»5 Minute Wrap Up by Equitymaster

On This Day - 14 DECEMBER 2011
Govt. is to blame for bad corporate governance

In this issue:
» Chinese competition impacting capital goods
» Mr. Jhunjhunwala no longer believes in Mr. Buffett
» Should investors worry about ICICI Bank?
» European Union should be dissolved
» ...and more!
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India Inc. in recent times has received a lot of flak for dubious corporate governance practices adopted by certain companies. The Satyam scandal and the 2G scam are prime examples in this regard. But while fingers continue to point towards corporate India, can one say with certainty that the Indian government is above water in this matter? Not really.

Take the case of the Coal Minister. In a scenario where the government finances are in disarray , his solution to this was apparent in the following statement, "Cash-rich companies like Coal India Ltd can lend to the government whenever the government is in need of funds. For example, enactment of the Food Security Bill would require huge funds. Coal India belongs to the people of this country and an amount of Rs 250 bn can easily be given to the government for implementing social schemes". So the obvious question is, what has Coal India got to do with the Food Security Bill? The Coal Minister appears to have forgotten the simple fact of taking into consideration the interests of the minority shareholders and believes that funds can simply be diverted from public sector enterprises to meet government needs at the drop of a hat. Coal India for its part may not lend money unless it gets interest payments for the same. But again, can the government afford this when its finances are already stretched?

In a country where the government has failed to meet its target as far as power generation is concerned, surely the focus should be on how to improve the availability of coal. It should be noted that despite being home to one of the world's largest coal reserves, the Government has revised upwards its estimated coal shortage for FY12. The same will now stand at 112 m tonnes, up from 83 m tonnes forecasted in December 2010. The entire shortfall is likely to be met by imports.

Hence, it only makes sense that any funds that Coal India has should be utilized towards improving coal productivity and the prospects of the company and shareholders rather than for meeting some government agenda. There is no doubt that government needs to keep an arm's length distance from the way public sector enterprises are run. The management of these companies need to focus on growing and enhancing the overall growth of the economy rather than bowing down to the whims and fancies of the government. And the government for its part needs to seriously take a long and hard look at its corporate governance practices and go in for a big overhaul of the same.

Do you think that the Indian government is equally to blame as corporate India when it comes to bad corporate governance practices? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
How much leave one is entitled to is surely of much interest to all employees across countries. Today's chart of the day shows that Asian economies work more than their European counterparts. Interestingly, southern European countries such as Greece, Italy and Spain which are struggling with the burden of massive debt are among those who enjoy the highest number of holidays. Does this mean that they will now have to work more to get out of this slump? One will have to wait and see.

Source: The Economist

So, the dismal IIP numbers has been the latest thorn for India's economy. However, if one digs a little deeper, like Firstpost.com has done, a 25% fall in capital goods has been even more disappointing. It isn't just the order inflow that has taken a beating; the competition from Chinese players is making matters even worse. Not only are the Chinese power equipments 15%-20% cheaper, their delivery timeline is also more efficient. Besides, the Chinese equipment companies can reach into the deep pockets of Chinese financial institutions to provide cheaper loans for Indian firms that buy Chinese equipment. Thus, in view of these advantages, it is not difficult to find out why the Indian firms are a worried lot. Of course, the Government of India is mulling a 14% import duty on Chinese equipment to stem the slide but a lot of people say that this would be too little, too late. Thus, the next few quarters are likely to be the key determinants whether the sting of the dragon hurts Indian companies in the power equipment space and if it does, then to what extent.

It could be a case of 'once bitten twice shy'. But the term Credit Default Swaps and its association with the subprime crisis have such charred memories in the minds of investors that they would rather stay away from it. The recent reports of the country's largest private sector lender ICICI Bank entering into the maiden CDS transaction approved by RBI has not gone well with investors. Speculations are rife about the bank doing so in anticipation of huge NPAs on its books. Whether the same is justified is difficult to say as the bank's management has yet not divulged any statistics. Even its exposure to the beleaguered Kingfisher Airlines is not substantial enough to call for panic. However, ICICI Bank does not have a venerable track record when it comes to sustaining asset quality. The bank has painstakingly corrected its processes and brought its balance sheet and asset quality in order after the subprime crisis. It is for the entity to now prove the naysayers wrong. However, investors would be better off not taking impromptu decision on the stock based on under researched facts.

Warren Buffett is a name that everyone has heard of. The legendary investor's investment style that has helped him become the second richest man in the world has been the subject of discussion in every investment book. His style of investing that is termed as value investing is simple though difficult to follow. It involves investors to invest in fundamentally strong companies and then sit back and wait for the share prices to reflect the true value of the company. Many have tried to imitate the legend and many have become rich in doing so too. India's own Mr Rakesh Jhunjhunwala was one of them.

However, the recent volatility in the stock markets has prompted Mr. Jhunjhunwala to change his investment style. He no longer advocates holding investments for a very long period of time. Instead he feels that holding stocks for 12 to 18 months is also value investing. His change in approach may have something to do with the fact that he has taken a serious hit to his portfolio in recent times. Whatever his reason for change, we still do not agree with Mr Jhunjhunwala that this is approach is akin to value investing. For fundamentals and intrinsic value of a company to actually get unlocked, 12 to 18 months is an extremely short period of time. It does not even take care of one business cycle in most cases. Adopting a short term approach like this is equivalent to bowing to Mr Market and appreciating his manic depressive mood rather than taking the advantage of the same. This in itself is against the philosophy of value investing.

Ever since the debt crisis in European Union (EU) unfolded, credibility of the Euro was increasingly being questioned. There were two options in front of EU to get out of the current debt trap and save Euro. The first one was to extend support via bailout packages to the debt ridden countries. And the second one was to let those countries default. While the first option is being pursued now, noted economist Marc Faber is of the opinion that EU should be dissolved as intervention is the wrong medicine. While allowing the countries to default would mean further pain is on the anvil, intervention can just delay the imminent rather than providing a meaningful solution to the current crisis. He believes that while the default option appears to be more agonizing in the near term it will be beneficial in the long run. We second his opinion here. If the liquidity injection exercise continues, perhaps the future generation will be loaded with debt slavery and pay a price for the deeds of their ancestors. You may call it a generation debt trap!

In the meanwhile, the stock marketopened on a weak note but recovered the losses during the course of the day's trade. At the time of writing, BSE Sensex was up by 82 points (0.5%). FMCG and banking stocks led the rally while consumer durables and power stocks suffered losses. Red marks were seen across Asian stock markets with Taiwan (up by 0.4%) being the only exception.

 Today's Investing Mantra
"The only time to buy that which you don't understand, is on the day with no 'y' in it". - Warren Buffett

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