»Straight from the hip by Jawahir Mulraj

Poor governance impacts the economy
15 OCTOBER 2011

The policy paralysis and inaction are telling on the economy and on corporate performance. The Economic Times of Oct 10 says that the Nifty 50 companies are expected to show a fall in quarterly profits for the Sep quarter, the first time in 2 years. Companies like Maruti Suzuki, Ambuja Cement, Reliance Communication, Bharti, DLF and others are likely to show a drop in profits.

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Maruti Suzuki has been affected by a strike in its Manesar, Haryana plant. The root cause of the problem is that the company hires labour on a contractual basis, because taking them on a permanent basis poses a big problem if there is a reversal in the industries' fortunes, thanks to inflexible labour laws. Most companies are, therefore, hiring on a contractual basis. In effect this means that those who have a permanent job enjoy security thanks to labour laws, but for future generations, the labour laws hamper offer of permanency. In other words, the laws are probably acting against the interest of labour.

Maruti has lost market share sharply, due to the strike. It is contemplating a $1b. plus expansion in Gujarat.

DLF has been affected as rising interest rates (up 25 basis points in each of the past 13 quarters) have affected sale of houses. This impacts the demand for cement (Ambuja) and steel (SAIL).

The telecom companies are down as they have spent huge sums on acquiring spectrum and on capex for the infrastructure (telecom towers) to use the additional spectrum. Besides, Bharti has made a large acquisition which is yet to pay off. Three of R. Com's executives are in jail, for their alleged role in the 2G scam and the Supreme Court has correctly questioned CBI about the need to keep them denied of bail. They are salaried executives and cannot, by any stretch of imagination, be considered to benefit by the out-of-turn allotment of spectrum. The 2G scam is not about sale of spectrum at low prices, which is how the figure of loss of Rs 1.76 lac crores was computed. It is about out-of-turn allotment, which benefitted the allottees. Even the estimate of Rs 1.76 lac crores of loss is highly suspect; the original figure of the inspector charged with evaluating it was some Rs 2,600 crores. But, thanks to the paralysis, telecom companies' growth is slowing down.

Similarly, after years of turning the blind eye to environmental rape by iron ore mining companies, the pendulum has now swung sharply the other way, with the Supreme Court ordering all units in Bellary to shut down. About 100,000 jobs have been affected. Iron ore supplies to steel mills are down and JSW, which overtook Tata Steel to become the # 2 steel producer, just four months ago, is contemplating shutting down its 1 million tpa Vijaynagar steel plant that's operating at 30%.

Domestic coal supplies have been hit for a variety of reasons, including environmental reasons. Andhra politics is another; the demand for a separate state, Telangana, has affected iron ore production in AP. This is purely political. Moreover, the CEO of Mahagenco, Maharashtra's generation company, has complained of poor quality.

Shortage of coal is so acute that 50% of power plants are running with less than a week's supply of coal. There have been power breakdowns in parts of the country. Imported coal prices have been raised because some Governments, like Indonesia and Australia, have slapped a tax on exports.

All this has resulted in a fall in Sep 2011 excise collections by 8%, the first time in 16 months. Industrial production growth is poor.

Inflation continues to be high, at 9.7% and so long as it is the RBI would not ease interest rates. The next policy review is on Oct 25.

There are, however, some positive items of news. There is, finally, a consensus on the new industrial policy, one that seeks to encourage industry and hopes its share would grow to 25% of GDP and that it would provide 100 m. jobs in the next ten years. Unless there is such large job growth, the young population would quickly turn from being an asset to a huge liability. This would require a change in existing labour laws, for it is more important to first create new jobs and only then worry about security of the job. Without the former there won't be a latter.

Should the new industrial policy be announced, it would be a very bullish factor.

The Finance Minister has also cleared the way, as recommended by the Ashok Chawla Committee, for a market related pricing of gas. This would be beneficial to producers such as RIL and ONGC, who have been pointing out that the increased capex costs and falling output (in the case of RIL) necessitate market determined gas pricing. They have also been pointing out that competing imported LNG costs $15/unit as against the $4.2 Government determined price for gas.

The shortage of gas has meant that supplies have been maintained for power producers but been cut for fertiliser companies, whose costs of producing fertilisers have gone up, and production fallen. Thus, despite a bumper crop, farmers are not making much more income this year.

Another bullish signal would be if the Government can finally thrash out an agreement on GST (goods and services tax). Yet another would be successful rollout of the UADAI the unique identity project.

On the flip side, another crisis in Eurozone, which cannot be ruled out, would swiftly dent the current rally. The market rallies whenever there is an announcement of further funding for weaker European nations, since there is a lot of global liquidity, but falls sharply back when a new crisis erupts. And erupt they will. The Eurozone's problems are not yet over.

The most interesting corporate news was the offer by Unitech to buy out Telenor's 67% stake for Rs 269 crores. Unitech was one of the companies who is alleged to have got out of turn allotment of spectrum. It quickly sold a 67% stake to Telenor, for a whopping Rs 9,100 crores, whilst retaining 23% in a JV called Uninor, an amalgam of Unitech and Telenor. Later there was a fallout of partners and, since Uninor was not adequately funded, an erosion of value. In order to be rid of the need of depending on a partner to fund growth, Telenor offered to buy the 23% stake in Uninor, at a far lower valuation. Unitech turned the table and offered to buy out Telenor's 67% stake, (for which it had received Rs 9100 crores) for Rs 269 crores! This is amazing!

After Germany and France promised further financial support to the Eurozone, investors enthusiastically ramped up markets. The BSE-Sensex rose 860 points last week to end at 17082, and the NSE-Nifty rose 244 to end at 5132.

The market is moving up as there is a lot of liquidity; foreign investors were net buyers, for example, in each of the five days last week. So whenever fears of a crisis abate, they step in to buy. They would, however, be equally fleet of foot to flee when another crisis erupts. As it will. So it is a market for quick traders.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

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 authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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