Stay away from such companies... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Stay away from such companies... 

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In this issue:
» Will India get junked soon?
» Infy to start off result reason tomorrow
» IMF ups its global projections
» Google's ambitious plan
» ...and more!!

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They say when it rains it really pours. And in Ranbaxy's case, the troubles just seem to be piling on. The company is in deep trouble with the US FDA for failing to stick to the requisite quality standards and is paying a heavy price as a result. Not only have two of its manufacturing plants been shut down, but there is also a very likely possibility that it may not be able to launch some products for which it has received the exclusivity window on time thereby impacting its performance. The US FDA saga has already taken a huge toll on Ranbaxy's revenues and more importantly has blemished its image. While the fall in revenues can be reversed, rebuilding its image will indeed be an uphill task. In the meanwhile, the Singh brothers have exited the business and paved the way for the Japanese company Daiichi Sankyo to take the reins thereby leaving minority shareholders in the lurch. All these issues strongly highlight the lack of good corporate governance practices by Ranbaxy. The ones who really suffer in the end are shareholders.

While it may not be easy to predict such developments, on the chance that there is even a whiff of bad management practices, investors would do well to stay away from such companies. And there are many of them out there...

00:51  Chart of the day
The BSE-Smallcap index has surged nearly 86% since its lows of March 2009. This by far outperforms the BSE-Sensex that has moved up by just around 69% during this period. What is more, the P/E multiple of the BSE-Smallcap Index has more than doubled to 12.3 times as of now, from just around 5.9 times in March. In short, smallcap stocks have seen the biggest expansion in valuations as compared to the broader markets. So, does that make small-caps expensive? Yes, overall! But one can still find some wonderful long term opportunities within this segment. The only caveat - tread carefully!

Source: Prowess

The Finance Minister's 'no comments' in the recent budget on how he will be lowering India's fiscal deficit in the years to come has made rating agency S&P quite concerned over the country's outlook. The FM disclosed during his budget speech that India's fiscal deficit (excess of government expenditure over its income) is likely to touch a level 6.8% of GDP by the end of FY10. Moreover, on including off-budget items such as fertiliser and oil bonds, the deficit figure will stand at about 12% of GDP. Currently, the agency has given a rating of BBB-, which is one step away from the 'junk' status. Any downward revision on this rating could lower India's appeal with foreign investors (which we are anyways not complaining much about!).

However, S&P has added that it expects its India outlook to stabilise at the current levels provided the country manages to reduce its deficit burden in the medium term. This is also keeping in mind that a faster than expected economic recovery would help India to achieve faster fiscal consolidation through higher revenue growth.

Cautious note
Source: Mint

The IMF, perhaps the most pessimistic of all the financial institutions on India so far, has finally decided to make amends. In its latest report, the global organization revised upwards India's 2009 growth projections by nearly 1%. It now expects the country to grow by 5.4% during the year as opposed to its earlier forecasts of 4.5%. And if the table sourced from Live Mint below is to be believed, growth range in the vicinity of 5%-6% seems to be a foregone conclusion. While this is by no means a bad number, the kind of havoc that the global financial crisis has wrecked on India could be gauged from the fact that between 2004 and 2008, when the world was awash with liquidity, India's growth rate averaged 8.8%. Secondly, the growth in recent times has been achieved by the government by taking on a significant amount of debt and since such a luxury is not going to be available to us every year, it will only take a significant level of global economic recovery and some big bang reforms to take us back to the heady days of 9% growth.

As per a leading Chinese news publication, US oil tycoon Thomas Boone Pickens, who had in place ambitious plans to build the world's largest wind farm with a total capacity of 1,000 MW, has now put those plans on the backburner. The reasons for the project failing to take off hold a lot of significance for the sector as a whole as they illustrate how the recent changes in the global economy are bound to affect investments in the wind energy sector. He has indicated the lack of transmission lines, a drop in the price of natural gas and the impact of the economic recession as factors that have forced him to drop his plans.

Wind projects, which are located in open areas, usually end up being far away from the place of final consumption. This problem calls for robust transmission infrastructure to evacuate that power and take it to the final place for consumption. And if this is proving to be such a big a problem in a place like the US, it can only be imagined what kind of a bottle neck it could become for other lesser developed countries. Seems like the euphoric highs of investments the wind energy saw before the credit crisis will take a while before they come back.

After making few efforts to remove Microsoft from its dominant positions in segments such as email services (Hotmail), web browsers (Internet Explorer) and even mobile phone operating systems (Windows Mobile system), Google is now planning to make its most ambitious assault on its rival company, Microsoft. It plans to go head to head by launching its very own operating system (OS), the Chrome OS in the second half of 2010. As per the company, this OS will be for personal computers based on its web browser Chrome and the open-source coding platform Linux. In simple terms, it will be specially designed to run applications such as e-mail, word processing and multimedia through the internet rather than from a user's hard drive. Given its long dominant position in the OS space, it is about time Microsoft felt some heat. And who better to do it than one of its biggest rivals? However, considering that the Windows OS has a share of about 90%, Google will not be anticipating huge results in the short-term.

The investing community is waiting eagerly for what the management of India's second largest software company, Infosys has to say about the business while declaring its first quarter results tomorrow. During FY09, the company clocked an annual revenue growth of 30% YoY. But then, expecting constrained IT budgets to lead to rate cuts from top clients, it candidly lowered its FY10 revenue guidance (in dollar terms) by around 3.1% YoY to 6.7% YoY. It may be noted that this goes in sync with Gartner's projection of 6% YoY decline in global IT spending.

As the pricing pressure continues to take a toll on the company's profits (which are already hit by sluggish growth in demand) one cannot expect extraordinary results.

After witnessing a volatile trading session, the markets managed to end the day on a flat note today. The BSE-Sensex closed lower by about 11 points (-0.1%), while the NSE-Nifty ended higher by about 5 points (0.1%). The Asian market ended the day on a mixed note, while the European markets were trading in the green at the time of writing.

04:55  Today's investing mantra
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
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10 Responses to "Stay away from such companies..."

V S Gurumani

Jul 10, 2009

I have been investing in companies from time to time. Ranbaxy has never figured in my list, though I have considered it many times. The reason, when I look back, is that when it came to actually putting my money, I did not feel that sense of trust seeing the faces of their CEOs and promoters. Something on their faces and in their body language communicated to me that they were not telling the whole truth. The lesson? Trust your instincts when it comes to your money, after all the analysis and listening to the smart advisers who come on the TV media!



Jul 10, 2009

Also thanks for not recommending buying Air India's stock. This company is also facing unusual circumstances. Employees had to let go salary for June and top management has been asked to forget even July's salary!
Interesting to read, in today's ET, Nusli Wadia's long due acceptance that "airlines is a bad business to enter into". Poor chap, he could have saved his money and pain by reading Buffet! Buffet also made similar mistake by buying airline's stocks although avoiding the same in his career earlier. But soon he accepted and corrected his mistake. Its worth reading his analysis on this matter.

Would be great if you dont quote Buffet wrongly to meant buying all such stocks facing problems like GoAir, Air India, Ranbaxy, Suzlon,....



Jul 10, 2009

the mails recd.are interesting with high authenticity.useful to have birds eye update on macro developments across gobal markets.Thanks.



Jul 9, 2009

A nice article indeed..... All the stocks whether one recommended or not rose to zenith in the post-election run up market irrational exuberance. I would appreciate if the team could sample the would be subscriber a few recommendations to find for himself how the stocks fared. My kudos to the entire team that is doing an extensive research and picking the stocks. RAGHAVAN



Jul 9, 2009

Your website published number of articles in last one week quoting Warren Buffet in grossly inappropriate way. Here is one such excerpts taken from your article:

"After all, as Warren Buffett would testify, great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause stocks to be misappraised."

So according to your earlier logic (based on entirely wrong interpretation of what Buffet meant), one should buy Ranbaxy now as it is facing unusual circumstances.

I would recommend you to read Warren Buffet again and quote the context also in which he had said those words. Else you will keep on mis guiding your readers!

Its good to see that common sense has prevailed and thankfully in first para of your today's wrap up you didn't recommend investors to buy Ranbaxy!


CP Arora

Jul 9, 2009

I really enjoy "The 5 Mintue Wrapup" everyday. This along with subscription of stock select, midcap and hidden treasure has changed my perception on investing.My impression about stock market was to make quick money but that's not true. I have now started investing based on fundamentals and this is really working. Even though, market has gone down but still I am not losing money. Thanks and my salute to equity master for giving unbiased views. Cheers, CP Arora, Gurgaon



Jul 9, 2009

Thanks for providing the valuable and informative articles/news in general and the impending problems that generally people face during the rally. Thanks again


Inayat Qureshi

Jul 9, 2009

Thank you for informing to keep away from Ranbaxy due to governence issue and problems faced by the company in USA. Indeed this information is a great help to the readers of Equitymaster. If you list the names of other companies the investors should keep away will be appreicated. Thanks and kind regars,


gm vegad

Jul 9, 2009

thanks for alerting us by your proper
provide the sameline information regarding others.

thanks again.
with regards.


Gopinath Mavinkurve

Jul 9, 2009

Thanks for informing about the governance issues at Ranbaxy. You have rightly advised us to keep away from such companies - you also state that there are many such companies out owe it to us to let us know more such instances. So let us know about them please! Thanks again.

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