Air India wants to go public for a shocking reason!

In this issue:
» CCI slaps Rs 63.1 bn fine on 11 cement companies
» The reason why Bangalore is India's leading realty market
» Greece to go from developed to developing economy?
» SEBI raps continually underperforming mutual funds
» ....and more!

------------------- Take the first step towards becoming a well-informed individual -------------------

Sign up for the weekly e-letter Straight From The Hip to get a weekly dose of unadulterated views on business, social and political events across the world and their impact on our lives from astute stock market observer, Jawahir Mulraj.

Click here to sign up for the free e-letter and become a well-informed reader today!------------------------------------------------------------------------------------------------------

00:00

Why do companies get listed on stock exchanges? Generally, the purpose for raising money is to fund future expansion plans and to create liquidity by facilitating trading in the share market.

But what if a company issues an initial public offering (IPO) just so that it can facilitate employee stock options for its employees? And what if that company is none other than debt-ridden loss-making public sector firm Air India?

So far the government has been supporting this ailing national carrier with tax payers' money. But if the recommendations of the pay parity report, also known as Dharmadhikari report, are implemented Air India could soon be listed on the stock exchanges. The report recommends listing of the state-owned firm so as to facilitate employee stock options. That too, as part of voluntary retirement scheme (VRS) for probably 7,000 of its 'voluntary retirees'.

In theory, this novel idea may seem to be a quick fix to Air India's ongoing financial constraints. But can the government allure investors to buy shares of Air India? For one, the sentiments in the IPO market are not too encouraging. Secondly, investors have already burned their fingers on other aviation stocks. And given Air India's abysmal financial health, inefficient operations and excessive government interference, the chances of a successful IPO are very bleak.

Do you think Air India should be listed simply to facilitate ESOPs for its employees? Share your views or you can also comment on our Facebook page / Google+ page.

01:05		Chart of the day

After much wait, the Competition Commission of India (CCI) has finally slapped a penalty of nearly Rs 63.1 bn on 11 cement companies that have been found guilty of cartelisation and price manipulation. The companies have been ordered to pay a penalty to the tune of 50% of their average profit during the financial year 2009-10 (FY10) and 2010-11 (FY11). As today's chart of the day shows, the worst hit companies include Jaiprakash Associates, UltraTech Cement, Ambuja Cements and ACC. Each of these companies has to pay over 10 bn as penalty. In addition, the competition watchdog also fined industry body Cement Manufacturers' Association (CMA) at 10% of its average turnover in 3 years (about Rs 7.3 m). Cement players are expected to challenge the order in the competition appellate tribunal.

Data source: DNA Money

01:30

Property markets across India have tumbled in recent times. In the last quarter itself, Mumbai and National Capital Region (NCR) saw a drop in volumes by 58% and 57% respectively. However, one city has been an exception in the current turmoil. It's Bangalore. The city registered a volume drop of just 18% in the last quarter. Moreover, it also absorbed 49 million sq ft of residential space in the last year. This is highest by any city in India. Apart from this, it also registered highest absorption rate when it came to commercial real estate market.

So, what has been the reason for this outperformance? Presence across all price points is one of the reasons. For instance, in Bangalore one can buy a property ranging from Rs 20 lakhs to Rs 1 crore with ease. Stability in prices is another reason. It may be noted that during the bull run, prices in Mumbai and NCR went through the roof. But in Bangalore, the rise was gradual. Calibrated price increases resulted in high affordability. Also, it may be noted that Bangalore is an IT hub. Thus, the demand for commercial space is likely to remain buoyant there as compared to other cities. However, the situation might change soon as many pending project approvals in Mumbai have been recently given a green signal by the local municipal authority.

02:11

As value investors, we've always had our fair share of doubts about the modern portfolio theory. Or for that matter, the entire practice of indexing, which all global institutions so widely follow. A recent episode surrounding Greece further confirms our suspicion. Apparently, an exit from the Euro zone would likely downgrade Greece to the status of a developing nation. Now, this logically means that investors could become wary of investing in the country. But that's hardly the case. As per the strange rules of indexing, Greece could actually witness a sharp jump in inflows as it would now form a bigger proportion of the emerging market index as opposed to a small proportion of the developed market index before the downgrade. This is certainly perplexing. Shouldn't investment decisions be based on intrinsic values and the difference between the intrinsic value and the current stock price? We certainly think so. The downgrades or the upgrade should hardly matter as long as the intrinsic value is intact. But we are hardly complaining. As we can always take advantages of the pricing anomalies that arise due to the strange behaviour of the so called big institutions.

02:49

Levy penalties to quash monopolistic trends in one sector. At the same time, allow a protective shield to guard companies from competition in another. The government's latest sectoral regulations seem ill conceived. The only difference being that the entities bearing penalties largely belong to private sector. Now, no prizes for guessing that the government has a special interest in the entity being protected! As most readers may have guessed, we are referring to the cement and power equipment manufacturing companies respectively. The CCI has imposed heavy penalties on cement manufacturers for forming cartels and fixing prices. But the inability of power generation equipment manufacturers to compete with Chinese imports is not seen as their ineptness. PSU behemoth Bharat Heavy Electricals Ltd. (BHEL) in particular.

India will shortly impose a 5% import duty on power generation equipment. Local manufacturers have demanded this for the past two years. The supply of cheaper equipment has eaten into their order book. Ones coming from China, Korea and Japan cater to almost 30% of power equipment market in India. Chinese exporters benefit from low interest rates and an undervalued currency. Thus, it is not surprising that the likes of BHEL fear capacities lying vacant. As it is, BHEL's order flows have remained low over the last three years. In the absence of this import duty, BHEL's incremental capacity will lie unutilised. The discriminated approach to policy making, however, seems a stifle disturbing to us.

03:29

The Securities and Exchange Board of India (SEBI) over the past few years has been doing its bit to protect the interest of shareholders and investors. The latest issue that has come under its radar is the continuous underperformance of certain mutual fund schemes. Obviously, investors are free to exit funds which have not been doing well. But there are some fund houses where the performance of a significant percentage of schemes has not been upto the mark. And that too, on a continuous basis! These are the funds that the SEBI aims to address. The idea is to have a word with the fund managers and the CEOs to get a sense of what they intend to do to ramp up performance.

At present, there are around nine fund houses where half or more of their schemes have underperformed the scheme benchmarks consistently over the last three years. In the case of nine others, up to half the schemes have given lower returns than their benchmarks. Opinions wary whether the time period of three years is sufficient time to determine a fund house's performance. We for one believe so and also view the SEBI's move as a step in the right direction.

04:12

In the meanwhile, the Indian stock markets have been hovering in the negative zone throughout today's trade. At the time of writing, the BSE Sensex was down by 105 points (0.6%). All the sectoral indices were trading in the red except auto stocks. Barring Malaysia, all other Asian stock markets too were trading weak.

04:30

Today's investing mantra

"Now I did a lot of work in the earlier years just getting familiar with businesses and the way I would do that is use what Phil Fisher would call, the "Scuttlebutt Approach." I would go out and talk to customers, suppliers, and maybe ex-employees in some cases. Everybody. Everytime I was interested in an industry, say it was coal, I would go around and see every coal company. I would ask every CEO, "If you could only buy stock in one coal company that was not your own, which one would it be and why? You piece those things together, you learn about the business after awhile." - Warren Buffett

Test Your Warren Buffett Quotient Now!