»5 Minute Wrap Up by Equitymaster

On This Day - 16 MAY 2016
The Economy Is Paying the 'Price' Of the Vote...

In this issue:
» Manufacturing sector after two years of Modi government...
» Has Warren Buffett taken a U-turn on technology stocks?
» ...and more!
Richa Agarwal, Research analyst

I was on a vacation last month. To escape the scorching heat of Mumbai, I decided to take shelter in Nilgiris...and booked a ticket to Coimbatore. My final destination was Ooty and Coonor. As the journey date came closer, I was excited to take a break from local train travel in Mumbai and hop on a toy train amidst mountains and lush greenery instead.

Don't worry - I'm not about to go into a travel account and make you look at my pictures. The reason I'm telling you this has to do with the seizure of Rs 570 crore on May 14 in Tamil Nadu state...funds suspected to lure voters.

On the way from Coimbatore to Ooty, the police stopped our cab twice. They asked us how much cash we were carrying. Our answer did not satisfy them. So they checked our bags, and only then we were allowed to carry on.

This was obviously strange for us, so we quizzed our local driver who suggested it was because of the upcoming elections. The week before, a vehicle was seized with Rs 12 crore in cash...going in the direction of a small village to woo voters and buy votes.

It's one thing to read about this in newspapers, but experiencing it firsthand was saddening.

As per Mr Rajan, it is estimated that Rs 500-600 billion in cash would increase with public in the poll bound states. Several hours after the Rs 5.7 billion was seized the other day, the SBI claimed it was an official transfer. Few believe it. And rightly so.

Over the years, despite rising awareness and social media activity, the political parties seem to have gotten even more brazen in their bribes for votes.

Their manifestos are full of freebies rather than policy. 'Gareebee Hataao', education for all, employment for all...are things of the past.

Modern manifestos assure mobile phones to all ration card holders...100 free units of power (with no need to pay electricity bills) ...free lap tops for students of Classes XI and XII...double gold for mangalsutra from the existing 4 grams...Rs 500 coupons for people to buy handloom clothes from state-run Co-optex during Pongal...new farm loans...waiver of farm loans...vehicle subsidies......housing schemes, resolutions to prohibit shale gas projects ...the list goes on.

I'm not sure about the economy, but politicians have indeed 'progressed' and seem to be quite 'upwardly mobile'.

And when it comes to double standards, these parties put anyone to shame. You see, prohibition is another point of focus in the Tamil Nadu election manifesto, to woo women's votes. Interestingly, Tamil Nadu State Marketing Corporation, or TASMAC, a state-owned company that has 29,000 employees and annual revenues of Rs 262 billion, enjoys a monopoly on the sale of liquor. Not to mention TASMAC has been one of the tools to subsidise the freebies by the state political parties.

It's not just Tamil Nadu. Corruption and dole politics is not a one-state phenomenon. Cash has been squandered to purchase votes - at times causing stampedes - across states. Even the central party is not immune to it...though they're approach might be more refined.

A case in point is the popular unemployment allowance scheme, MGNREGA. Almost a decade old now, Mr Modi called the scheme a 'living monument of the Congress party's failure'. However, after two years in power, the Modi government has a different view on it.

Finance Minister Mr Jaitley recently allocated Rs 370 billion, the highest ever budgetary support, to the scheme and promised more. The government is not ready to give up subsidy politics for a growth-led model yet.

This indicates that the government is skeptical about the employment situation in India and the prospect of natural growth in the Indian economy. Those betting on macro tailwinds have reasons to be cautious. Investors should rather do some second-level thinking and bet on something tangible.

Economic growth will be a mirage as long as parties count on subsidies and dole politics instead of real development and empowering citizens. No wonder the public sector banks and PSUs are in dire straits...

Meanwhile crony capitalism and black money go unabated, funding the ambitions of the political parties. When political parties are so brazen, crooks like Vijay Mallya are bound to flourish. Unless the loopholes in the system are plugged, India's fight against corruption, black money, and slow growth will remain a lost cause.

What are your views on the murky vote bank politics in India? Let us know your comments or share your opinions in the Equitymaster Club.

--- Advertisement ---
Profit From Junior Blue Chips...

We have released our latest Special Report on the best of the best small caps - Junior Blue Chips!

Yes, we believe Junior Blue Chips possess the high growth potential of small caps along with the stability of blue chips.

That is an amazing combination every investor would want in his portfolio.

And the best part is you can get this report for FREE!

Just click here to know how...

3:00 Chart of the day

On May 16, 2014, Narendra Modi-led BJP emerged victorious in the general elections. It's been exactly two years since that day. So, one may rightfully ask: Where is the Indian economy headed? Has Modi's economic agenda worked for the economy?

Of course, one cannot have a binary 'yes' or 'no' answer to such a question. But there has be some parameter to judge the business landscape.

The RBI recently published its 32nd round of Quarterly Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for quarter ended December 2015. OBICUS captures actual data from the companies in the manufacturing sector. In all, 1,058 manufacturing sector companies responded in this round of the survey.

Among other factors, one key factor that gives us a good picture about how the demand scenario is shaping up is to see the trend in capacity utilisation rates.

The chart of the day shows the trend in capacity utilization rates across nine quarters from Oct-Dec 2013 to Oct-Dec 2015. It is worth noting that the utilisation rates may not be comparable sequentially as the demand may be affected by seasonal factors. So, a year-on-year comparison may be more appropriate. If you consider the utilisation rate of 72.5% in 3QFY16 (Oct-Dec 2015), it is an improvement from 71.7% a year ago. But it is still lower than the utilisation rates recorded in 3QFY14 (Oct-Dec 2013) when the UPA-II was in power at the Centre.

This reflects that the manufacturing sector is not out of the woods yet despite oil prices being advantageous. While the Modi government may like to revel in the theory that India is a 'bright spot' in a gloomy world, we stand by RBI Governor Raghuram Rajan's realism: In the land of the blind, the one-eyed man is king.

Indian Economy After Two Years of Modi Govt

Indian Economy After Two Years of Modi Govt


There have been some reports recently that state that Warren Buffett is backing a consortium to acquire Yahoo Inc's core assets, the American multinational technology company.

Some may be baffled at the idea of Buffett bidding for Yahoo. The Oracle of Omaha has often been vocal about his discomfort with technology companies. He kept away from two internet booms. He never invested a single dollar in close pal Bill Gates' Microsoft.

Is Buffett's IBM investment and now Yahoo's acquisition bid his late entry to the technology sector?

We believe one should not jump to conclusions until the deal structure is revealed. Buffett is known to be an ace deal maker. In several deals in recent years, he made sure he profited even without a surge in stock prices.

An article in Bloomberg aptly states that this time too Buffett may not be betting on the stock's performance, but rather on its continued existence. What more, the assets for sales - including finance, sports, and video sites - are essentially media businesses. And Buffett has had a long history of investments in the media and advertising industry. That's his circle of competence.


After trending lower during most part of the trading session, the Indians stock market pared losses and were trading near Friday's closing level. The BSE Sensex was trading higher by 37 points (0.15%) at the time of writing. Information technology, FMCG and realty sector stocks were the leading gainers. However, banking and telecom stocks were leading the losses. Mid cap and small cap indices were trading marginally in positive territory, each higher by 0.13% and 0.04% respectively.

4:40 Today's investing Mantra

"Technology is clearly a boost to business productivity and a driver of better consumer products and the like, so as an individual I have a high appreciation for the power of technology. I have avoided technology sectors as an investor because in general I don't have a solid grasp of what differentiates many technology companies. I don't know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don't overpay for them. Technology is based o-n change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles." - Warren Buffett

Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and conditions for research reports click here.

Details of Associates are available here.

  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407