|»5 Minute Wrap Up by Equitymaster|
On This Day - 28 AUGUST 2010
What should India Inc. do with its excess cash?
In this issue:
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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.
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.
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.
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.
Data Source: Yahoo Finance, Kitco, CNNfn
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