Even Buffett can't save this company - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Even Buffett can't save this company 

A  A  A
In this issue:
» Indian growth story not so bleak
» Australia-India trade to double by 2015
» Priority sector lending rules to change
» Realty investments in India get riskier
» ...and more!

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A popular magazine, the 'Newsweek' made an announcement recently. The announcement stated that the magazine which has been in publication for the past 80 years will stop its print edition. This announcement rocked its loyal subscribers. But Newsweek's decision actually throws to light an important management lesson.

Newsweek was founded in 1933 by The Washington Post. It rapidly grew to become the second leading non-pictoral magazine in US. But the tide turned for the bad as digital media started to take priority over print media. As a result the subscriber base started to shrink. The magazine had adopted the rate card method where the publication offers deep discounts to ensure that it has the subscriber base it is targeting. As a result Newsweek had to incur millions of dollars to get its target subscriber base. While revenues were dwindling, the costs just kept mounting. Costs of newsprint, publishing, printing, etc were just some of the costs that it had to incur which were all spiraling upwards. Therefore in 2010 the magazine was sold to a popular website The Daily Beast. Eventually the changing preference towards digital media caught on and hence the decision to stop the print version from next year.

This side of the story is heartwarming. It shows how a popular magazine fell victim to the modern world of internet and digitization. This is yet another example of the changing times. Even Warren Buffett has stated that the print media is a declining industry. Unless the print companies, both newspapers and magazines, can find a way to woo advertisers back from the online world to the print world, the industry has little hope of survival. This is the first lesson for companies. That they have to be aware of the broader macro changes and adapt accordingly.

But there is another side to this story. Newsweek was not the only magazine that ran a print version. If you look at the numbers of magazines like the Time and The Economist, the story is quite different. During the same time that Newsweek claimed to be losing circulation, these magazines were actually gaining subscribers. In fact as per a leading daily, the circulation of The Economist has doubled to 1.6 m this year as compared to 844,000 a year ago. So what is it that went wrong for Newsweek?

Some say that the death was on account of some overtly sensational news pieces published by the magazine. Some say it was due to the insensitive cover designs used by it. The magazine preferred to use sensationalism instead of sticking to its core strength of being a well written conservative news publication. And this is where companies could learn another lesson. In a competitive world the only way to survive is to stick to your core strength. It is this that can help to stand the test of time. Investors would do well to remember this. Especially at times when there is a change in management control. If the companies decide to waver away from their core strengths its best to avoid such companies. Because such companies would eventually die and fade away.

Do you agree that companies should stick to their core strength in order to survive in a competitive world? Do share your comments with us or post your views on our Facebook page / Google+ page

01:05  Chart of the day
The country's GDP growth has been coming down in recent times. After witnessing a spectacular performance till 2007, the real GDP growth did dip in 2008. However the dip was not as bad as that in the rest of the world. Since then economic stimulus did stimulate the economy. The growth revived. But policy paralysis and deteriorating governance took its toll. Result being that the real GDP growth (adjusted for inflation) in 2012 dipped below what it was in 2008. Now all eyes have turned towards what will happen next year. Some think that the conditions are going to get worse. There are reasons behind this. Inflation has continued to remain high. While the Reserve Bank of India (RBI) has not increased interest rates, however it has not brought them down either. The global slowdown has hit the companies that depend on international sales. Thanks to the inflation and interest rates the domestic consumption has also taken a hit. Therefore the pessimistic view is not entirely unrealistic. However, the recent reforms announced by the government have boosted the outlook to some extent. As shown in the chart, the United Nations expects India's growth in 2013 to be better than what it was in 2012. Will this actually happen? Only time will tell.

Data Source: Financial Express, United Nations Economic
and Social Commission for Asia & the Pacific

India is without doubt a land of billion opportunities. But doing business in India is a tough job. This is the reason why some countries have so far not been very forthcoming in expanding trade with India. But thanks to a slowing global economy, several countries are now eyeing the Indian market to prop up their economies. Australia is one of them. For some years, China has been Australia's biggest trading partner and also the largest export market. Much of country's recent boom was fuelled by China's investment-driven commodity consumption. But with the Chinese economy slowing down, the commodity-rich country is now scouting for newer avenues for growth. Australia now wants to tap the Indian market. It has set a target of doubling trade between the two economies to US$ 40 bn by 2015. It is worth noting that in the past India has not been on its priority list. Hopefully, this will open up a lot of opportunities for Indian corporates as well.

Indian banks had gross non-performing assets (GNPAs) of 2.9% at the end of March 2012. The same has gone up almost 40% in the last 2 years. That is not all. Critically restructured assets and NPAs are expected to rise further by the end of FY13. As per Crisil estimates, gross NPAs are likely to touch 3.5% by March 2013. The worries over asset quality are more so in the case of public sector banks (PSBs). During FY12, gross NPAs of PSBs grew by Rs 390 bn compared to only Rs 5 bn in the case of private sector entities. One reason could be that the the PSBs account for around 80% of the banking sector's credit. Two, the major sectors that reported irrecoverable loans are real estate, textile, aviation and infrastructure (specifically, power and telecom), in addition to priority sector loans. Again, PSUs are the major lenders to these. In cases like textile, aviation and power the lending by PSU banks were despite poor fundamentals of the sector. Interestingly, even when it came to priority sector lending it was the PSUs that took the hit. Join the dots together and we can understand the reluctance of private and foreign banks to lend more to priority sector.

The RBI on its part is focusing on priority sector lending to encourage banks to undertake more direct lending to farmers. It has even extended the scope of such loans to include cooperatives of farmers and loans to government agencies for construction of dwelling units and slum rehabilitation. But there is nothing that suggests that such loans will be serviced well. Under priority sector norms, banks need to set aside 40% of their total credit to agriculture, exports and micro lending. Little wonder that the non-PSU banking entities prefer to invest in NABARD bonds rather than lend to priority sector. RBI would do well to ensure quality in priority sector lending before expecting rise in volume.

Recently, quite a few property/land deals have erupted where there have been accusations of wide spread corruption. Take the case of DLF-Robert Vadra deals or BJP president Gadkari's farm land transactions for example. Now, what these accusations have done is that it has made investment in the property sector riskier than ever before. You may ask how? Let us explain.

For instance, you might own a land/property that was a part of shady deal involving politicians and builders. Let us assume you bought a land/property from a developer in a sensitive geography. By sensitive we mean land whose end use is restricted as per the state nomenclature. And this land belonged to a farmer or a tribesman who had earlier sold it to the developer from whom you buy now. But this developer through his political nexus might have bought the land from the farmer by paying him minimal amount. The politician might have also funded the developer and then tweaked the end use of such a land. Now, when you buy such a land/property and the original owners turn up suddenly saying that the deal was done under coercion you land in a soup. They can file a court case and the property or land that you have bought could end up in a dispute. Not only will its value fall but it will also be difficult for you to find another buyer. Thus, the legal risk attached to realty investments has increased manifold after the recent show of events.

World stock markets witnessed mixed performance across various stock indices. US markets (Dow Jones) in particular were down by nearly 205 points on the last trading day of the week. The weak earnings season in the US resulted in the US markets witnessing their worst low in four months. Although the companies have been able to meet their revenue expectations, their forward guidance is a concern with investors.

In India, stock markets witnessed a volatile week of trade. The Sensex was almost flat at the end of the week. Announcement of a higher inflation figure (7.8%) in the earlier part of the week dampened investor sentiments amidst concerns that the Reserve Bank of India may not reduce interest rates any time soon. The results season continued with some companies reporting good numbers while others still not able to hold ground in a weakening economic scenario.

Amongst the other markets, Japan was the top gainer (up by 5.5%) followed by France (up by 3.4%). Brazil was the only index to end on a negative note (down by 0.4%).

Source: Yahoo Finance

04:55  Weekend Investing Mantra
"Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety" - Benjamin Graham
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2 Responses to "Even Buffett can't save this company"


Oct 20, 2012

I agree with you fully , but Newsweek is not the first company to fall prey to this type of management . Yes companies and their managements do have to focus on their core strength and this will give all a sense of reason to believe and support.



Oct 20, 2012

India unlike China is not a monolithic country but is more like the European Union with different States having a common currency and Central Bank but widely different cultures.Thus it does not make sense to directly compare India with China.However it must be remembered that a federation has certain inherent strengths as members of the erstwhile USSR have come to appreciate

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