|»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:
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...
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...
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.
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.
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.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement
Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407