|»5 Minute Wrap Up by Equitymaster|
On This Day - 13 NOVEMBER 2008
Mr. Tata's mantra for survival
In this issue:
Now, in communicating to his group companies that the global crisis will continue for the next 12 months, Mr. Tata has advised them to go slow on spending - either for acquisitions or for daily operations.
In a letter he shot off to his senior managers yesterday, Mr. Tata asked for improving operational efficiencies, implementing aggressive cost control measures, reducing operating expenses considerably and postponing non-essential capital expenditure and capacity expansion. He has also asked for freezing all acquisition plans except those that are considered highly critical. "Failure to manage this crisis could result in irretrievable positions," he said.
"Some of our companies with substantial foreign operations or those which have made substantial acquisitions are already facing major problems in raising capital or establishing lines of credit for their operations," Mr. Tata said and Business Line reported.
He was most probably hinting at his two lead companies - Tata Motors and Tata Steel - which have faced serious troubles in recent times. The former, for instance, has faced delays in the planned launch of 'Nano', considerable decline in sales of commercial and passenger vehicles, and heavy financial burden on its acquisition of the Jaguar and Land Rover brands.
The latter, on the other hand has witnessed considerable pressure in its international operations (Corus) as steel prices continue to fall amidst slowdown in demand.
Interestingly, while Mr. Tata's call for austerity might indicate the right voice in these troubled times, Warren Buffett has something interesting to say on such initiatives. This is what we also mentioned in our yesterday's newsletter. He says, "Whenever I read about some company undertaking a cost-cutting program, I know it's not a company that really knows what costs are about. The really good manager does not wake up in the morning and say, 'This is the day I'm going to cut costs', any more than he wakes up and decides to practice breathing."
While details on this 'consumer credit' plan are still awaited, it is believed that it will provide a greater 'bang for buck' as compared to buying mortgages. It may be noted that this shift in strategy disheartened investors leading to nearly 5% decline in the Dow Jones on Wednesday.
Interestingly, while the treasury is unwilling to use TARP money to help bail out the automobile industry, it is willing to consider the case of non banking financial companies engaged in auto finance.
The IHT calls it 'devising policy on the fly' and we agree. The unexpected scale and severity of the financial meltdown has meant that the US treasury is forced to make changes even while the bailout package is underway.
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Apparently, the Fed's stance is that the information should not be given out because it is highly sensitive and would remain so for some time to come. Given that it is the tax payers' money that is involved here, we wonder whether the average American citizen will buy the argument.
While most of the key Asian indices closed in the red today, China gained nearly 4%. Indian markets were closed today. European markets have opened on a mixed note on account of increased worries about a deeper slowdown.
According to rating company Moody's, gross non recoverable balances (in other words, gross non-performing loans) on credit cards rose to 6.8% in August 2008 (up 48% YoY). Almost each of the large American credit card companies have had to provide between US$ 1 bn to US$ 3.5 bn in the third quarter for losses on card loans as a result of which their profits plummeted. The likes of American Express have also had to get themselves converted into a bank to get the lifeline of Federal 'bail out' funds.
The Fed has, however, now taken an austere stance on the proposal for a special program that was to allow non repayment of as much as 40% of credit card debt to customers who do not qualify for existing repayment plans. The said plan was based on delaying tax payments until the credit card dues are recovered. However, this time the Fed has tightened its own belt and those of the defaulters. Probably again because they are not 'Too Big to Fail'!
The once bright future of India Inc. has suddenly been shadowed by a haze of grey. The reasons vary from high input costs, lower sales, lack of increment to order book and shortage of capital.
The ones dependent on exports are in fact looking forward to the 'Hand of Obama' blessing them in the near future.
When we recently spoke to one of the largest exporters of silk fabric from India, the company was not even sure of its sales in the next quarter. Trends in volume and realisation growth were therefore not hard but impossible to predict.
Indian individuals and companies are yet to come to terms with 2% of the country's GDP being shaved off. At such times, the ones that cater to economies not growing at all or de-growing must obviously be finding the reality unpalatable. Probably it is time that we stop paying heed to the soothsayers and take note of the inevitable.
A lower inflation number provides room for RBI to cut rates. This must be welcome news for New Delhi as it has been struggling to sustain India's growth momentum in the face of a worldwide economic slowdown.
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