India's oil crisis
(Jan 9, 2009)
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In this issue:
» Oilmen's strike taking its toll
» What were the auditors doing?
» Bank of England cuts rates
» Buffett got a better deal?
» ...and more!!
Employees of public sector oil companies have recently gone on a strike demanding higher wages. As per a leading business daily, these white collared employees have the moral backing of the senior management who also stand to benefit from a wage hike.
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Indian Oil's Koyali, Panipat, Mathura and Haldia facilities have been affected as a result of the strike. GAIL has also been forced to cut back natural gas supplies by 47 m cubic meters per day. The oil companies have stocks of refined products that could last up to 19 days. If the strike extends beyond that, the government will turn towards the private players. However, it will still throw the entire fuel dynamics of the country into disarray. In fact, the government has asked the companies to sack nearly 70 executives in the fore front of the agitation.
It is indeed tragic that PSU oil companies, especially the marketing companies, have to go through one headache after the other - pricing controls, crude price shocks and employee agitations. Very few industries, barring the airlines, have such a tough time on a regular basis!
Sun Pharma had made headlines in May 2007 when it announced the acquisition of the Israeli based company Taro Pharmaceuticals for a consideration of US$ 454 m, which was touted to be the second largest acquisition by an Indian pharma company after Dr.Reddy's had acquired Betapharm. The move was in line with Sun Pharma's strategy of strengthening its presence in the highly competitive US generics market and given that Taro derived 90% of its revenues from North America it seemed like the perfect fit. The only problem then was that Taro had losses at the net level, which despite Sun Pharma's successful track record of turning around the other loss making acquisitions that it had made in the past, was still quite huge. But then the deal ran into trouble with Taro backtracking and saying that it is no longer interested in the deal. In the meanwhile, Sun Pharma had already infused interim financing to the extent of US$ 60 m to provide immediate liquidity to Taro, which was on the verge of bankruptcy. The legal battle since then has continued. Sun Pharma is still the largest shareholder in Taro with a 36% stake. But given the uncertainty that surrounds this deal, at some point Sun Pharma will have to contemplate whether this acquisition is worth all the trouble.
Ranbaxy is paying a heavy price for not conforming to the quality standards of the US FDA.While two of its plants at Paonta Sahib and Dewas have been shut and an import ban has been imposed on 30 products, further approvals are getting severely impacted too. The company, which has been very aggressive in challenging the patents of branded drugs, was successful in making a spate of out-of-the-court agreements with innovator companies for their respective drugs, each with an exclusivity window. This was then a good strategy as it ensured some kind of certainty with respect to the revenues that could be generated from drugs whose patents were being challenged. But the trouble with the US FDA has changed all that. For instance, the company has been unable to launch the generic version of GSK Plc's anti-migraine drug 'Imitrex' with the 180-day exclusivity window as the ANDA approval was filed from the Dewas plant, thereby losing out on an opportunity of generating substantial revenues and profits (around US$ 20-25 m). In the meanwhile, GSK Plc's patent for 'Imitrex', the drug which generated revenues to the tune of US$ 1 bn, expires in February this year. It seems highly unlikely that the issue with the US FDA will get resolved before that.
As the interim CEO of Satyam, Ram Mynampati has the unenviable task of salvaging the beleaguered company. He has pointed at a strong receivable position from its customers, fixed assets and customer support but has not made any statement regarding the fictitious funds.
He has also begun the damage control exercise by addressing Satyam's employees. In a letter to the employees, he said, "This is as good a time, as any, to remind ourselves that we have been acknowledged as being amongst the top three Best Employers in India by Hewitt and Mercer in independent surveys in 2007." At a time, when there are question marks over hard numbers like cash and bank balances audited by world renowned firms, we wonder how seriously one should take such seals of approval.
Mr. Mynampati also says, "We shall soon be a successful case study of how organizations have turned over a new leaf." Time will be the judge of that, but it is sad that such a situation has arisen in the first place. If only financial conscience keepers did their basic job properly.
Speaking of financial conscience keepers, what were the auditors at Price Waterhouse doing? Auditors conduct several tests, right from vouching accounting entries to analytical procedures, to verifying the accuracy of the financial statements. They pay special attention to cash and bank transactions. And still, if Mr. Raju's mail is to be believed, 95% of the cash on the books was simply not there.
We can think of 3 possibilities: 1) The cash was there. The auditors had verified it. Mr. Raju has siphoned it off later and his mail is a lie. 2) The cash was not there. The auditors were hand in glove in the fraud (think Arthur Anderson & Enron). 3) The cash was not there. The auditors were asleep at the security gate.
We wonder if appointing the same auditor for 8 years made the Satyam's system weak. In fact, it is time to question if auditors should be appointed by the management in the first place. Should external regulatory agencies have a greater say in their appointment?
Few things happen once in 300 years. Especially those that are not dependent on the rules of nature but are designed by mankind. The current economic recession has brought some of the most infrequent instances to the fore. After the US Federal Reserve's move to bring interest rates to near zero levels and flush the economy with cheap money, the Bank of England yesterday tried its best to mend the flagging economy by cutting base interest rate from 2% to 1.5%. As per Economist, this makes it the lowest interest rate since the central bank was founded in 1694. The Bank of England's mission then was to provide war finance. Its task now is to fight a recession that looks increasingly likely to be the worst since the second world war. Whether the additional infusion of funds will solve the economic distress? We are not sure. But we can certainly get the whiff of economic problems for the future being nurtured.
In an interview conducted by a leading business daily, Mr. Montek Singh Ahluwalia, Deputy Chairman, Planning Commission of India, has said that the "most optimistic outcome of the current macro economic environment is that the recession in the industrialised world might come to an end by the end of the second quarter of calendar 2009. We will then begin a slow recovery. No one expects a fast recovery."
He is also of the view that it's still not completely clear if the problem of toxic assets has been correctly identified and that the recession may cause many other non-toxic assets to become problematic. According to him, one has to still watch out for the credit card risk. Moreover, house prices might not have really bottomed out and there could be a further slide.
Christmas was not merry for the US retail players. Major retail players like Fred's, Ross Stores, Kohl among others have reported flat or declining sales. In fact, even Wal-Mart, which was the sole gainer in December store sales, has now reduced its earnings outlook for the fourth quarter by 10%. With the US in recession, its retail sector would continue to face tough times in the coming quarters.
There is a mini storm brewing in the US currently. It concerns the notorious TARP or what is popularly known as the government bail out of the troubled financial institutions. The bone of contention seems to be the terms of the deal between the US Treasury, the government agency that is in charge of the program and the firms, which are being supplied with capital. Some people are of the opinion that the treasury is leaving a lot of money on the table and is not looking after the taxpayer's interest to the extent it is supposed to. In other words, the terms of the deal with the treasury are not as attractive as the one being handed out to investors like Warren Buffett by the very same financial firms. The treasury, in its defense, is arguing that it cannot approach government's investments in the same manner as someone like Warren Buffett because the government is not in it for profit but for ensuring stability and credit flow into the system. As long as the taxpayer gets its money back with a decent return, the treasury is not unduly worried about the profitability aspect of the TARP. So, which camp are you in? As far as we are concerned, the noose need not be so tight so as to defeat the very purpose of capitalism nor should it be so loose that mistakes of the past are repeated.
The Indian markets closed lower by 2% today. BSE Metal (down 7%) and BSE Realty (down 5%) contributed to the fall. While the Asian markets closed mixed, the European indices are trading in the red currently. U.S. stock-index futures are also in the red. As per Bloomberg, the declines are due to fears that a report today will disclose job losses in the US for a 12th straight month.
"Stock speculation is largely a matter of A trying to decide what B, C and D are likely to think-with B, C and D trying to do the same." - Benjamin Graham
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