Sunday, June 6, 2010

Throw the dice... Let the stocks roll


The corporate scorecard for the year ended March 2010 passed off uneventfully. No surprises on the upside. Coming out of a bad year, results were along expected lines. If there were any pockets of disappointment, it was, for me, the public sector units. Across industries, the PSU units showed some tiredness in their performance. It is unlikely that they can do anything spectacular, given the fact that making profits itself is seen to be a kind of ‘mission accomplished’ for the PSU’s. The other takeaway as far as I am concerned is the worry that most of India’s engineering giants are running out of steam. In spite of bulging order books, execution seems to be fumbling. One last worry is the high rates of attrition in the services sector. Whether banking or IT, the attrition rates are getting higher.
I met with a few companies in the IT sector as well as the finance sector. It is a challenge for them to hold on to people long enough, especially at the entry and middle levels. A friend of mine runs a head hunting firm focused on senior hiring. The main driver for change is money (no surprises). But what was sickening was the chase. Mediocre quality rules the roost and has highly inflated egos, apart from expecting fancy salaries. At the entry level, it is clear. A couple of thousand rupees more per month is reason enough for change. In one IT co, they worry after every pay day. Some employees simply do not turn up. They are not bothered about any letter of release or certificates! Here, I do not blame the employees. The employers are the root cause. In difficult times, they let go of people. An easier option would have been to let go of few seniors who are superfluous and take an across the board pay cut. Instead of that, they sacked youngsters, who now give it back to them likewise. And I also see madness returning in the hiring area. Start up cos and cos planning their IPO’s or fund raising want to adorn their payrolls with names. In this hurry, they are willing to pay fancy ‘sign on’ bonuses and ridiculous salaries. Of course, the people joining realise what is happening and they take advantage of the need (greed) of these companies. Net net, I am seeing unsustainable cost structures getting built in the services industries. The senior fellow wants to pay a fancy salary to the junior, simply because it ensures that he will get a higher salary! The biggest take away from the recently ended fiscal year is not in the balance sheet, but will make itself felt in the profits in the years to come.
The other thing that, to me, is worrying is the failure of companies to add to supply. Not much spending on capital expenditure, not many new facilities coming up, infrastructure not getting the desirable momentum portends difficult times ahead. Add to this domestic inflation which is quite stubborn, I find it difficult to see the road ahead for most of the large companies. At some stage, supply will come in and normalise the profits. The present levels of profits are clearly not a sustainable thing. Companies will have to give up on the bottom line when the top line accelerates. Add to this, in sectors like FMCG,competition from unorganised sector, local and regional players is very evident from looking at the stagnation in businesses of companies like HLL ‘s They seem to be enjoying growthless profits.
And the moment the markets get better, companies are in a mad rush to increase the supply of equity. And regulator relaxes the rules to create more illiquid stocks.
These are the times when I feel that our markets lack an instrument where one can go short on a stock over an extended period. In the old badla system, one could do this. Alas, today there are no derivatives which will let you short a stock over a long period. The monthly or quarterly rollover system is no substitute for the old system. And this brings me to a point that was raised by a good friend, Nalin Moniz (he runs a PMS company) in response to an article of mine on evaluation of PMS. He maintained that when one cannot short a stock effectively, it is not fair to insist on absolute returns. The stock market is structurally skewed in favour of the bulls.
So, to make money in the stock markets, one has to get lucky in the minefield of small cap companies. The other thing is to keep money handy and pray for a decent fall in the market (say by around thirty or forty percent from here) and then buy. Timing is everything in today’s markets, where there is too much money chasing limited investment options. The good thing is that this money exhibits a herd mentality. If they all panic together, it gives a good buying opportunity.

No comments: