Leading consultants eat the humble pie
(Mar 10, 2009)
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In this issue:
After investment banks, it may be the turn of global consulting firms to eat some humble pie! That is because these firms that claim to have the ability to advise beleaguered companies on how to restructure themselves into turning profitable, need some restructuring themselves.
» Global financial assets shed US$ 50 trillion in value
» Debt laden 'Samurai' governments
» India's flickering power problems
» Hedge funds shed weight
» ...and more!
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As per Business Standard, the data collected from the Registrar of Companies shows that firms like McKinsey, Boston Consulting Group and Deloitte that have been providing consulting services to several Indian companies are not too profitable themselves. Several Indian companies, particularly those in the public sector have been hiring the services of these firms at hefty fees at the pretext of adopting global practices to realign their businesses.
However, it is surprising to see the funds not flow into the firms' bottomline. Probably like the investment banks, these firms too have been bled by the hefty compensation packages awarded to their employees.
Performance of Indian operations - Net profit
Source: Business Standard
As per the Asian Development Bank, the global economic crisis has wiped a staggering US$ 50 trillion off the value of financial assets last year including US$ 9.6 trillion of losses in developing Asia alone. In fact, developing Asia has been hit harder, losing the equivalent of just over one year's worth of gross domestic product (GDP), as compared to other emerging economies because the region had expanded much more rapidly.
It takes a lot of insight for a value investor to select his picks even during a bear market. Warren Buffett can vouch for that. However, there are certainly more and relatively lucrative options. The same holds true for a company waiting for the most opportune time to increase capacity or for a government wanting to invest in the country's infrastructure. It may, however, not be possible to accurately time either of these. This is because of the ancillary decisions involved. Companies have to worry about the cash flow position and governments need to be careful about their fiscal position. But fundamentally, times such as these when commodity prices are at multi-year lows could be considered most opportune.
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The RBI's funding of US$ 250 m to the UK subsidiary of India Infrastructure Finance Company (IIFCL) seems planned on these lines. The fund is meant for financing import of capital goods by Indian companies in the infrastructure sector. The move is indeed thoughtful given the liquidity constraint overseas. This funding is also part of the government's endeavour to use US$ 5 bn of India's forex reserves for infrastructure development. Though the amount is pretty small, the fact that the actions are in the right direction is comforting.
Deferred gratification or the ability to wait in order to obtain something that one wants is considered to be a personality trait which is important for success in life. Some have even included this as part of a person's emotional intelligence. But what if one talks about policymakers around the world who are hell bent in flooding their coffers with debt while mentioning that they are doing this for revving up the recession hit economies?
Call it instant gratification indeed! As reported by The Economist, governments in the US, UK and China are "among the many countries that have adopted spend-now-pay-later policies to stave off economic disaster." These countries are benefiting the current generations while adding on tremendous risk for the future ones, given that these massive stimuli, tax cuts and bailouts will add to the cost of living in the future. The Japanese government has, for instance, borrowed so much that its current debt to the country's total GDP stands at a whopping 200% and is expected to further rise to 225% next year!
India's power problems are far from getting resolved. Especially when the Power Ministry and the Planning Commission are not in sync with regard to the gravity of the problem. On one hand, Mr. Kirit Parikh, Member (Energy) of the Planning Commission, has hinted that the 78,000 MW (megawatts) power capacity addition target will be difficult to achieve during the ongoing five-year plan (2007-2012), given the non-achievement of financial closures of projects and other issues faced by the sector. On the other hand, the union power minister, Mr. Sushilkumar Shinde believes that the country will be able to achieve the target 'with ease'! In fact, he even made a statement as recently as two weeks back stating that India will be able to add capacity of nearly 92,000 MW (including captive power capacity) during the 11th five-year plan.
|Image Source: Economist
Considering that India has added only 12,000 MW or 15% of the target in the first two years of the five-year plan, Mr. Shinde's optimism seems to be way too stretched. The country continues to face severe power shortage, the state electricity boards remain in a mess, loss and theft of power remain at high levels, and now there is lack of funding for projects given the liquidity crunch. Given all this, we believe achieving even 40%-50% of the target will be a major achievement!
In economics there is no free lunch. And that is exactly what governments and policy makers seem to be forgetting when they are printing and pumping in billions of dollars the world over to offer stimuli to their ailing economies. In his recent interview to CNBC, the legendary investor, Warren Buffett has opined and we quote, "US economy has fallen off a cliff but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s."
The 78-year-old billionaire believes that while the country is experiencing a 'close to the worst-case' scenario of falling business activity and rising unemployment, causing consumer confidence and spending to tumble, the economic rekindling could work, but not without accompanying inflationary pressures.
The hedge fund industry has been through tough times of late. Clients have withdrawn funds as investment losses have mounted, leading to a sharp decline in performance fees. At their peak in 2007, they employed as many as 155,000 people. As per Bloomberg, it has since dropped to about 145,000. In fact, they may cut 20,000 workers globally this year, on top of the 10,000 jobs they cut last year. Indeed, the fortunes of employees are tied to the fortunes of the companies they work in.
Diamonds do not seem to be forever, especially when it comes to Indian traders and exporters dealing in this industry. This is because the Indian diamond industry has lost its glitter on account of the global financial meltdown. As per the estimates, nearly 30% to 40% of factories have closed down. In addition to the downturn woes, diamond polishers in Surat, the heart of the diamond industry in India is also facing growing competition from China, Angola, Namibia and Botswana. Subsequently, as we had mentioned in a recent issue of this letter, several diamond exporters are taking to other businesses like stock broking.
Indians have a great track record of being grand planners and poor executors. And the Indian government takes the cake on this account. In 2004, the present government planned to raise expenditure on education to 6% of GDP. How much did they achieve? 3.5% of GDP at last count, as per a leading business daily. It announced the setting up of 8 IITs, 7 IIMs, 20 NITs, 30 central universities and several other institutes. At the end of the government's tenure, 2 IITs, 6 IIMs, 10 NITs and 14 universities are still to be launched. Need we say more?
Asian markets closed on a mixed note today with the benchmark indices of Hong Kong and Korea leading the pack of gainers. Indian markets were closed today on account of Id-e-Milad and will remain closed tomorrow as well on account of Holi. European markets, meanwhile, have opened on a positive note. Investors in the US will be looking forward to Federal Reserve chief Ben Bernanke's pre-market comments on reforms to address the risks in the financial system.
"The extravagance of any corporate office is directly proportional to management's reluctance to reward the shareholders." - Peter Lynch
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