»5 Minute Wrap Up by Equitymaster

On This Day - 4 JULY 2011
This Indian promoter is much bigger than the Tatas & Ambanis...

In this issue:
» India ranks low on the Global Innovation Index
» Charlie Munger prays he dies before Berkshire pays out a dividend
» Govt. finances are again in a mess
» Investor not very keen about IPOs
» ...and more!
----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more, click here to read on...


The most important element in any business organisation is its human resource. That is why investors lay significant importance on factors such as the quality of a company's management and the integrity of its promoters. Any company that ranks high on these fronts is rewarded with a premium valuation by its shareholders.

Not so surprisingly, most government companies rank pretty low on these fronts. Public sector companies are often plagued with issues such as corruption, inefficient management, bureaucratic organisation structures, slow decision making, poor succession planning, etc. The list is endless! As a result, they seldom command the kind of valuations that their private sector counterparts command.

Now the interesting part... Just two weeks back we had discussed the Tatas surpassing the Ambanis in terms of market wealth.

You would be surprised to know that the Government of India is the biggest promoter of our economy. If you take into account the combined market wealth of all listed government entities the price tag comes close to Rs 20,000,000,000,000 or Rs 20 trillion. How big is that? To give you some perspective, all the 100 listed government companies together account for nearly 30% of India's total stock market wealth. From another perspective, it would take the country's top ten private business groups collectively to reach such a magnitude.

Do you realise the contradiction? Despite the lower valuations in comparison with private sector peers, the government remains the biggest promoter. We believe that herein lies the problem as well as the opportunity for India. Just imagine the quantum of value that can be unlocked if only the country's biggest promoter and management get revamped! What a paradigm shift the economy could witness! Alas, if only...

What are your suggestions to India's biggest promoter? Share your comments with us or post your views on our Facebook page.

 Chart of the day
Launched in 2007, the Global Innovation Index tries to gauge the level of innovation in society by taking into account factors such as human capital and research, institutions, infrastructure, market and business sophistication and the output they produce. Today's chart of the day shows that India ranks far below at 62 on the innovation front. On the other hand, China, at 29, leads the lower-middle income economies.

Data source: Global Innovation Index 2011

Nothing goes on forever. No, not even at Warren Buffett's Berkshire Hathaway! The thing we are referring to is dividends. We all know the Oracle of Omaha's aversion towards paying out dividends from the sizeable cash hoard he has at his disposal. It is all about opportunity cost as per him. If he is able to make a better use of the shareholder money than the shareholders would do themselves, why not reinvest rather than give dividends? Like with most of his arguments, this makes perfect economic sense to us. And this is the reason why he has not paid out a single penny as dividends since the inception of the firm.

However, if Buffett's partner Charlie Munger is to be believed, all of that could change now. "I think that some of you will live to see a Berkshire dividend, but I hope I don't," Munger remarked recently. He could well be right. The cash pile at Berkshire Hathaway keeps on building up. As per last count, it amounted to a whopping US$ 40 bn. Thus, it is becoming harder for both Buffett and Munger to effectively reinvest the proceeds. After all, it is very easy to show 100% returns with a portfolio of few million dollars than the one worth billions of dollars. And the problem is only going to get worse from here on we believe. In view of this, a dividend from Berkshire Hathaway in the long run does look like a distinct possibility.

Are you amongst those wondering why is there an overdose of information on the precarious health of the US government's finances across media? Well, you are not alone. And the answer to this question is very simple. Of course the health of the US is an important indicator for the global economy. But the fact that media has very little access to the financial health of our own government cannot be sidelined.

It appears that our own government fares no better than the US when it comes to financial prudence. Debt management seems to be a term as alien to the Indian government as it is to its American counterpart! As per a leading daily, the Indian government has an overdraft limit of Rs 300 bn with its banker, the RBI. But despite receipt of Rs 350 bn in advance taxes for the first quarter of FY12, the overdraft limit was exceeded. For this the government had to issue cash management bills to the central bank. Excessive government borrowings over the years and high rates of interest on them seem to be taking a toll on the government finances. Unless a proactive measure is adopted to do away with subsidies in a time bound manner, we may not be far away from the mess the US is in currently.

Remember the spate of IPOs (Initial Public Offerings) that flooded the markets last year? Wonder where they vanished this year? As per a recent study done by Dealogic, only US$ 780 m has been raised through IPOs in India over the past 6 months. This is considerably lower than the US$ 4 bn raised during the same period last year. The companies that were scheduled to come out with their IPOs have just been postponing their dates. In fact, some have even shelved their plans. Why? Because investors are no longer interested in IPOs. This is true. Investors have become wary of new IPOs. They are afraid of losing money in them. And they have a pretty good reason to be scared. Many of the companies that had come up with an IPO are now trading significantly below their IPO prices. And investors who had invested in them are stuck with these investments. It is always better to wait for a fundamentally good stock at right valuations rather than just lapping up the shares at the higher prices that the management and investment bankers assign to them.

It seems that finally a correction long overdue in the property markets is just around the corner. Over the last quarter property prices in 8 major cities have witnessed a fall. Considering the lack of demand and rising interest rates, a correction was pretty much on the cards. However, what surprised us is the extent of time taken for this correction to actually set in.

It may be noted that builders in large cities have deep pockets. So, they were holding on to the prices in anticipation of a turnaround in the near future. However, it seems that now they longer have the capacity to hold on to the prices. Rising interest rate means that buyers would defer their purchases. And this will further worsen the liquidity issues faced by the builders. Hence, reducing prices is probably the only solution left with the developers right now. And we believe that this is just the beginning. May be a massive correction is just around the corner as rising inflation would mean interest rates would remain high in the near term.

In the meanwhile the Indian stock markets are trading in the green, however they have corrected slightly since their strong opening. At the time of writing, the benchmark BSE Sensex was up by 71 points (0.4%). Realty and auto stocks are the major gainers while Capital goods were on the losing front. All Asian stock markets were also trading in the positive with China leading the gains.

 Today's investing mantra
"The economy depends about as much on economists as the weather does on weather forecasters." - Jean-Paul Kauffmann

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