There was no 2G/Coal Scam?

Telecom ministry's primary objective is to increase the penetration of telecommunication services in the country. If we start with that motive, all the talk of a scam of selling national resources at low values to telecom companies starts to appear to be on a weak wicket.

Now, there is a possibility that money had changed hands to favor certain parties over the other which should be investigated. However, what is unfortunate is that CAG (implicity) wants the government to act as profit/revenue maximiser and not worry about what it means to the public.

I believe the national auditor is committing a mistake, and it is rather, ironical that while the national sentiment derides companies for making excessive profits, even if they are good corporate citizens and at the same time calls the Government's policies which try not to increase revenues, but seeks to improve the reach and to reduce the cost of services to its citizens as being scams.

In reality, government's role should be to act as a catalyst for growth and not to act like a monopolist and extract maximum revenue for every service or resource it allows to be used its constituents.

Similar argument applies to the what has come to be known as the Coalgate Scam. How can a nation which cries about lack of power and electricity accuse policy makes for allocating fuel supplies to power generators    when the government owned monopoly provider is unable to fulfill that demand.

Lets all step back and try to see the bigger picture. This is not a defense for corruption which must be condemned. However, we must be careful to not throw out the baby with the bath water.

Satyamev Jayate - Organic Food

Satyamev Jayate took on an important issue today, which affects us everyday without us realizing the ill effects that it causes to our health. Our food has been poisoned by excessive use of pesticides and harmful chemicals. You can watch the episode here (Toxic Food -  Poison on our plate). To know more about the effects of pesticides on our health, which include cancer, increases risk of neurological defects such as Parkinson's disease, causes congenital defects in children, affects fertility in males etc.  Please read the Wikipedia article here

Fortunately there are companies providing healthy, organic food options right at our doorstep. For example there is an company providing Organic Food right inside your office cafeterias, that too at reasonable prices. Companies such as American Express, GE, HSBC  etc provide organic meals at their office campuses in Gurgaon and Hyderabad. The food is catered by Organic Express, a two year old venture, started by alums of ISB and IIM. Organic Express currently provides organic food in over 15 locations in Hyderabad and Gurgaon. More details on Organic Express, which uses the highest percentage (>70%) of organic content in their meals, in India and perhaps in the world, can be found on their Facebook page. 


The latest episode was very pertinent and hope this sparks an organic food revolution in India. Happy Eating!!

CCI Imposes 6000Cr Penalty On Cement Manufacturers!

Kudos! CCI found some gumption and imposed a heavy fine on 11 cement companies, which they found guilty of collusion and cartel-ization . However what is ironic is that this was done on the basis of a complaint by builders association. Wonder who will investigate the cartel among the builders themselves. Despite severe cash crunch faced by these builders and leverage to support land banks, the real estate prices go up every month, like clock work. 

The eleven cement manufacturers, on whom the penalty has been imposed, are ACC, Ambuja Cements Limited, Ultratech Cements, Grasim Cements now merged with Ultratech Cements, JK Cements, India Cements, Madras Cements, Century Cements,   Binani Cements, Lafarge India and Jaypee Cements.

Educomp's FCCB Repayment Could Trigger 200+ Cr Loss

Educomp announced today that it had tied up loans of $155 million to repay its FCCBs that are coming up for redemption and also for further capex. In addition, it also announced that it had further raised 10 million in FCCBs from IFC and dilute further equity of up to $50 million and Rs 149.5. Would also allot additional equity ($15 Mn) and warrants ($40 million) on a preferential basis to promoters at a price of Rs 193. Which is at a premium to current market price.  The shares are today trading 9% up at Rs 149 on the back of this news.

There is a surprise waiting for Educomp's investors in Q1/Q2 in the form of a loss of almost $32 million dollars of redemption premium on FCCBs, that they had (it appears) not amortized over the duration of the FCCBs + further loss of about Rs 50-60 Cr on unamortized component of MTM loss on 78.5 million dollars of FCCBs that were outstanding for a total loss of over Rs 200 Cr.

What may comfort the investors is the share allocation at a premium to FIIs (at Rs 149) and the proposed allotment to promoters at Rs 193 (equity and warrants) . However the loss in Q1 or Q2 (depending on when the FCCBs are repaid, would offset these notional gains from allocation at premium.

RBI: When In Doubt Pout! And Why They Are Wrong?

RBI today left its key policy rates (Repo / Reverse Repo) and CRR unchanged. While the announced policy is consistent with the strong noise it has been making on keeping inflation rate in check, and given that headline inflation level rose in May, the move was not entirely unexpected.

That said, I do not entirely agree with this policy. In it own words current inflation is due to supply constraints and not necessarily demand driven. Food and Fuel are driving inflation in the mix. Interest rates only have a marginal impact on demand for fuel especially the one that we import. The non-import variety (electricity, coal) need encouragement and support in the form of lower interest rates to keep prices low with higher production

Food inflation, which perhaps is the most sensitive matter, needs improved infrastructure, greater farm equipment etc to fuel growth. By keeping interest rates high the RBI will  likely achieve the opposite.

Core inflation is anyway on a downtrend should have signaled RBI to reduce policy rates. 

S&P Threatens To Junk India's Credit Rating?

“Slowing GDP growth and political roadblocks to economic policymaking could put India at a risk of losing its investment-grade rating which is just one notch above speculative-grade and carries a negative outlook,” said S&P primary credit analysts Takahira Ogawa and Joydeep Mukherji. S&P had earlier in the year downgraded India's credit rating, from stable to negative. Markets in India fell after the release of this note. 


It is however interesting that, S&P had last year downgraded United States as well. However investors had given it (S&P) a thumbs down, by pushing up American stocks (US stocks are up 30% from the lows seen last year), further denting their credibility, which was anyways low.  S&P, we must remember, played a key role in the economic bust of 2008, as its credit analysts (as well as those from other credit rating firms) had wrongly labeled  the junk credit default swaps as being rated AAA (Tripple A) , the highest rating denoting the instruments were risk free, leading to massive blow up for several investors including banks that relied on their rating. 


What is shameful and ironic for the firm further is that this comes a day after Spain, which S&P rates a couple of notches above India, sought 100 billion Euro bail out. Which raises the questions as to why is S&P so quick to denounce India's economic prospects and is willing to go soft on other nations? What is interesting is that post the downgrade in the US,  the head of S&P (who, interesting of Indian origin) was made to step down due to external pressure. 


That said, there are problems that India must focus on and improve governance and pick up pace of reforms to win back investor conference that seems to be dwindling by the day. These investors were not waiting for S&P to tell them that. 
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CAG Report: COALGATE was an April Fools Prank

CAG today came out with a note its COALGate Report was an April Fools prank, and that it had succeeded in making a fool out of all Indians (well almost all...). It also clarified that media was their hand in gloves partner. CAG chief thanked the Indian media in helping them play out this prank on Indians and on foreign investors.

Meanwhile, a high ranking minister, in the government who had not yet read this report challenged the CAG chief to sell the coal block at 50% of the alleged loss, adding that there are basic and fundamental errors in the report.

Hexaware Deal: Why is Citi reducing outsourcing to the company?

As follow up to my earlier post on "Why Hexaware sale may not happen" (at least not in a hurry) it seems we must add one more reason. Citi which is probably the biggest client of Hexaware is, rumored to be reducing outsourcing to Hexaware creating further nervousness in the minds of the investors/potential buyers.  As a result the stock has been underperforming the market in the last 3-4 days.

However, it would be interesting if the news is true, as it was earlier rumored that Hexaware (or atleast the PE investors) in Hexaware had awarded the sell mandate to Citi. However, later the contract was given to two other MNC investment banks (CS and MS).  Not sure if there is a link between the two, but this could potentially be the reason why there is sudden talk of Citi consolidating spending away from Hexaware.

Elections Results: Analysis

While analysts have been quick to write off the Congress Party and believe that Congress party has weakened, I believe the election results are positive for the Congress, if you look at the big picture (especially from the view of the central government).  Remember the elections were held in the backdrop of

1. Massively televised scams (read 2G, Commonwealth etc) which generated huge public sentiment against Congress
2. Baba Ramdev movement against black money
3. Anna Hazare movement against corruption

In light of all this, one would have completely written off the Congress party. However, they improved their tally in UP, gained seats in Uttrakhand, in Punjab and retailed Manipur with improved results, versus last elections.  Even more importantly BJP, its sole competitor at the center lost ground every place (except in Goa). The fact that BJP failed to capitalize on worst ever sentiments against the Congress Party is huge plus for the Congress party and its government at the center. Although it also means that coalition politics would continue to take center stage even at national level. Congress would do well to utilize the next two years to push governance especially in education and in healthcare.

Hexaware Sale. Why I think its not happening?

Why I think Hexaware may not get sold soon?

I think that any buy out deal on Hexaware is going to be difficult, and my reason is simple. Its peers, NIIT Technologies, Zensar, Infotech Enterprises each of which have comparable (if not higher revenues than Hexaware) are trading at less than half the valuation of Hexaware. Take NIIT Technologies for example. NIIT, like Hexaware, is focussed on niche verticals (BFSI, Travel), has been growing really well and had large deal wins announced during last year, stellar and stable margins over the past several quarters and rea venue runrate higher than Hexaware, is trading at market cap of less than 1500 Crore. While at today's market price, hexaware is close to 3500 Crore.

Any financial or strategic buyer looking to consolidate will look at this and simply baulk at the valuation gap, making the deal severly unlikely. Unless, the promoters and existing funds invested in Hexaware agree to sell at a discount to market price which is unthinkable and never done especially in India.

Why should the Vodafone Tax Ruling by Supreme Court be cheered

The Vodafone verdict has been welcomed by the industry. But there is a section of people who have raised flags and see this in a negative light. For me the argument is simple. Consider the following:

1. The government allows deduction of investments of up to Rs 1 lac (One Hundred Thousand) to an individual from one’s taxable income, under section 80C. Thereby providing you a perfectly legal way to avoid paying tax on Rs 1 lac. 
2. This is fantastic. Government is encouraging you to invest therefore you make investments eligible under this scheme and spent this 30 thousand you saved on taxes (lower TDS) during the year. 
3. However, next fiscal when you filed your return, the tax man comes knocking on your door and says that the scheme is retrospectively withdrawn, as this was avoidance of tax on 1 lac of income, and avoidance of taxes is to be discouraged. 
4. How would you feel about this? Is the government justified in doing this?

This is the problem with retrospective changes. Vodafone (and Hutch) made investments though a perfectly legal and allowed way to invest in telecom sector in India. The tax department wants to retrospectively change this and tax these investments. Well frankly they were not even changing the written law.

The Supreme Court has called it correctly. If India wants to be taken seriously, we atleast have to honor our written laws. We have to make the laws clear and transparent and cannot leave them open to interpretation. Invite people in and then trap them. No one likes uncertainty. The judgement is a welcome relief and upholds the letter of the law and is rightly being cheered by the industry.

My Equity Portfolio

IIM Placements are like cattle fairs?

While the country debates the moral hazard of politicians in making a strong Lokpal, I would like to draw your attention to another instance where a similar moral hazard is always ignored. If you are a young graduate, or any one else looking for a job your would know what I am talking about.  You guessed it right, this is HR professionals telling them to not focus too much on the money part, or to sticking around for a long term and career vs job BS. Another personal anecdote is a recent rant by a the HR head of a certain reputed group, frustrated because he found not takers for job offers from his group companies at India's premier B School, comparing placements to cattle fairs.

One would do well to try to identify agency costs to what one reads or hears in the media these days. 

Jubilant Foodworks - Dominos India

Feel cheated by Dominos India. Had recently ordered Pizza Mania (which a a set of 4 pizzas). To our surprise there was not cheese on the pizzas but was loaded with mayonnaise. When we called up the store, the store person at first refused to agree but when we pressed him he agreed that the cheese had been replaced with Mayonnaise. 

Their reason for using it is that it is cheaper than cheese. However it is taking unsuspecting customers for a ride.  Mayonnaise is 50% Oil and 50% Egg, so they are not only feeding you more fat but even god won't help you if you are a vegetarian. Nowhere on their menu or website is this fact disclosed. Had they done this is the US, they would be facing huge class actions and criminal suite. Now I am okay with mayonnaise, however if this is their standard of disclosure than I am not sure what kind of chemicals they are putting in their products. 

While the stock of Jubilant Foodworks has been shooting for the sky (Its market cap which is over $1 billion, is interestingly 50% of the market cap of the parent company - remember Jubilant Foodworks is India franchisee of Dominos, as it gets a high PE multiple) I am not going to order any more pizzas from Dominos.

 

Is Cyrus the best choice for Chairmanship?

We have all read glowing tributes about Cyrus Mistry, the new Chairman in waiting, of Tata Sons, India's most respected business conglomerate. He is not too old but is mature enough, has the right credentials, comes from a certain community and represents the largest shareholder.  All very good and he may turn out to be a good Chairman, however I have seen no analysis of why he is the number one choice.  As a small minority shareholder, I would like to know 

• Who all were considered for post of the Chairman? After all a committee was formed for the search
• And why is young Cyrus, best choice out of all the others considered or not considered

Why is there so much secrecy on the process? After all Tata's are supposed to be transparent and open. Or maybe I am expecting too much? 

Sachin misses out again on his 100th hundred

Arrhh! he missed it again! Twice!!!

Everything was aligned

• No pressure test with India already up 2:Zip in the 3 match series
• Perfect conditions for batting
• Huge run chase
• Home conditions
• Thousands of cheering fans

He came close, but could not get past the nervous nineties in the first innings. The cricket gods even gave him a second chance, after the pitch surprising started to spin on the 5th morning and WI collapsed in their second effort to give India a whiff of victory. All nicely set up to for Sachin to blast a ton and take India to victory with his 100th International hundred.. But it was't to be. Sachin missed, getting out early to a delivery that stopped on him. And India could not close out the win despite useful contributions from a number of other players. 

Australia, here we come...

Sachin Scores 100th ton at Wankhede in Mumbai?

As if truck loads of talent and some luck wasn't enough, Sachin, it seems has additional help for scoring his 100th century at his home ground in Mumbai. The powers that be have made sure that pitch curators craft a perfect pitch to make sure he gets to the landmark at his home ground.

When it comes to Sachin, every thing else is secondary. 

Vikram Akula resigns from SKS Micro Finance

Vikram Akula, the star face of Micro finance movement in India. has quit the board of SKS Micro Finance, a company that he founded. Akula's company changed thousands of lives for the better, freeing them from the monstrous local money lenders by providing them seed money to start or support their micro enterprises. However, with one strike of regressive policy by the state government of AP, where SKS had majority of its 'tiny loans' business, brought down the company to its knees.

When SKS was listed last year, there were many detractors who said that an MFI should not be run with a profit motive. Would be interesting to find out, what have these guys done to provide financial inclusion to the underprivileged. To be sure, SKS was making loads of money, but it was pumping it back into the system to provide more loans to the poor. Any money that shareholders would have made would not have been from the pockets of the poor (No decent sized listed company in India has high dividend yields).

If government, wanted to decrease the interest rate charged further, then the right way would have been to encourage creation of hundreds' of more SKS'. Increased competition would have brought down interest rates by forcing these companies to innovate and reduce their costs or perish.

Perhaps the trigger was malpractices by some unscrupulous players and unfair collection processes deployed by some lenders.The solutions was to identify culprits and put them behind bars for violating the law of the land. But with its poor regulation the government has thrown the baby out with the bath water. 

Cricket loses out to Kabaddi?

The recent cricket matches between India and England and now India -WI have drawn poor response from spectators. While some of this was expected due to the heavy cricket calendar and string of defeats in England immediately preceding, the nearly empty stands have been surprising.  While, I pretend to care less about the results (vs earlier) I still am saddened to see India lose and am egging them on to win from the comfort of my living room. In contrast the IPL drew huge crowds.  This raises important questions for the administrators and players alike

1. Are the glory days of test cricket over, despite continuous cries for the purest format from the players because at the end a sport would survive only if there are spectators? 

2. Is ODI format destined to become irrelevant with Players wanting Test Cricket and Spectators wanting T20's? 

For India, importantly, this may be a chance to try popularize other sports. People are already trying to innovate in hockey to revive the game. Similarly there is brewing interest in other traditional and non-traditional sports. Kabaddi, for example.  It was interesting to witness huge in-stadium crowds for the kabaddi world cup organized in Punjab. While a part of the crowd may have been herded in by the gov't, it was massive.by any standards. Also, it helps, if team India is doing well. India emerged world champs in Kabaddi, on expected lines.

Perhaps, real acid test for cricket in India would be the series down under. India need to do well to stem decline of interest in the game

Everonn close to raising $100 Million from PE?

As reported by BS, Everonn may be close to raising $100 million from private equity players including Carlyle and New York Life capital partners. If true then this would be among the largest PE investments in education sector. At current market price of Rs 298, it has a market cap of about $115 million dollars. However, I would be surprised if Everonn is able to pull it off due to the following reasons

1. Carlyle has burnt its fingers in the past in another Indian education company, which it self has fallen out of favor due to fears on corporate governance. With Everonn's recent problems, including arrest of the former CEO and also deferring of the open offer and poor Q2 results, PE players won't get any where near the company

2. The open offer was to be at Rs 528, almost double the current price. The sharp decline in price would prevent any preferential allotment due to SEBI restrictions on pricing (higher of average of last six months or last two weeks)

Also, NIIT, which is a venerable Indian education training company, is three times the size of Everonn and is available at less than $100 million after adjusting for its 25% stake in NIIT Technologies. And, Educomp, despite concerns on debt is also available at a lower PE of 6.5.

The deferring of the open offer is really worrisome and could see the stock really tanking to lows seen in 2009.