What goes around comes around
(Mar 4, 2009)
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In this issue:
It pains to see the company, which you have toiled for years to build, cheat on you. Who would know this better than the former Chief Executive Officer of insurance giant American International Group (AIG)? The company's US$ 62 bn quarterly loss in December 2008 was the largest ever reported by a US company. Former CEO, Maurice Greenberg, the insurer's largest individual shareholder, has sued the company accusing AIG of overstating its financial health and masking losses on credit default swaps that hedged default risk for US$ 527 bn of debt. Mr. Maurice who ran AIG for nearly four decades before being ousted in March 2005, had acquired shares of AIG as part of various deferred compensation plans at an inflated price only to later lose nearly his entire investment once AIG's losses became known.
» Rupee's steady fall
» Progress of 3G in India
» China showing signs of recovery
» StanChart's IPO plans
» ...and more!
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Interestingly, the seeds of most of the problems that AIG is facing today were sown during Greenberg's tenure. Therefore, what is to say that there will not be somebody to sue him? We wonder.
While private sector telecom companies remain in the lurch for permission (license) and spectrum, the state-owned BSNL and MTNL have started their 3G (third generation) services in select cities. As reported by The Economist, the 3G spectrum auction that was originally scheduled for January 16th, after having been postponed twice, will now not happen until September this year. This is considering that the UPA government cannot initiate any reform measure given that it will have to follow the election code of conduct.
The magazine has quoted the GSM Association, which has calculated that "a five-year investment in 3G networks worth US$ 15 billion in today's terms would yield a return to the economy worth more than twice that (over US$ 35 billion). Accordingly, a year's delay costs US$ 3.2 billion, because the benefits of 3G are deferred."
While the economic upheaval in the US and other developed countries continues unabated, the anxiety back here in India also seems to be on the rise. If a consumer confidence index compiled by CNBC-TV18 and Boston Analytics were to be acknowledged, India's consumer confidence sank to a new low in February 2009.
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The most plausible reasons for this may be skepticism over the state of one's personal finances and the health of the Indian economy in general. With progressively deteriorating status of consumer spending, household income, job security, and economic conditions, the gloom seems to be increasingly pervading the psyche of the masses.
The rupee has had a rough ride so far and the deepening global financial crisis has only accelerated its fall. The rupee yesterday hit a low of 52 per US dollar as the weak stock markets and fears of capital outflows took centrestage. FIIs, who had contributed to the blazing journey of the Sensex to 21,000 levels, have been pulling out money from Indian equities in droves ever since the crisis erupted. Besides this, the deteriorating fiscal deficit has been another reason that has exerted considerable pressure on the Indian currency in the past one year.
Toyota is a widely respected name from the auto industry. In fact, it is considered to be a paragon of excellence from across sectors. Books are written to infer the management lessons from its success story. So, it comes as a surprise when CNN Money reports that Toyota is seeking government loan.
Toyota is seeking the loan for its finance arm, Toyota Financial Services, which needs low-cost funds. The low funds will help the company finance reluctant customers with near zero interest rates. It may be noted that the cost of debt at Toyota has gone up in the past one year. Just goes to show how the recession has not spared even cash-rich companies like Toyota.
While most MNCs love to tap in the potential in developing economies, few opt to share the growth opportunities with local investors. Standard Chartered Bank, which is very optimistic about its growth in South Asia and particularly India, has decided to track the unbeaten route by weighing options for an initial public offering (IPO) in India. Last year the bank completed 150 years of operations in India. It currently has 90 branches in 33 cities, and 2 m retail customers, the largest for any foreign bank operating in India. Interestingly, India was the second largest contributor to the bank's operating profit in 2008, including US$ 146 m from the sale of its mutual fund business to IDFC last year. However, the bank's gross NPAs rose to 1.4 % in 2008 from 1.1 % in 2007. The prime reason for the bank's interest in getting listed in India seems to be the shortage of capital overseas to help it fund its local growth.
The Tata Group has had its mettle tested in the past one year what with terrorist attacks, expensive acquisitions and land disputes taking their toll on the companies' performance. One of these massive acquisitions was that of Corus which was taken over by Tata Steel for US$ 12 bn in 2006. Since then many have questioned the logic of this deal citing it as too expensive. The fact that the global economy has been deteriorating has only further compounded problems.
In fact, Corus has been eating into the profits of Tata Steel on a consolidated basis and this was amply demonstrated during 9mFY09, wherein EBDITA margins for Tata Steel on a consolidated basis stood at 15%, a far cry from the 43% margins posted by the company on a standalone basis.
Despite this, Tata Steel continues to stand by Corus and the MD Mr. Muthuraman has reiterated that Corus has been a good buy as the latter's fundamentals are sound. He further went on to add that Corus' poor show was nothing to do with its fundamentals and that it has been a victim of the meltdown in the global economy just like many global steel players. While high administrative and staff costs and absence of raw material security have hampered performance, the silver lining in the cloud has been the geographical diversity, good product mix and skilled expertise that Corus has lent to Tata Steel. Eventually, Corus may start contributing to Tata Steel's overall performance, but for the time being the pressure persists.
A Bloomberg report shows that the Chinese government's US$ 585 bn stimulus package has started having its desired effect of pushing the economy closer to a recovery. As per the report, the Chinese manufacturing index climbed for the third straight month. Incidentally Chinese stocks too witnessed healthy gains today after output and new orders expanded for the first time in five months. The country's Prime Minister Wen Jiabao has gone on record to say that recently surging loans, growth in retail sales in January, and an increase in electricity output and consumption from the middle of last month are signs that government measures have shown the desired preliminary results. Infact, the Chinese central bank's Vice Governor Su Ning has gone so far as to say that a recovery in the first half is "very likely". Well, now that is great news. And in a not so 'decoupled' world economy, any good news is more than welcome.
The Indian markets closed marginally higher today, aided by gains in the BSE-Metal (up 3%) and BSE-Oil & Gas (up 1%) indices. While the Asian markets closed firm, the European indices are also trading in the positive currently. As reported on Bloomberg, crude oil prices rose 3% to US$ 42.7 a barrel as equities in Europe and Asia advanced amid speculation that governments will widen efforts to bolster economic growth.
"The most important quality for an investor is temperament, not intellect... You need a temperament that neither derives great pleasure from being with the crowd or against the crowd" - Warren Buffett
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