account convertibility”. Gee, making a virtue out of necessity? Not so nice, Guv…! How many more steps left? Story behind the story is RBI just woke up and realized that they've lost control of their own industry. Now they're desperately scrambling to get back on their feet. Left with not many options, it opened the floodgates wider praying that some of the incoming dollars may flow back too. Now, know your limits –

- Individuals can remit up to $200,000 against $100,000
- Companies allowed to invest overseas up to 400% of net worth overseas against 300% till now

- Partnership firms also allowed to invest overseas 400% of net worth
- Ceiling on portfolio investments by companies raised to 50% of net worth from 35%
- The requirement of 10% reciprocal shareholding in listed Indian companies done away with for overseas portfolio investment
- Companies can prepay ECBs up to $500 million against $400 million now
- Mutual funds allowed to invest an aggregate of $5 billion overseas against $4 billion now

Will it cause a dent ? I doubt. There are not many parking bays available for the greenback than emerging markets. No other market in the world is yielding returns as do emerging markets (EM) like India. China and Brazil have become way too overstretched. Developed markets have been consistent underperformers. That leaves the dollar to leave Indian shores only when Indian companies begin repaying or foreclosing their ECB borrowings made earlier. That’s wheels-within-wheels scenario since prepayments shall be triggered only if there are significant dollar earnings from exports, which is too much to ask when every dollar of export is fetching less and less Rupees. Add to that the Fed rate cuts. The recent 50 bps rate cut by the Fed on September 18 has only accelerated the inflows - FII reacted by increasing their investments in India with $1.54 billion of investments in just 3 days between September 19-21. RBI may use its sponge to mop up dollars, but in July alone, it bought back $11.42 billion.

How much more can it suck in? And is it advisable? Well, I’ve dealt with that already.

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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.

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What will RBI do now ?

The sign of maturity of any economy is in its attainment of functional automation without having the need for frequent policy interventions. In that sense, if central banks gradually loosen their grip and reduce the frequency and magnitude of their intervention and monetary control, the economy should reflect a fair sense of its health through its currency exchange rates in relation to that of others.

But TCA Srinivasa Raghavan in his article has observed that the balance of opinion is in favor of intervention, for some reasons. One is that no central bank chief wants to be held responsible later for not warding off a recession. So he or she does the popular thing. The other reason is perhaps that everyone has learnt from the Asian crisis that when the going gets tough, the credit flow must start going. To choke off the tap is to invite disaster where people who had nothing to do with the problem lose their jobs and property.

So do Bankers that expect the Reserve Bank of India to soften its view on interest rates in the light of the US Federal rate cut. Domestic loans and overseas borrowing may become cheaper, they say.

But I go if central banks intervene, are they not defending or even protecting the bad guys who were indiscriminate in their processes (like subprime lenders that overlooked creditworthiness of borrowers) and screwed up not just themselves, but everyone in the end? Do they deserve to be bailed out? How different is it from the tax amnesty schemes that ridicule many an honest taxpayer?

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Banish them all

There’s always big trouble if you take brokerage reports seriously. They analyse everything to death.

I know there are surgical processes for genital rejuvenation, liposuction and buttock implants. Is there something for Analyst annihilation? Me thinks investors world over will only be too happy to pick up the tab.

Every day they brazenly appear on business channels, newspapers (and even your email inbox is not spared) advising you to buy some or other stock. You go by their words and you’ll never get out of it. They talk as if they are economists (they connect Ben Bernanke’s rate cut with the fortunes of Indian Banking stocks and still say “decoupling”), scientists (wax eloquently on the potential of a “new” drug discovery that never takes off) and technologists (a sure dud, it will be) all rolled into one.

Yesterday just five minutes before the market opened, one analyst said Sugar stocks have no scope for another year. He quoted over supply, low prices, policy hurdles and what not. Up they went 20% and hit the upper circuits. It had me in splits.

I have 40% of my portfolio in sugar. All bought at 52 week lows when everyone was busy buying overheated Real Estate, Infrastructure and Power sector stocks. I had another reason. Not one analyst put out a `buy’ on it.

Bernanke did it, finally...

It’s a tight rope walk for Ben Bernanke, no doubt. If policy makers cut rates too cautiously, they risk a recession; if they cut them too much or too early, they risk stoking inflation.

In reducing its benchmark interest rate by an unusually large one-half percentage point, to 4.75 percent from 5.25 percent, the Federal Reserve made it clear that policy makers viewed the turbulence and disruptions of the past couple of months as too dangerous to ignore.

The reaction in stock markets was ecstatic: the Dow Jones industrial average jumped 200 points almost instantly and ended the day up 335 points, or 2.51 percent, at 13,739.39.

With a weak dollar that helps surge in American exports, for a change, the US is no longer the world’s engine of growth; the global economy could now become the engine of American growth.

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Academics test drive at hedge funds

Yale University professor Roger Ibbotson

The growing and lightly regulated hedge fund industry is attracting new players — business school professors eager to test their theories in a field known for big risks and occasionally bigger rewards.

Hedge funds are becoming a tempting tool for faculty members looking to sharpen research and giving a Wall Street perspective to their students, all while making some extra money. Economic consultant Peter Bernstein reportedly said the link between academic theory and Wall Street is not new, but the interest among professors to run a hedge fund is.

While hedge funds frequently outperform more traditional investments, some have failed spectacularly. Last year, Connecticut-based Amaranth Advisors wrongly guessed that tropical storms in the Gulf of Mexico would cause natural gas prices to spike. The storms didn't develop and Amarath lost billions within a week, prompting lawsuits and congressional hearings. So did several others that chased subprime debt.

Does this enthusiasm to test drive academic theory explain why there are more busts than booms in hedge fund domain? Why does the expression “up by the stairs and down in the lift” come to my mind?

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In my other blog

Tech Trends and business ideas

Pimp your I/O
Devices are cool
Farmed out sourcing

All go rhythmic

Free world, yeah
Don’t grudge the central banks
A whiff of freedom
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Rewarding the Lemons

Lately, this story from my younger days cross my mind often.

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The Emperor Paul, of Russia, was so provoked by the awkwardness of an officer on review that he ordered him to resign at once and retire to his estate. “But he has no estate," the commander ventured. “Then give him one!" thundered the despot, whose word was law, and the man gained more by his blunders than he could have done by years of the most skillful service.

An involuntary smile came to my lips as I think of the ravage caused by subprime mortgage lenders and the liquidity infusion from central banks of US and Europe….

Rewarding the lemons?

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Black Swan - CNBC killer?

Thanks to this post by Matt McCall of DFJ Portage Ventures, I could read this splendid write up by Michael J Mauboussin of Legg Mason Capital Management on Strategies. Find the link in Matt’s post.

Stowing away some startling insights for my own recall and for you, my readers.

- The difference in [investment] return has nothing to do with knowledge; and everything to do with emotional and psychological factors. (Curtis M Faith – Way of the Turtle)

- What separates the good from great investors is not knowledge or raw smarts, its but patterns of behavior.

- All investors must be alert to black swans – events that are outliers, have an extreme impact and are explained only after the fact. We get closer to truth if we focus on`falsification’ (seeing one black swan) instead of `verification’ (seeing lots of white swans does not allow for the statement all swans are white; but seeing one black swan does disprove the theory).

- Cognitive errors including loss aversion are often the source of sub-optimal investment decisions. They tend to focus on frequency [of losses/gains] than on its magnitude. Buffet distinguishes between experience and exposure. Experience looks to the past and tries to predict the future. Exposure, in contrast considers the likelihood and impact of an event that history, especially recent, may not reveal.

Great nuggets of wisdom…. I had never been a fan of quant models of investing. (Confession : I had consulted on a quant venture some time back for a friend from the hedge fund world. But that I did for a living… can’t thrust personal beliefs on clients) My logic – no model can predict a million minds and their billion different views that spur investment decisions. Now I am a total heretic. Buffet, Taleb, Mauboussin, Matt and now I, give you one more reason why you should stop watching CNBC that gives rebirth to the breed of analysts that should have long been dead and gone…

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Complex hedges and the quant threat

O.K. So our IT CFOs are getting smart. They no longer settle for currency markets to determine their future. Joining the global trend of using exotic hedges to protect their realizations, they too are getting used to clever bets.

Check this out. Under the tailormade transaction known as STRIPS in market parlance, the corporate can settle the dollar every week, fortnight or month over the next few years, through what’s called a “series of options”. For years few bothered to use it, but in recent weeks there has been a flurry of activity. In the last one month, deals worth $100-200 million have been struck almost everyday.

Good. But coming to think of it, it’s a bet. The management strategizes, the operations team executes, marketing sells it and bills the client. All of them work so hard - only to stake it all in a quant bet? Here I risk sounding like your grandfather. But I am a sworn enemy of anyone trying to define a future thro quant theories and complex hedges. How many CFOs understand the complexity of hedge before they book one? After all, CFO is only an employee and not a shareholder who's ass is on the line if his call goes wrong. At best, he's a bean counter and can plead mea culpa... Since when has anyone been endowed with the power to call future course of a currency !

This seems to be the thrust of A.V.Rajwade’s article in BS. He says some instruments are so complex that it can take investment banks' computers entire weekends to value them! Can't agree more. The best hedge I go is constant investment in R&D led innovation to reduce costs, improve operational logistics and expand margins without affecting the cost to consumer. The day you think that's not possible and wait for exchange rate hedges to save your bottomline, it's time you exit the business and head for the hills. Because, you're on your way down...

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Mallya's Spyker deal is not just hype and glory

Not many would have sensed the spirit behind Vijay Mallya’s co-investment in Skyper, a Formula1 team. Knowing his penchant for high life and fast cars, may be it just got swept aside as just another Mallya indulgence.

Yet it appears the deal between Vijay Mallya - Chairman and CEO of Toyota sponsor Kingfisher Airlines – and Dutch entrepreneur Michiel Mol - Spyker’s Formula One Director might just make incredible business sense.

Here’s to why. It might just give a uniquely high-impact advertising forum by providing sustained brand visibility for the 90-odd minutes of a race. Importantly, given the increasingly stringent limits in Europe on liquor and tobacco advertising — two significant Formula 1 income-earners — the sport is making inroads into Asia. China and Bahrain are recent entrants to the calendar, Singapore follows next year and, who knows, it may be India after that (Mr Mallya heads the local racing body). These will provide Mr Mallya with an entrée into high-value Asian markets to grow his airline and liquor businesses.

Especially after Narain Karthikeyan raised the profile of Formula One racing in India when he became the first Indian to compete in a Grand Prix with Jordan in 2005. Now Mallya believes his purchasing Spyker could boost it still further. With a local hero behind the wheels, the Indian viewership also might shoot up. If anything, that could be a bonus of sorts.

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Debt vapor

Thinking of early 90’s when I had just started working….

Indian companies were then extremely under leveraged and over mortgaged. For every Rupee of debt, one had to mortgage Rs.4 worth of assets because Marked-To-Market (MTM) as a concept was totally unheard of. Book Value has been the norm and it suited institutions better. I remember the time when I used to wait outside the offices of GM/ED of Banks / Financial Institutions (FI) who literally rationed loans. We never had extra assets to mortgage as properties worth several times the value of loans have already been locked down by earlier loans and this wait was necessary to get an NOC to create a second charge for a new loan. Still the securities to total debt ratio managed a cool 4 to 1.

Cut to the early `00, the situation reversed. Liberalization meant multiple streams of credit available to Banks/FIs and FII, PE and Hedge Funds entry meant surfeit of money supply that had difficulty in finding room to get parked. Corporates reveled in this new order of things and leveraged themselves to the teeth. They had a problem of finding destinations to invest in. The recklessness fueled by sudden excesses meant bad judgment and funds literally got sucked into projects that turned out to be literal blackholes, from which nothing would come out.

And now we hear this. I am not surprised. Are you? I think history will repeat and it’s time we prepare ourselves to cool our heels at the reception lobby of Banks/FIs waiting to be called in by the GM/ED…or who knows, it could even be outside a Manager’s office at a Bank Branch…!

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Will India's IT vendors turn realty players?

Pune factories going the Mumbai Mill-land way… Turning into expensive real estates. Bajaj Auto looks like exploring turning its Akurdi plant into developed real estate.

Judging by the little or no R&D investment by India’s famed IT vendors, recently endorsed by Indis’s distant 46th ranking in global IT map, what are the odds for Infosys, Wipro and TCS to junk their businesses and turn realty plays? Satyam already has its "Maytas " group (got by reversing “S.a.t.y.a.m”) of companies into which it can morph any day.

Going by the large swathes of land and building they hold, You can’t grudge them that… Benefits? Besides the huge value that they can unlock, here they don’t have to face up to an IBM, Accenture and EDS or to brood about higher visa costs, rising wage costs, Rupee depreciation, poor skill levels, shrinking margins, attrition levels….

Aside of that, few will see any great organic upsides in the near term to their shareholders…

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