What should India Inc. do with its excess cash?

Aug 28, 2010

In this issue:
» Gold outperforms crude oil by a big margin
» India still offers good opportunities, says Mark Mobius
» SEBI gets cracking on 'media-savvy' companies
» RBI to go slow on interest rate hikes
» ...and more!!

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After the slowdown in FY09, Indian companies recorded a much improved performance in FY10. Not only their sales and profits improved, companies also showed higher cash generation. In such a scenario, any investor will expect to receive higher dividends from the company he invests in. But what we are seeing of late does not paint a promising picture on this front. In fact, India Inc. has turned stingier on dividend payouts.

So what are Indian companies doing with all their excess cash?

Well, some companies across sectors like cement, paints and automobiles are waiting to spend towards capacity expansion. Some of these include companies reviving expansion projects that were put on hold during the slowdown. And then there are others who are investing just to keep pace with the recovery in domestic demand.

There is another reason why companies are not willing to part with their cash. It is the fear of rising interest costs on the back of rising inflation. Given this, companies are trying to conserve cash for future capex as the cost of borrowing is expected to rise.

We believe that the thoughts on conserving cash (and not paying out higher dividends) for expansion is a right way to go. But then, we also have a fear. It is of companies ending up wasting this cash on unprofitable ventures (like mindless acquisitions and diversifications) like what we saw in 2006 and 2007.

What do you think? What should the companies you have invested in do with their excess cash? Share with us, or post your comments on our Facebook page.

 Chart of the day
Today's chart shows the performance of two widely tracked commodities - gold and crude oil - over the past 2 years. And as we see, gold has outperformed crude oil by a wide margin. In fact, investors who would have bet on oil to reach newer highs in mid-2008 are now sitting on almost 45% losses. And those who invested in gold then have reaped returns of around 35% point to point.

Data Source: CNNfn, Kitco

Variety is one thing that keeps investing interesting. At a time when many feel that Indian equities are fairly valued if not overpriced, there is one respected voice that begs to differ. We are talking about Mark Mobius. He observes that Indian markets tend to trade at a premium to other emerging markets. But he adds, "We are still able to find some very good opportunities in India and if you consider the growth prospects, some of these higher price earnings ratios can be justified."

Mobius further adds, "Two sectors we still are interested in India are commodities and consumer stocks." He points out that all the IPO activity has diverted the funds away from the secondary markets. As a result of this, secondary markets as a whole have not seen much of a rise of late. However, given the relative premium compared to other emerging markets, Mobius stresses on the need to be selective about the sectors and stocks one chooses. A point we can hardly disagree on.

Do you sometimes wonder why the front pages of leading business dailies invariably carry content on the same set of companies? And why the developments at some other equally sound and fast growing companies find no mention? Or at best can be located in smaller prints on later pages? Incidentally, SEBI shares your anxiety. Hence it is now attempting to ensure better distribution of information.

SEBI has asked companies to disclose their tie ups with media groups. The regulator believes that some media houses have been carrying content motivated by their commercial interests. These can mislead unsuspecting retail investors. It is also concerned that media houses pick up stakes in companies in return for the latter getting coverage through advertisements and news reports. This brings in conflict of interest for the reader who expects an unbiased view.

We think this move is of paramount importance to empower retail investors. Only such a move will ensure all listed companies get a fair chance of featuring in the media. Also all companies will carry the risk of their misdoings uncovered by the media.

Most IT companies in India are gung ho about the "e-commerce" space. They are touting it to be one of the main drivers of growth in times to come. Even the popular e-commerce site eBay seems to be mirroring this sentiment. In an interview with a leading television channel, its Chairman stated that he expects the Indian e-commerce space to grow by 30% each year to reach a size of US$ 1 bn in the next 3 years. This would be driven by a growth in high speed internet in the country. The government has just concluded 3G and BWA spectrum auctions. These services are expected to be launched by this yearend or by the beginning of next year. This would certainly drive the internet penetration in the country which will in turn boost the usage of e-commerce. No wonder the Indian IT majors like Infosys, TCS and Wipro are all gearing up their offerings in this area.

Several experts are now well and truly worried about the fizzling out of the US recovery. Among them is the CEO of the world's largest bond fund manager, PIMCO. Mohamed El-Erian believes the economic data coming out of the US is 'alarming' and signals that the recovery is losing momentum. He points out at high unemployment, shrinking consumer credit and the credit squeeze for small companies. What is worse, he believes increased government spending and additional debt purchases from the US Fed are unlikely to do the trick. It does seem like all the frantic action by US authorities has not been of much use. The US has to brace itself for a long and bumpy road ahead.

The RBI has raised key interest rates four times already this year. These moves have been to help tame raging inflation rates. However, inflation has now been coming down slightly, due to an improved supply position and the rate hikes that took place earlier this year. There is also the need to ensure that GDP growth in India does not get stifled. Thus, the RBI has indicated that it may cool off further rate hikes to ensure a healthy 8.5% growth.

The RBI's top priority is to contain food inflation, but will rely only on gradual steps to correct prices. Given the global uncertainty and the time lag in monetary transmission, the governor D. Subbarao has decided to rely on a Roman phrase 'festina lente' for doing his job. This means to 'make haste slowly'. We are not likely to see any rapid hikes or strong moves in the coming months from the RBI, if this is really the case.

The past week was largely negative for the world markets. Barring the UK market (up 0.1%), all other key markets closed in the red. Weak GDP data from the US, which increases the likelihood of the country slipping back into recession, resulted in the weak performance the world over. The biggest loser of the week was India (down 2.2%). The key sectors that led the sell-off in India included realty (down 8.5%), metals (down 3.3%), and banks (down 2.5%). Prices of crude oil and gold rose 2.3% and 0.8% respectively during the week.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance, Kitco, CNNfn

 Weekend investing mantra
"Beta and modern portfolio theory and the like - none of it makes any sense to me." - Charlie Munger

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17 Responses to "What should India Inc. do with its excess cash?"


Aug 29, 2010

Companies with surplus cash should progressively raise dividends. Dividend yields on Indian companies is extremely LOW much lower than comparable companies in US or Europe.
A second but less important way is to BUY BACK but only if the index falls more than 20% and stock falls more than 25% from current levels.
Else companies are likely to WASTE moneys: Either they will blow it through so called acquisitions or steal through any number of devious means.



Aug 28, 2010

i am subscribed member and i am not received any
research report for buying shares;.


soni chirag manekchand

Aug 28, 2010

tremendous report to read.it covers all important issues from all over world.which is very important for an investor.i heartly thnks equitymaster for giving me such good report.



Aug 28, 2010

They should pay higher dividend and share excess cash with the share holders.



Aug 28, 2010

i contend corporates should be very circumspect with there cash exp. but also should not loose sight of the bigger pic. and ensure cash goes into building of future capabilties to some extent rest cud be conserved.


Abdul Sathar

Aug 28, 2010

Excess cash should be wisely invested but the Management has to take into consideration of the shareholders and should consider paying part of the excess cash to shareholders



Aug 28, 2010

Dividend as a % of investment amount (current mkt price) is so low in most cases that dividend is irrelevant now. A look at the share holding pattern of any good company will show promoters/FII/FI holding is very high and this category of share holders do not require dividend. Hence it boils down to real retail investors and whether dividend payout helps them. Retail investor comes for capital appreciation rather than dividend, hence if companies use their money wisely in their business, they would do justice fo investors.

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