Time to ensure a meaningful end to scam stories... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Time to ensure a meaningful end to scam stories... 

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In this issue:
» Troubled infrastructure sector leading to a rise in stressed assets
» S. Korean Govt. mulls 10% tax on excess cash reserves
» Non performing loans in Indian banks are understated
» Should a stock split announcement influence your investment decision
» ...and more!


00:00
 
Almost 2 years have passed since the coal scam unearthed and blackened the face of many big wigs - including high ranking corporates, politicians and bureaucrats. Since then, a lot has happened in the Indian economy. A new Government with a clear majority has taken charge, economic and market sentiments have improved and new scams have surfaced. And concerns like corruption and crony capitalism have given way to optimism.

However, every now and then, few skeletons from the past keep tumbling out, waking us up to the dangers that are still lurking around. Take the recent event in which once prestigious but now a suspect Aditya Birla Group has been slapped with a penalty of Rs 1.5 bn. More than the amount, it is the context that is worrying.

The story goes back to October 2013 when an FIR was lodged against Hindalco Group by CBI over an alleged illegal allotment of a mine in Odisha. The allegation also incriminated the former coal secretary PC Parakh for misusing official position and for unduly favouring Hindalco in the matter.

As reported in article in The Economic Times, this was closely followed by tax department raiding the group's offices, apparently being tipped off by CBI itself. The effort was not in vain as a sum of Rs 25 crore was found at the corporate office of the Aditya Birla Group in New Delhi. The group itself was as clueless about it as anyone else. A claim by the senior executive that it was his money did not convince the authorities. Almost 10 months have passed since then. And outcome - a penalty worth Rs 1.5 bn, six times the original sum that takes care of tax and interest component! Quite well deserved, some may believe. Or is it a much sought and easy exit for the group and others involved?

The key questions on the matter still remain unanswered. Who did this cash belong to? And what purpose was this huge amount serving, lying thus in the Corporate office. The penalty comes along with the reports that CBI is closing the coal block allocation case against Mr. K.M Birla. And no one is talking about the diary that was recovered in such raids that maintained record of payments made to politicians, undisclosed to the tax authorities, the dates of which coincided either with the Lok Sabha or some state assembly elections. In short, there are too many loose ends that need to be disentangled. And once answers are sought in earnest, we will not be surprised if Rs 1.5 bn penalty seems paltry.

The decision to file a closure report in the Hindalco case in the coal allocation scam offers an easy escape, not a meaningful closure, and brings us back to square one. While it is good that the scams are being brought to public notice, the system is failing to get to the bottom of such cases. In turn failing to ensure justice and assurance that such instances do not occur in future. Instead, the attention span of common man is getting shorter for such events, thanks to the frequency which they keep appearing. Meanwhile the crony capitalism continues to thrive. And public resources keep getting transferred into private hands. This makes us wonder if better days are really ahead for us!

Do you think more efforts need to be put in to investigate scams and ensure they do not get repeated ? Let us know in the Equitymaster Club or share your comments below.

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01:30  Chart of the day
 
The problem of stressed assets worsened in the Indian banking system last year. As can be seen in today's chart, the stressed loan portfolio of the PSU banks jumped from Rs 3.2 bn to Rs 121 bn in FY14! While the same for private banks and foreign banks has also risen, due to unscrupulous lending practices, the jump in the case of PSU banks is startling.

Excessive lending to the infrastructure sector which was plagued with execution issues is the primary reason for this. While the private banks were a bit circumspect in lending to the troubled sector, PSU banks went all out. Not to mention the fact that the lending practices at PSU banks are fraught with corruption. The recent case of Syndicate Bank highlights how corporates with poor financial standards can easily get loans by greasing the palms of CEOs at PSU banks. This further meant that liquidity flew into the troubled infrastructure sector leading to a rise in stressed assets.

While infrastructure growth is necessary, it should not be at the cost of asset quality. Government should take steps to improve the working environment in the infrastructure sector. This shall improve the repayment capacity of the companies. Also, banks, especially PSUs, should adopt a more rational approach and not lend to the sector carelessly. Else their asset quality will worsen further.

Infrastructure segment poses huge risks for PSU banks


02:30
 
If you remember, few months back an activist investor in the US went public with his views about how Apple Inc, arguably one of the most innovative companies in the world, should return excess cash to shareholders. Courtesy its rock solid operations, the company was sitting on a ton of cash, much above the company's reinvestment needs. The activist therefore opined that the extra money should indeed be returned to shareholders. None other than Warren Buffett countered this. Buffett urged Apple's CEO to ignore the investor. He was of the view that a company's operations should be run in accordance with what the management thinks could add best value to shareholders over the long term. If this means building a huge war chest, so be it.

Well, we don't know what words of advice Buffett would have for the South Korean Government. For it has sent across a similar warning to Apple's archrival, Samsung Electronics. Apparently, the South Korean giant is sitting on a cash pile 58% bigger than Apple's. And it is now facing flak from the Government for not doing anything about it. So much so that the Government is considering imposing a 10% tax on cash in excess of company's capex and dividend payout needs. We believe that this sort of meddling should stop. The management should not be forced to take decisions that it feels may not earn it more than its cost of capital. A lot of times it is a lot better to sit on cash and do nothing instead of destroying it by making some bad investment decisions.

03:15
 
It will not be wrong to say that the corporate debt restructuring packages have been the biggest scams in India over the past few years. The recent scams unearthed in select PSU banks are just the tip of the 'loan ever greening' iceberg. And sectors like power, aviation, infrastructure, real estate have had a much biggest role to play in the understatement of nonperforming loans in Indian banks. As per an article in Mint, the declared NPAs of most PSU banks hardly take into account the uncommissioned projects. 65% of the incremental 69,842 megawatt (MW) power capacity in the country is stranded at various stages. Construction has been completed on projects with a capacity to generate around 28,000 MW, but these have not been commissioned yet. And until they do, the projects are unlikely to be in a position to service the loans. Meanwhile for the 40-odd listed Indian banks, the gross NPA has gone up 21% YoY to Rs 2.5 trillion! Thus as we had pointed out earlier, the same corporates that are crying hoarse over subsidies to the poor are the beneficiaries of the government's fiscal profligacy.

03:45
 
One by-product of a rising stock market environment is companies increasingly announcing stock splits. A leading daily points out that so far in 2014, almost 50 companies have announced stocks splits. And many of these are from the small cap segment. This would all be okay, as stock splits are a legitimate way of decreasing the absolute price of each share of a company. The problem arises when companies try and use stock splits and bonuses to arouse speculative interest in their shares in the hope that this will lead to a rise in prices. Unsuspecting investors who do not understand the essence of stock splits get attracted to companies announcing these.

We will not bore you with the technical details. But know that stock splits are nothing but a way to cut a share into smaller pieces. Just like you would cut an apple into smaller pieces so that each piece is of a more manageable bite-size. It does not suddenly make a company's business more profitable and valuable. And so there's no reason why a stock split announcement by a company should make any difference to your investment decision.

04:22
 
Rewind back to last year. India seemed to be in a major crisis. The Indian rupee went into a tailspin. The economy was struggling to recover. Inflation was raging high. Everything seemed to be going wrong for India all at once. But stock markets work in mysterious ways. They move in anticipation of future events, which may often be out of sync with existing circumstances. So had you invested in stocks around May-August 2013, you would have doubled your money on at least one of three stocks. Yes, that's true. As per an article in Firstpost, out of the 2,200 actively traded stocks on the bourses, 774 have witnessed gains of over 100%. Some have even delivered returns as high as 2,511%! All in a period of just about a year.

The party just seems to have begun. Market participants have already started calling out big targets for the benchmark indices such as the BSE-Sensex... 40,000... 60,000... Some have even been bold enough to say that Sensex will hit the 100,000 mark.

There is indeed little doubt that the markets will scale new highs as revenues and earnings grow. But we do not see much point in indulging in such target- setting exercises. In the end, it all boils down to earnings. If you can find fundamentally sound companies that are in a position to grow their earnings are a solid clip, then you are most likely to be rewarded well. So do not cry foul if you have missed out the stock rally so far. Buy good businesses at a fair price and rest assured that returns will follow.

04:45
 
After opening firm, the Indian stock markets pared gains but continued to trade positive. At the time of writing, the BSE-Sensex was trading up by 69 points (0.3%). Majority of the sectoral indices were trading in the green led by IT and banking stocks. Realty and FMCG were among the few stocks trading in the red. Most of the Asian markets were trading strong led by Taiwan and Korea. However, the Japanese market was trading lower. European markets have opened the day on a positive note.

04:55  Today's investing mantra
"Behind every stock is a company. Find out what it's doing." - Peter Lynch
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2 Responses to "Time to ensure a meaningful end to scam stories..."

Vignesh

Aug 22, 2014

Good Article. Please provide Like functionality to articles so that we can endorse it.

Like 

Johari Mal Surana

Aug 22, 2014

The edition of the 5 minuts wrapup is really very much awakening to all investors to invest their funds after a carefuk thought.

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