A shocking insider view of a giant corporation! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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A shocking insider view of a giant corporation! 

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In this issue:
» Will the reformist Railway Budget die a premature death?
» Should taxpayers bail out Air India?
» India focuses on newer markets for exports
» India's car sales to surpass Japan by 2016
» ...and more!


---------------------------- Raise your voice before this turns into yet another scam! ----------------------------

When millions don't even have food to eat, our government is thinking about bailing out multi-millionaire CEOs!

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00:00
 
Which is the most important resource in any organisation? Without any doubt, it is the people. It is people who create an organisation and give it a sense of purpose. And which is that one element that binds together and drives an organisation? The answer is culture. 'Organisational culture' can be defined as a collection of shared beliefs, truths, values and assumptions that give an organisation a specific identity. It then follows that such culture plays a very crucial role in the success and survival of any business.

The giant corporation that we're going to tell you about knew this secret. It was this very secret that helped it survive for 143 years and emerge as one of the world's largest and most important investment banks. If you haven't guessed yet, we're referring to Goldman Sachs. But in the last few years, the investment bank has gained tremendous notoriety for its opportunistic ways. And what we read yesterday left us in a complete state of shock.

Greg Smith, a senior Goldman Sachs executive who recently resigned from his post, gives a disturbing inside view of the workings of this behemoth. According to him, the internal environment at Goldman has become extremely 'toxic and destructive' in recent years. Instead of focusing on servicing its clients, the firm now seems solely focussed on making money for itself. Instead of protecting the interests of its clients, it tries to make money off them. It is important to understand that the culture of an organisation flows from top to bottom. In other words, an organisation's leaders build and shape its culture by setting the right examples. As per Mr Smith, right behaviour is no more rewarded. But make money for the firm irrespective of the means used, and be sure about getting promoted. And this is exactly what has gone wrong with Goldman. Taking advantage of clients and making quick bucks is a perfect recipe for destroying an organisation in the long run.

We believe that herein lie some very essential lessons for value investors. While carrying out the fundamental analysis of a prospective stock, make sure to take into account some key qualitative factors. How is the company's culture evolving and in which direction is it heading? Is the company serious about protecting the interests of its customers? Or is it too arrogant and short-sighted? If the answers are not too encouraging, be wary of investing in such companies.

01:20  Chart of the day
 
Just yesterday, Railways Minister Dinesh Trivedi broke away from years of populist policies and came with a bag full of bold reforms for the Indian Railways. He announced a hike in train fares across categories in the range of 8-22%. The hike was put forth after a gap of 8 long years. A few days back, he had also raised freight rates by 20-25%. It must be noted that the Indian Railways have been going through a financial mess. The reforms presented by Mr Trivedi are needed to salvage the giant public sector undertaking (PSU) from going the ill-fated way several PSUs have gone.

Yet ironically, the strongest resistance came from his own party, the Trinamool Congress, chaired by Mamata Banerjee. So much so that she has asked Prime Minister Manmohan Singh to sack Mr Trivedi from office and recommended another party member Mr Mukul Roy to succeed him. Whether Mr Trivedi resigns or whether his big vision budget sees the light of day will be known soon. But this episode makes one thing very clear. Our current government is incapable of initiating any tough yet important reforms in the long term interests of the country. Their only focus seems to be to serve their own narrow interests and to remain in power at any cost. Much like Goldman Sachs, isn't it?

Do you support Railway Minister Dinesh Trivedi's Railway Budget reforms or should he be fired? Let us know your comments or post them on our Facebook page / Google+ page.

Data source: The Economic Times
^Ratio of total working expenses to gross traffic receipts
*Revised; **Projections

02:10
 
So the verdict is that the Aviation Minister has requested the government to bailout the ailing Air India. And he has asked for a sum of Rs 65 bn for this. This is in addition to the US$ 500 m that the airlines would receive from Boeing. This is compensation for the delay in the delivery of aircrafts that it had bought from the latter. But will this help wipe away its woes? Not really. It has a financial burden of Rs 675.2 bn in the form of debt. This comprises of short term debt as well as long term loans related to the huge aircraft purchase that the company had made. At the same time, as per the government, recessionary conditions and economic slowdown hurt its revenue stream. And increasing fuel costs started squeezing its profitability and eventually led to the mess that it is in now. Finally, it has reached a stage where it badly needs a bailout. Else it would go under. And the government would not allow that because it would hurt its reputation if it allows the national carrier to go belly up.

So we taxpayers would be paying to bring Air India out of its financial distress. But that's what we work so hard for, right? To pay taxes so that the government can bail out the companies that are in a financial distress that is primarily brought about by the government and its insane policies. If you agree with this statement then you have nothing to worry about. But if you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

03:00
 
That India has hit 'reforms inertia' has been vindicated yet again. Politics has already generated serious constraints in important sectors. Agriculture and infrastructure have hit roadblocks that could eventually compromise India's long-term growth potential. Year after year, India's planned budget documents have been nothing but fiscal profligacy. On one hand, tax cuts made way for improved vote banks in urban areas. On the other hand, subsidies took care of the matter in hinterland. This time around, a saner government would vouch for the fact that none of the options are viable. Higher tax receipts and subsidy cuts are necessary to keep the economy from fading into oblivion. But our policy makers have a mind of their own, one that does not look beyond poll results. Hence budget expectation and its delivery are likely to be as disconnected as chalk and cheese. However, most of us cannot help wishful thinking!

03:30
 
The recent financial crisis can be considered as a learning experience - that of not putting all eggs in one basket - for exports dependent nations of the world. In fact, even the not-so-export-reliant nations such as India (exports formed about 22% of India's GDP in 2011) can take cues from this episode.

This is not to say that the nation should reduce it focus on the developed nations completely. After all, the European Union and North America account for nearly 30% of the merchandise exports. But back in FY05, these regions had a combined share of 40% of exports. Over the years, there has been a considerable shift from the developed West to the regions such as West Asia, Northeast Asia, Africa and Latin America. According to the Commerce Ministry, these regions collectively formed nearly half of the exports in FY11. This shift in focus on export markets is attributable to the many bilateral trade deals and other agreements signed since 2005.

04:00
 
Auto companies in India have been facing a lot of headwinds as of late. Rising fuel prices and interest rates have taken a toll on demand. But these are near term concerns. The outlook for the sector from a long term perspective remains strong. Especially, as the government focuses more on infrastructure development. What is more, India is poised to overtake Japan as Asia's no. 2 vehicle market by 2016, behind only China. According to HIS Automotive, a Denver-based research firm, sales in India are projected to increase to 4.88 m vehicles by 2016. Besides infrastructure development, new product launches by companies and entry of more foreign players into the market will also keep customer interest alive. And in turn drive demand for vehicles.

04:26
 
After last week's cut in cash reserve ratio (CRR) for scheduled banks, the Reserve Bank of India (RBI) kept both CRR and repo rates unchanged in today's mid-quarter monetary policy review meet. In reaction to this, the Indian stock markets have fallen further into the negative territory after opening trade on a weak note. At the time of writing, BSE Sensex was down by 217 points (1.2%). Red marks were seen across all sectoral indices. Asian stock markets presented a mixed picture with Japan (up by 0.7%) being the top gainer, while China (down by 0.7) faced selling pressure.

04:46  Today's Investing Mantra
Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid." - Warren Buffett

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    40 Responses to "A shocking insider view of a giant corporation!"

    r v iyengar

    Mar 30, 2012

    All politicians of every hue have always used the national wealth to further their party interest. TMC chief and her followers are no exception.
    The whole episode shows the govt and the ministers in a poor light.
    It looks as though all powerful party chief has political pygmies for members of her party. Their submissiveness is akin to the humbleness of chaparasis.
    As you have pointed out the PM and the Government too have cut a sorry figure.
    Strictly speaking the Government has lost it's majority and it is morally not right for it to continue in "Power"

    Like 

    G Madhav G

    Mar 27, 2012

    I fully support the Railway Budget presented by Mr Trivedi. When you want better services from Railways and improvemet in its infrastructure, increase in railway fare is a must. Ms Mamta Banergee is doing a dirty and chiep politics. New minister will make his boss happy by decreasing fare hike and worsen financial crisis of Indian Ralways.

    Like 

    GCM

    Mar 24, 2012

    Fare hike is not the only solution for the financial problems faced by the Indian Railways. The fares have been partially rolled back. Let us wait and see how Mamta Banerjee handles the railway through her crony Mukul. If she can solve the problem without burdening the common man she will have the blessings of millions. If not the same million will hound her out of power.
    Let us give the dog its due for the time being.

    Like (1)

    S R PAL

    Mar 22, 2012

    We have to agree to weather we want "free" growth or "work" growth.In free growth the rich pays for the poor--who finds it more easy to stay poor. While in work growth the people ,whoever it may be has to work to improve.The choice is simple.However we must be truthful in this simple thing,and acknowledge the choice to the world.At least we will be looked on with respect for our choice.

    Like (1)

    Ragini Ghanekar

    Mar 20, 2012

    I fully support fare hike by now resigned railway minister. I am not an expert to judge the impact. But this should be done in small doses so that people get used to the new tariff and happy to get improved services, tangible and intangible. For that matter, this should be done for all the subsidies including diesel since this is the reality of life. How long you can protect people and mess up government finances? Since government deficit has wider ramifications which has adverse effect on well being of general public which they themselves do not see. government is suppose to know better than provide sops to public to garner votes.

    Like (1)

    Edward

    Mar 18, 2012

    Our Country needs big money for development in various fields.Instead of spending money on Assets which will help in generating development we are spending money on expenses. This will increase borrowings and the deficit will widen.

    Like (1)

    S Dutta

    Mar 16, 2012

    The steps taken by Mr Trivedi are indeed commendable. For the first time I see a politician rising above party lines and also above selfish interest to do something which may be initially umpopular but extremely necessary for the COUNTRY. Country is First and there should be no doubt about that. I challenge other politicians also to follow this example. Pronobda, are you listening?
    However this should not be a licence for Raiways to profligate and remain inefficient. A cost cutting target of 10% YOY for the next 3 years will be essential to show that the Railways is also on the same page. They are equally desirous of ensuring productivity and reducing wastage.

    Like (1)

    Ash

    Mar 16, 2012

    actualy What mr h.v. nathan has said is what is happening , and what his views are the same as all political parties and most of the people. Even this is constitutionally incorrect when an MP can not be called back by public, how can We call back minister . We have Individula representation system as constitutionally , But we turned it to in the name of loyallity , slve representation . all parties who have slaves are more successful than who are having less, At this I remember one incident when Bhoj was sent by his uncle to be murdered by his minister, he ( Bhoj) has written that So many great person came here , but Earth has not gone with them , But According to Mr hv nathan , It seems , earth will go with Mamta. I wish a great luck to Mamta and great loyal person hvnathan to help mamta to take this earth wealth with her , as she is the great well wisher of people afterall people elected her.
    No system is bad, the problem is with people if people are right then even bad system will work in right direction , but if bad people are there , the best system will not work

    Like (1)

    jins varghese

    Mar 16, 2012

    I simply agree with Mr. Sivaramakrishnan. All these derivatives of greed will one day bounce back on these highly qualified buffoons and we would be the one who would bear the brunt.

    Like (1)

    P.V.Ranganathan

    Mar 16, 2012

    Mr. Trivedi said Nation above party - what a refreshing thought! But the political crooks will never let that policy take effect

    Like (1)
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