Shattering Myths - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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17 MARCH 2008

In January when the Sensex was hitting 21000, two myths were floating around. One that India was decoupled from world markets, and, even if the US went into a tailspin, our markets would zoom barabar zoom ahead. The other was that, somehow, Government policy didn't matter much and that, despite the messes our political leaders are famous for making, we would march ahead thanks to the vibrancy of our private sector.

Guess what? A recession in the US, or problems with its financial sector, do have repercussions on us. The problems of subprime lending hit Indian financial institutions and hit banking stocks, bringing down the index. Last week, problems created by injudicious investment in America by Carlyle, led to its defaulting on $ 16b. bonds which could lead to its liquidation. As a result, its subsidiary in India had to sell off the investments held by it, causing a further downslide.

US job data released last week was bad news; it lost 80,000 jobs in Jan/Feb. The US Fed is countering this with sharp interest rate cuts, and pumping more money into the system which leads to more reckless spending and investment of the sort that caused the subprime and real estate bubble problem in the first place. Given that the world is waking up to the reality of over exploitation of irreplaceable fossil fuels with oil hitting $ 108/b., it is not going to be an easy task to pull the US economy out of its recession.

And guess what? The policies of our politicians do matter and do affect economic growth. Take oil; everyone knows that the easier to find, light sweet crude, reserves are getting depleted at the rate of 1000 barrels a second! And that prices of oil and its products are not going to be coming down. Our leaders have to take, and quickly, a series of commonsensical steps. They are doing just the opposite!

Like making cars/two wheelers cheaper, when the need is for encouraging public transport. Like not increasing price of petrol/diesel, dissuading its consumption. Like not paving the way for alternative energy source by quickly formalising the 123 Agreement with the USA to allow for nuclear power to be generated, simply because the West is anathema to the Left. Like turning a blind eye to the over 30% theft of power that takes place in all states. Like 11,000 MW of installed power capacity not being used because they have no coal, a resource which India has in abundance but which is not allowed for exploitation by the private sector. Yes, foolish public policy affects growth and will continue to do so because commonsense is not a prerequisite for reaching heights of political power.

Perturbed by global developments, during last week the BSE-Sensex had three upticks and two downticks, including a huge downtick on Thursday when it lost 770 points, thereby converting investors' teeth into dentures. It bounced back handsomely on Friday, with a 403 point gain, to end the week down 215 at 15760. The major contributors of the net 215 point fall were SBI, with 52 and Infosys with 45 whilst the major gainer was RIL with 77. It is interesting to note that on the day of the big fall on Thu, net FII selling was, at minus Rs 172 crores, far lower than on Monday (minus Rs 1137 crores) when it lost 51 points. This indicates nervous selling with fall in prices not justified by volume.

Guess what? The Sensex may have made a temporary bottom (the Indian hockey team most certainly has) and next week may see the continuation of the rally which started on Friday.

In corporate news of interest, L&T's stock price took a 9% hit after news that its subsidiary in Dubai had lost money in commodity futures it bought on the LSE. One should expect more of this and not come down so heavily on management that they become completely risk averse for fear of investor fallout. Managements would need to take positions and risks, albeit with a good monitoring system for those risks. Problems such as those created by Nick Leeson at Barings or, recently, by a junior trader Jerome Karviel at Societe Generale, were due to poor oversight more than anything else.

One of the areas in which Indian companies would have to start paying attention is in proper customer service. This is abysmal, with little recourse for poor service. Take telecom, our most successful liberalisation story with an amazing growth in number of people having connectivity at one of the lowest cost in the world. Operators take a charge for giving itemised bill details (imagine getting a restaurant bill with just the total), their helpline numbers are manned by outsourced agents who couldn't care less for customers and they are at liberty to disconnect if you dispute the bill (since you don't get an itemised bill without paying extra for it you are never really sure). Mobile number portability would be one thing that could lead to better service, lest the customer go to another carrier; DOT is dragging its feet on that slower than an elephant stuck in quicksand.

It is, therefore, heartening to note that one telco, Tata Teleservices, is thinking of introducing customer service quality standards which, if unmet, would result in it giving monetary compensation to its customers! Kudos to Tata Tele! Investors must factor into their future profitability assessments the cost of true servicing by all Indian companies; which will shave off a few % points from the NPM figures.

The market ought to rally from here and, with a bit of luck, should see the Sensex crossing the 17K mark. The next week will see the face off over the nuclear deal between the Government and the Left parties but the former is likely to blink, and mortgage the future to the immediacy of staying in power a little longer. Ah well. Long term in India is the tip of one's nose.

Have you read the latest Honest Truth by Ajit Dayal?

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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