Is a profit warning reason enough to panic?

Sep 15, 2011

In this issue:
» China insists developed economies should sort out the mess
» 'Too Big To Be Jailed'
» Why petrol prices may be on fire again?
» Greece's future remains within the Euro family
» ...and more!
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When we ask company managements about their outlook for the future, we expect nothing but the truth in reply. But it seems that honesty is not considered to be a very good policy when it comes to investor relations. Or rather, investors in India are rather too naive to appreciate short and medium term hiccups in a business cycle. The pressure to outperform analysts' estimates is not uncommon amongst large and mid corporate. Especially sectors like IT that put across EPS estimates for the next quarter are in the firing line. But would investors appreciate transparency about the business they own rather than being fooled like the naked emperor?

The reaction to an update by FMCG major Marico on the BSE website citing possible near term risks to profitability clearly highlights confused investor mindset. At the time of writing the stock had corrected by nearly 10% within a few hours of trade. Concerns over volumes due to price increases and lingering pressure on input prices are not alien to any business. We do not see any reason why investors should assume that Marico will be insulated from such hiccups. Nor are these issues that cannot or will not get ironed out over the longer term. A correction in prices may very well be a realignment of valuations to long term fundamentals. But a profit warning for the near term is a onetime temporary blip and can certainly not be reason for investors to panic!

We believe that long term investors need to look at revenue growth and profitability that is sustainable across business cycles. Accordingly valuation multiples can be assigned to the stock and margin of safety should be judged. Else, such random market reactions can prove to be very damaging to one's portfolio.

 Chart of the day
The US' claims of meeting its future debt obligations by overhauling its fiscal policies seem to be getting more unreal. As today's chart shows, the gap between the tax collection in the US as a percentage of its GDP and the social security outlays will widen over the next 75 years! In such a scenario an entire generation of Americans will have to keep paying higher taxes without any hopes of social security benefits.

Data source: Economist

"Too Big To Be Jailed"! Well, this is neither a forthcoming Hollywood flick nor a new phenomenon in global markets. But it is a term that we think suits most appropriately few rich and famous in our country who choose to park their wealth abroad to evade taxes. And mind you that includes our politicians too!

No doubt bringing back the black money stashed abroad to India could do wonders to the country's fiscal position. But the government seems to show no intent of competently dealing with the corrupt system and the defaulters. We were thus least surprised when we came across a ridiculous scheme that the Finance Ministry is considering to encourage Indian citizens to disclose their black money stashed abroad. The defaulters will not just escape prosecution but will also pay a penalty lower than normally levied for tax evasion.

Such voluntary disclosure schemes are available in many other countries. However, we seriously doubt its success in the Indian context. It is interesting to note that under the mandatory asset disclosure system we hardly find any politician disclosing his true net worth. In that case, can we expect the same person to voluntary disclose his unaccounted assets in public domain? Rather than tightening the noose by signing information exchange treaties with the tax haven countries we believe government is taking placid steps to fight the corruption menace.

Do you think that those who have stashed black money abroad deserve such compassionate treatment? Let us know your views or post them on our Facebook page.

With the debt crisis and economic turmoil severely crippling the developed economies, especially the highly indebted European nations, a lot of hope is being pinned against China to become their savior. But can anyone really correct your wrongdoings? We really doubt; and same is the case here. Wen Jiabao, the Chinese Premier, has asserted that the developed economies must first sort out their own mess. They must bring down deficits and create jobs instead of piggybacking on China for their revival. Steps must be initiated to prevent the sovereign debt crisis from spreading further. At the same time, the fast growing dragon economy has offered to help by making investments in those economies. In return, however, China has urged the European Union and the US to open up their markets.

There is no respite for the Indian oil marketing companies (OMCs) it seems. The OMCs fell victim to high crude prices on account of disturbances in the Middle East and North Africa in the recent past. This time, it will be the play of exchange rates governing their fates. As international fuel prices remain firm and rupee depreciates against the dollar, the petrol prices back home might be on fire once again. With daily losses pegged at around Rs 150 m per day, the OMCs are pushing for a hike of around Rs 3 per liter for petrol. It is to be noted that despite being out of the regulation net, losses already incurred this fiscal on selling petrol stood at Rs 24.5 bn. At current rates, total loss on petrol for the full fiscal year is estimated at Rs 53 bn. This is apart from losses on regulated products like diesel, domestic LPG and kerosene which are estimated to be at Rs 1,216 bn for FY12.

Further, if the trend persists, the state run oil retailers will need to borrow to finance their working capital needs. In a rising interest rate scenario, this can only make things worse. The impact will not just be on state run OMCs. The Government and upstream companies (ONGC and GAIL) will be dragged along. This is because they have to share the major portion of such losses. Raising petrol prices in an inflationary scenario is a tough call. But the bullet can't be dodged for long. As Government goes for an FPO on ONGC, perhaps it is time to come up with a clear subsidy sharing formula as well so that investors know what they are getting into.

The Euro zone crisis is like watching a family drama unfold. France and Germany are the strict but yet forgiving parents, while the PIIGS are the errant children. But, with the world watching, this family really needs to get its affairs in order soon.

Earlier this week, stock markets tanked globally on expectation of a Greek default and its probable exit from the euro zone. However, France and Germany have confirmed that Greece's future remains within the Euro family. Greece has vowed to stick to harsh austerity measures needed for an EU bailout. If the country does not fix its debt-ridden economy it could very soon run out of cash, and lose access to its US$ 150 bn bailout package. Measures to stabilize the euro zone's economies urgently need to be implemented. The world is quickly losing patience with the Euro crisis and the shoddy way the countries have handled their fiscal balances.

That European economies are in a precarious state is a foregone conclusion. So debt saddled is Greece, Portugal and Ireland, that there is the imminent threat of a prolonged recession in the Eurozone akin to the Great Depression and the fall of the Euro. Moreover, there is also the possibility of these 3 economies having to leave the Eurozone. The trouble does not end there. Italy and Spain have also been marred by high debt and weak growth and given the huge size of these economies, bailing them out will undoubtedly be quite difficult. One solution that has been doing the rounds is that Greece should be allowed to default. But besides this, George Soros recommends some bold policy measures which include protecting bank deposits in weaker nations, making sure that banks in defaulting countries are kept functioning, recapitalizing the European banking system and protecting the government bonds of other deficit countries. Indeed, these measures would cost money and so Soros has proposed setting up a European Treasury which will have the power to tax and therefore to borrow. Whether this sees the light of day remains to be seen, given the kind of political deadlock that has already been witnessed among the Eurozone countries.

Despite buying interests in select heavyweights from the software and consumer durables space, the Indian indices languished close to the dotted line for most of the session today. At the time of writing, the BSE Sensex was trading higher by 69 points. Most other Asian markets also closed higher. Europe has also opened on a positive note.

 Today's investing mantra
"Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere." - Warren Buffett

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8 Responses to "Is a profit warning reason enough to panic?"

Cdr.S S Kumar

Sep 15, 2011

Why the whole nation including the media and your goodself, talking of black money stashed abroad when it is abundant in our own backyard. Every property deal is 70-80% black. If you can check that, enough strength will get build up to get Swiss money back easily and swiftly. First clean your own house which should be the first priority and will immensely harm the polititions and corrupt babus.


rajiv jain

Sep 15, 2011

voluntary disclosure will not give positive results. harsh steps are required with boldness and internal strength without losing the precious time.



Sep 15, 2011

Hi, The politicians who have stashed away money abroad deserve no leniency. I think,the Indian IT authorities should inform countries like Switzerland to deduct the tax amount (maybe a flat rate or variable rate of the asset value)and transfer the same to the Indian government. Names need not be disclosed. Once this is implemented, it will not be attractive to hold money abroad as the tax-evasion purpose is is no longer satisfied. Gradually such occurrences of evading taxes will stop. regds


Narayan Mansukhani

Sep 15, 2011

Mondatory asset disclosure will not work, the only way is information exchange treaties with tax haven countries, and who ever is stashed black money abroad should be prosecuted and their all assets must be confesticated and names should be made public.


Adi Daruwalla

Sep 15, 2011

Greater the position of power, the greater is the responsibility,and the greater the responsibility, the greater is the accountability. Thats whats happening at the centre (N. Delhi) but its all hotch potch, need scotch brite to clean it and the 2nd list is out by Wiki so where is the assignment of whos done what and the judgements and sentences that need to be passed. Why amnesty schemes, there should be more penalty for those that defraud the country. This is reverse thinking by government providing amnesty schemes, and aiding and abetting wrong doers who bring global shame to the Indian nation. What is the concrete action for the first list also that was published. It was suppossed to appear in the all India press why has it been supressed????



Sep 15, 2011

What else can be expected of the corrupt, by the corrupt and for the corrupt Government. This should have been very obvious to every one long time ago, seeing the way our Finance Minister is stone walling the black money issue for such a long time in spite of help volunteered by others. It is more important to save the individual and illegitimate politicians than serve the country. What a wretched tribe this is!



Sep 15, 2011

Marico Management is to be congradulated for its action.In fact Longterm investors should thank them.


Debapriya Adhikari

Sep 15, 2011

The industrialists evade taxes but that is not parked abroad...but politician act smart to fool the countrymen

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