No room for complacency, tough times not over

7 MARCH 2009

Well, auto sales in February are up with the leader, Maruti, recording a 19% y-o-y increase (y-a-y!!) and Hyundai a 45% one, on a much smaller base. Inflation is down to a bit over 3 %. RBI has cut by a ½ percent both its repo rate (to 5%), at which it lends to banks, and its reverse repo rate (to 3..5%) at which it borrows from them. But, tougher times loom ahead and there is no room for complacency.

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The trade deficit for the 9 months to January, in $ terms, has widened from $ 66.8 b to $ 99 b. Our main import bill is of crude oil, where demand is not curtailed, as it should be, by price movements of petro products, since we foolishly continue to follow a policy of subsidising petrol and diesel. The 19% increase in car sales must be seen in this context, as leading to further increase in imports to fuel the vehicle population. The Government has done nothing about increasing roads, so a lot of the fuel is wasted in idling, including the time spent waiting for siren toting convoys of VIP cars, an abuse of imperial power! Nor is the irresponsible Government doing anything to curtail both fuel consumption or carbon emissions by helping create efficient public transport systems and discouraging, through taxation, vehicles that are gas guzzlers. It would be a good idea to consider taxing, at time of purchase, vehicles differentially, based on their certified fuel efficiency norms.

The global economic problems are far from over and are threatening to spill into the area of trade, as protectionism increases. It was the huge increase in global trade that enabled countries like India and China to lift millions out of poverty. But as banks fail, needing bailouts, and as lending by them is curtailed, businesses, and trade, gets affected. Demands for local jobs for local people, increases; Obama has included this as part of his latest bailout package and Gordon Brown in Britain is under huge pressure to follow.

Banks like Citi have virtually destroyed themselves and are likely to be taken over. Citi's stock price has fallen from a peak of $55 (market cap $ 277 b) to under $1 (market cap $ 5.5b), a lower valuation than both SBI and ICICI Bank. RBS is owned 70% by the Government. How institutions that have survived for so long can flounder due to poor management, is amazing. Foreign banks like Citi and RBS grew their business more through investing (in complex derivative products) than through traditional lending. Indian banks, especially PSU ones, have been, thankfully, circumspect and have stuck to their knitting; hence our financial system is not under any great strain.

It does, though, boil down to good governance. Witness the events at Orissa Sponge (the word Sponge refers to the product, sponge iron, and not to the attributes of its promoters). The promoter group, Prashant Mohanty, had some 105 lac warrants, of which 35 lac warrants had been pledged to an NBFC as collateral. Since the promoter did not meet his obligations, these were sold to another NBFC and ultimately to Bhushan Steel. As per reports, Mohanty first obtained a Kolkata High Court stay against the second NBFC, then called an emergency board meeting and then announced a board resolution allowing him to exercise 30 lac warrants out of those that had been pledged and sold. An independent director has claimed that no such resolution had been passed, and promptly resigned.

One recalls, years ago, how Jensen & Nicholson had made a rights issue of convertible debentures to its shareholders. After the issue had been completed (allotment had been made and debenture certificates despatched) the promoter group discovered that some group had purchased the rights to a sizeable quantity which would give them, on conversion, a significant holding. Alarmed, it had cancelled the issue even though it was complete in all respects and, worse yet, had been allowed to do so by SEBI!

Satyam's promoter, Ramalinga Raju, has himself confessed to fraudulent accounts; yet the State Government has not yet frozen the assets of the promoter group! These should have been, on day 1, to enable claims by shareholders defrauded by false accounts. Last week, Raju's younger brother, was granted bail. Now, in desperation to find a buyer for the company (one foolish enough to take unquantifiable risks of lawsuits filed in the US) SEBI has tweaked the process of bidding. The average price for the takeover would not be that in the past six months, which would make it a non starter. Nor will any competitive bid be allowed. All this is done in the name of protecting the interest of minority shareholders when what has been done to them would violate the Geneva convention had Satyam investors been POWs! Bad governance by promoters in management, followed by abysmal governance by the State, with duped investors paying the price!

In other corporate news, RIL is to merge with RPL in the ratio of 16 shares of the latter fetching 1 share of the former. RIL's holding in RPL would be extinguished post merger. The merged company would be the largest in India by market cap. and by turnover.

India still believes it can get a 7% GDP growth in 09-10, and seems to be deriving comfort from the NRI repatriation to bolster its invisible earnings. However, the global slump could well make a dent. Dubai, which has 100,000 foreign workers (to work on its construction boom) is seeing an exodus as the boom is over and the country is in financial stress. The Indian Government has bulk booked 20,000 seats next month in anticipation of a return

India is going into election uncertainty, with general elections to be held between April 16 to May 13. It is highly unlikely to result in a clear mandate, which will lead to extended uncertainty as horse trading takes place (one hopes no animal welfare organisation objects on behalf of horses, for the comparision). So the economic policy stance of the next Government will not be clear till Q3.

Global markets are at very crucial support levels, some under them. The Dow Jones Industrial has gone below its 7500 support, with the next major support at half that level. The S&P 500 has gone below a support of 750; the next one is again half that level. London and Paris are at support levels. Perhaps these may hold, leading to a bounce; if so, one should sell. Good governance is needed but is nowhere in evidence in the political arena.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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