Get ready to bailout more 'Navratnas'! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Get ready to bailout more 'Navratnas'! 

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In this issue:
» 'Ethical investing' the key to long term returns
» Troubles for Indian aviation are short term?
» US economy to win over China model
» QE-III will not help the US - Roubini
» ... and more!

---------------------------- PETITION - Save India's Democracy and Growth Story ----------------------------

India's future is dark. The economic situation can be as bad as 1991 they say. And the political situation is also uncertain.

Our MPs are shouting, finger pointing and politicking. And they worked ONLY 21% of the Monsoon Session. Important Bills are pending to be debated and passed.

Citizens of India... Don't be silent spectators. Every voice matters. The Berlin Wall did not fall with just one effort. It all adds up. Help bring India back on track.

Sign this Petition. And spread the word...


The Indian PSUs appear to have little to worry about. They would continue to function the way they do. It does not matter whether they are efficient in their operations or not. At the back of their minds they know that they have the backing of the government of India. It is this thought that led the national carrier Air India to continue working in an inefficient manner over years. And when the tide turned, it appealed to the government. And what did the government do? It bailed the distressed airline out.

Now there is yet another set of PSUs that have approached the government for a bailout. This time around it is the national telecom companies - Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL). Both companies have approached the Telecom Ministry for a bailout package for the spectrum fee burden. The telecom regulator has proposed a onetime spectrum fee on a prospective basis for all telecom operators. As per Hindu Business Line the spectrum fee burden for the two companies is estimated to be about Rs 100 bn. The two companies have barely been able to keep themselves afloat following the cut throat competition in the telecom sector.

But the thing is that is it just these two companies that are facing a highly competitive and difficult business environment? Is it not true for the rest of the companies in the sector as well? Then why would it just be these two facing difficult times? The thing is that the other operators have also vehemently opposed the high spectrum fee. But the government has turned a deaf ear to their plea. It feels that the fee is justified given the limited supply of the spectrum in our country. But if it does yield to BSNL and MTNL's demand for a bailout then it is sending out two messages. One that the fee is not too high for other operators but is high for the PSU operators. Two that PSU companies will get bailed out no matter what.

The second is more alarming. For most of the troubles that the two operators are facing are self made. They have not been able to trim down their cost of operations and hence have been bleeding away. For instance the losses of BSNL are estimated to be around Rs 88.5 bn in FY 12 (as per Business Standard). Both BSNL and MTNL have been in the red for the past 3 years. Moreover both have had issues related to their employees as well. As a result, the two companies are facing tough times. If the government bails them out then they would get some breathing space for some time. But the long term problem will just continue. And like we saw with Air India unless operating issues are taken care of, one bailout will only be followed by another. And who will pay for these bailouts? Of course the people of India do that through their tax money. How long can we continue bailing out these inefficient PSUs? It is time to take a stand against it. We recently ran a campaign against bailouts. 97% of the particpants refused to see our tax-money being wasted like this.

Do you think that BSNL and MTNL deserve to be bailed out? Please share your views or you can also comment on our Facebook page / Google+ page

01:10  Chart of the day
When we are young and in our 20s, the word retirement really does not bother us. But as we start ageing, the word starts to come in our mind a bit too often. Till it finally becomes the only thing we can think about. The reason for this is the need for savings. Something that can help take care of our expenses even when we are no longer working for it. Therefore the key to have a secure retirement is building an adequate repository of savings. Economic times recently ran a study on the quantum of savings that we would have by the age of 60 depending on when we start saving. They have assumed that we invest Rs 8,000 per month at a real interest rate (adjusted for inflation) of 4.76% per annum. Today's chart shows the real savings that we would have when we turn 60 depending on the age at which we start saving for it. Needless to say the results show that the earlier you start the better it is. The reason behind this is the power of compounding. More the number of years in compounding, more the size of savings at the end.

Source: Economic Times

The alleged shady link between DLF Ltd and Robert Vadra, has created a furore over the last few days. Where the matter goes from here is anyone's guess. Especially, given the fact that several major Congress Ministers have come running to the defence of 'private citizen' Mr Vadra. It highlights the quality of our polity which 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.

But there are some very critical lessons for retail investors here. If you may have noticed, the stock price of DLF Ltd has dropped by nearly 11% ever since the controversy broke out recently. In fact, the stock is down 82% since its January 2008 peak price. This shows the risks associated with investing in companies with questionable corporate governance. Crony capitalism is not a new thing in India. An article in Firstpost aptly points out that companies that utilise natural resources have little choice but to deal with politicians and bureaucrats. The real estate and mining sector, especially, do not have a very strong regulatory framework. As such, these sectors are often mired in corruption.

We believe that investors must give utmost importance to factors such as corporate governance and management integrity. And extra-caution must be exercised while investing in companies belonging to notorious sectors.

Short term problems with long term solutions. That is how the Indian government approaches most issues plaguing the economy. The result being that the so called short term problems have termite-like effect on the economy's growth engines. Take the case of the Indian aviation sector. The Aviation Minister sees high fuel prices and airport taxes as the key problems for the sector. No wonder he has been quoted by Mint calling the sector's problems as 'short term in nature'. That players in the sector have been running without profits for years seems to have skipped his notice. Entities like Air India are far from showing a turnaround in financial performance. That too despite being bailed out with taxpayer money several times. Kingfisher Airlines is set to bring several banks on their knees, let alone save its own fortune.

Lower fuel prices or airport taxes therefore cannot solve the problem of this inherently capital guzzling industry. Getting rid of such operational costs is therefore certainly not the solution. The sector needs to have a regulator that insists on safety and operational efficiency. The earlier our policymakers rid themselves of their myopic visions the faster will they be able to bring the economy on track.

US' tirade against Chinese trade practices continues. The dragon nation has grown at a stupendous rate in the past several years. As a result of which it has evolved into a manufacturing behemoth. However, Mr. Ro Khanna, a former Deputy Assistant Secretary at Commerce in the US, opines that China's model will not sustain for long. He believes that what gives US the edge is its free market economy. This promotes entrepreneurial culture. And thus will finally trump the Chinese model. For this he has cited the examples of 15 successful American entrepreneurs. They are doing well despite the availability of cheap labour abroad, currency manipulation, intellectual property theft and subsidies to foreign competitors. This is on account of better productivity and expertise in making complex equipment and machinery. US for a long time now has expressed its displeasure over China's insistence on pegging the Yuan to the dollar. It believes that this unfairly results in undervaluation of the Chinese currency. As a result of which there is the absence of a level playing field in international trade. China so far has not necessarily bowed to US demands. And whether US is eventually bound to dislodge China from the top spot in manufacturing remains to be seen.

Not so long ago, New York University economist Nouriel Roubini expressed his views about the US' fiscal cliff being one of the key factors that could derail the entire global economy. He believed so given the expiring tax breaks and automatic spending cuts (which would kick in at the same time) leading to a possibility of the economy going in to recession i.e. if left unchecked. He also said that the US economic recovery would remain modest at best, thereby making it highly vulnerable to external shocks.

Commenting on the possible effects of the recently announced QE3 program, Mr. Roubini is of the view that even though the size and duration of QE3 is more substantial, its effects as compared to the first two editions of the program would be lower. While QE3 may make investors take on more risks in the short run - leading to a possible asset (equities included) reflation - Mr. Roubini believes that the overall slowing growth would eventually take toll on the valuations of equities, which were low when the previous rounds of the program were declared. In short, this time around, the valuations may not be justified. Further, while the Fed's aggressive money easily strategy would curb the risk of an outright economic contraction, sustenance of growth would be difficult given the post crisis debt-averse nature of those who can afford debt and the deleveraging process of the balance.

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 59 points (0.3%). Among the stocks leading the losses were Maruti Suzuki and Sterlite Industries Ltd. Other major Asian stock markets have closed the day on a mixed note with Hong Kong and Japan closing in the green while China and Korea closed in the red.

04:55  Today's Investing Mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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20 Responses to "Get ready to bailout more 'Navratnas'!"


Jan 20, 2013

I agree that PSU's are often used for socio-political purposes other than their object - an economically efficient and profit standard for the sector.

Instead they are pushed to price-control, and accept inefficient operations, which burdens every taxpayer, not only the users of their products and services. Little wonder that "freeing them" turns them profitable.



Jan 20, 2013

just to clarify, the comment about oil prices is ill informed. The breakup of oil price at pump in india ($211.5)
Crude @$100/bbl = Rs 34/l (1 bbl = 159l)
Refining margins for RIL = $9.6/bbl against $6.8 last year Q3, 3 times higher than refining margins in Singapore ($3.03) this already includes some taxes.
US data is approx $6/bbl in supply costs.(figures not avl for India)
My friends, you are paying most towards taxes, levies and refiners margins, not crude



Nov 3, 2012

If these PSUs like MTNL/BSNL would not be there , u r still paying Rs.16 per minute for an incoming call.

Like (1)


Oct 17, 2012

All PSUs are burden on the taxpayers and again they are all white elephants for Govts. It is BSNL & co. who ruled till liberalisation and now they cry for competition. It is not competition but the inefficiency of the staff due to loss of under the table income.We remember the days when even transfer of line was doen when bribe is paid in thousands. What we expect from these staff now who have whole life eaten this type of bread? Govt should not bail them out, rather dead wood amongst staff should be kicked out for fresh recruitment to save BSNL. Or else, let it die a natural death.

Like (1)


Oct 16, 2012

The inefficient operation of these firms is basically due to Govt. intervention. They have to carry on the burden of existing staff most of whom are now redundant due to large scale changes in technology. Many high level influential people do not clear their bills. The arrears run into several crores of rupees. Over and above the tariff can not be revised to optimum without Govt. consent.

There is considerable political interference in day to day operations.

Unless Public Sector is allowed operational freedom as is in several developed countries it is nit possible to run them efficiently.

Like (1)

ash chaudhary

Oct 16, 2012

Bailouts if necessary are a social evil and required. For e.g if you do not bail out the oil companies then u will have to pay Rs 100 for petrol and Rs 95 for diesel in the near term. Rs 100 will be the new Re 10 note. Considering BSNL and MTNL, just check into their functioning /operational cash flows and why they score so's because all the private operators use their routers and pay them peanuts(see which companies digital racks are placed in the infrastructure of BSNL)So that is why you are in the 75 paise rates, just check what are the rates abroad though they are more technically advanced if you do not bailout these companies then be ready for Rs 3 /minute call not cry later that cost of living is too high and it's better in the other countries....look at what happened to telecom operators like Hughes for e.g, they could not sustain this model...also ask RIL why their gasoline and diesel retail outlets/pumps do not exist...govt asked the PSU's to take their products from RIL at ex refinery gate prices and sell it low rates (APM) to the public, thus increasing u see regulatory norms for the private sector are different and norms for public sector are different..look at the archaic labour laws itself...which private sector other than Tata's pay pension...none....where as in US all private sectors pay huge pensions to their retired staff and just because they are paying now for the second and third generation together, they have sold off the Corus,Arcelors, Alcoas and Jaguars....Also look at the poilticians / their relatives nexus running the retail chains, which has played havoc in the country on the commodity prices for food grains, essential items average American household spends only 20% of their salary on petty house-old chores and food where as in India you spend until the salaries are kept lowered by these private sector sharks, India is going no want worldy pleasures at Indian salaries Ha u see no money in the hands means no rolling in the system, so economy goes for a six and only the rich get richer...

Like (1)


Oct 16, 2012


Like (1)

dr.m.narayana bhat

Oct 16, 2012

you have rightly raised mtnl, bsnl issues.

there are far more serious matters with oil marketing companies. they is a clear case to file a PIL & take up the matter with SEBI strongly. Govt. is using it's majority stake disregarding the interest of the minority for several years.

Like (1)

Manoj Khare

Oct 15, 2012

I disagree. My tax money is not used for investments in public goods, so I'd rather it was used to bail out public sectors which deliver something, however little rather than in subsidies for vote banks and personal expenses of netas

Like (1)

Sushil Chandar Kapur

Oct 15, 2012

Public money should NOT be used for bailing out PSUs. Government is providing many freebees throiugh PSUs,at the cost of tax payer. Loss making PSUs should be privatised.

Like (1)
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