A shocking revelation by a leading Indian industrialist! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

A shocking revelation by a leading Indian industrialist! 

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In this issue:
» India Inc staring at declining ROCE
» Why do Japanese stocks trade at such a huge discount?
» The govt is killing the telecom sector
» Why is UK losing its equity cult?
» ...and more!

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Have you heard this idiom "elephant in the room"? In English language, this is a metaphor for a situation where everyone knows the obvious truth but no one talks about it. Indian corporates are generally known for keeping mum in matters concerning the role of government in the functioning of the industry.

But finally, one bold gentleman has decided to point the elephant. The man is none other than the outspoken industrialist Rahul Bajaj. Speaking at the World Economic Forum, he set off a full-blown attack on the government. He stated that the reason for Bajaj Auto's success was the fact that it did not deal with the government at all. In fact, he went on to say that the corporate group had decided decades ago that they would not enter any business that would require dealing with the government. Evidently, both the group companies-Bajaj Auto and Bajaj FinServ Ltd- are into motorcycles and financial services respectively. Neither of these companies manufactures or buys anything for the government, nor do they have to go through any bidding process.

His jibe at the government didn't end there. He stated yet another harsh reality that appears to be at the heart of India's economic problems. Mr Bajaj said that his company had "piles of cash'' on its balance sheet. Despite this, it had no plans to invest in power plants, coal mines and infrastructure development projects. Why so? The reason was to avoid frequent contact with government officials. This one sentence speaks volumes- "I want to sleep well at night."

This episode raises several questions. What is the real reason that is hindering investments in India-availability of funds or investor confidence? Why do investors shy away from investing in companies or industries where government intervention or proximity to the government is high? Why do public sector stocks typically trade at a significant discount to their private counterparts? All questions seem to point to one answer- a highly corrupt and inefficient government.

Do you think companies that face little to no government intervention are the best wealth-creators for investors? Let us know your views or post them on our Facebook page / Google+ page

01:08  Chart of the day
As per an article in Economic Times, Indian companies are witnessing a declining trend in the return on capital employed (ROCE), with several companies reporting the worst numbers in the last five years. As today's chart of the day shows, the number of companies in the BSE-500 index with decreasing ROCE have been continuously on the rise over the last couple of years. These 500 companies have together made capital investments of about US$2.45 trillion, equal to about 125% of India's GDP. On this huge investment, the average return has contracted from 11.7% four years ago to 9.3% in recent times. In fact, one out of every three companies has reported the worst ROCE in five years. It is worth noting that ROCE indicates the returns generated by a company from the total funds (equity plus debt) it has deployed in the business. In order to create shareholders value, the return should be greater than the cost of capital.

Data source: The Economic Times
*Companies constituting the BSE-500 index

For the investing community as a whole, Japanese equities have indeed been a conundrum. Here we have one of the most developed markets in the world. But with valuations that are nearly half of a typical developed country. A recent article in The Economist would perhaps help throw some light. Apparently, the President of a leading Japanese firm was sacked last year. And if you thought he might have committed some fraud, you can't be more wrong. His only fault was that he helped uncover an accounting fraud to the tune of US$ 1.7 bn. But when the truth came out, the board kept their jobs and the whistleblower lost his.

Such hand-in-glove relationship of the institutional shareholders with the board of companies is the rule rather than exception in Japan. What more, even the proposal of having independent directors on the board is fiercely opposed every time it crops up. With so much bureaucracy, it is certainly not surprising that attention to shareholder wealth creation gets thrown out the window. It would be an understatement to say corporate governance in Japan needs some serious overhaul. Till then, its equities may continue to be more of a value trap than value buying opportunity we believe.

The much awaited 2G spectrum auction is scheduled to start next week. But the telecom operators have already started feeling its heat. In a meeting by the Cabinet it was decided that the incumbent GSM operators would have to dish out a one-time fee on spectrum beyond 4.4 MHz. This means that the operators like Bharti Airtel, Idea Cellular and Vodafone need to pay for excess spectrum held by them. The fee amount depends on the price determined during the auction process. Using the reserve price, the amount is estimated to be Rs 250 bn. Interestingly, more than half of this has to be shelled out by the PSU operators. While the two have already approached the government for a bailout for the fees, the other operators have to shell out the cash from their own pockets.

More interestingly, this insane fee is not applicable to the operators in the CDMA space like Reliance Communications and Tata Teleservices. As per the Finance Minister, the reason for this is that the auction is for 2G GSM licenses. Therefore, the price for CDMA cannot be decided through the same. The telecom industry has obviously expressed their concerns on this. They feel that this is yet another example of CDMA operators getting preferential treatment from the government. While we would not like to get into the blame-game, one thing is for sure. The ridiculously high one-time fee is yet another nail in the coffin for the telecom operators. They have already been burning given the intense competition and regulatory dilly-dallying. Now the one-time fee would burn another hole in their already burnt pockets.

We know that China is the largest consumer for a range of industrial commodities like iron, copper, coal etc. However, its love for the yellow metal is unknown. Fathom this. In this year, China's gold demand is expected to grow 1% to 860 tonnes. This would effectively mean that China will overtake India as the world's biggest consumer of gold. As per consultancy firm Thomson-Reuters, China's jewellery demand will be at 520 tons while investment demand is expected to be at 270 tons for the year. The balance 70 tons will come from industrial consumption. It may be noted that in 2011, China's mine output was just 371 tons. So, effectively, China imports a lot of gold to satisfy its domestic demand. And increasing demand from China this year means that the gold prices are likely to stay firm. While the record high of $1,920 per ounce is still far away, the China factor may well see the same being breached soon.

A culture of investing in equities appears to be on the wane in the UK. Indeed, pension funds in the country for the first time in decades are holding more bonds than equities. The shift to bonds began way back in 2002 when the dotcom crash, corruption in corporates such as Enron among others diminished the appetite for equities. The idea was that by investing in bonds, the volatility of the equity markets could be done away with. Moreover, bonds guaranteed income streams to meet pension payments. As a result, UK funds hold 43.2% in gilts and fixed interest compared with 38.5% in equities. But all is not hunky dory. So high has been the demand for bonds that yields have dropped to record lows. Further not only has this pushed up pension scheme deficits, but has also created a supply shortage of bonds. So, it is obvious that this trend cannot continue for long. And so pension funds will have to look for a more balanced approach in making investments for the longer term.

In the meanwhile, Indian equity markets were trading below the dotted line with the BSE-Sensex lower by about 180 points (down 1%) at the time of writing. The stocks in the capital goods, banking and oil & gas space were leading the pack of losers. The key Asian indices also closed in the red today.

04:40  Today's Investing Mantra
"Really wonderful businesses need no book value. Book value is not a great proxy for intrinsic value and it is not a substitute. Berkshire was not worth book value in 1965, intrinsic value was below book value, now the business is worth a great deal more than book value." - Warren Buffett

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    15 Responses to "A shocking revelation by a leading Indian industrialist!"

    Emmanuel k

    Feb 1, 2013

    Opportunity in the Good plan of the airlines in community of the set Bank of the point the elephant of the $1,457.000 in the The Economist would perhaps help throw some light in the Leader of the lord.



    Nov 10, 2012

    Mr. Bajaj is not developing business because he lacks vision and his risk taking level has gone minus. Let him take the money which he is currently keeping idly to Heaven. In India, all traditional business houses influenced government for their favour. He was also against opening Indian market, because he was afraid that his monopoly will be affected.

    Like (1)

    Krishna Murthy

    Nov 10, 2012

    We all feel whatever Mr.Bajaj has told is the real hard truth. It is very unfortunate that the rulers and their hench men are not listening.The entire country is in the hands of low class looters.

    Like (3)


    Nov 10, 2012

    Well I am surprised to hear such comments from Shri Bajaj. The Bajaj family benefited from their association with Mahatma Gandhi. After Independance small fry Bajaj became what he is today, because the Congress Govts cuddled the baby Bajaj for 30 years. Giving him a monoply in Small car like FIAT, and vespa scooters. He enjoyed a monoply for years made his money. And now he is turning his bark at the hand that fed him???

    Like (1)

    Umesh Sharma

    Nov 9, 2012

    It would be wrong to say that A government cannot play a proactive role in the development of Industry or any other arm of economy like agriculture or trade. .Unfortunately we have a situation where the fence eats the crop and powers that be want to have finger in every pie they come across.That is why it is very difficult to take up any project here since authorities will do every thing to stop you from proceeding unless you satisfy the person occupying the seat of power.What Mr.Rahul Bajaj says is 100% true.That is why the best talent simply moves overseas to realise their dreams and achieve their ambitions without any hindrance from undeserving elements.We continue with subsidies reservations and development schemes which do not help anybody constructively.

    Like (3)


    Nov 9, 2012

    This is perhaps right answer to so called " NEHRUVIAN SOCIALISUM ". Rahul Bajaj is absolutely right in his statement. Enormous wealth of Mera Bharat ? is only with few guys out of 125 Crores Indians ! Liascence Raj !
    Why Shantanurao Kirloskar (Doyen of Industries)was asked for holding 200-300 $ at his residence ? - During Great P.M. Mr. V.P. Singh , then F.M. - List will go 100 times . Regards to Rahul Bajaj for opining openly about facts. (Sorry Mr. Deepak Parekh)....

    Like (3)


    Nov 9, 2012

    I entirely agree with Mr. Rahul Bajaj!Of course there are good people in Govt. who want to do good for the country and earn their salary with high esteem and self respect. But they are in a minority and they are effectively blocked from independent functioning by corrupt officials legislators and politicians.

    Like (2)

    M M Kashyap

    Nov 9, 2012

    When Rahul Bajaj has said it, no further comments are required. HATHI KE PAON MEN SAB KA PAON. It is really a sad state of affairs. As regards companies having direct dealing with d government they too are good wealth creators but at a very high cost perhaps. Who knows d amount of CUT being applied to please d High Offices that be! Thanks.

    Like (2)

    P. Vijay Sagar

    Nov 9, 2012

    Hats off Equitymaster Agora for highlighting the great Industrialist of this country. Sirji: I would like to bring just give few examples of Industrialists of this great nation and these Industrialists will not allow our great country to overtake China.... For instance great Industrialist Birla Saab, bought Technology from German to make cars named "Landmaster' eventually took turn as Amassdor, Mark 1 to Mark 5 and finally became zero. With help of Govt. they could run monolpoly business. Similarly Bajaj bought Vespa know how from Italy and named Bajaj Scooter and Priya and that also eventually became zero. All these 50 years great Industrialists have not bothered to change even basic nuts and bolts and with same bolts they ruled for 50 years and became the country's most richest personalities and I salute them. After opening of FDI for two wheelers and four wheelers, we great Indians can see the light of the day of new vehicles inline with global competition... This is our country, who has made the Govt.......... like this our great Industrialists..... To add to this, Kinetic launched gearless vehicles with Japanese collaboration in 1988 or 89 and they too did not change basic model and earned quite good amount for solid ten year and after birth of Honda two wheelers Kinetic is almost became zero. India is a great country with great persons of high integrity.....

    Like (1)


    Nov 9, 2012

    It is due to the endeavor of such bold enterprising entrepreneurship despite the Govt. we see some development happening in the country. Players like Tatas could not get into Airlines where Mallyas could walk in with ease speaks
    the obvious- "the elephant, rather the white elephant in the room"

    Like (1)
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