Friday, February 26, 2010

Amaar Sonaar Bodget...

The extremely clever budget unveiled by the FM confirms that the economy has its own momentum in spite of the government. Yes, of course, the stimulus in the form of excise cuts last year, did add a few more rupees in to the pockets of the businessman. The NREGA outlay has been enhanced, to ensure rising consumerism. The budget has been on expected lines and the FM has taken advantage of the fact that most people’s eyes were on the fiscal deficit number. By curtailing some spending, partially rolling back the excise stimuli in the backdrop of good industrial growth, his task became easy. In fact, the buoyancy in industry has enabled the FM to surprise the small universe of taxpaying Indians to have some increased money in their pockets. As usual, huge increase in outlays on education and healthcare (from a small base, so it seems large) which one hopes will reach the target audience.
Fiscal deficit (whilst being high) at 5.5% of GDP (a higher base than last year, remember) is not very low, but the markets seem to have taken to it kindly. Non plan expenditure, thankfully, is only up by 6%. The plan outlay has increased by 13%. Of course, we never get to see what actually happens later. Typically, the capital expenditure falls short of estimate to give in to rising revenue expenditure demand. Surprisingly, some government departments show a drop in expenditure allocation (Law & Justice,Mines, Supreme Court, huge drop in Petroleum ministry outlay,etc).
The budget is high on expectations from industry. Near 15% growths in revenues have to come from excise and the budget document shows a near 30% increase in customs duty revenue. The budget banks on the momentum of economic growth rather than give any thrust to the economy.
The corporate sector does not get anything. Partial withdrawal of stimuli by bringing excise up by two percentage points and increase in MAT by three percentage points is what they have got. Demand continues to be strong and governments for years have not bothered with increasing the supply side. In this context, the companies can easily pass on the increases to the buyers or at worst live with slightly lower margins. Of course, there are usual suspects in the industry basket, who seemed to have successfully lobbied overtime and got honourable mention in the budget speech itself. A reduction in duty for ‘magnetron’ in Microwave ovens, which may bring down the cost by around Rs.200/- on a microwave; a reduction of duty by 5% on medical equipments; a duty cut in Rhodium (a precious metal used in jewellery) and reduction of duty in watches that are imported! These kinds of actions definitely smell. The corporate sector appeared relived that the last year’s undeserving cut in excise duty was only partially taken away. For the corporate sector, this budget does nothing good. Service Tax remains undisturbed waiting for convergence with the GST.
Imposition of MAT should impact some of the Infrastructure companies marginally. However, it may not impact the earnings so severely. The action of putting more money with a few taxpayers, is good for sectors like automobiles, FMCG etc., Of course, it is likely that the lowering of income taxes may partly be saved.
Moving to the Direct Taxes Code and uniform GST now have deadlines (1st april 2011) for implementation. I hope that there is no extension in this. So a breather for the mutual fund industry gives them another year to continue with corporate and banks’ money.
For the markets, the budget is a big non-event. Yes, there was a holding of breath in the run up to the budget. But, nothing unexpected has happened to disturb the market. If anything, a few more rupees are available with some stock market investors, who also pay some taxes. This budget does not give the market any reason to move either way. What happened after the budget was more of a relief rally. What could happen is that FII money, if it was waiting on the sidelines, anticipating a bad budget, could come in to the market and spark a rally. In my view, our markets are fairly valued, with a lot of high growth expectations. No need to go through the budget to take any investment decisions. Interest rates should stabilise since the borrowing plans of the government do not seem too extravagant.
One interesting development is the opening up of banking licenses to the private sector. It would be interesting as NBFC’s start to talk with small private banks for marriage. We could also see some of the ‘hidden’ owners of old generation private banks breathing a sigh of relief as this will provide the opportunity to legitimize the holdings. The valuation of NBFC’s (those perceived by the markets as being desirous of getting in to banking) and small private sector banks will turn volatile. Of course, this is negative news for PSU banks. More competition as well as loss of whatever talent is left is on the cards.

Usual cautionary note is that the fine print is yet to be read and analysed.

Moneylife article on savings

Thursday, February 25, 2010

Is SEBI taking over AMFI???

Finally, SEBI has a full time CEO. Media reports suggest that he was ‘guided’ there by the regulator rather than chosen.We did not have the grand old man, Mr. Kurien introducing him to the media. In his first interview, he has already sounded out his intent to convert AMFI in to an SRO.If a person with no experience can make this statement on day zero, obviously he has been planted or imposed in his chair. Someone who is totally to the industry has made this remark. If AMFI becomes a SRO, it would be tragic. UK is a class example. It is akin to setting a cat to guard the milk.
Why is AMFI having a CEO, who is sixty plus, with zero experience in the mutual fund industry? Who chose him? Was it AMFI members or SEBI used arm twisting?
If AMFI moves to self regulation, it will become a law unto itself, like IRDA. AMFI will become a parking slot for retired bankers and civil servants. AMFI is just a club cum trade lobby, with vested interests guiding each and every move. SEBI, in the first place should never have given any freedom to AMFI to write any rule books.
AMFI is also a distributors club. Imagine, this is the only industry where the seller has to have a license. The fund manager can be a autorickshaw driver. AMFI / SEBI have done nothing to take care of this.

An afterthought: Maybe SEBI interfering in AMFI is a good thing. Hopefully, AMFI will now be aware of the existence of the universe called 'investors' and a watchdog will be in place. If it has to be a SRO, at least half of AMFI Board should be of people outside the industry, who can shake a leg for the investors

What a shame!!

Thursday, February 18, 2010

Mutual Funds- Dividend - the creative fudge

A mutual fund dividend payout is just taking your own money and giving it back to you

A spate of advertisements by fund houses about dividend payouts from various schemes has been enriching the print media of late. How do you use the dividends in a mutual fund at all? You have a corpus NAV, which gets reduced not only by the dividend payout but also by the amount of dividend distribution tax that is paid to the government of India. Unlike a business entity dividend, the mutual fund dividend is eyewash and is of use only to some tax avoidance or evasion entities.

It is no sign of prosperity of the mutual fund. Dividend option is good for those who seek tax-free income in the short term. In equity mutual funds, if your holding period is beyond one year, then any gain on sale of mutual fund units is tax-free to the investor. In such a case, why opt for dividend and then suffer the payout to the government of India?

The corporate sector uses the dividend option in liquid funds, because of tax arbitrage. Even with the dividend distribution taxes, they still make some extra money in the short term. For an individual also, a daily dividend scheme in a liquid fund does make some sense.

When the new Direct Taxes Code comes in, probably we would have to search for new loopholes.

However, when it comes to equity schemes, a dividend payout helps only someone who wants to indulge in ‘dividend stripping’. For this to happen, one has to be holding the units either three months before the dividend date or for nine months after the dividend payout. Let us assume that the pre-dividend net asset value (NAV) of a scheme is Rs20 and that there is a dividend of Rs4. Once the dividend is paid out, the NAV will decline to say around Rs15.12 (Rs4 for the dividend and 88 paise as the dividend distribution tax to the government). After a year, let us assume that the NAV has not moved at all. In this case, you have a ‘loss’ of Rs4.88 when you sell the units which can be offset against short-term gains. Of course, you have taken away Rs4 as dividend, which is like agriculture income, i.e., tax-free! A lot of HNIs use this route and many fund houses discreetly market the dividend payout three to four months in advance. Of course, it is illegal to announce dividend intentions so early, but who the hell cares about the law? Many schemes, if analysed, show healthy inflows around three to four months before the dividend payout.

A mutual fund dividend is taking your own money and giving it back to you. In the process, the dividend distribution tax chips away at some of your asset value. This distribution tax is not applicable if you are a non-taxable entity like a charitable organisation.

As a retail investor, stay put in the growth option. You will be better off. Whenever the fund pays a dividend, the NAV drops by the dividend payout plus the dividend distribution tax.

Wednesday, February 17, 2010

Labour without borders... The lazy Indian

Recently, I met with a few companies in the textiles and engineering industry in south India. They all agree that times are distinctly better and that their order books are bulging.
I asked them about why results of companies like L&T were below par in spite of having so much orders on hand.
It was interesting. Across sectors, we are facing a shortage of 'skilled' labour. It is sad that most of the engineering graduates as well as MBA's from second rung colleges do not acquire any skill sets that they ought to have, in order to justify the tag or label they carry. Unfortunately, in the era of shortages, the youth have an exaggerated self opinion of their worth and ask for wages far beyond what they deliver.

The mills in south India are turning to migrant labour from North India. Cheaper, better productivity and reliability. The labour is focused on making money and sending it to their homes, so work harder.

It is strange that in India, no one wants to work hard in his home state. All of us have seen that poor work culture places like Kolkata or Kochi where the locals set their own slow pace of idling. However, the same Bengali or the Keralite is amongst the hardest and best of workers when they work in Mumbai.
So, Raj Thackeray and Shiv Sena notwithstanding, there is a very strong case for encouraging migrant labour. That is the only way that the miserable productivity of the Indian working class will improve. To start with, all state government jobs should go to out of state persons. That can set the pace.

PSU stocks.

Why I Hate PSU Stocks
February 09, 2010 11:46 AM |
R Balakrishnan on saving and investing prudently

From mindless government interference to wasteful expenditure, the many reasons to shun the stocks of government-owned companies

The planned disinvestment of government (PSU) companies is keeping these stocks buoyant. Normally, when there is a likelihood of fresh supplies (whether it is sugar or potatoes), the market price softens. However, when it comes to stocks, our markets are perverse. Stock prices are actually moving up, in anticipation of divestment! I can understand this in the case of private sector companies—the promoter pushes up the market price. I am sure that even the PSU honchos want a higher price, but one wonders who would want to bid up the prices before an issue. Are the investment bankers creating the demand? Or is it the existing institutional investors who push the prices up, dump it in the market and then buy from the primary issuance?

Of course, the government has now gotten smart. For the initial public offerings (IPOs), the government is talking the right language. It announced some policy changes to benefit NTPC, for instance. The government has a right to do this; after all, it owns the company and it runs the country. However, I have several issues with PSU stocks.

Some of these companies have such low floating stock that market prices are distorted. If the government were to issue stocks of such companies (like MMTC), investors would do best to keep far away and leave institutional investors to guess their true worth.

I only look at whether a public issue from a PSU really changes anything at all. Does it mean that the government would appoint a CEO on merit rather than an officer from the IAS? Will a PSU’s functioning be any different? Will the employment policy be different so that the PSU can attract and retain talent? Will corruption come down? Will PSUs have a long-term business strategy? Or is it that I expect too much? When a PSU offers shares to outsiders or to the public at large, maybe it is irrational to hope for better accountability.

Public-sector banks are prime examples of market listing not making the slightest change. Chairmen still get appointed without having the tenure to think long term. Banks still act as tools for the finance ministry to participate in loan melas, write off loans to fulfil political agendas and then the Reserve Bank of India helps them to window-dress balance sheets by diluting standards of accounting, reporting and governance.

Or look at the irrational wage policies of PSU banks. When the whole world is moving to a ‘cost to company’ concept, banks have agreed to provide pension as a ‘defined’ benefit! Soon, at some stage, the pension bills of the PSU banks will exceed their current wages. Bank employees still get their time-scale increment, so there is absolutely no incentive to work. Promotions and caste-based themes decide everything. The top deck is reserved for the politically influential. Even the write-off of assets is through the inefficient and not very transparent route of asset reconstruction companies (ARCs).

Or take the oil marketing companies. The government’s policy of irrational subsidies has ensured that these companies never realise their true potential.
In spite of all this, why does one still want to invest in PSU stocks? Do fund managers not care only because they are investing someone else’s money? Or is it because they genuinely feel that PSU stocks are comparatively more reliable?
I look at simple things like return on equity (RoE) and see that most PSU units struggle to reach double-digits. They are rich in assets (land, property, etc) as they have built holiday homes, staff quarters, etc. Will these assets actually be sold off?
I will look at PSU stocks when the government sells them off entirely, without retaining any stake and not having any say in the appointment of a single employee. Till then, the PSU basket offers futile hope. Of course, one can take a view that it cannot get worse; so it will get better. As for me, I will chase private sector stocks. I know that some of them may be crooked but many are hungry for performance.

(This has been published in Moneylife as a column)