Should promoter stake sale worry you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should promoter stake sale worry you? 

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In this issue:
» No more bailouts likely for Air India
» Currency investors speculating on Euro and Yen
» Gokarn: India needs a National Policy Agenda
» Can banks afford yet another agri loan waiver?
» ...and more!

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We completely subscribe to Buffett's classical value investing technique of buying stocks for very long term. It is true that for solid businesses that sport tremendous wealth creating ability, the time to sell the stock is 'never'. But this advice cannot be misconstrued. There cannot be anything more dangerous than assuming that one can remain ignorant about stocks in the long term portfolio. It is not the quarterly change in earning per share that you need to keep a hawk eye on. It is neither the accumulation to order book that you should celebrate. Nor should temporary headwinds give you sleepless nights. You need to react only when there seems to be a permanent change in the business model. Or when the decision making by promoters do not seem aligned with interest of minority shareholders. But there are some updates that may not fall in any of these categories. Yet are material enough to sound an alert, if not make you panic.

Promoter holding in companies is a very important statistic. Except in cases where the company is professionally managed (eg: L&T, HDFC, Tata group), this data cannot be overlooked. There may be instances where promoters may dilute a minor percentage of their holding. The dilution could also be necessitated by a government mandate to bring public shareholding to a minimal threshold. But large and unexpected dilution of promoter holding does warrant explanation. In the absence of reasoning, investors are very likely to assume serious discrepancies in the actual and anticipated performance. Cases of promoters' pledging of shares are also looked upon with caution. For in the event of promoters' inability to buy back the same, banks selloff the shares.

KS Oils, HDIL, 3i Infotech and SKS Microfinance are just some of the cases in India where stocks felt the heat of promoter stake sale. CNN Money recently reported Google executive chairman Eric Schmidt's plans to sell a big chunk of his stake in the web search company. This again brought a pertinent question to the fore - Should promoter stake sale worry you? We believe it should. Especially if the sale brings down the overall promoter stake in the company below 25%. More so, if the company does not have a professional management in place sharing the same long term vision as the promoters.

Having said that, promoter stake cannot be the only cue for investors to take investing decisions on stocks. Neither should you buy stocks where the promoters are increasing stake, without confirming its long term fundamentals and valuations. Nor should you sell ones where promoters are offloading a few shares, without seeking reasoning. Thus while it is important to remain cued into the developments in companies you own, it is not necessary to react to each one.

Should promoter stake sale worry investors? Share your comments or post them on our Facebook page / Google+ page

01:35  Chart of the day
At a time when cheap money is threatening to make inflation a global problem, it is not incidental to find key metro cities topping the global cost of living index. As per Economist, Tokyo has ranked first 14 times in the last 20 years. Only last year, Zurich was ranked first last year thanks to its strong currency. The index, which is based to 100 based on New York's price levels, take into consideration weighted average of the prices of 160 products and services. It is relieving to see that despite spiraling prices, Indian metros Delhi and Mumbai do retain some cost competitiveness.

Data source: Economist

The decision to bailout Air India had stirred up quite a bit of emotion as the government had decided to use tax payer money to help the airlines. The airline was in deep loss. At the same time the debt burden was spiraling upwards. The government decided to give it Rs 300 bn to resolve its problems. This amount was to be given in tranches till 2020-2021. But a year down the line, things have changed.

As per a leading daily, Air India has received only Rs 45 bn as against the Rs 85 bn that it was supposed to receive in year 1. For the rest of the bailout funds, the government has decided to extend the period of bailout. This means that instead of getting the funds and coming out of the woods in 8 years, it will now take longer for Air India. The reason for this change of heart is not a sudden concern for using taxpayer money. It is actually related to the fiscal deficit. The fiscal deficit has not come under control, forcing the government to rethink the bailout strategy.

The question is why not just let the airline deal with its problems? It seriously needs to rethink its operational strategy. For instance, even after the bailout was announced last year, its pilots decided to go on a strike to protest a training program. The strike resulted in operational losses. Such nonsensical activities will keep on hurting its operations. So no matter what the amount of bailout, things will not get better. It would probably be better for the airline to instead be gripped with fear that it may need to fold its operations. Maybe then it would rethink its operational strategy and try to take constructive steps to turn things around.

The 2012 Ban Bailout Investor Poll by Equitymaster showed that 97% of the respondents were against bailing out of sick companies. Equitymaster forwarded the Poll results to the Civil Aviation Minister for his perusal.

Japan's move of depreciating the Yen has already raised concerns of currency wars getting escalated. What is more, a substantial policy gap has emerged between the Euro and the Yen. As a result of which currency investors are looking to profit handsomely from it. The most popular trade in the currency markets has been buying the Euro and selling the Yen. That explains why the Euro has gained nearly 9% against the Yen this year. While against the dollar it has gained just over 1%. Indeed, it is not that the fundamentals of the Euro zone have significantly improved. It is just that Japan seems quite keen on keeping the value of its currency lower to prop up its economy. Investors in the meanwhile have been selling the Japanese currency on the assumption that the Bank of Japan will step up the central bank's efforts to boost the economy through more quantitative easing measures. This in turn would lead to a fall in the value of the Yen.

Put yourself in the position of the CEO of an international retail chain looking to set up shop in India. With the current government welcoming FDI, you would be busy making budgets and plans to start operations. But what would be your reaction to a sudden roll back of such plans?

Investment activity in any country would strongly correlate with its growth phase. And with the latter not being at the envisaged levels in India, the desire to kick start investments seems to be at an all time high. According to former Deputy Governor of the RBI, Mr. Subir Gokarn, a key feature between the nexus between economic policy and performance in India post 1991 has been the implicit commitment to a broad policy agenda by successive governments. The broad thrust on fiscal matters, industrial policy, trade and foreign investment and financial sector development have remained constant. While other factors would have had a role to play, it seems though that the broad commitments towards the policy agenda would have hugely mitigated several long-term risks. This, according to Mr. Gokarn, seems to have boosted investor confidence over time. With the telecom and coal scams making headlines in the recent past, it would not be surprising to see potential investors stay away from these sectors. Particularly, given the potential challenges to project viability. Mr. Gokarn believes it would be good to have a national policy agenda, in which all parties explicitly commit on policy positions on key issues. We cannot agree more with Mr. Gokarn, given that these steps would have a strong impact on the sentiments to the jittery, yet willing investors.

In 2009, the UPA provided financial relief to over 40 m indebted farmers by announcing a Rs 700 bn farm loan waiver. This move is believed to have led to the Congress' stellar performance during the 2009 elections. Well, according to Corporate affairs minister Sachin Pilot, the Center will not hesitate to bring in another bailout package for farmers if such a need arose. He stated that the government would be there to protect the needs of the farmers and the poor. Plus there needs to be more efforts to reduce inequality in the country. Well, this may just be the fuel that will help the UPA secure another victory.

Last time around government was supposed to take over the debt of farmers and compensate the banks. But, even farmers who could afford to repay their loans defaulted, leading to willful defaults and write-offs in the banking space. Come 2013, these PSU banks, which comprise 70% of the country's banking sector are already reeling under asset quality stresses and slowing loan growth. The high interest rates and slowing GDP growth in India helped contribute towards this. Can public sector banks now afford more defaults? Well, definitely not to fund political ambitions and please vote banks.

The rising oil prices have drawn everybody's attention. While oil producing and exporting countries (OPEC) has been a favorite target to blame, the real culprit is Federal Reserve's loose monetary policies. This has been suggested in the Schork Report, a subscription service that offers daily views on the energy cash and derivatives markets. There have been some valid reasons to target the Fed. We all know that oil is priced in dollars. This implies that any decline in the dollar will drive oil prices higher. Fed in an attempt to rein in economic disaster has been printing money thus keeping dollar artificially cheap. So no wonder that oil prices look so out of tune with demand supply dynamics. As Fed seems to be in a mood to continue the deluge of dollars, we wonder if an artificial oil crisis is just around the corner.

Except for selective buying interest in pharma stocks, the benchmark indices in Indian equity markets have had a lackluster session today. The BSE Sensex was trading higher by around 34 points at the time of writing. Other major Asian markets closed a mixed bag while markets in Europe opened flat to negative.

04:50  Today's investing mantra
"Being early on the way down looks a great deal like being wrong, but it isn't. It turns out you won't be able to accurately tell who's been swimming naked until after the tide comes back in." - Seth Klarman
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