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Do you have a Ponty Chadha in your portfolio?

Nov 23, 2012

In this issue:
» A strong indication that commodity prices could plunge
» The tug-of-war between globalisation and protectionism?
» Brazil is propping up its gold reserves
» Will this help us reduce our fossil fuel dependence?
» ...and more!

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Rags-to-riches stories abound in India. And so do sibling rivalries. A man who was part of both the plots was recently shot allegedly by his own brother. The man we're referring to is none other than liquor baron Ponty Chadha.

Not many may know that as a boy Mr Chadha used to sell snacks with his father in front of a liquor shop. From such modest beginnings, the worth of his business empire today stands close to Rs 80 bn. His interests span across sectors such as real estate, sugar, film production and exhibition. One may wonder what the secret behind his extraordinary success story could be.

An article in Firstpost presents a very pertinent perspective. It points at a common thread that links all of Mr Chadha's business interests. According to the said article, all of his businesses belong to sectors that tend to have political or mafia links or both. Take sectors such as liquor, sugar and real estate. These sectors have heavy involvement of the government and the underworld. Liquor business across the country is either directly or indirectly controlled by the government. This creates a breeding ground for crony capitalism. And need we say anything about the murkiness and corruption that the real estate sector is mired with? It is believed that Ponty Chadha's claim to the astounding riches was attributable to his robust political muscle. In fact, the Comptroller Auditor General (CAG) had indicted the BSP government in Uttar Pradesh along with Ponty Chadha-owned Wave Industries and PBS Foods for alleged anomalies and discrepancies in the disinvestment process of state-owned sugar mills in 2007.

The lesson that investors must learn is to be very cautious while investing in sectors that tend to have shady links with politicians and mafia. Of course, it would be unfair to blacklist all companies in these sectors. There could indeed be companies with clean management and strong corporate governance. But given the nature of these sectors, the chance of finding instances of crony capitalism is quite high. History shows that companies with poor corporate governance are seldom great wealth-creators for shareholders.

Do you think it is wise to invest in businesses belonging to tainted sectors if they are available at attractive valuations? Share your views with us or you can also comment on our Facebook page / Google+ page

 Chart of the day
There has been a significant growth in foreign capital in India. From 1.1% of capital investments in FY05, foreign capital accounted for 8% in FY11. But is this likely to continue? Foreign inflows have been pouring into the country from foreign institutional investors (FIIs) and FDI (foreign direct investment). But what India really needs is the latter if it wants to take GDP growth to the next level. As today's chart of the day shows, FDI inflow in India has grown over the years but is still a small quantum. In fact, in the first half of 2012 (1HFY13) FDI has contracted 42.8% to US$ 10.4 bn, according to figures by the United Nations Conference on Trade and Development. The reasons are not hard to find. Lack of meaningful reforms and scandals rocked the government and compelled rating agencies to downgrade India. Once this happens, cost of borrowings goes up making many projects unviable for foreign investors. Regulatory hurdles are also plenty. But all is not so bleak. One has seen investments shoot up in the Indian auto space in recent times. And it is hoped that FDI in retail should also pick up. But it goes without saying that the government will have to be more aggressive if the steady flow of FDI has to keep up in the coming years.

Data source: Business Standard

A lot of experts are predicting a sustained slowdown in China. And hence are deriving the next logical conclusion that commodity prices should also start heading southwards. Most of these conclusions though are based more on theory and less on observation we believe. But what if observation also points to the same thing? In that case, the argument for a commodity downturn becomes even stronger in our view. An article on the Australian portal of has talked about exactly such observations.

It has warned of sharp correction in certain commodities where inventories are going through the roof at the same time growth is facing downward pressure. For example, cotton stockpiles in China are set to climb to about 9 m metric tonnes. This is enough to cover the country's deficit for as much as six years! Cotton is not the only commodity giving jitters to investors. It is being estimated that around 8 m tonnes of aluminium, 15%-20% of global supply, could be dumped into the market by around 2014. This, as rising costs and interest rates make storing the same for long periods of time unprofitable. Steel too is showing signs of cracking under pressure. Industry observers are warning that the entire sector is now operating at a loss and struggling with problems of oversupply along with a broader economic slowdown. Thus, the evidence of another serious leg down in commodities seems to be getting stronger by the day.

'Globalisation' was the concept that defined economic growth for countries all over the world. Taking examples from each other, countries kept developing policies to open up their economies. The idea was that it would boost their own trade growth thereby helping their own economies. Trade flourished. To the extent that trade growth outpaced economic growth. However, things have changed over the past two years. Trade has come down significantly. This has led a man by the name of Joshua Ramo to state that maybe globalisation is running backwards. Mr Ramo is the Vice Chairman of consulting firm Kissinger Associates. If you think about it, what he says appears to be true. Most countries particularly the developed ones are now looking at discouraging imports. They are coming up with more and more policies that promote the use domestic products and services. In other words, they are adopting protectionist measures to support domestic industry rather than relying on outside goods. In essence, protectionism is completely against the concept of globalisation. Though the US has always been vocal about the need for free trade, its own recent policies seem to be contradictory. A clear example is its policies towards Indian IT services.

Gold has always been an important component of any country's overall reserves. While the western countries have higher component of gold reserves, emerging ones have a relatively smaller proportion. But it seems that Brazil is on a mission to gradually increase its gold reserves and curb the gap. It may be noted that Brazil raised its gold reserves for the second month in October 2012. Brazil's gold holding expanded by 17.2 tonnes to 52.5 tonnes. This is the highest level ever achieved in the last 11 years. However, it may be noted that gold forms just 0.5% of Brazil's total reserves. Thus, the current large buying is an effort to increase its gold holdings.

Amidst uncertainty in the global markets many other central banks are also expanding their gold reserves. For instance, Kazakhstan, Russia and Turkey have all increased their gold reserves. This confirms that prices are likely to remain firm in the near future. Further, it should be noted that all the nations collectively bought 374 tonnes of gold in the first nine months of this calendar year. And it is expected to reach 450-500 tonnes by the year end as per World Gold Council. This again reaffirms the chances of gold prices going up.

The Cabinet Committee on Economic Affairs (CCEA) may just have a solution to India's fuel import bill problem. The CCEA has made it mandatory for oil marketing companies, namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation (IOC) to blend 5% ethanol with petrol. Since ethanol is cheaper than petrol this can help reduce our fossil fuel dependence. While the blending of fuels has been going on for the past 2 years, a clear policy directive was absent. This new directive makes blending compulsory. Ethanol gives better mileage, lowers pollution emissions and is cost effective. A litre of petrol costs around Rs 70 while ethanol costs Rs 40 a litre. Over a billion litres of ethanol will be needed for this blending program. However, India has no supply shortage since the country produced over 2.2 bn litres in FY11. It may be a drop in the ocean, but this will help India's fiscal deficit.

In the meanwhile, Indian equity markets have shed their gains and are trading weak. At the time of writing, the benchmark BSE-Sensex was down by 69 points (0.37%). Consumer durables and power stocks were trading strong while realty and banking stocks were trading weak. Asian stocks markets were trading strong with Japan, South Korea, Hong Kong and China trading in the green.

 Today's Investing Mantra
You are better off in businesses that are not capital intensive." - Warren Buffett

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    1 Responses to "Do you have a Ponty Chadha in your portfolio?"


    Nov 23, 2012

    If blending of ethanol is such a great idea, I don't know what CCEA was doing all these years!
    In any case, sugarcane supply is expected to be tight this year and it makes greater business sense to convert available cane into sugar rather than ethanol.
    This means instead of relaxing its grip on industry, govt will now impose one more condition on sugar industry by ordering it to produce ethanol.

    Like (2)
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