Bluechips need not remain bluechips

Dec 18, 2010

In this issue:
» Cheap global money good for India?
» The 'big evils' according to author Nassim Taleb
» Is it justified to ban microfinance IPOs?
» Mumbai to house a third of India's office space
» ...and more!!

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"Fortunes change, there is no assurance that major companies won't become minor, and there is no such thing as a can't-miss blue chip. " Peter Lynch. Blue chips by definition are large companies with a reputation of running the business profitably across business cycles. But the economic crisis in 2008 showed a different side of the large entities. That of creating a bigger mess when things go wrong. The disdain of regulators towards the 'too big to fail' is not new. But the RBI and the SEBI have especially been watchful of such entities taking shape in India.

SEBI chief Mr Bhave in fact has gone on record to say that the big corporates tend to abuse power. And they are therefore the most difficult to regulate. He also recommends restricting the growth of big entities by disallowing excessive leverage. Mr Bhave's comments do not come as a surprise to us after the path breaking reforms he has initiated in the mutual fund industry. But we believe that lowering leverage may not be the most ideal way to mend abusive corporate heavyweights.

History has shown that large corporates tend to misuse their supremacy for undue favours. These at times lead to misallocation of critical resources. At times laws are created to particularly suit the bluechips' business interests. And this is not restricted to India. Such favouritism towards the 'too big' is rampant globally. Regulating the financial stability of large corporates is important. But policies favouring their growth at the expense of smaller entities need to be restrained. Only then will there be a level playing field for all bluechips-in-the-making. More importantly, this may avert corruption. As also abusive use of wealth and power by large companies. For investors, it is important to remember that bluechips remain bluechips only as long as they generate lasting wealth for shareholders. Therefore, they cannot be blindly invested into.

 Chart of the day
The entire population of a country is not the target audience for sale of cars. Particularly in emerging economies where a large section of the population can barely afford two square meals a day. Also, in economies like India, the concept of 'family cars' is more pronounced as against individual cars in the West. Hence, the comparison of number of cars produced in context to the population in an economy needs to be judged carefully. However, as today's chart shows, even in comparison with its emerging peers that have similar economic characteristics, India lags in car production. No wonder that global car makers are making a beeline here.

Data source: Nation Master

The Indian markets are looking to attract a fresh wave of cheap global money. This is what is believed by financial group Citigroup. As per it, strong growth in the Indian economy and rising profits of Indian companies are acting as attractions for more foreign investors to set their eyes on India. This seems good news for the stock markets in the short term. However as for the long term, we believe that Indian markets' and the economy's dependence on short-term inflows is a key risk.

As a matter of fact, India's current account deficit (excess of imports over exports) is currently running at around 3.7% of GDP. This is sharply higher than the 3% level of FY10. The sorry part is that almost 80% of this deficit is paid for by the short term inflows received by way of FII money. Were these inflows to dry up for some reason, the Indian economy can get into dire straits. So, while more foreign money coming to Indian shores can perk up stock prices here, these can add to the economy's risk even further.

The noted author of "Black Swan' Nassim Taleb has criticized the US government and big companies by calling them 'evil'. He told a business channel, "They're both very bad, particularly big government. Big government ends up like socialist states. They end up favoring large corporations that have a lot of employees. That kills growth from small companies who cannot get to Washington, they cannot get lobbyists."

Taleb continues to advocate that investors devote large portions of their portfolios to safe assets (like gold) and smaller portions to higher-risk plays (like stocks).

The IPO of micro-finance major SKS Microfinance raised a lot of eyebrows in the industry. The pioneers of the industry were opposed to the company's promoters trying to make extraordinary profits from the IPO by way of selling their shares at huge premium. But investors were in no mood to give up then, and loaded up on the issue as it was a 'new idea from a new sector'. The performance of the stock post the IPO seems to have changed all that. With several cockroaches falling off the SKS cupboard, now even those in the government are accusing the company.

As per a leading business daily, the Andhra Pradesh government (AP is the hub for most MFIs) has asked the RBI to disallow MFIs to go in for IPOs. The reason it has given for its view is that IPOs defeat the very purpose of microfinance that is to be a socially responsibly organisation and not a capitalistic one.

While we are not sure whether MFI IPOs need to be banned or not, the idea for investors still remains to check the quality of the company and sector before applying to an IPO. Just buying a 'new idea from a new sector' doesn't make much sense!

Infrastructural problems have dogged Indian metros for a long time now. And there seems to be no end to it in the medium term. About 50 m sq ft office space is expected to be added in the country in FY12. Of this, 17-18 m sq ft will be by Mumbai alone. This means the mega city will add a third of India's office space next year. And that too, despite high vacancies and a stock of 47 m sq ft in office premises.

Mumbai is already the world's fourth most expensive office market. Last year office rents had fallen by 40% from their peaks in key business areas of the city. This happened because corporates and financial institutions deferred leasing office space following the global slowdown. However, the rentals are now seeing a revival.

Well, there is no denying about the positive outlook for the economy. And being the financial capital, Mumbai will be at the helm of its growth. But how much can the city hold? Is there sufficient infrastructure to support this kind of construction? The existing basic utilities and transport infrastructure are simply not enough to accommodate it.

The week gone by was a mixed one for global markets with the RBI's status quo on interest rates and better economic indicators coming out of the US. However, concerns about Euro zone persisted as rating agency Moody's downgraded Ireland's debt. China was the top gainer for the week, up 1.9%, while Hong Kong was the top loser, down 1.9%. In Europe, UK was the top gainer up 1% while in the Americas US was up 0.7%. In Asia, India and Japan were amongst the leading gainers. The BSE-Sensex gained 1.8% during the week.

Data source: Yahoo Finance. Kitco

 Weekend investing mantra
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." - Benjamin Graham

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6 Responses to "Bluechips need not remain bluechips"

SS Varadan

Dec 21, 2010

Chart on Cars:
One more mis-presentation of statistics!
One should ALSO compare no.of transport vehicles USED Domestically per thousand(including bullock-carts,Cycles,Rick-shaws,Autos,Cars,Buses,Rail-passengers,Air-lines,Shipping etc.......)This will clearly show how many people use multi modal transport(seats) per thousand. Again Take no.of people earning above 2500 US$ per Month AND using Cars among them? This should convey meaningful summary to the reader, which is new to the reader and useful!


Ram Suresh Upadhyay

Dec 20, 2010

Past performance can be showm by picking the stocks out performed.what is your current recommendation for 300% return as a trial


Ameya Patil

Dec 20, 2010

If Bluechips remain bluechips,where will be the romance of investing in stock market


G. Natarajan

Dec 20, 2010

Performance chart of share movement as on 17/12 - The text says Japan & India and the legend in graph indicates
china & India.



Dec 18, 2010

good statement



Dec 18, 2010

"Bluechips need not remain bluechips" - wow!

Well, was Satyam not a blue-chip not long ago? Overnight, literally, the stuff went off the bellwether list of index!!!

For once, there is a lot to emulate from Warren Buffett; yet, one may not be wiser adopting his buy-and-hold-only option!

About the mother of all blue-chips, Reliance Industries (no, I am not talking about any of Anil's indulgence, almost all of which are already dead or dying, in hyped paper-wares that are nothing but the "first time ever"/"world's largest" vapourware) is in the eye of one of the leading brokerages' analysts quoting that there is an item of Rs7000+ crore in value in their published books, that does not seem to reconcile.

By sheer coincidence (alone, one hopes), the size of this mysterious entry is too close to the number the ex blue-eyed-boy of ex blue-chip Mr Raju, threw up in his love letter to stock exchanges!!

But then, given the many tens of thousands of crore worth of intrinsic value of the company assets (unlike the stuff we found on the 'bench' literally, in the other case), may be the lucky ones will have an opportunity soon to buy THE blue-chip, when it becomes horribly pink and hence dirt cheap, so that by merely sitting on it for an year or two (needless to say, when the Dept of Co Affairs, SEBI and other babudoms of GOI muddles thru, insearch of 'natural' sunlight to come thru at the end of the tunnel, never mind soothing words like Corporate Governance & Regulatory Framework et al ie another kind of vaporware!) to make a few new rag-to-riches Warren Buffets, around here!

Well, watch the space....

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