Which company do you trust the most?

Jul 12, 2011

In this issue:
» Infosys results spook markets
» India & China need to copy each other
» The US$ 37 bn blow to the US
»  Indian govt. on an austerity drive
» ...and more!
----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more,click here to read on...


For decades in India, scams and scandals have always been associated with politicians. Sadly, as of today, that has not changed as politicians continue to siphon vast amount of funds for their personal gain; money which could have so easily been deployed for India's development. But India has had to witness another disturbing trend in the last few years. Notably that of big Indian companies being implicated in large scale corruption. Satyam is a case in point. The scale and scope of this fraud was so huge that it rocked the entire nation. What also made it so shocking was that the company's auditors were equally at fault. Especially since the outside world has no choice but to accept the 'audited' financial statements at their face value.

But the matter did not end there. In recent times, a spate of scandals has erupted in the telecom space which has indeed tarnished the image of India Inc. While all of these have highlighted the unholy nexus between politicians and businessmen, there have also been instances of Indian companies involved in 'window dressing' accounts in some form or the other. All with the aim of displaying higher profits to investors.

Indeed, finding any fraud in the way companies report their financial statements is practically impossible for any investor. But if a careful study of annual reports every year does throw up some anomalies, investors would do well to be careful before investing money into the stocks of such companies.

Investing in stock markets is not only about how fast companies are growing. Is the quality of growth good? Are profits higher because of the strength of the company's business or because of some accounting manipulation? Does the company's management have a good understanding of the business? Are its business decisions sound? How good are its corporate governance practices? These are some of the questions that investors need to ask themselves. In a bull run it is very easy to get carried away with all the exuberance surrounding potential growth prospects. But ultimately the strength of a company's business and the soundness of its financial statements do get reflected in the valuations.

Thus, even now, it is better late than never to identify those companies having strong managements with good corporate governance practices at reasonable valuations. This will certainly ensure strong returns in the long term.

So, which company do you trust the most when comes to the credibility and transparency of the reported financial statements? Please take our poll and cast your vote.

 Chart of the day
Emerging economies have been growing at a brisk pace as compared to their developed peers in the past few years. However, this growth has come at a price. Namely that of excess growth in credit as highlighted in today's chart of the day. Too much of growth in credit can be worrisome as its spurs bubbles in various asset classes. Interestingly, post the global crisis, China's bank lending had zoomed led by surge in credit especially to the property market. But subsequent aggressive monetary tightening measures by the Chinese government have led to a slowdown in China's credit growth in the past one year.

*Growth in bank lending to private sector less growth in nominal GDP
Data Source: The Economist

The much awaited quarterly result season for the IT companies kick started today. The country's 2nd largest IT company, Infosys has reported its quarterly performance. The company reported a 3.2% quarter-on-quarter (QoQ) increase in sales. However, net profits declined by 5.3% QoQ. The decline was mainly on account of higher operating costs (as a percentage of sales) which in turn were brought about by the higher staff costs during the quarter. The company has recorded a sequential increase in its volumes. However, pricing remained subdued. Infosys' results were substantially below the management's guidance.

Since its turnaround in 2010, the IT companies have seen a steady increase in demand. However, pricing has remained a concern as clients have not shown the willingness to pay higher for the services. But some companies like TCS and HCL Technologies have indicated positive uptick on this front. With Infosys reporting lackluster numbers in terms of billing rates, all eyes would naturally turn towards the bellwether TCS to see if the trend is different. If not, it does appear that the IT industry may witness another round of slowdown.

A recent edition of the Wall Street Journal has made a very interesting observation concerning both India as well as China. It talks of how both the nations need to copy each other's policy steps to get rid of the problems their economies are currently faced with. Let us consider China first. It is a well known fact that China's meteoric rise over the past few decades has been fuelled by massive public investments. And even now, it exceeds the target that it sets for itself. However, the state sponsored plans have started to act more as a hindrance than help. It is throttling the development of the private sector and not letting consumerism flourish. This was borne out in its 11th five year plan. Here, despite efforts, investment contributed more to GDP than consumption.

For India though, the problem is exactly of the opposite kind. The execution of investment projects is woefully slow and has always fallen behind schedule. Still, the Government keeps on setting new lofty goals for itself. But this may not be the solution to the problem. Obstacles to timely execution will have to be addressed. It may help to take some inspiration from China. And the dragon nation in turn could do itself some good by allowing more consumption to take place like how it is in India currently.

The pressure is on the world's largest economy to perform. But the recovery seems to be stuck in the doldrums. The unemployment rate in the US escalated in June. New jobs created were also well below expectations. And now the government is running out of ways to prop up the economy. According to Moody's, the US government is currently supplying around a fifth of the nation's personal income. Jobless benefits, food stamps, social security and disability allowances, etc are a few of the ways in which it is artificially sustaining the economy. Total government benefits rose to US$ 2.3 trillion in 2010. This represents a 35% increase from the pre-crisis levels in 2007.

However, a number of these benefits are expected to run out this year. With US$ 37 bn less flowing in, this consumption fed economy may just falter. Unless more jobs are created, and wages increase, there will be no money for consumers to spend. Thus, once benefits stop, the economy may very well go further down in the dumps.

Rising subsidy bills and poor capital market conditions (divestment road-map gets derailed) has brought in a worry for the government as far as its state of finances is concerned. Widening fiscal gap has forced the government to go into an austerity drive. The government has advocated a host of procedures to reduce expenditure in order to promote fiscal discipline. And this is not the first time that the government has resorted to such austerity measures. In 2009, post Lehman crisis, the finance ministry had taken a step to reduce the non-plan expenditure by 10%.

While steps towards expenditure rationalization are certainly appreciated we doubt whether they are enough to achieve the ultimate road-map towards fiscal prudence. It may be noted that the government has a target to restrict fiscal deficit at 4.6% of GDP for FY12. And considering the current state of affairs it does appear to be challenging. We believe that subsidy is the real culprit for the current financial/fiscal imbalances. While deregulation can bring an end to the subsidy era, it is a politically sensitive issue. Unless we have a consensus over it, fiscal challenges will continue to prevail. While austerity measures will provide some respite, it is certainly not a foolproof solution.

The Indian stock markets have plunged by nearly 2% in today's trade. Infosys results for the quarter were disappointing, leading to the fall in IT stocks. At the time of writing, the benchmark BSE Sensex was down by 360 points (1.9%). All sectoral indices were trading in the red led by IT and Realty. Asian stock markets were also trading weak.

 Today's investing mantra
"Investing is simple but it's not easy. Because emotions get in people's way or greed and that sort of thing. They get all excited about stocks when they've gone up recently, and they get depressed when they've gone down." - Warren Buffett

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5 Responses to "Which company do you trust the most?"


Jul 13, 2011

Interesting read indeed.
two points
1)China 's massive capital expenditure was good for economy as infrastructure was developed eg. 300 KMPH trains crisscrossing country( India do not have anything near it)which brougt employment to many,more income,consumerism, real massive alleviation of poverty- except for inflation raising its head now.May be India shall follow same instead of throwing money through subsidies
2) Euitymaster was recommending Buy on Infosys-still with new results trickling in , does it hold good ?- as usual there are three opinions from various agencies - Sell ,Hold and Buy



Jul 13, 2011




Jul 12, 2011

you are a teacher.i am just astudent .i hope you are a good teacher.thanks.


Adi Daruwalla

Jul 12, 2011

For the soundness of the companies financial statements, the shareholders must attend the annual shareholders meeting and ask if the financial figures have been whetted by the auditors independent from the boards fixing or needling the same. Recently Wipor has been asked to prove to SEC in the USA that its auditors are independent when it comes to fulfilling their audit duties as there was a 32 million siphoning off by an inidvidual in Wipro which also resulted in one suicide in the USA. There is a lack of integrity in all aspects of Indian life, and what is the veracity of an audit done by so called external auditors.


anupam garg

Jul 12, 2011

trust...wht's that?

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