India Inc may not agree with Buffett on this...

Oct 3, 2011

In this issue:
» Has India's debt position improved?
» Sebi wants companies to disclose relevant risk factors
» Why is Germany in no hurry to fix the euro crisis?
» Near-bubble valuations of Indian tech startups
» ...and more!
---------------------------------------------------------- Free Video ----------------------------------------------------------

Recently we recorded a short video with Asad Dossani discussing among other things prospects for Gold, Silver, Crude Oil...

In the video, Asad also reveals two derivative trading ideas that you could profit from.

Remember, this video is absolutely free to view!

Quick! Be among the first to view this video! Click Here!


Share buy-back by companies are often received with a lot of excitement by investors. It typically signifies promoters' attempt to enhance intrinsic value of the stock by reducing its supply in the market. This could also be done to avert takeover threats by competitors. Most of the times, the mere announcement of a share buy-back is enough to send stock price of the company soaring.

In a very surprising statement last Monday by legendary investor Warren Buffett's Berkshire Hathaway, the company plans to repurchase its shares. In fact, in a more recent interview on CNBC, Buffett said that the company had already commenced the buy-back, though he did not reveal the number of shares repurchased. It is interesting to note here that this is a complete reversal from Buffett's hitherto stance on the whole idea of share buy-backs. For over four decades, the octogenarian value investor has shunned giving away cash to investors either in the form of dividends or share buy-backs. He has maintained that stock buy-backs are too insignificant to make any real difference to shareholders and are mostly used by executives to prop up the value of their stocks which are linked to their compensation plans. Instead he has been of the opinion that corporate cash should be reinvested in businesses that in turn produce more cash for investment.

However, Buffett believes that a buy-back can be initiated only if a company has excess cash beyond its near term requirements and its stock price is quoting at a discount to its intrinsic value. With about US$ 70 bn of cash and Berkshire's stock price trading close to its book value, Buffett does think his own company is a good buy. Of course, the maximum price he is willing to pay is a 10% premium over the book value.

Buffett's stock repurchase announcement has come at time when the US economy is going through what renowned writer Bill Bonner calls the Great Correction. It hints at the poor economic outlook of the US and the dearth of big investible opportunities. Despite Buffet's optimistic views on US economy's recovery prospects, the share buy-back is certainly a very credible hint of poor investment scenario in the US even from a long term perspective.

Coming to Indian companies, should cash rich entities go with Buffett's logic of shareholder value creation? We do not think that the judgment can be as easy. One, because the growth prospect in India in the longer term is far more enticing than in the US. Secondly, given the tight liquidity scenario, Indian companies may be better off keeping themselves self-sufficient for their future funding needs. Further, it will not hurt to keep some excess cash in case they wish to explore inorganic growth opportunities; especially at a time when the chances of fetching a value 'buy' are high. Thus, while we can completely understand Buffett's change of stance with regard to share buy-back, we believe that it is too early for India Inc to consider such options without adequate reasoning.

Do you think cash-rich Indian companies should buy-back shares to reward investors? Share your comments with us or post your views on our Facebook page

 Chart of the day
While the developed world is burning in a severe debt crisis, emerging economies seem to be in a much better shape. In fact, as today's chart of the day shows, India is estimated to have a better debt position in terms of a proportion to its GDP (Gross Domestic Product) compared to other economies. For instance, India's debt to GDP ratio is expected to decline from 77.7% in 2007 to 75% in 2011. On the other hand, developed countries like US, Greece and several others have witnessed their debt to GDP ratio rise substantially since the financial crisis first broke out in 2007.

Data source: Business Standard
*Figures for 2011 are projections

Ever been daunted by the big, bulky offer documents that companies distribute when they come out with initial public offerings (IPOs)? Most of them contain so much information, that investors are not able to discern which data is relevant and which is not. One such area is the possible risks that companies and the sectors that they operate in face. Most of these enumerated are very generic in nature and many a time specific business risks are so disguised so as to appear generic. That is why Securities and Exchange Board of India (SEBI) is considering a new set of regulations that require disclosure of only relevant risk factors by companies in a format that is easier for investors to understand.

Further, the market regulator is also planning changes in norms to bring in more clarity in the disclosure of 'related party transactions' and litigations faced by companies. What has been observed so far is that companies tend to disclose all conceivable risks and details of litigations, irrespective of their actual materiality. Also, many of them extend a specific risk to include generic consequences, thus compromising on clarity and accuracy of risks involved. Thus, we believe that the Indian capital market regulator's decision could be instrumental in preventing the misuse of the requirement of risk disclosures. However, when this will get implemented, remains to be seen.

Germany may have been able to salvage the reputation of its partners in the euro zone so far. It has provided rescue loans to economies like Spain, Ireland and Portugal. However, despite the threat to the euro, Germany seems to be in no hurry to resolve the debt crisis in Europe. Like a conservative regulator, it believes that those at fault need to go through some pain. Also, past experiences have shown Germany that nations receiving debt relief funds tend to go back on their austerity plans. Hence, being one of Europe's most fundamentally strong economies today, Germany would not want to compromise on its own financial stability. If this gives out any indication of the limited extent of relief funds at the disposal of the debt ridden economies, investors need to be wary of the same.

High prices are a reason to worry not only for the common man. Venture capitalists, too, are feeling the heat. However, it is not the commodity prices which are driving them crazy, but the very high valuations of early stage technology companies in India. Interestingly, one reason is common in both the cases- supply side constraints. Very few good opportunities for private equity or venture fund investments are presently available in the Indian technology market. However, every Silicon Valley venture capital fund is actively looking for quality investment opportunities here. This is leading valuations to near-bubble levels.

There is another reason for the higher valuations. It is the IPO plans by US technology firms such as Groupon and Zynga. High valuations of these firms are creating big valuation expectations in the market. All this is making efforts made in searching quality opportunities a complete waste because investors have to leave the idea at the final stage due to higher valuations.

The Indian stock markets have been trading below the dotted line. At the time of writing, the benchmark BSE Sensex was down by 299 points (1.8%). All sectoral indices were in the negative, led by the metal and realty sector. All Asian stock markets were trading in the red as well. Hong Kong (down by 4.6%) and Indonesia (down by 4.5%) were the biggest losers. European markets, too, have opened on a negative note.

 Today's investing mantra
"Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected." - George Soros

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "India Inc may not agree with Buffett on this...". Click here!

2 Responses to "India Inc may not agree with Buffett on this..."


Oct 4, 2011

A lot of people have been telling that market
could go down to 4200, but if you see from a foreigners eye and
if you see in the currency already 12% or 13% fall in the rupee.
I am not so negative. Markets always irritate you when they are going down and
this is a perfect time where you can start building a portfolio.

Knowing very well that you could have some more burns via on the way
down but markets always test your nerves to sort to speak. I am not
negative at all this point in time,The Indian market has already discounted
the Greece bad news. I am hope time can be wasted in these
situations. We always know that markets take their own time to do things,
effectively this is a time to build a portfolio that is what I will say
one thing is certain. This market gloom and doom made many stocks
valuation at mouth watering level



Oct 3, 2011

1) India's debt to GDP ratio you have mentioned pertains to public debt only. There is another ratio private debt to GDP ratio for India , which you can clearly see in the IMF.ORG website, so if you add both public and private debts , then this ratio is well above 120 %. So India is not at all comfortable wrt debt to GDP ratio , as you are saying.
2)India's actual fiscal deficit is much higher that what is reported by Govt.This is next only to Greece, but we are getting reports it is around 4.6 % or so.
Problem is everyone is going by newspaper reports, no one is going deep enough into these matters and asking pointed questions.

Equitymaster requests your view! Post a comment on "India Inc may not agree with Buffett on this...". Click here!