Being Nice in business! and its implications

Seth Godin, in his post sees a big opportunity in being nice. However, being nice is just one more example of A Rule of Thumb ( like "Customer is King") you just unwittingly follow. It works sometimes but not always. Consider a company serving a big line of customers with just one employee manning the service desk. She greets every one, asks a couple of questions about their health and suddenly there is a mad rush at the end of the line and the company now needs two servers.

What is the best way to be nice? Simple! don't charge for your service. This is the mistake that a lot of people can make. I am not saying don't smile, or be unpleasant (even though the smiling kinds are costlier to hire and anyway even more costly to maintain ie. keep motivated) but the problem is just getting carried away by these rules of thumb. You need to really ask yourself, does this really impact your business.

BA, for example found out that it was much more beneicial to solve a customer complaint than to get it right the first time. Now should all businesses do that? Anyways, what would happen to all the six sigma experts, then?

Avoiding Moral Hazard: Fed Style

Moral hazard in economics
In economics and ethical theory, the term moral hazard may be used for any situation where a person or organization does not bear the full adverse consequences of its actions.

Lending and debt
Rescue operations carried out by governments, central banks, or consortiums of financial institutions can encourage risky lending, if lenders know that in case of serious problems they will not have to take losses. Similarly, if governments know that inability to pay creditors will lead to yet more loans (to prop up finances), then they are less likely to have sound financial policies.

By refusing to bailout Lehman, Fed signalled that it would longer allow moral hazard ( although it had been looking the other way and may have caused moral hazard itself when for example it brokered the Bear Sterns deal, or remember TBTF? anyone).

While its difficult not to feel sorry for the employees of firms that fail, you also know that some where atleast some of these were arrogant enough to make 'bad bets' (as they call them, almost likening it to gambling). If they had come good these guys would be reverred like gods. But now, who will pay back the investors who thought their money was safe with these geniuses.

Tough Questions from Singur: Tata Motors and Government Vs Farmers

Tata Motors as stopped work in Singur in West Bengal, but its spokesperson said that there is still a small window open for Tata to return if normalcy returns. The $350 Mn that Tata Motors has put into the project is now a sunk cost. There are two scenarios for Tata to return.

1. Farmers give in (of their own volition/ forced or coaxed by government/ community pressure from lure of future jobs etc)
2. Or Tata strikes a deal with the farmers and gives additional payout to these farmers

The second scenario is appealing if the total payout would be lower than the amount Tata would have to invest in a new factory elsewhere + time costs. However this would not generally be good for other companies (and even for Tata) as this could potentially become a trend.

Even if the government acquired the land from the farmers at the prevailing market price, it is always a fraction of the land value after is handed over to the industry. The question is, at what price should the government acquire land. Is forced acquisition justified. What happens if one farmer does not want to give up his land and his land is smack in the middle of the land in question. What is your answer if the farmer in question is you and you little hut, that you call home, is smack in the center of it. What if farming is the only thing you have done your entire life. These are tough questions to answer if you are not the farmer.

And without fail, there are also rumors/reports of people close to the government owning a substantial stretch of land close to the land under question. What of these?

However, if you were a true believer in free markets, you would ask Tata to acquire land on their own at market rates and go fetch elsewhere even if one farmer refuses. The pseudo capitalists would let the government do their dirty in this case and use the free market argument to get government to slacken regulations elsewhere. What would you call such people? Ethical?

Certainly not....

NSE NIFTY Technical Analysis

NSE has moved towards its target of 4650 levels. However it traced back from the resistance level. It has to close above 4670 to make any decisive move. I expect the sensex to move sideways for a few more days. Further reduction in crude price could be one trigger. Growth has already slowed down, however this may have already been factored into the price. June IIP growth nos showed a Q0Q increase and should be higher July onwards due to base effects.

The question is, Has the drop in growth has bottomed out?'.

Options Trading Strategy: Write 'On the Money' calls cover above 4650-4670. Buy Put options (out of money)

August 13, 2008

NSE NIFTY - Resistance Levels

It would take some real triggers for NSE NIFTY to break through. It has strong resistance at 4450 level. Post that it would encounter resistance at around the 4525 to 4540 levels and the second at 4650 levels. If it breaks above these levels, nifty could see a huge upward swing. But to close above that would require huge positive fundamental triggers.

Options Strategy: Buy Put options, Write Call Options at 4450

August 4, 2008

Falling Service Levels of Private Companies (Telcos, Banks, Discoms etc)

We, in India have always wondered if we would ever get respite from the poor service levels that public sector enterprises have been dishing out to us in the past. There was hope that things will change when private sector takes over. For a brief time this was even true and we though the days of poor service were over.

However it is now time to face reality. You just have to look at the large private sector players today to realize that the dream has gone sour especially in this department. Far from being customer friendly the large telcos, banks, and power discoms behavior rivals the worst departments in the public sector and in many cases service levels and regard for customer is even lower. This is true especially of the top players in each category.

Bottom line is that these private companies care only about their profits. The decision for them is simple and depend on the answer to this question, 'Is investing in customer service for you NPV (Net Present Value) positive or negative?'. God help you if the answer is negative. Large private companies are more like monopolies in their respective field. Take telcos for eg even though there are a number of companies now, with no number portability you are locked into telco and therefore there is no reason for them to improve their service as long as there is no mass exodus.

So what can you do as a consumer. Make it expensive for them to deny you good service. Switch, Complain, Sue. Be aware of your rights. Abuse back, blog about that poor experience that you have had. Cause a mass exodus of customers. Cause a run on the bank. Make theme pay. Make them realize customer is king. Other wise only competition can be your savior.

Future of Training Outsourcing in India

In India the growth in services sector has been despite the formal education system, therefore the IT companies had to build huge captive capacities for IT skill development. In the absense of adequate supply of trained talent these played a very vital role.

N & A, the largest players in this segment had positioned them selves as being an IT training provider to non-engineers and its trainees were therfore not considered by the Tier 1 companies as being up to the standard. However, over the years while N has moved upwards and started to address the engineering segment in a big way, IT sector has also lower requirement to be seen as only employing IIT engineers and therfore it makes perfect sense for large IT companies to source talent from training providers such as N.

Some of the other emerging sectors which did not have such training capacities and either due to lower agency costs or due to urgent need to train people, have out sourced their training to N. More innovative amongst them have been quick to adopt new models.

But there was reluctance in IT companies. Imagine if you were leading the training dept at these IT companies what would you do. However, with large companies now hiring upto 3000 per month, training has become a CXO level problem as managing training at these levels needs a professional training organization.

It is only a matter of time before they board the ship too. and therefore, I believe that the future is bright for companies like N.

Buffett's gyan on Investing:

"Rule No 1: Never Lose Money.

Rule No 2: Never Forget rule No 1."

Warrent Buffett

Go N Deal Go!

Well, the left may think that the N Deal is anti national. BS! Maybe the left MPs do not suffer prolonged power cuts at odd hours during summers. The nuclear deal, is in the interest of the aam aadmi (the Common Indian Man). But what about the the the nation's sovereignty. BS! BS!. No body is ever going to use a Nuclear Weapon (read WMD) against the country. How many bombs do you need for nuclear deterrence. One, two, three. (More BS!) I bet that we already have a stockpile, big enough to deter all of our enemy countries.

Anyways, if we feel the need to develop some more WMDs some day, what is to stop us from going ahead and asking IAEA inspectors to leave? Would we not be back in a situation that we are in today?

Coming back to the question of power capacity. We not only need more power, but need to improve the efficiency of distribution as well. The transformer near our house has tripped four times in the last 5 hours, leaving the whole DLF phase 2 (apparently a premier locality in Gurgaon) without power. Another theory we have is that they cut power here so all people buy flats in the new societies that have power back up and can buy their own electricity from power generating companies.

So here's cheers for atomic energy! Go N Deal, Go!

Dawn of PE in Indian education space

As fund managers and investors look for new ideas in the investment universe, Education is one sector that is gaining prominence for both PE and Venture capital. With only a handful of listed players and and a few other organized players operating in the non regulated segment of education, there is ample headroom for growth and possible entry of more players in the next few years.

Educomp, the country's leading education company on the basis of stock market performance (market cap had recently crossed $2b) has a revenue base of 280 crores implying huge growth expectations from the company. Gaja capital had invested in the company and made handsome returns on its exit last year.

Everonn, with revenues of ~95 crores in 2008, has touched valuations of 1700+ crores before correcting over 60 percent recently. Recent investors include New Veron, DB & The India Fund (Blackstone)

NIIT, on the other hand gives investors an exposure to education and to the vocational training space. Its revenues crossed 1000 crores in FY08 and is Asia's largest education & training company, is also down ~40% from its 52 week high. It is expanding its horizons beyond IT education into other employability segments and is a leading player in School education and in Corporate training . Its current market cap is ~$400Mn.

With a 100bn+ population and poor education infrastructure, Education offers a huge opportunity for value creation for private money. However the rule is "Caveat Emptor" as all is not lais·sez faire.

Sensex Valuations

Often, we hear people talking about sensex PE and pointing out how the market is overvalued in comparison with other economies They are implicitly refering to the theory of mean reversion and implying that the markets would correct downwards.

However they completely ignore the fact that that the underlying economy is still growing at 7-8 percent in real terms and therefore the premium over other markets is justified.

Anyways, what i really wanted to point out was that they also imply, that along with the sensex, other stocks should fall as well. While their movement is correlated to an extent, one needs to take a look at the underlying valuations of these stocks independently of the sensex. The sensex PE is at 13-14, but other stocks with similar growth performance are languishing at a PE of the order of 5-6 or below. Which would make sense if the markets were expecting a dip in earnings. i.e. profits next year being lower than in the previous year and not just a slow down in growth, in the short term.


If you were to do a DCF valuation, a short term performance blip anyways has low sensitivity to the overall valuation as a large majority comes from the terminal value. So if structurally the story is intact and long term growth is not threatened, which I believe is, I would be a buyer in these markets

Dividend Yield of Sensex Companies

Dividend yield of the 30 companies part of the BSE-30 sensex is as follows:

Top 10 dividend yield stocks

Recent stock market correction has left many stocks with attractive dividend yields which indicated a huge value (assuming of course that their earnings do not go down even if growth is slower). A list of the top 10 dividend yield companies is as follows. Remember that dividends are tax free in the hands of the investor and to compare yields to bank interest rates you need to remove a third from the bank rates.

Company Dividend Yield -%
ARI Consolidated 16.37
Hind.Housing Co. 15.95
Swastik Safe Dep 15.87
Ashirwad Capital 15.35
Disa India 14.80
Kanchan Intl. 14.79
Schrader Duncan 14.19
Hinduja Ventures 14.04
Assam Petrochem. 14.01
Allsec Tech 13.33

Of Bottled Water

Read Vir Sanghvi's column on bottled water scam in the mint today. I see that happening all the time. Restaurants in India supply over priced bottled water. What he forgot to mention was that this happens in cinemas too. In PVR, for example, you need to pay a bomb for every thing from pop corn to water. Since they cannot sell bottled above MRP, they have come up with a novel scheme. Water bottles supplied to these halls are different from the usual ones available else where. Mind you, just the bottles and not the water are different. MRP printed on them is way higher that usual for similar quantities of even same brand available outside (and people pay for this despite water coolers that are installed in the premises that are filled with filtered water. They could do atleast this much)

I do not know if they pay a higher tax to the govt (vat etc on this ) but it sure makes them a huge margin. I guess every one has to just put his/her foot down and stop buying items that are priced nonsensically.

NIFTY Options Strategy

NIFTY bounced back today. The volatility is likely to continue.

Anyways, for those expecting the market to increase , recommend buying a strap (ie go long in two calls and one put options with same maturity and strike price) or a strip (long in two puts and one call options as before)

Google Ads Slider - Giving in to customers desire to view ads

Only Google can get away with it. Notice the slider (circled here)

Phew !!!!

Technical Analysis

Was reading Graham's "The Intellingent Investor". According to him, its is difficult to benefit from trend following. A number of people I know, deride technical analysis. However, I believe that patterns should be looked at in a way you would look at statistical models.

And therefore like these models, technical pattens represent statistical realities and like all statistical models, would give you predict correctly only a certain percentage of times. As long as this is above 50 percent it has some value. Need is to be persistent with your apporach and to select patterns where predictive success percentage is substantially greater than 50 percent.

Anyways, market held above the 4015 support today. Fundamentally the markets look prime for entry. However, the momentum may take the market down further in the near term.

Technical Support NIFTY

The next support for NIFTY is at 4015 levels. If that does not hold then the market can go down a further 5-6%. However, clearly these are attreactive levels to initiate long term long positions.

June 28, 2008

Financial Analysts and Consultants

Can never forget the following comments by a consultant:

Q. What does he tell a client who desperately wants to buy into the market?
A. "Buy half of your desired position now"

Q. What does he tell a client who is losing money in his position and wants to sell?
A. "Sell half your position now"

Now just imagine what would he tell his clients if the market moved up and what would he tell them if the market moved down.

Making sense of the Oil bubble

Prices of oil cannot continue to rise and sky is not the limit as most speculators would have you believe right now. Yes fossil fuels reserves are limited but human ingenuity would find a way to use alternative energy sources. Already a lot of ways which were not economically viable earlier are now profitable because the price of crude is way above the breakeven mark for them. As for limited refining capacities there is always a cycle of over capacity and shortage similar to all commodities.

Guess it is easier to return to these reasons when the price trend reverses than now. Till then keep looking at the following reasons for price rise and take your pick:

• Limited fossil fuel reserves
• Rising crude demand due to rapid demand increase from emerging economies
• Limited crude refining capacity leading to short to medium term fixed supply
• Cartelization from OPEC/ hoarding
• Speculation / Traders playing on uncertainty due to all of the above / Psychology