Oops, the GHIT has hit the fan - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Oops, the GHIT has hit the fan A  A  A
17 APRIL 2013

A famous Ajit Dayal line: "There are 4 things of immense value in this country: the HDFC brand name, Infosys, Tata, and Gold"

There is an expression in the English language "the $#^@ has hit the fan."
Typically used when bad stuff happens and everyone can not only see it, but can also smell it.

Well, investors in the Indian capital markets (dominated by companies owned by our Lijjat-papad munching and honey licking "corporate honchos") are probably looking for an expression to describe the smell that seems to pervade the already polluted air we are forced to breathe when "bad stuff" happens.

So, after recent events that confirm the saying, "et tu Brute", just as Brutus' knife makes that last twist to dispel any illusion of Julius Caesars's survival, I am proud to announce the launch of a new expression: "the GHIT has hit the fan."

This expression, unlike the original one, has to be used carefully and in very select circumstances.

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The "G" in "GHIT has hit the fan"
For example, when gold fell by nearly 5% on April 12 and followed on with another 10% whack on April 15 and - at the time of writing - is still looking for the sewage pipes, owners of gold (like me) were shocked. We have bravely believed that gold is the ultimate hedge against all the smelly paper dollar bills that Ben Bernanke is throwing out of his helicopter for the past five years (Is Gold a Rotten Apple?).

What made the decline in gold prices strange was the fact that the Bank of Japan has just announced that they have taken on American passports. The Japanese central bank has vowed to print approximately USD 78 billion every month till the economy in Japan shows some sign of revival. Across the Arabian Sea, and just above the Cyprus nuclear bomb which forfeited bank savings, the European Central Bank said they would not cut interest rates further but they will continue to do what it takes to avert a break-up of the Euro currency. What this means is that the ECB, too, will print more money each time a Euro-member looks like they are in trouble. And, given the state of the general European economies, that printing machine will be pretty busy.

But, people don't seem to care about these important things. So gold has been a stinker.

The "H" in "GHIT has hit the fan"
For years I have maintained that HDFC is a fabulous institution built, painstakingly by members of a core team that really did all the hard work and have brought HDFC to where it is. Deepak Parekh, now their Chairman, happened to be the man on the top who got the media publicity and the credit but the team he built and led (to his full credit!) did much of the work. Over the years I have had some concerns as HDFC expanded to new businesses and chose CEOs to run these various businesses, like HDFC Mutual Fund (disclaimer: Quantum Mutual Fund, which I am affiliated with competes with HDFC Mutual Fund) and HDFC Bank.

The parent HDFC is the saint of the mortgage business and would, in my opinion, never mis-sell their products, and incentivise a distribution channel to be aggressive on the home loan front. In the pre-Lehman era HDFC refused to get involved in the market share game and saw its share of home loans decline from over 60% to about 35% by 2005. The people who grabbed that market share were the public sector banks like State Bank of India and the "grab-all-you-can" ICICI Bank. HDFC's share "underperformed" its peers in that period. But the management team refused to compromise on their ethical values and their way of doing business. HDFC knows that its role is to help people buy homes that they can afford.

But HDFC Mutual Fund is no saint. It has been a part of the racket in the mutual fund business which has focused on gathering assets and figuring out ways to ensure that the payment of commissions to distributors is never compromised. The mutual fund industry - indeed, the country - are paying for this mis-adventure. While the distributors, CEOs, and CIOs may have stashed away their little treasures from the boom times, the retail investor has withdrawn from the equity markets and left share prices to be a function solely of FII flows.

At a time when Mr. Deepak Parekh, as a "captain of industry", was writing an open letter to the Prime Minister about a clean and corruption-free India, HDFC Mutual Fund never came out on the open to support the extension of the tenure of then SEBI Chairman, C. B. Bhave - a person who tried hard to break the strangle hold of the legendary distributors on the industry. And SEBI did not spare the large mutual funds - including levying fines on HDFC Mutual Fund. Ostensibly, one only writes letters to cleanse the system when the cleansing does not affect one's own business!

And, as the recent CobraPost sting operation has suggested, HDFC Bank and HDFC Insurance may also be less than saintly. With a sufficient number of videos on their web site, CobraPost has raised a lot of questions:

  • Did pressure of these monthly targets force the bank and insurance employees to suggest creative solutions for converting black to white?

  • In addition to these taped suggestions, were any actual transactions actually done?

  • Did any senior person know about this?

  • Was this also a result of aggressive growth - opening one branch every business day could compromise the hiring standards in order to meet targets?
While the answers will be known over time, the saintliness of the HDFC group has been dented. HDFC may still be a saint, but lending its name to the bank, the insurance business, and the mutual fund business has diluted its integrity factor - though, in a world of market cap, there has been tremendous value addition to the stock price of HDFC.

But does the end justify the means?
Maybe the "captains of industry" can write an open letter to us on that?

The "I" in "GHIT has hit the fan"
Infosys may be good at writing codes which comprise of "1" and "0" and exporting Indian brain cells via the internet to the rest of the world.

But they seem to be clueless on how to communicate with investors. Their stock price reacts to their quarterly announcements as a child would react to a hot pan - or to a candy. Either the market loves what they say (October 2012), or the market hates what they say (April 2013). With a stock that tumbled over 20% the day Infosys announced their 4Q FY 2013 numbers and gave their guidance for the next year ending March 31, 2014.

But there is something more sinister about what is going on in Infosys - and it's not about their strategy and what they will do with their cash.

It is a more fundamental question: how do they select their key leaders, including their CEO?

Watching their CEO on TV always brings up a fundamental question: is he there in the post of CEO because he was a founder? Or because he, indeed, deserves to be the CEO?

Is that the legacy of Narayan Murthy - the man who is seen to be the king of corporate governance in India?

And, for all their talk on corporate governance, why can't a non-founder be a CEO?

Or, is Infosys a modern version of the "family-run businesses"? In a family business, every heir with the last name as the founder gets a crack at being CEO. In Infosys, does everyone who signed the original shareholders register, get to be a CEO?

The "T" in "GHIT has hit the fan"
The Tata group is seen as the golden boy of good behaviour in corporate and social India.

Well, like HDFC, that sheen has been slowly rubbed off as many companies using the Tata name build out their own "culture" and "business practices".

In the 1980's there was the controversy over the NCPA and the alleged payment of money for cement (then in short supply); many of the Tata satraps or chieftains, were known to be "players" in the stock markets in the 1980's and the 1990's. Arundhati Roy has often written about the alleged theft of minerals from tribal areas by Tata companies. For those who recall the Radia tapes, connected to the 2G scam, there were conversations with Ratan Tata. In West Bengal, there was the ill-fated attempt to set up their Nano factory there. A year later, there was the visit of Ratan Tata to Gujarat and get land there for the Nano project - despite the shadow of Godhra.

And now, there is no Tata at the top.
That's probably good for corporate governance but, guess what?
The person running the show represents the largest shareholder group - the Mistry family.

The Mistry family were shareholders in South India Viscose, shut down since 2001. SIV, located near Sirumugai, had been accused by the Tamil Nadu Pollution Control Board of releasing untreated effluents into the River Bhavani. After the plant was closed, the company was a "sick" unit and poisonous gases like carbon disulphide were still there on the premises. The BIFR had to auction the gases to other parties who had to clear them away. I may be wrong, but it seems like the Mistrys washed their hands off SIV.

Any new cute onle-liners, Mr Dayal?
So, having been an investor (on behalf of clients and individually) at some point in time in these "gold-standard" companies over the past 30 years - and having authored that very cute sound-byte "there are only 4 things of immense value in India", the past few weeks have been jarring.

Many beliefs have been called into question.

HDFC group was caught with their pants down on March 13 and any premium the group may expect for "integrity" needs to be reviewed.

Gold got a beating on April 12, 15 - and still being punished.

Infosys continues to prove that it this baby has great potential - but probably needs to be adopted by someone other than its founders.

The Tata group has not released any bad news (as yet!) but they have been in a gradual state of decline in my "integrity" assessment.

So, companies I am affiliated with continue to be shareholders in - or recommend - buying some of the stocks of the groups mentioned here.

Just as all gold is not gold - the Quantum Gold ETF only buys gold bars rated by the London Bullion Market (LBM), and does not buy gold from Middle East refiners.

Investors should not assume that every HDFC or Tata group company is good - the various group companies may have the same brand name in front of them, but you need to dig a lot deeper to understand what they are about.

So, my new one-liner is: "Gold is the only thing of value left in the country - despite the wild swings in price; most corporate groups have shown they respect price more than they respect values."

But, my dear readers, Karl Marx - convinced about the death of capitalism - said it better, "All that holy is profaned".

The greed that people have will destroy capitalism.
The greed of the businessmen, the bureaucrats, and the politicians is destroying India.

How I wish the captains of industry would prove us wrong!

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

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9 Responses to "Oops, the GHIT has hit the fan"

Dr Jagadish

Apr 27, 2013

Well i certainly endorse your views that only gold is sacrosanct in India. i personally prefer to keep my money in physical gold rather than rupee, no need to worry about our governance, CAD, Inflation, falling/raising Currency and host of other factors associated with equity investing.

i used to hold lot of equity at one point of time - almost 100% now down to 50% of my wealth.

Still i prefer equity over realty as i do not have to worry about legalities of owning a piece of land which can be questioned/modified by unscrupulous Govt officials and brokers.

Equitymaster association has rekindled my faith in longterm investing in equity as an asset.

i also agree with infy being run like a modified family company and have a feeling that they are fudging their numbers when the actuals may be a dismal set.

HDFC missells (which is a corrupt practice- giving them unfair access to ordinary people who do understand investing) mutual fund and insurance through all their portals - take the case of HDFC online insurance it is omnipresent - now that i have mentioned this i am sure to get a spam entry to my email from one of HDFC counters(no thanks to their association with email servers like that of gmail). It fell down long ago Mr Dayal, when greed took over, i wonder how could you take so long to see it?


E. Pinto

Apr 22, 2013

There is one big S you have not mentioned. Sahara.
And if there are going to be perpetual sob stories, then we do not want to read The Honest Truth.



Apr 18, 2013

Part of your article is true. One Gold is not sacrocant.It mmay come down to may be 25K. We may be the highest importer of the material, but it is mainly dependent on I'nal movements, os if in $ terms comes down to 1300 or 1250 (cost of mfg.) than our prices are bound to come down.
Secondly slurring the names of HDFC group and Tata is not in good taste. By far these are the best governed group. there might be some lap[ses, but that does not mean they ALL have become bad, Rememebr Tata means Trust.
About Infosys also you may be partially right.
Thanks Damani



Apr 18, 2013

Mr Dayal, if you truly believe gold is the only thing left of value in this country, then shouldnt Quantum AMC just run its gold fund and gold ETF and wind up all the other funds?

You have been part of the Indian equity culture for a long,long time now.Should we be this pessimistic?

Or am I wrong here?:)

Like (1)

Dr Aniruddha Malpani

Apr 18, 2013

Minor typo - "All that holy is profaned".
should be
"All that is holy is profaned".

Like (1)


Apr 17, 2013

Brilliant!You say it the way it is.Pl keep it up.
The coutry needs more people in financial world like you to clean the mess.
Yes..very little needs to be said after seeing cobrapost videos about HDFC.And Times of India Group holding companies have lot of stake in HDFC Bank.Is that the reason we do not read much about what really happened with all the investigations.Everything seems hushed up.

Like (1)


Apr 17, 2013

this is because of everybody now thinks to survive by abll means.u can understand the meaning of all means

Like (1)

Jonathan Gomes

Apr 17, 2013

Very well written Mr.Dayal.

Like (1)


Apr 17, 2013

Brilliant stuff,Mr.Ajit Dayal!!! You hit the nail on the head this time - questioning the integrity of HDFC and Tata brand names. Unfortunately,I too have been a victim of the mis-selling by HDFC Insurance. Maybe it's a sign of the times when you can no longer trust even so-called reputed names like Tatas. Gold seems to be the only fall-back in these troubled times-- untarnished and shining as it has been thru the ages.

Like (1)
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