Monday, September 28, 2009

Suzlon- Windmills of my mind

Suzlon. Would love to find out how many family owned companies are doing business with the company and how much is the revenue loss.
The company came with great fanfare and good publicity, now surely is struggling at the listed entity level. Promoters have been busy selling shares and creating their personal wealth outside of this company.
Watch the cash flow, the debt and the dividends. You can smell the company with these three things.

Corruption as a national trait

This kind of corruption is the NORM in India. Even if these &%^#( are paid a million dollars a year, they will not stop this corruption.
In Chennai, I have yet to find a single service from a government entity, that does not involve speed money.
In my lifetime, corruption is at its highest and getting worse day by day.
All you to do is to make a list of where the government servants send their children for schooling and higher education and you will quickly understand how.
Of course, property, gold, lifestyle, holidays are the other things to check.
India surely will scale new heights in corruption.
Mera Bharat Mahaan.

Saturday, September 26, 2009

Independent analyst- Is this an oxymoron in India?

When will we get independent analysts like this? This piece is also interesting in the light of everyone stupidly shouting for 'consolidation' in the banking space. Consolidation does not mean anything in banking. It does not increase availability of total credit.

Manipulating the listing price - IPO investors take care

In a process called 'laddering,' IPO shares are offered to particular clients by underwriting firms under the understanding that they will purchase more shares at a specified price after the opening company begins publicly trading. These 'particular clients' are frequently executives of companies that the underwriting firm does banking business with (and wishes to do further business with). The practice of laddering tricks the market. Investors observe that an IPO stock's prices are rising and join in the trading, assuming the shares are moving at an honest rate. Laddering artificially balloons the value of a stock, making it appear to be a hot pick before investors. After the IPO stock's value rises, the client-investors often sell their shares and make huge profits. Those who are not client-investors of the underwriting firms, and thus not aware that the value of the stock has been inflated, fail to sell, and end up holding highly overpriced shares.

L&T buys Chola mutual fund business. Chola Wins

At last,the Murugappa Group has realised its folly. It was doggedly hanging on to its mutual fund business, losing money hand over fist. Group companies support not withstanding, the size refused to grow. Performance middling, bloated staff strength and lack of shelf space in financial services. Now that they have sold it off to L&T, the next act would be to sell off what still remains in the Financial services space. It is sad, that of all the Chennai based fiancial services firms, Chola, with its staid though solid group backing, has been a disaster. Inability to think long term in this business, lack of risk management and a greed for moneylender type returns are not what will give you strength. Plus, unlike Sundaram which was focused, or Shriram(inspite of all the troubles it went through)which created a niche in second hand vehicle finance, combined with a big retail footprint in the south, Chola was a boutique which went sour.
For the Murugappa group, the situation would improve further once they also exit the financing business by selling out fully to DBS. That business is unviable and I doubt if the group likes loss making businesses.
Now, they should be very happy that someone has been stupid enough to pay Rs.45 cr for a handful of mutual fund schemes. For the buyer, I doubt if the non-group assets would be of any significant size and the 45 crore may actually turn out to be a huge percentage of the AUM that is non-group.
Now, L&T, has got a bunch of 80 odd employees and a new business which they cannot ever hope to make money out of till they exit the same. Maybe, with their brand, they will be able to rope in a crazy foreign partner who will pay a fortune to get in to bed with L&T.
As a business, there is absolutely no sense for L&T to get in to. Unless they think that the L&T brand will pull in a huge AUM and they can use the financial clout to get cheaper money for L&T Finance.

Thursday, September 24, 2009

Moody's caught with its pants down

Rating agency Moody's caught with pants down.
Proves the point of what I wrote in my ET piece. Listing and greed go hand in hand. Only way out is to delist the company. Distribute the capital between 20 or 30 odd banks who can form a committee to hire and fire people. Maybe some of the large investing insitutions like CALPeRS can sit in on the Board. Best way to preserve the independence of the rating agencies.

Politics of Business- Location, Location and Location

HyderaBAD. Andhra and Tamil Nadu are two states where politicians are in to serious business. A high number of Andhra MP's are from emerging business houses in 'infrastructure'. In essence, any business where government is involved. Tamil Nadu politicians prefer to stick to real estate, gold and media. AP uses the capital market route very regularly, whereas the Tamil nadu politician rarely does, preferring to keep affairs away from any form of scrutiny.
Andhra has given us a whole bunch of stories- Satyam, Maytas, Nagarjuna, Prithvi Info, Bartronics, The vanishing Leasing companies of the 80's, etc...
I recall that in our working career, we used to joke that if a company is from Hyderabad, Ahmedabad or Baroda, better be careful. These cities seem to specialise in nurturing greed, using whatever short cuts need to be deployed.
Of course, this abounds everywhere, but these locations seem to leave no route unturned, even if it means using the listing route.
Recently, the newspapers carried a story about how MP's from Andhra, who owned businesses in Infrastructure (and dealing with government for most business) were on committees that 'looked' in to delays and other problems in contracts with the National Highway Authority of India (NHAI). Of course, each of their companies has significant business with NHAI.
No follow up to the story. No TV channel raised this issue.
Of such stuff is corporate governance in India made of..

Tuesday, September 22, 2009

Some shareholders are different from others..

Very interesting news item. A family company uses the listed company to make money. Key employees get in on the act and do their own thing.
Virtually every listed company would have a satellite of family owned companies which take away the cream. The promoters build their personal wealth. Often, these companies are structured such that the promoters shareholding in these companies will be through near and dear rather than 'related' persons.
Some large groups have a separate corporate team of loyal employees handling this for them.
Surprising that this news item caught some newspaper space.!!

Wednesday, September 16, 2009

Tax evasion- the shareholder vs promoter

This story will die. The company will pay a fine from its corporate balance sheet. The directors who are responsible for skimming off the money not only from the tax man but also from the shareholders will get away scot free.
The Indian government's reluctance to punish white collar crime is well known, given that the vested interests are high.
This is precisely the reason that when anyone invests in an Indian company, the call to take is only on relative honesty and not in the aboslute sense. I even doubt if the next annual report of this company will comment on this.
This is precisely one of the events on which the stock exchanges and SEBI should insist on a disclosure from the company promoter/manager and seek explanation about what is the loss to the shareholders. Further, if any penalty is to be paid, it should not come from the company. The promoter should make good the loss of money to the shareholders also.

Tuesday, September 15, 2009

Hiring in times of boom and bust

This is good. In my corporate life, I have found absolutely no value add from the so called HR specialists. Often, they take your info and give it back to you in a different form. Generally, they end up hiking the cost of hiring and inflating the wage bill.I remember a firm called Hewitt or something like that which used to send me questionnaires and then ask for a fee for the full report! Wonder what the firm ever did to charge a fee! All they did was send a stupid excel sheet to a few firms and agglomerated the data. They had the cheek to ask for almost a lakh of rupees for this so called 'survey' of which the only use was that some key employee would study it and ask for what the highest paid in the bracket was getting. This survey single handedly pushed up the wage costs in the financial services industry. Typically, the CEO would like to hire juniors at as high a salary as possible, to justify his own fancy salary.
I found that the best way to keep the new hire pay down is to ask for the latest salary slip. Most candidates generally lie about their salaries. Even after giving their salary slips, they will maintain that there are some things 'off the record'. These are generally lies. Today, not even marwari companies give you too much 'off the record'. More disgusting is the lies the candidates make about 'expected' bonus. It is generally useful if you tell them to go collect it and then join. This usually is a ploy to extract 'sign on' bonuses, which became popular.

Indian Banking- PSU economics explained

One of my favorites from Catch-22:

Yossarian was riding besides [Milo] in the co-pilot’s seat. ‘I don’t understand why you buy eggs for seven cents apiece in Malta and sell them for five cents’
‘I do it to makea profit’
‘But how can you make a profit? You lose two cents an egg.’
‘But I make a profit of three and a quarter cents an egg by selling them for four and a quarter cents an egg to the people in Malta I buy them for seven cents an egg. Of course, I don’t make a profit. The syndicate makes the profit. And everybody has a share.’
Yossarian felt he was beginning to understand. ‘And the people you well the eggs to at four and a quarter cents apiece make a profit of two and three quarter cents apiece when they sell them back to you at seven cents apiece. Is that right? Why don’t you sell the eggs directly to you to eliminate the people you buy them from?’
‘Because I’m the people I buy them from’, Milo explained. ‘I make a profit of three and a quarter cents apiece when I sell them to me and a profit of two and three quarter cents apiece when I buy them back from me. That’s a total profit of six cents an egg. I lose only two cents an egg when I sell them to the mess halls at five cents apiece, and that’s how I can make a profit buying eggs for seven cents apiece and selling them for five cents apiece. I pay only once cent apiece when I buy them at the hen in Sicily.”In Malta’, Yossarian corrected. ‘You buy your eggs in Malta, not Sicily.
Milo chortled proudly. ‘I don’t buy eggs in Malta,’ he confessed, with an air of slight and clandestine amusement that was the only departure from industriour sobriety Yossarian had ever seen him make. ‘I buy them in Sicily for one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents apiece when people come to Malta looking for them.’
‘Why do people come to Malta for eggs when they’re so expensive there?’
‘Because they’ve always done it that way.’
‘Why don’t they look for eggs in Sicily?’
Because they’ve never done it that way.’
‘Now I really don’t understand. Why don’t you sell your mess halls the eggs for seven cents apiece instead of for five cents apiece?’
‘Because my mess halls would have no need for me then. Anyone can buy seven-cents-apiece eggs for seven cents apiece.’
‘Why don’t they bypass you and buy the eggs directly from you in Malta at four and a quarter cents apiece?’
‘Because I wouldn’t sell it to them.’
‘Why wouldn’t you sell it to them?’
‘Because then there woudn’t be as much room for profit. At least this way I can make a bit for myself as a middleman.’
‘Then you do make a profit for yourself,’ Yossarian declared.
Of course I do. But it all goes to the syndicate. And everybody has a share. Don’t you understand? It’s exactly what happens with those plumb tomatoes I sell to Colonel Cathcart.’
‘Buy,‘ Yossarian corrected him. ‘You don’t sell plumb tomatoes to Colonel Cathcart and Colonel Korn. You buy plumb tomatoes from them.’
‘No, sell,’ Milo corrected Yossarian. ‘I distributed my plumb tomatoes in markets all over Pianosa under an assumed name so that Colonel Cathcart and Colonel Korn can buy them up from me under their assumed names at four cents apiece and then sell them back to me the next day for the syndicate at five cents apiece. They make a profit of one cent apiece, I make a profit of three and a half cents apiece, and everybody comes out ahead.’
‘Everybody but the syndicate,’ said Yossarian with a snort. ‘The syndicate is paying five cents apiece for plumb tomatoes that cost you only half a cent apiece. How does the syndicate benefit?’
‘The syndicate benefits when I benefit’, Milo explained, ‘because everybody has a share. And the syndicate gets Colonel Cathcart’s and Colonel Korn’s support so that they’ll let me go out on trips like this one. You’ll see how much profit that can mean in about fifteen minutes when we land in Palermo.’
‘Malta,’ Yossarian correcte him. ‘We’re flying to Malta now, not Palermo.’
‘No, we’re flying to Palermo,’ Milo answered. ‘There’s an endive exporter in Palmero I have to see for a minute about a shipment of mushrooms to Bern that were damaged by mold.’
‘Milo, how do you do it?’ Yossarian inquired with laughing amazement and admiration. ‘You fill out a flight plane for one place and then you go to another. Don’t the people in the control towers ever raise hell?’
‘They all belong to the syndicate.’ Milo said. ‘And they know that what’s good for the syndicate is good for the country, because that’s what makes Sammy run. The men in the control towers have a share, too, and that’s why they always have to do whatever they can to help the syndicate.’
‘Do I have a share?’
‘Everybody has a share.’
‘Does Orr have a share?’
‘Everybody has a share.’
‘And Hungry Joe? He has a share, too?’
‘Everybody has a share.’
‘Well, I’ll be damned,’ mused Yossarian, deeply impressed with the idea of a share for the very first time.

Monday, September 14, 2009

Change is temporary- SNAFU

Get ready for the next frauds to happen within calendar 2010. Already, danger signs in India. High priced and dubious quality IPO's, banks lending recklessly, accounting fudges happening all over.
The interesting thing is that the analyst community in India will be a party to this rather than find out. Research hiring increasing and sell reports are scarce. Every share is a 'buy' and every IPO is 'subscribe'. Honesty again gets a back seat. With Indian firms ruling the roost in the audit field,post Satyam, expect more creative and Nobel prize worthy accounting.

An opinion piece in today's Economic Times. On ratings

Saturday, September 5, 2009

Suing the Rating agencies

A very interesting development in the US, the home of the rating agencies. It is high time that the rating agencies are stripped of their 'veil' of 'independent opinion' and held culpable for their views. This development need to be watched.
It is very sad that when rating agencies are under a cloud, CRISIL wants to go and rate 'equities' of mid cap companies. Mid cap companies are a mine field, where the promoters are yet to line their pockets and personal goals have a big priority over anything in the company. I think that if anybody invests on the basis of a rating, the agency is surely guilty. The agencies market themselves stating that they do all their homework. So, an investor has every reason to base an investment decision on ratings. The courts need to recognise this and hold the agencies accountable. Though I do come from a rating agency background, what I am seeing today in credit rating agencies is shocking.

Thursday, September 3, 2009

Banking consolidation , Microfinance et al
The insightful article on microfinance is a must read. Micro finance is not just about making credit available to the small guys and replace the money lender. It is also about understanding whether money will come back. All was fine till the government introduced this thing called the NREGA (like a dole, but guaranteeing some Rs.100/- per day for 100 days in a year to rural Indians) which has made rural India lazy. A family is quite content with this dole, which is also aided by rice at One rupee a kg (market price 30/- plus, free electricity and housing which is free of any cost.
The rush of people in to microfinance will make rural India undergo a 'credit immunity' syndrome. Very much like in the emergency days of Indira Gandhi, when the nationalised banks were forced to go on a rural lending binge. The borrower ultimately refused to give money back. Bankers who tried to recover were threatened physically and told to buzz off.
Micro finance kind of gives me a 'deja vu' feeling.
I am wary of nationalised banks, since the politicians will use it to get votes and the bank staffing leaves a lot to be desired. Bank chairmen are appointed at the fag end of their careers, where they are reluctant to take decisions, fearing subsequent enquiries, or are so corrupt that they use it as a time to build bases for a corporate life as a director or advisor. No one lasts long enough to give a vision or direction to the bank.
Recently, the ET talked about banking consolidation.
Consolidation in the banking sector, by bringing together banks is a great buzzword and virtually everyone wants it. The argument is that a bigger balance sheet enables you to lend more to a single customer. How true and nice it sounds.
Wait. Let me get the arithmetic right. There are two banks, A and B. Bank A buys Bank B. The cap of A is 500 and of B is 500. So the combined capital, logically, should be around 1000 (Let us not get in to valuation arguments here). So, Bank A, which could initially lend say 75 (if the banks’ single customer limit was 15% of capital) to a single customer, can now lend 150 to the same customer. Does this prove the point?
Let us delve further. Formerly, Bank B was also lending 75 to the same customer. Now it no longer exists. So, what has changed? Instead of two lenders of 75 each, we have created a single lender of 150. Is this what is desirable?
Let us not blindly repeat what everyone says. India is a tiny country, financially, with per capita GDP of less than a thousand dollars. When this rises, the banking sector will grow correspondingly. Global banks have to be large because they operate across borders. Indian banks also can, if they raise capital. By merging two existing banks, nothing changes. Two and two is four, when it comes to counting money. Yes, accountants can make it twenty two, but that does not take you very far.

Indian IPO's--- A great resource

My good friend, Ashok Kumar, runs a great site called
He has sharp and incisive comments on IPO's hitting the market. The great thing about him is that he calls a spade a spade. Anyone who follows him is very unlikely to go wrong.
He also provides a host of corporate services which you can gleam from his website.
I am delighted to provide a link to his site.

Tuesday, September 1, 2009

Maytas- A Fish story....

IL&FS takeover of Maytas. Is it good money after bad or just a change in status, with the money already having been lost? Having lent huge amounts to the promoter against shares in Maytas, the ownership was already there. Suspect that there is also huge lending and co-investment in projects by IL&FS and other institutions, which could have gone sour had Maytas been hurled in to bankruptcy. So, this move will perhaps help all to salvage some accounting value rather than real cash flow. One fails to understand how a company like this could have lost a sum of nearly Rs.5 billion in one accounting period. There were also talks that many properties that are supposed to belong to Maytas the company face issues relating to title and traceability. Now, there is a long haul. With IL&FS admitting that the company needs 'recapitalisation' one does not have to read between the lines to figure out that what is gone in to the company now, has perhaps vanished.
These kind of bail outs smell. Do not think that any one would have shed tears if Maytas had folded.