India Inc.'s 'get-rich-quick' scheme

Aug 2, 2010

In this issue:
» Greed in real estate is back!
» India faces grim risk of a structural shift in rainfall pattern
» Time to pull off the stimuli in India, says Dr. Raghuram Rajan
» Is the US economy really recovering?
» ...and more!!

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 Chart of the day
Many of us felt the pinch when the Indian economy slowed down over the past two years. There was an overriding fear of companies doing rampant cost cutting that led to job losses and salary freezes across industries. But then, there were certain people who weren't really bothered.

We are talking about CEOs and directors of some large Indian companies, who took big pay hikes despite their companies facing a decline in both revenues and profits.

We recently did a study on the BSE-200 companies. And from the 113 companies on which we have the data for FY10, we see that the directors' remuneration has increased at an average annual rate of 52% during the period FY07-FY10. During the same period, net profits of these companies grew at an annual rate of just about 17%!

We believe that good management practices call for giving due consideration to the interests of shareholders and customers first. But some of these boards/managements seem to have been more concerned about building their booty, even as their companies fought the slowdown.

Data Source: CMIE Prowess;
Note: Data is for 113 of BSE-200 companies for which FY10 data is available

Anyways, if a run-up in directors' remuneration in large Indian companies were to continue like this, it would make more sense for you to become a director on a board, rather than a shareholder!

Continuing with the topic of corporate greed, the days of real estate companies paying huge premiums to buy land seem to be back in full force. Reports on Bloomberg peg the premium that Indiabulls paid for land recently at 90% over the reserve price. This was mill land being auctioned by the National Textile Corp. in Central Mumbai.

With the swift economic recovery in India, real estate players seem to be back to their mantra of buying land at whatever price it takes. And in the process, they also end up ensuring that they bid up realty prices further. This is because land bought at such high prices becomes one of the biggest components of their costs for making homes. And guess who ends up paying the price for such hefty purchases of land? House buyers of course!

We thought the RBI was amongst the most proactive central banks globally. The recent interest rate hike in fact reaffirmed this view. But an excerpt of a recent interview of Dr. Raghuram Rajan, the economic advisor to the PM, made us see things better.

Dr. Rajan believes what the RBI has done so far is clearly not enough. And that the central bank should move more swiftly to withdraw all the monetary stimuli. This is particularly because now is the best time to do so. The economy has shown some sustainable signs of recovery. Companies have got back their pricing power. At the same time consumer inflation (CPI) continues to hover at double digits for over 24 months. Thus Dr. Rajan believes that it is high time we stop living with negative real interest rates. Nevertheless, he believes that the pace of such tightening cannot be without considering supply side constraints. Having said that, the interest rate curve seems to be clearly pointing upwards. Hope companies and individuals will be better prepared this time around.

If you look at these statistics, you will be forgiven to assume that one of the worst recessions of all times is all but over. The statistics that we are talking about is the US GDP growth in the past four quarters. By growing at 2.4% in the June 2010 quarter, the US GDP has now grown positively for four consecutive quarters. Naturally, this begs the question, are we there yet? Certainly not, if noted market observer John Mauldin is to be believed.

As per Mauldin, the US GDP has been boosted by certain onetime figures and if one strips them out, the growth looks rather sad and one not worthy to be called an economic recovery. Take the case of US government spending. Of the 2.4% real GDP growth in 2QCY10, around 0.9% came from government stimuli, most of which is going to be nonexistent in the latter half of the year. Furthermore, other important GDP contributors like inventory build-up and real estate also don't look like they would contribute in the same vein as before.

Thus, it looks like the US still has some distance to go before it can talk of a sustainable economic recovery. Policymakers however, seem to be taking growth at face value. They are arguing for tax hikes and austerity measures even as the economy is looking fundamentally weak. And this, as per Mauldin, could be a dangerous thing to do. Even we would concur. Deficits should indeed be reduced. But perhaps now is not the time (in the US). Double dip anyone?

Well, the jury may still be out on whether a recovery is taking place in the US or not. But on the housing front, the picture looks bleak. Former Federal Reserve Chairman Alan Greenspan is of the view that the slowing economic recovery in the US feels like a 'quasi-recession'.

He has further stated that the economy might contract again if home prices decline. Housing activity has declined after the expiration of government tax credit. The National Association of Realtors has reported that the pace of home sales fell in June for a second month. Plus there are expectations of transactions being 'very low' in the coming months. The US also has to contend with a persistently high rate of unemployment and rising fiscal deficit. The latter could push up inflation in the longer term. But if the financial system is broke, is how Greenspan has chose to put it, the chances of inflation posing a problem are lower. In the near future though, the US has to focus on getting its economy back on track. That looks easier said than done.

Anyways, after last week's volatility, Indian stock market had a strong outing today. The BSE-Sensex was trading with a gain of around 190 points (1.1%) at the time of writing this. Today's gains were largely led by stocks from the banking and realty sectors.

Most other key Asian markets also closed strong today, led by gains in Hong Kong (up 1.6%), China (up 1.3%) and Japan (up 0.4%).

The near-normal monsoons have given a lot of cheer to India Inc. and the government alike. As per the latest estimates, the shortfall in monsoon has narrowed to 3%. But the Indian Met Department (IMD) has warned against a structural shift in the pattern of the annual rainfall. This could yet force a change in cropping patterns in the country.

As per the IMD, the number of depression points that aid rainfall are just 3 now as compared to 7-8 that are required for a normal rainfall. If such conditions continue for a few years, there could be a structural shift in the entire monsoon itself. This could threaten the dependability of monsoons for the country. For a largely agriculture dependent economy like India, this is like an alarm bell!

 Today's investing mantra
"Managers and directors might sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell part of it. And if it isn't smart to sell all on such a basis, they should ask themselves why it is smart to sell a portion. A cumulation of small managerial stupidities will produce a major stupidity - not a major triumph." - Warren Buffett

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4 Responses to "India Inc.'s 'get-rich-quick' scheme"

Adi Daruwalla

Aug 3, 2010

In this country it is always unfortunate but true; whenever we want to expres ourselves. All stories are the same, and never show or have shown great signs of improving. The shareholders deserve to get better returns for putting faith and money in the company. The director's also deserve returns but not exponentially greater than the return given to share holders. Also SEBI needs to be in the picture where promotor hoding is less than even 20 percent and for years on end companies have not paid dividends and juggling corporate corpus for suiting their own needs. A case in point is of the Ruia run Essar group. E.g. take the case of Essar Oil, the promoter hoding when I last saw it a few days back was 15%, small percentage is held by FII and DII and 80% is public. No dividends have been paid for a long long time, forget about bonus. Many petrol pumps have been opened in Gujarat and Daman. It seems that production is starting in sep 2010, of Gas. How many times have these stories circulated production commenced etc. When is the reality one does not know! Even this time it seems like manipulation. All corporates are using their people (resource) like condoms, and acheiving only thier crafty ends and then throwing the people away. So finally what is the regulator going to do. I again strongly urge that SEBI needs to maintain that Promoter holding compulsorily for the first 15 years must be between 50% - 75% in companies that have floated and procured money from the public. This will ensure performance because the promoter has to earn. If the company is in loss promoter is in loss. SEBI it is high time to bell the Cat (Corporates by putting this clause.)Someone at Equity master through thier good office needs to raise this to SEBI.


max monteiro

Aug 3, 2010

Its very sad that such a thing is happening. Do they really deserve those huge pay checks. I for one is of the belief that companies are run not by the directors but the hard working employees who are deprieved of their just wages which they truly deserve.The salaries of these directors should be regulated and the directors should get performance based incentives and increments just like the workers are paid.


Dr. Pradeep K. Panda

Aug 2, 2010

Very useful and informative write ups that so smartly encapsulate the macro and micro economic scenes.Keep doing this good service. Thanks.


G M Rao

Aug 2, 2010

I also feel that the RBI is making very very small moves and because of this the inflation is going out of control. One side Govt is spending lot of money for CWG, however, failing to construct proper and sufficient godowns for the agri commoditity storage this is really hurting common man. If common is hurt and the economy will not grow.

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