What do Satyam, Ranbaxy and DLF have in common?

Oct 14, 2014

In this issue:
» Better CV sales an indicator of economic recovery?
» Saudi Arabia is fine with lower oil prices
» SEBI to make the delisting process simpler
» Fed likely to put rate hikes on hold
» ...and more!

It is a sad fact indeed that we have not yet seen the last of scandals in Corporate India post the Satyam debacle. The recent developments with respect to realty firm DLF is testimonial to the fact. Indeed, as reported in various business dailies, stock market regulator SEBI has barred DLF and 6 of its top executives including the chairman from accessing the stock market for a period of 3 years.

What has led SEBI to take this action is the company management's failure to disclose material information to investors when it came out with its equity offer in 2007.

In some sense, it is hardly surprising that it should be a realty company that is facing such regulatory action. It is a fact well known that most realty companies have poor information disclosures and the entire sector in that sense treads in murky waters.

That said, in the past few years, other sectors have faced regulatory ire as well. Take the case of pharmaceuticals. The biggest to suffer in this regard has been Ranbaxy which has bore brunt of the US regulator for its shoddy efforts at sticking to good manufacturing practices norms.

All of this serves as a fitting example to re-iterate what we have always highlighted in our previous editions of the 5 Minute Wrapup. And that is the importance of corporate governance and management integrity of companies during the process of stock picking. Strong growth prospects and rising stock prices may be reasons enough for investors to invest in those particular companies. But none of this matters if the management quality is dubious because over a period, this is bound to adversely impact businesses and thereby erode shareholder wealth in the process.

Now judging the management is not always an easy task and is subjective because it cannot be quantified. But the various points that give an indication of this is the kind of communication that the management has with its shareholders and investors, its disclosures, its treatment of minority shareholders, how effectively it allocates capital and whether it has a long term track record of growth and profitability.

If any company fails on any of these counts, investors would be better off staying away from it and look for better investment opportunities elsewhere. Indeed, at Equitymaster we would rather not recommend a company with questionable capital allocation skills than be sorry. Yes, that may keep us from recommending some very 'popular' stocks. But our primary aim is to ensure that the investor's hard earned money is not subject to undue risks.

How much importance do you give to the quality of management when investing in stocks? Let us know your comments or share your views in the Equitymaster Club.

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The delisting process on the Indian stock exchange has always been cumbersome and taxing. Corporates maneuvering rules to their advantage was another dampener. However, with SEBI planning to revamp delisting rules, the process is likely to become more investor friendly. For one, it shall reduce the tax burden on investors. Currently, the settlement of delisted shares is done offline. This attracts higher tax. With SEBI proposing an online exchange and tendering of shares, the tax burden on investors will reduce. This is likely to make the delisting process cheaper. It is also considering shortening the delisting timeline from 137 days to 50 days. Both these steps are a welcome move. However, the biggest concern for investors is to get the right price during the delisting process. While steps like these would help in better price discovery, SEBI should also take measures to protect the interests of minority shareholders during the tendering process.

 Chart of the day
Sales figures for commercial vehicles are always keenly watched. They are indeed a barometer for on the ground activity in the core industrial sectors of our economy. And the sales numbers for month of September that came out yesterday have some good news on this front. The sales of commercial vehicles increased 8.6% YoY during the month. This comes on the back of 16 straight months of decline. Industry veterans peg this as a sign that fleet owners have started buying trucks once again, in anticipation of improved economic activity going forward. It may also be an indication of the fact that sectors that make heavy use of commercial vehicles - such as mining and infrastructure - may also be picking up.
Is the CV sector poised for recovery?
*Passenger vehicles, **Commercial vehicles

The little bit of luck the new Government was hoping to come its way is finally here. In fact, make it a rather big slice of luck if you ask us. This luck that we are referring to is nothing but a new era of lower crude oil prices. We haven't done the analysis but we are quite sure that the inflation in India and also the deficit numbers paint quite a pretty picture when oil prices aren't playing mischief. Thus, if there's a real possibility that crude prices are going to remain lower for longer, it would be like manna from heaven for our policymakers we believe. Well, if an article is anything to go by, this is precisely what the Saudis seem to be telling the oil market.

Apparently, Saudi Arabia, the proverbial 600 pound gorilla in the room when it comes to oil prices, would like to see crude at around US$ 90 per barrel at least for the next couple of years. In fact they would be happy to see it go to even US$ 80 if need be. The Saudis seem to be betting on the fact that lower prices would curb fresh investments and would thus stop new oil like those from the US shale patches from coming in the market. This would then set the stage for higher prices in the future. However, some experts argue that this is not the real reason and Saudi hardly wants prices to drop. It is however unwilling to bear the entire burden of production cuts and wants other OPEC members to chip in too. Either ways, it is heartening to know that amid rising supplies and subdued demand, it will be the oil consumers that look like the likely winners at least in the medium term.

Say you have been working nonstop. You have overexerted yourself and are extremely tired. What should you ideally do? The simple, wise answer is rest. But let's say you have a slightly twisted psyche and are a workaholic, what would you do to keep going? Maybe a shot of coffee... Maybe even a cigarette if you are a smoker... or some such energy booster that will provide you the temporary kick to get back to work...

Place this analogy in the context of the developed world and you will get a hint of what's been happening there. Like the human body, the economic system too needs periods of activity followed by appropriate periods of rest. Growth and slowdown are both important aspects of an economy. But political compulsions and ignorance drives policy makers to take measures that artificially keep the growth momentum going. Money printing and controlling interest rates near zero are such artificial boosters. The problem is that once you start taking them, it becomes a vicious cycle. You have to keep taking more to avoid a breakdown. At the same time, these artificial boosters have serious long term side effects.

The US Fed is in a very tricky position. Either embrace pain now or more pain later. As we know the Fed from its past actions, it has chosen to kick the can down the road. And this why we feel it will again find the right excuses to delay its monetary tightening program.

In the meanwhile, the Indian stock markets had a volatile trading session today. At the time of writing, BSE-Sensex was trading lower by 35 points. Barring banking and healthcare stocks, most stocks were trading in the red. Most Asian stock markets were trading in the red with Hong Kong and Japan being among major losers. Even the European markets have opened the day on a weak note.

 Today's investing mantra
"I don't look to jump over 7-foot bars; I look around for 1-foot bars that I can step over." - Warren Buffett

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7 Responses to "What do Satyam, Ranbaxy and DLF have in common?"

Prakash Patil

Oct 20, 2014

Yes A "Quality" Management team will provide a "Quality" Product and which will bear a long term "Quality" stock. In the present scenario please provide enough emphasis to evaluate also a company's management team and their previous achievements.


Satish Dabholkar

Oct 16, 2014

We agree with the action of SEBI in the matter of DLF stock.
But no one is questioning about the SEBI which has awakened after Six years.
It is necessary that Government should also question SEBI directors like Mr Sinha about the time required by it to know about the misstatement in the prospectus..What about the auditors who have approved the prospectus at the time of issue of shares in the market.
Unless we also hold SEBI and Charted Accountants Institute for this thing no purpose will be served,
It is very funny to overlook the lapses of functioning of monitoring authorities appointed by Government.



Oct 15, 2014

I feel all 3 had a repo and among top leaders in their business segment but behind scene there was dirty working. My family has owned Ranbaxy stock for years and progress is did in 90's I think was great. Did the new Gen promoter (Malvinder Shivinder duo) get into greed? The stock paid decent dividend and several bonuses which I think is an indication of promoter confidence in company future and sustainability? Did lack of growth lead beyond few years lead to adoption dirty methods? The other 2 named may have different reason but fate for a common investor is same that years of trust and investment does down the drains. DLF perhaps is core into business which is mostly done with bad money (or should I say cash). But then how does a corporate with that large size manage cash dealings?


penugonda prabhakar

Oct 15, 2014

company mistakes he do correctly as it is growth and money
now all members meet do the solve the problems. Satyam in members patent works.This company workers careful doing works as it is solving. Actually buying.


kumar m

Oct 15, 2014

dear team equity masters,
it is great to note that comments from investors/traders are solicited on issues of quality of management post DLF fiasco.

i suggest all managements, which are directly involved through
businesses with any political party, cannot be trusted. look at
coal block de-allocation, DLF fiasco, next in line - SUN TV,
Sahara Group, JSPL, Kingfisher, etc. etc. & the list continues.

Satyam & Ranabxy are totally in different genre, in Satyam's case
it was a case of "one upmanship" as compared to other software
giants and personal greed whereas, in Ranbaxy's case, the belief
of management adhering to good practices has been shattered or exposed in usage of their products in US.

DLF management was aligned to a political party and derrived benefits in land allotments, construction sanctions, etc. and this had to happen. Law takes its recourse when power (game) changes. Hence, investors and traders are well advised to stay away from politically aligned companies.

Kumar M



Oct 14, 2014

It is very difficult for the companies to run in India.If you go deep in to all companies in India no one is clean. When It comes to do business some manupulation are inavitable.It is pity that instead of nipping in the bud regulatory authrities or Government taking steps only after 15 to 20 years after the company is established and thousands of crores invested.For instances 2G spectrum scandel,Coal block allocation scandel,Ranbaxy,Sahara,Sethu samudra project (Rs. 2000 crores dumbed under the sea)Sathyam Computer scandel. Nokia and Vodafphone tax dispute and so on. If you go deep into the thousands of companies in India all will be in soup. The MNC companies will be scared to invest in India. It is better to ignore the past and strict regulation is necessary to avoid confusion among the investors in future.


Virendra Sinha

Oct 14, 2014

Good and ethical management is a key indicator. Grade this on a scale of 0 to 5 where 0 is worst and 5 the best.
Then multiply all the other parameters with this factor.
If you gave management a 0 then all other parameters will also be 0 [nx0=0].
What do Satyam, Ranbaxy and DLF have in common? You can add Kingfisher to the list.

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