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. Wire money online to India with Xoom.com for as low as $4.99. 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. [...]
Archive for February 25th, 2008
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DOES HE KNOW SOMETHING?
February 25th, 2008 
krishna 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 [...]
THE LEGEND OF A BIG FALL
February 25th, 2008 krishna 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. Wire money online to India with Xoom.com for as low as $4.99. 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.
THE BURIAL OF EMBEDDED VALUE
February 25th, 2008 krishna 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. Wire money online to India with Xoom.com for as low as $4.99. 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, [...]
