India Culture, Business, Sports and Food. Get all the buzz in India now

Amidst so much talk and analysis of what is going wrong in the economic world today, the one thing that has not been stressed enough is what impact it may be having on the “feel-good” factor for stewards of the Indian economy. The one strong underpinning of this multi-year bull market has been how confident businessmen and investors have felt about the future. This is not as tangible or quantifiable as other economic metrics but every bit as important. After all, businesses and markets are run by human beings. When they feel less confident, they go into a shell, which often compounds the problems which made them less confident to begin with. 

Put yourself in the shoes of the CEO of an Indian company and ask what he must be feeling today. Just one quarter back he had unlimited access to capital, the economy was cruising at 9 per cent and the global economy was expected to deal with a US slowdown and come out of it relatively unscathed. Now, it appears the US is probably already in recession, economists are talking about a serious Asian slowdown, Indian GDP growth is grinding closer to the 8% mark by next year, industrial production has turned sluggish, interest rates are stubbornly high with the Reserve Bank of India reluctant to cut yet and access to equity capital is drying up with big IPOs being pulled out. Global investors are also getting risk averse so access to private capital and even global market access may be constrained for companies. All this is happening at a time when Indian companies are in the midst of executing fairly significant expansion plans requiring large capital expenditure. 

For managements to take on more risk and for investors to fund it, sentiment needs to be strong. Yet, everything that has happened in the last few weeks points in the opposite direction. Not to mention the state of the stock market. Never believe a CEO when he tells you market movements do not concern him. A large part of the feel-good in any economic environment is derived from the capital market, make no mistake about it. Do you doubt that business sentiment will be crippled if the Sensex goes to 12,000 and stays there for some time? Sentiment is a fickle thing, it turns all so easily. Once managements start withdrawing, it is a slippery slope. Guardians of the Indian economy must recognise the risks of a souring of sentiment and do everything in their power to stop it.  

Admittedly, the influence of policy makers on business sentiment is limited yet small steps can have surprising effects. Have we not all seen how a mere pat on the shoulder from a captain galvanises a young fast bowler? In our maze of numbers we forget we are all so human. Can the RBI signal lower interest rates and I stoke demand? Can the finance minister cut taxes and provide a fiscal stimulus? Could a few large issuers hit the market with some really attractively priced IPOs and revive sagging primary market sentiment? I do not know the answers but shoulders are sagging a bit. One can see it. We just cannot afford to let the old feel-good fade away.

Dr. Manmohan Singh was worried. No, not worried, but concerned. No, not concerned, but agitated. Yes. When curiosity starts biting viciously, the mind cannot but get agitated. He was, of course, curious. And there seemed to be no way of quenching that curiosity.

The media were agog with rumours about an impending cabinet reshuffle. If it had been an official announcement, the PM would not have bothered. He knew that a formal denial would follow.

This was a rumour featured in all gossip columns. The greatest gossip of them all, the visual media, were also forecasting a cabinet reshuffle. One can ignore news, but the man who disregards a rumour, does so at his own peril.

So the cultured Doctor was sure that there was going to be a reshuffle. But who was going to barge in and who was going to be kicked out? Will the portfolios of the ministers be changed?

Who will get what? The PM was anxious to know. Of course, being only the PM and not Sonia Gandhi, he had no right to expect to know anything in advance. His lot, he knew, was to wait and watch.

He would come to know, when the ministers would be sworn in by Abdul Kalam. No, no, not Abdul Kalam. He was no longer the President. That woman - what was her name? - Some Patel, Ahamed Patel? No, a woman. Some other Patel. Ah! Pratibha Patil! When she would say ‘I…’ and rest her office, the ministers - at least the new ones if any - would have to confess their names and admit their identities: Then the Prime Minister would know.

But curiosity is something that cannot wait to be killed at the last moment. He wanted to know in advance, at least before the invited audience at the Rashtrapati Bhavan came to know the names and the faces. What faces? Does it matter at all? After all, whatever the face is now, it will be lost once the person joined the cabinet. But that is a side issue. Who are going to become ministers? That is the question now. Curiosity, earlier biting the PM, now started eating into him. He had to do something about it.

He could ask Karunanidhi. At least he would know, whether his daughter was going to be inducted into the cabinet or not. But if Dr. Manmohan Singh talked to him, Karunanidhi would definitely talk about the Ram Sethu issue. He would want to know the Centre’s position on it and the line it was going to take before the Supreme Court. And what could the PM say? If the government knew what it was going to tell the Supreme Court, it would have already done so. The government, being a secular one, had nothing but contempt for Rama. But he seemed to carry some votes in his pocket. If there was a way of keeping the votes and letting Rama go, the government would have embraced the idea with enthusiasm.

But Karunanidhi would not listen. He wanted the bridge to go along with Rama, making way for T.R. Balu, the Shipping Minister to sail in the Palk Straits. So talking to Karunanidhi would only be inviting acrimony.

Lalu Prasad Yadav might know all about the cabinet reshuffle. But if the PM asked Lalu to satisfy his curiosity, Lalu may use the occasion to demand a Bharat Ratna for Rabri Devi. Sure, anyone who would be prepared to accept the award from the hands of the present President would be making the ultimate sacrifice. The sacrifice of self-respect. That itself, being an act of the highest form of humility, would make the person deserving of the highest award. But then, if Rabri was given the Bharat Ratna, the next in line would be Mrs. Deve Gowda. And Sonia Gandhi would not like that. So Lalu cannot be approached. Who else?

Pranab Mukherjee? He was already considering himself to be more important than the PM. Why confirm it by seeking enlightenment from him?  Chidambaram could know some particulars, as his son was close to DMK circles, thus being in a position to know Sonia Gandhi’s mind.

But, after the recent coronation by a TV channel as the Indian Politician of the Year, Chidambaram would be assuming airs. Not that he did not have any earlier. But the air assumed by him now could be so dense that he may be causing a low pressure area around himself. And worse, under the pretext of mentioning in passing the next budget, he may start giving lessons in economics to Dr Manmohan Singh. That being the ultimate in humiliation, would be the limit. No, no Chidambaram. Anyway who knew what was going to happen to him in the reshuffle? The Leftists were already baying for his blood.

Talking of Leftists, Prakash Karat would certainly be posted with all details about the reshuffle. But if he was approached, he may start talking about the nuclear deal. It was already exploding in the PM’s face, and he did not want to invite another blast. The effects of radiation had started to tell.

Arjun Singh may be expected to find out at least some aspects of the reshuffle. But he would carry tales to Sonia Gandhi, accusing the PM of being a nosey sort of man, exhibiting an inquisitiveness, totally unbecoming of his office.

The PM was by now a man resigned to his fate. He wrote on a piece of paper lying on his table, “Who am I to aspire to know anything in advance? I am only a Prime Minister. There are higher powers.” He studied it to steady himself, and stifle his curiosity. And to divert his mind, he switched on the TV set. Someone was giving a pitch report prior to a one-day fixture and pointing to a spot on the pitch said, “Look… over here, yes over here…” The other words were lost on the PM. The words “over here” had an electrifying effect on him. Yes. That’s it! One can ‘overhear’! Sonia and Rahul Gandhi would definitely be discussing the cabinet reshuffle, to decide who was going to be made what. If only he could go to Sonia Gandhi’s residence, hide in a convenient corner, and listen, he could get all details. But could he? The hiding part of it, he could carry out with consummate skill, having perfected the art by sheer practice.

After all, whenever the communists came to discuss the proposed pact with the US, he had successfully hidden himself. When he started weighing the pros and cons of attempting to overhear the conversation between Sonia and her son, his enthusiasm diminished. There were no pros, but plenty of cons. Just then, he heard some footsteps. Someone was approaching. No, there were two of them, somebody talking to somebody. Yes. They were Sonia and Rahul approaching his room.

Dr Manmohan Singh was shaken. Their arrival on the scene, just as he was considering the outrageous act of overhearing their conversation, disconcerted him. He felt as if he was already eavesdropping. His conscience castigated him. He felt guilty. He also knew, that his face would reveal all.

His was the face of a nobleman, and it would not hide his inner secrets. One look at him, and she would know. He must avoid the mother and the son. He took a decision. His face would not hide anything, but he could hide himself. He jumped 

from his chair, jumped around the sofa set, jumped over a table, and the final jump led him behind a wardrobe. As he stood motionless, a practice which had grown on him through his years of prime-minister-ship Sonia and Rahul seated themselves near the table where he had been sitting and brooding. They thought that he had gone to the restroom, and would be returning shortly.

Just then, Sonia Gandhi’s eyes fell on the piece of paper on which he had been scribbling. The words, “Who am I to aspire to know anything in advance? I am only a Prime Minister. There are higher powers,” stared at her.

She was impressed and showed it to Rahul. He too was impressed. “Could’ we ever hope to get a Prime Minister like him? Whoever comes or goes, he must stay.” As he heard these words of Sonia Gandhi, Dr Manmohan Singh, heaved a silent sigh of relief. Whatever the blasted reshuffle did, it would not touch him.

What a shame. The stock that was supposed to double on listing actually lost a fifth of its market value on Day One. One sincerely hopes this ends the mindless flipping game that has dogged the IPO market through this Bull Run. When Anil Ambani and his investment bankers proudly spoke about how $190 billion had come in by way of subscription money; creating history; I had a sinking feeling this was coming. Now the truth is out.

Yesterday, all of $2.5 billion of Reliance Power stock got traded, cash and derivatives put together, and even that stock could not be absorbed. Where were those billions that had rushed in to subscribe it? If indeed that had come in to buy the great growth story in Indian power, has it all changed in barely a month? I said it then and I will say it again; these institutional bidders are a bunch of flippers with no regard for the paper they are buying. So, the next time you get all excited about a foreign cited about a foreign fund buying a stock at a lofty price, do remember that all of them had egg on their face with Reliance Power. They are suckers who promoters and bankers have wrapped around their little fingers.

So now Anil Ambani has his cash sitting nice and pretty in the bank, raised at Rs 450, while you are holding the baby at Rs 370. Truly sad. Yet, do not feel even for a second that great “value” has emerged ill that stock after the first cut. Rs 370 is lower than Rs 450, but not fair value for the stock. It still trades at just under five times expected book value for 20012-13 that is five years forward. You can buy NTPC today, with larger capacity on the ground at three times the book value. Reliance Power can fall to Rs 300 and still be expensive. It probably will, if it is not supported.

Anil Ambani has fabulous businesses in his group, in Reliance Communications and Reliance Capital. Yet, I think he has played his cards all wrong with this IPO and severely dented the image of his ADA Group. The next time he approaches the market to raise capital; the memory of this debacle will haunt him.

When a momentum party ends in the stock market, the biggest hangover is always felt by the “themes” that emerged as most popular during the heady days of bullishness. One theme that gained a lot of currency in late 2007 was “embedded value” or sum of parts (SOTP) valuations. Stock prices that could never be justified by current earnings were easily explained by ascribing value to future business streams of the company. Promoters were only too happy to play along: they merrily announced value “unlocking” strategies from diverse businesses and plans to raise humongous amounts of money in these subsidiaries using the then prevalent market euphoria. So analysts and promoters played this game of make believe to the hilt and investors made money for a while, till the music stopped. One look at the screen today will reveal the carcasses of those great SOTP stories.

Power was the area that promoters wanted to exploit the most. Their eyes must have lit up at the IPO valuation of Reliance Power and even more so at the prospect of it doubling on listing.

So it became the perfect cue for companies like Sterlite and JP Associates to announce the hiving off of their power businesses and plan placements/listings for them at valuations benchmarked to Reliance Power. Analysts did not waste any time in revising price targets upwards based on this ingenious unlocking of embedded value. REG and Jindal Steel and Power floated around in similar SOTP bubbles.

Sadly, the script did not play to plan. The list is long: Punj Lloyd was rerated to include Pipavav Port valuations, IDFC and ICICI got great rub-off s from their brokerage holdings as brokerage stocks soared to ridiculous valuations and countless stocks derived embedded, value premiums from their real estate holdings. Now the scales have fallen from investors’ eyes but too late, stock prices of these companies have collapsed.

In hindsight, which is perfect, it was sheer madness. One bit of insanity led to another. First, outlandish valuations were ascribed to a sector, and then those valuations were used to pump up stock prices of another company holding fragments of that business. Nobody questioned the fact that the starting point or the very foundation of such “derived” value was completely out of whack. I suppose 

all things pass in a bull market, at least for a while. It is great that investors and analysts will now get real and come back to the world of tangible earnings. I doubt if this SOTP madness will resurface anytime soon. The next time you hear the word “unlocking”, you know what to do. Run.