The risk that these 480 Indian companies face... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The risk that these 480 Indian companies face... 

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In this issue:
» Construction spending declines in the US
» Coal mining in India is a victim of policy mess
» Borrowers in debt market postpone plans
» Faber's yet another gloomy prediction
» ...and more!

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Hostile takeovers have dotted the US landscape since the 1950s. But in India these have only recently begun to gain momentum. According to Wikipedia, a hostile takeover allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover. A takeover is considered hostile if the target company's board rejects the offer, but the bidder continues to pursue it.

In India, one such example in recent times has been that of the hotel chain East Indian Hotels (EIH) wherein ITC had been gradually buying more shares of the former in order to launch a takeover bid. And there is the possibility of more such companies becoming vulnerable in light of the new takeover code. This code allows acquirers to make an open offer for an additional 26% on purchase of 25% stake of the target company. 480 companies as listed by the Economic Times, have promoter shareholding less than 25% of total equity. Thus, they are susceptible to the risks of hostile takeovers. However, it is not that simple. Most companies in India are managed by promoters. Hence, the latter is bound to protect its interest and will not relinquish control without a fight.

This means that the company launching such an attack needs to be very clear as to why it wants to go down this route. In mergers and acquisitions, in general, the acquiring company has to make sure that it pays a reasonable price for the target company. It needs to gauge the synergies that are likely to flow in on making the acquisition such that the payback period is not too long. Many a time, when competition for a particular target heats up, valuations soar. As a result, the company which has finally made the acquisition ends up paying a very high price.

This applies to hostile takeovers as well. Since these are bound to be fought tooth and nail by promoters, the acquiring company at the end of the day needs to evaluate whether the price paid and the potential benefits are all worth it.

Do you think that companies with low promoter holdings are increasingly vulnerable to hostile takeovers? Share with us or post your comments on Facebook page / Google+ page.

01:36  Chart of the day
Today's chart of the day shows that Japan has the highest number of banknotes and coins under circulation as a percentage of GDP. The next in the pack, Russia, China and India are neck and neck. Although the Euzo zone lags behind, it takes the cake in terms of absolute value as it is the world's most abundant currency. Almost US$ 1.2 trillion-worth of euros was floating about at the end of 2010.

Data Source: The Economist

Marc Faber, author of the Gloom, Boom and Doom report is back with another prediction. And this time, the prediction seems gloomier than ever. We say so because Faber is predicting a massive wave of wealth destruction hitting the global economy. So much so that the 'well-to- do' may lose almost half its wealth. As per Faber, the US Fed and the Government may have pumped trillions of dollars into the world economy and this seems to be currently fueling growth. But the trend cannot last forever and one day, all the borrowing will certainly come due. That will be the day the scenario highlighted by Faber may take place. And while the Government may continue printing, all that the printing will end up doing is create hyperinflation or cause the collapse of credit markets. This though are not the only ways in which wealth will be destroyed. There could be social unrests and wars also as per Faber.

It goes without saying that gold is the best bet for such an event. But we were surprised Faber also talked of investing in stocks. This because, he clarified, the stocks can go up because of sheer liquidity even though the main economy is not doing well. That's some really scary stuff from one of the world's foremost big picture guys, isn't it?

An important indicator that helps gauge the health of an economy has shown signs of decline in the US. We are referring to the construction spending. It declined during the month of February this year. After witnessing an improvement for some time, the indicator showed a decline of nearly 1.1% in February. This is the sharpest decline in the past seven months. Home prices have been lower in recent times and this has discouraged several builders from taking new projects. To add to this, the government too has taken sharp cuts in their construction budgets. Though the US economy has shown signs of improvement in recent times, but the good numbers have not translated into increased consumer enthusiasm. Consumers are still wary about big ticket expenditures like homes. This has increased the pressure on the construction industry.

The latest 'scam' unearthed by India's chief auditor alleged loss of US$ 210 bn to the country's exchequer. The reason being allocation of coal mines to private parties for captive use. It is not certain whether the calculations of losses incurred by the government are accurate. However India's critical power sector remains starved for coal. The mineral must be imported if not adequately mined. Imports have become expensive and unviable for the ultra mega power projects over the years. At the same time, the largest PSU coal miner Coal India has been inept in meeting demands. Whether or not coal India will stick to fuel supply agreements with power producers also remains a worry. The coal blocks allotted to private parties meanwhile remain unexploited. After the CAG allegation, several companies face the risk of losing their blocks. Commercial production from a coal block is twice as much time consuming in India (10 years) as compared to China. Hence, the woes of private players are not entirely untrue. Add to that delay due to environmental clearances. Hence India's coal mining sector is more an example of policy mess rather than fiscal profligacy.

High interest rate environment has dampened the fund raising plans of many corporates. Even banks and non-banking finance companies that are regular borrowers in debt markets have been impacted by rising interest rates. However, the debt laden companies have been worst impacted in this environment. They are struggling to find lenders despite offering interest in the region of 13-14%. This is because investors are worried whether such companies will be able to repay their borrowings. Fund raising by the corporates was also impacted as investors were not keen on lending money to them at the end of the year. This is because it adds to their tax liability in the current fiscal. We believe that the debt markets are in a sort of confidence crisis now. Corporate FDs offering 11.5-12.5% are also not finding any buyers! Even companies with higher credit rating are facing difficulty in raising funds. We believe that this dry spell is expected to continue till interest rates decline in the future.

The Indian stock markets traded well above the dotted line in today' session. At the time of writing, the BSE Sensex was up by 163 points (1%). Among sectoral indices, barring healthcare and IT stocks, gains were seen across sectors. Asian stock markets were trading mixed with Hong Kong up by 1%, while Japan was trading lower by 1%.

04:55  Today's investing mantra
"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it." - Warren Buffett

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    2 Responses to "The risk that these 480 Indian companies face..."

    kranthi Mark

    Apr 4, 2012

    Don't conclude this is the RISK to the Indian companies.. First of all we need to analyse the key reasons ! why the promoter holding came down to such a low level ?? which gives chance for take overs !!. When promoter group holding is coming down then Promoter loses the interest on the company expansion and future growth and try to exploit the nominal share holders by way of high perks and high comissions on profits. But probability is if the diluted holding is going into good dedicative strategic investors again gives higher probality of growth of the nominal share holders. By and large .In some cases these startegic investor like PE , VC ,and other funds makes managements to take decisions which makes shorterm gains and long term pains.Weather its low or dominant promoter holding MANAGEMENT is life blood to the company .The quality of management that runs the comapny with commitment and greater VISION always creates sustainable wealth to all the share holders irrespective of share holding pattern.

    Like (1)


    Apr 3, 2012

    I think it is good for the small share holders. Yes the fight will end either way. However some small share holders get good amount for their investments. The problem with the promoters and not with the common men. So let it be like that and in the long run the economy will get a great blow then let us cry together

    Like (1)
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