Should your stock act like a mutual fund? This one might...

Jul 30, 2011

In this issue:
» This company has more cash than the US government
» What drives India's teledensity?
» Finally! A solution to India's infrastructure problems
» Poor healthcare of a growing economy
» ...and more!
----------------------------- Mark Your Calendar. Global Crisis Starts August 2nd. -----------------------------

The global economy is in a crisis... And things are only going to get worse.

In fact, this crisis could get really bad on August 2nd and thereafter...

That's the day the US government could run out of money i.e. it will no longer be able to pay its bills.

You can well imagine the fall out of this on the global economy... there will be utter chaos, and stock markets could reflect this sentiment as well.

But how does that affect you?

Well, the chaos that this will trigger in the global economy will not leave India untouched.

And that's why you need to be really sure that your portfolio of stocks is Crash Proof.

How can you do that right away? Just read on to get access to a proven solution to crash proof your portfolio...


Investing in cash rich companies is a once-in-a-while opportunity for equity investors. In fact, at a time when the most well to do economies globally are reeling under debt, cash is certainly a prized possession. Especially if yours is a company looking to expand operations with minimal leverage. Very few companies globally have such luxury at the moment.

The reason for the cash accumulation is also varied. Some companies have painstakingly accumulated the cash from their internal accruals. Others have simply diluted equity to raise the capital. The latter are therefore certainly not equally credible. Most importantly it is the efficient utilization of cash that will determine investor returns. Companies may be sitting on cash piles unable to undertake capex due to under-utilisation of existing capacity. Other may be on the lookout for acquisition for long. In both cases investors have high risk of losing money if the cash is not employed prudently.

Today we came across a unique case of the management of one of India's most renowned bluechips setting the mandate of 'managing cash through investments'. Please note that the company's business is not even remotely linked to fund management; nor is this where the management's expertise lies. In fact the Indian subsidiary of British American Tobacco (BAT), ITC, has interests ranging from cigarettes to hotels to packing to branded retail. But none in buying and selling of equity stakes. It thus stumped us when the management recently announced its intent of investing surplus funds to the tune of Rs 50 bn for buying minority stakes in peer groups!

Having surplus cash in the war chest is certainly an ideal situation to be in a tight liquidity scenario. Especially when most of your businesses can be subject to a phase of slump due to deflation or economic downturn. But the decision to buy stakes in peer groups with their money should be left to the shareholders themselves. We do not agree with the ITC management's inclination to take it upon themselves to make 'substantial investments in shares' with shareholder money. Not only because this is something that mutual funds do. But especially because unlike routine investments, these typically tantamount to cases of hostile takeovers. And such deals tend to be at steep valuations. Here the management's ego come on top of business logic and shareholders' interest goes out of the window. We hope that the SEBI guidelines do deter companies from misusing or destroying shareholder wealth.

Do you approve the decision of ITC's management to invest surplus funds to the tune of Rs 50 bn for buying minority stakes in peer groups? Please share your comments or post them on our Facebook page.

 Chart of the day
The mobile phone is a common sight in India. Nearly everyone has one at least if not more. Interestingly, this same mobile phone has led to the growth in teledensity in the country. Teledensity is defined as the percentage of population that has a phone connection. Interestingly, despite being around for a much longer time, the landline teledensity in the country continues to be abysmally low. As shown in today's chart of the day, it is the mobile phones that have led to the surge in teledensity seen in recent times. One of the biggest reasons for this is the huge and diversified expanse of the country. It is expensive and difficult to rollout a landline network to reach every nook and corner. However, mobile phones help out in such situations as the infrastructure required is comparatively cheaper and easier to put up.

Data source: TRAI

The US government doesn't have many things going for it. It still has to reach a decision on raising its debt ceiling and its AAA status is being threatened. And now, tech major; Apple Inc. has more cash on its books than what is in the US government coffers. Apple's latest earnings show that it has a cash balance of US$ 76 bn, while the government's operating balance comes more than US$ 2 bn short. Well, this isn't too surprising. As per latest reports, Apple is currently the world's no. 1 Smartphone vendor, pushing Nokia to the no. 3 spot. It has been on the cutting edge of technology, with innovative products like the iPod, iPad, iPhone and Macbook. The company is able to collect more cash than what it spends, while the US government just prints money and spends. However, if the US government does eventually default on its debt obligations, it will be a tremendous blow to investors and businesses in the country, including Apple.

India does need to cross quite a few hurdles if it has to continue growing at a robust pace. None more so perhaps than the issue of land acquisition. Nandigram and Noida are perfect examples of land acquisition scripts gone horribly wrong. Fortunately for us, the Government is quite aware of the seriousness of the issue. And its proposed land acquisition bill, we believe, is a big step towards addressing the problem. As per a leading financial daily, the Government has recently come out with a draft land acquisition bill whereby it has offered a new deal to farmers. If the initial feelers are anything to go by, landowners, especially in the rural areas will have very little reasons to complain henceforth. As per the draft bill, the Government has offered twice the market price for land acquired in urban areas.

And here comes the real clincher. For rural areas, the offer will be as much as six times the market price! This may not be all. The offer will come with a comprehensive resettlement and rehabilitation package. Certainly, the bill does like quite attractive for the rural folk. For industries too, it may not be too much of a concern as land cost typically account for a very small portion of the total project cost. Where the bill will hurt perhaps is in the area of housing. Already, houses at most places are out of reach of common man. The current proposal may take them even further out of reach. How the Government finds the middle ground here remains to be seen.

India seems to be touching record lows in taking care of health of its population. The lack of proper health services is increasingly receiving the attention of countries. One may argue that the country's health is improving. Over two decades, life expectancy has risen and infant mortality rate (IMR) has declined. But numbers don't reflect the real story. We are in a pathetic state in maternal and infant healthcare, even when compared to not so prosperous neighbor nations. The argument that we have one of the highest populations does not look convincing either as China is managing these affairs fairly well.

The country's outdated and seriously lagging healthcare system can shock anyone and reflects the results of a mere 1% GDP investment in healthcare. This is higher only than seven nations in the world. That is not all! We seem to be taking a lead in rich-country health problems, such as diabetes, as well.

The problem is too glaring to ignore. And the Government efforts in the past to tackle it have backfired. The need of the hour is to create awareness among the people. It's time to allocate more funds to the miniscule share carved out for healthcare. Also, the Government needs to incentivize the sector enough to get private sector involved. Indian economy is touted as the next global growth engine with a lot of credit given to its growing young population. Taking the same for granted is the last thing the Government should do.

Negative and cautious sentiments prevailed over the world markets during the past week. Except for Singapore, all the markets closed the week in the red. The US stock markets were down by 4.2% during the week. Concerns that failure to raise the debt ceiling could lead to a technical default resulted in a steep fall. Further, fiscal woes prevailing in Eurozone and concerns with respect to slowing growth in US also worried investors.

Indian stock market was also down by 2.8% during the week. Apprehensions over further rate hikes dented investor sentiments in Indian markets. Weak global cues and possibility of a US debt default also overweighed markets. Amongst the other world markets, France was the biggest loser (down by 4%). Even Japan was down by 3.0% followed by India (down 2.8%) and Brazil (down 2.4%)

Data source: Yahoo Finance, Kitco

 Weekend investing mantra
"You have to segregate businesses you can understand and reasonably predict from those you don't understand and can't reasonably predict. An example is chewing gum versus software." - Warren Buffett

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23 Responses to "Should your stock act like a mutual fund? This one might..."


Aug 2, 2011

hotels is another business that the ITC management understands better.when they have the opportunity to grow in size to be the leader in the business, they should press ahead for control of EIH and LEELA. alternatively, if they get good price, they can always make handsome capital gains !



Aug 1, 2011

ITC can think of buying out the competition after getting an entry into its competitors' management. It is a good decision.


Anand Sundaramani

Aug 1, 2011

Any Company has to manage its stakeholders, shareholders being one of them. The liquid cash generated by the company provides it multiple options to deploy. The objective has to be: maximize stakeholder value. With this approach if the company seeks to ramp up investments, and that is the best option it has (given the opportunity cost) then I don't see why it should not.


Ganesan Rajagopal

Aug 1, 2011

Berkshire Hathaway anyone? Not that ITC can be a Berkshire Hathaway but with cigarettes not growing but still yielding great cash flow, the food business still ramping up, I can see why ITC would want to do this.


Ramakant Desai

Jul 31, 2011

I agree with you 100%



Jul 31, 2011

ITC is not in mutual fund industry and they do not have experience in buying and selling shares. If entering share purchasing/selling is for take over or for business of investment, shareholders' opinion has to be obtained.



Jul 31, 2011

Health care as you have pointed out has not received the required attention from the Govt. You have suggested that private sector should be associated in this task. If you meant that Private sector could contribute towards hospital services and medical care, I do not think that is a good solution. Some sections of middle class may benefit. Definitely not the Poor who need medical help more. The high cost of medical care established by Private sector is due to imitation of what is happening in the western world. Commercial goals of this sector overshadow social objectives.Govt sector is corrupt and totally inefficient. Where do we go from here? Can NGOs with social objectives help to bring in low cost medical care to the millions of Poor? People who talk about "bare foot" doctors have done precious little.
There had to be emphasis on preventive measures to ensure good health care. Clean drinking water, clean housing and surroundings, efficient waste disposal, correct personal hygiene and proper sanitary facilities should bring down sickness rates drastically down. Unfortunately the emphasis is not in these less glamorous measures.


J G Gaikwad

Jul 31, 2011

Dear Sir,

I fully agree with assessment of risk in ITC Management's decision of investing in peer group. Your logic of combination of high vluations of peer group shares and buyer's ego has a very high risk for investing co.


anupam garg

Jul 31, 2011

healthcare is 1 of d most important & ignored sectors...thr r only a handful of pvt players in this sector causing lack of competition & high world diseases r treated like diseases meant 4 rich, even though such diseases r affectin all ppl alike.

less than 1% investment is shameful by all standards...if govt can't take care d health of d country, it is requested 2 allow entry of more pvt players



Jul 31, 2011

Irrespective of my inklings regard to the investment of 50 billion rupees by ITC the company will go ahead with its own decision. The company has its own auditors and investment advisors to help it out. So what they are going to do must be the right thing to do.

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