A subdued quarter but investors should be excited - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

A subdued quarter but investors should be excited 

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In this issue:
» Kingfisher is bankrupt but has 2nd highest paid CEO
» DLF - Corporate 'misgovernance'
» Is low US jobs data eyewash?
» 225 B-schools have closed in 2 years in India
» ...and more!

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The Indian equity markets have had a buoyant time in recent weeks. The benchmark BSE-Sensex has gone up over 9% in the past one month. As a result a lot of investors have been wondering if the tide has turned for the stock markets at least. Well the underlying reason unfortunately gives nothing to cheer about. At least not to the long term prudent investor. A major reason behind the recent run up in stock prices is foreign Institutional Investors (FIIs) interest. But at the same time there is another reason for which we need to give you a bit of a background. It has a lot to do with the upcoming quarterly result announcements.

The upcoming September quarter results are expected to be another subdued set. Inflation as well as interest rates has continued to remain firm. At the same time the slowdown has affected the demand growth for both goods as well as services. Those companies relying on external demand to compensate may have to wait a while longer as the global headwinds continue to blow. As a result, the quarter results would not give investors much to cheer about. So one would wonder as to how the expected negative news is driving up stock prices.

The answer to this is that most stock market participants are expecting this quarter to be the bottom of the earnings cycle. This means that the quarter results will mark a turnaround point for companies. After this they should start delivering healthier results. The participants have a reason to expect this too. They think that the Reserve Bank of India (RBI) will start bringing the interest rates down. This in turn would fuel investments and consequently help companies deliver better results. But they seem to be forgetting the reason why RBI had turned hawkish in the first place. Inflation is still high and with the renewed FII interest in asset classes, is expected to continue remaining high.

Nevertheless the point is still the same. The participants are relying on short term data points to take a view on stock markets. This in our opinion is a futile exercise. It is best to leave the quarterly earnings to the companies. It is nothing more than an indicator of their short term performance. It would be better to concentrate on long term fundamentals and business models instead. And if you have identified such a stock then the short term news of negativity is nothing more than an opportunity to get this great stock at a bargain. Going along with the herd will yield nothing but pain in the long term.

Do you think that quarterly performance is an indicator of long term stock gains? Let us know your comments or post them on our Facebook page / Google+ page

01:05  Chart of the day
Gold has been a shining metal for most investors. A large part of the yellow metal's success in returns has been attributed to its safe haven investment status. But in recent times, the price increases appear to be more speculative than investment related. The reason for saying this is the fact that demand for gold as an investment has gone down. As per the World Gold Council, the investment related demand for gold (in tonnes) has seen a decline on a quarterly basis. One reason behind this could be the surge in price which makes the yellow metal expensive to hold. This could have led to the decline in demand.

Source: World Gold Council

If the CEO of a firm doubles his salary in a year's time, what would you attribute this increase in pay to? The profits of course isn't it? It's only logical to expect that a firm who has doubled its profits will have no qualms about granting a similar hike to its CEO. And thus, by the same logic, a firm where profits have been reduced by half, the CEO's take home should also suffer, isn't it? Well, let us tell you that this seems to happen only in the land of Utopia. For in the real world, some things are beyond the realms of logic.

Take the salary of the CEO of the troubled airline Kingfisher Airlines. The word has it that his salary almost doubled in FY12 from what he took home the previous year. And all this despite the firm falling deeper and deeper into a financial mess. What more, the king of good times is not alone in this endeavour. Almost all the major airlines have rewarded their CEOs with an equally hefty pay rise.

We wonder what this would do to the morale of numerous employees in the industry. Forget pay rise, most of them have seen their pay checks ceasing to come in anymore. As far as we are concerned, well it gives us one more reason to defend our stand of not looking at this sector as a good investment candidate.

But the sector has nevertheless seen favor from the government which has pumped in our hard earned money to bail the companies out. We recently ran a campaign against bailouts. Click here to read the results and comments on the same.

Last week, activists Arvind Kejriwal and Prashant Bhushan of India Against Corruption (IAC) aimed another severe blow at the government. They alleged shady land dealings between Robert Vadra, son-in-law of Congress supremo Sonia Gandhi, and real estate firm DLF Ltd. The allegations state that between 2007 and 2010, Mr Vadra bought properties worth Rs 300 cr with an interest-free unsecured loan worth Rs 65 cr from DLF. The activists claim that Mr Vadra was given properties at below market rates. This was in exchange of favours allegedly received from Congress state governments in Haryana, Rajasthan and Delhi. Whether the allegations are true or not remains to be seen.

Land dealings in India have always been mired with crony capitalism. The latest issue raises a lot of questions on corporate governance and the role of independent directors. K N Memani, independent director of DLF Ltd, has said that the transactions between Vadra and DLF were not discussed during the board meetings. He further stated that it is not possible to look at each and every sale transaction. But is this a good enough excuse? Especially, when the party in question is related to India's most powerful politician? The quality of our polity seems to be deteriorating day by day. It is time for citizens to wake up and take a stance against this. If you feel this way too, then help create a 'snowball' effect to save India's democracy and growth story. Participate in our petition to the government.

Presidential elections in the US seem to be hotting up. Senator Mitt Romney has gained over President Obama in the first round of debate. But things have not stopped here. Indeed, the economy and employment scenario in the US has been lackluster for quite some time now. So it is hardly surprising that these issues should form a crux of both the Republican and Democrat campaigns. The latest data to cause a furor is that of unemployment. The Labor Department announced that the unemployment rate had fallen to 7.8% in September from 8.1% the month before.

This has been viewed by skepticism by many people not least the Republicans. And the view of conspiracy theorists is that the fall in numbers is just a ploy by the current government to boost its ratings. This despite evidence to the contrary that the data is kept under strict secrecy with the White House not in a position to influence it. US' economy is floundering and it would be fair to assume that nothing meaningful will be achieved until elections are over. But whatever the outcome, the country will have to come up with something different to fire up its economy. Something that does not include another round of printing money.

The service sector increasingly enjoyed a larger proportion of India's GDP over the past decade. Needless to say that the youth looked forward to procuring a job in this space. A degree in engineering or management or both became the visas to well paying white collared jobs. The booming software and financial sectors also managed to absorb scores of fresh graduates coming out of these institutes. Students who did not manage to fetch admissions in the few reputed institutions were wooed by plenty of other new institutes. The 'business' of opening engineering colleges and management institutes therefore became lucrative. Hundreds of new institutes came up in the past decade and thousands of aspirants queued up to join them. That was a time when the country added up to one lakh seats to its professional colleges every year.

A decade later, the picture is one of stark contrast. As per Economic Times, since 2011, 225 B-schools and over 50 engineering colleges across India have downed shutters. With the campus placement scene being dull and students finding the fess unaffordable, the new institutes now have few takers. It is not that Indians are no longer interested in investing in higher education. But institutes that merely offer a degree without being able to impart adequate knowledge have lost their sheen. At least this has helped separate the wheat from the chaff!

After unleashing a series of reforms over the past couple of weeks, the reforms of the Indian railways seems to be next on the Government's agenda. Serious reforms are needed in this vital transport sector. It is no secret that the financial health of the Railways is not good. Almost every Railway Minister has used the organisation to usher in more and higher dose of populist measures. This has seriously undermined the Railways in practically every sphere of its functioning.

One of the basic problems with Indian railways is with regard to its pricing strategy, especially with regard to passenger transport. The Government is planning to benchmark basic fares to inflation. It will also encourage public-private partnerships to bring in investments. A freight network on the lines of the Golden Quadrilateral is also being considered. Railways are a commercial entity and it is important to formulate policies consistent with it. It would need extraordinary determination and political willpower to change the course of Railways in India. In a way, this also has the potential to change the course of the nation's economy as well.

In the meanwhile, after opening the day in the red, the Indian equity markets continued to trade below the dotted line. At the time of writing, Sensex was down by 141 points (0.8%). Among the stocks leading the losses were Reliance Industries and Hindalco Industries Ltd. Other major Asian stock markets have closed the day on a negative note as well.

04:30  Today's Investing Mantra
"Individuals who cannot master their emotions are ill-suited to profit from the investment process." - Benjamin Graham
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3 Responses to "A subdued quarter but investors should be excited"


Oct 9, 2012

As a retired professor of a prestigious higher technological institute,i wish to comment on downing of shutters of 225 B-schools and 50 engineering colleges. First of all, the parents of students entering/forced to enter these institutions should not thrust their wishes/dreams on their children.Secondly, the management/owners owners of these institutions looks at these B-school and engineering colleges as business.There are B-schools and engineering colleges where the 5th Pay Commission scales are still followed employing faculty who are not interested in teaching profession and not having a higher degree like Ph.D. The management is not interested in encouraging the faculty to acquire higher degrees. To put it bluntly,the management personnel/business persons do not have professionalism in their attitude,approach,etc. The Law of Nature sees that the fittest (not by strength but by ethics/professionalism) survives and progresses. As you stated "separate the wheat from the chaff(or is it the dirt!)"



Oct 9, 2012

Your today's edition covers two types of sleazy and immoral dealings at the expense of common man. One is that a CEO earns millions when his company's employees are not getting paid for months. What is the Ministry of Labour and the Left parties in love with labour force doing? And to top it all, our public sector banks have lent enormously, putting the hard earned money of common man at exemplary risk.
Second one is the Vadra affair. It is a shame that an independent director has the guts to speak like this - that such a major transaction was not discussed in the Board of Directors! Perhaps all directors were asked to close their ears? What is the RoC and Ministry of Industry & Commerce doing? Has the PM told you to stay silence? What is the use of petitioning to the government at whose behest all these scams and sleazy deals are taking place. Today one of the highly corrupt ministers in the central government is saying that they cannot investigate a private deal. Then why did the Law minister and other Congress functionaries defend Vadra? If that was a private deal, without any connections to the 'Ruling Family' of India, then why bother at all? What will the Congress/UPA functionaries say about Vadra's comment that it is a Banana Republic? Doesnt he belong to a family that has rendered it a Banana Republic by ruling for over 5 decades?
When will our country be relieved from such mis-governing crooks and the greedy rich people?

Like (2)

madhavrao bajirao patil

Oct 8, 2012

Dont worry,every thing will better for india. dont look to those are involved in a conspiracy to destablise our country.you are fearing to arwind kejariwal & his gang.I have to say to all indians the fact is Arwind kejariwal is not aJayprakash narayan,so do not worry even tudays electronic media helped them. The india absorbed many conspiarators in a past & we have more potencials to face those are involved to destablise india.all reforms will come in india for further growing progress. every thing will normal invest in a stock market without hesitation.within a 3/4 days DLF share will shine again on stock exchange

Like (2)
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