JSW brand promotion a.k.a How to transfer shareholder wealth to your family

Satyam was not the first case of its kind in India, but it was THE high-profile burst that destroyed investor confidence. It was outright fraudulent, as admitted by its own founder. (Which SEBI corroborated quite recently, despite Ramalinga Raju's written confession years ago. Nicely done, SEBI!)

Compared to outright fraud, corporate governance practices may seem a bit grey, if you add a dose of business jargon. What's worrying is the fact that it is becoming way too frequent. Cairn India did it recently when it announced that it was transferring $1.25 billion to a subsidiary. The audacity was shocking - they had already disbursed around 2/3rds of the sum before making the news public. Now, you would wonder why? This is a publicly traded corporation. In other words, baap ka paisa nahin hain - the shareholders have a right to that cash.  The management excuse: The interest rate from the loan to the affiliate is more than what it receives from its fixed deposits in the US currency. We do not invest in companies so that they can park their surplus funds in FDs and crib, do we? Reinvest for better returns or pay out dividends, duh. Not hand it over to related parties. 

Well, that was somewhat tolerable if I was Christ. What took the wind out of me was another article that I read today. For simplicity sake, assume that I started a company in 1982 and listed it later. I had named it XYZ Steel. 

Fast forward to 2014. It is a $10 billion plus conglomerate now. I announce that the brand name "XYZ" belongs to another private company named XYZ Investments Private Limited incorporated in 2005 (31/03/2005). Incidentally,  my wife holds 99.99% of equity in XYZ Investments. In the interest of brand promotion, I plan to transfer funds from XYZ Steel and other group companies to my wife's company, for using the XYZ brand name. This year's payout to my wife from XYZ Steel: 125 crore Rupees. 

Funny, right? That's what JSW Steel, a publicly traded corporation, is doing. 

But I wondered how the management would explain this to people who own their stock. Beats me. Well, this is how JSW Steel  responded to a query from Business Standard. Full report here.  "To ensure consistency in brand usage, uniformity in performance standards among various companies using the brand, appropriate framework has to be in place through governance structure, code of conduct and a business-excellence model. The brand owner has to be vigilant and needs to monitor that the brand name is not misused and the value of the brand is not diluted. Accordingly, JSW Investment Ltd, the brand owner since inception, has carried out a study to adopt best practices in managing the brand architecture, benchmarking with both Indian and international conglomerates. To sustain and improve the brand value and to bestow the tangible and intangible benefits in the longer term, a sustainable corporate-branding campaign involving substantial expenditure has to be done on a consistent basis - to disseminate the idea, knowledge, information and core values of the brand through a systematic campaign."

What the hell was that again? I don't know. I'm not that smart. But I have one ability - to smell bear-shit. And this one is. Stay away from JSW, folks. And if you own it, sell it, unless you want to hand over your rights to the promoter's wife.

Btw, the markets are funny, coz the stock did not plummet today as I expected.  That said, poor corporate governance does not pay in the long run. Satyam!

Beginners Guide to Financial Neologisms

Neologism is the name for a newly coined term, word, or phrase, that may be in the process of entering common use, but has not yet been accepted into mainstream language. - Wiki 

BRIC: Unless you have been hiding beneath one, you have heard of BRIC. For financial neologists, BRIC was the first major hit, a grouping of the major emerging economies of Brazil, Russia, India, and China. Four markets that are radically different in terms of size, potential, key drivers, and even market structures. It required someone with Goldman Sachs standing to pour them into a bucket and call them the collective driver of the global economy in the 21^st century.

13 years after the term was coined all the four economies are charting different growth trajectories with challenges that are unique and immense – from China’s potential bubbles, and India’s twin deficits/poor governance to Russia’s Putinarchy that managed to convert a commodity-driven healthy surplus to a widening deficit, and then there’s Brazil.

BRICS: = BRIC + South Africa. Hey, we never thought of South Africa (we never thought of Africa to be precise), when we coined the acronym. Want more representation? BRICS, it is.

PIGS: Now, that’s a smart one, even though animal rights activists might have a problem with it. It refers to the financially mismanaged grouping of Portugal, Italy, Greece, and Spain – countries with tottering economies even while they were ambulanced into the EU. These are the same babies that almost pushed the euro zone into a near-collapse and the painful bail-outs.

Like the BRIC, this neologism is also open to manipulation on a long-enough time-scale. Ireland came into the picture by (a) replacing Italy or (b) as an extra I a la PIIGS.  This even became PIIGGS, by adding Great Britain to the trash can. Portugal's Economy Minister Manuel Pinho was deeply offended that anyone would label his country with this term – as in, how can you call a spade a sty? 

PIGSHIT: Potential combination for the original PIGS + Hungary, Ireland, and Turkey. This is not used, as of today, but someone will think of it someday.

CIVETS: Another grouping of emerging markets, this one refers to Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Why the term? Apparently, the Civet is a nocturnal mammal that has this unique penchant for eating coffee cherries and then crapping them out as transformed coffee beans (after digesting the flesh), which are then used to make the much-acclaimed “fox-dung coffee”. And no, I did not brew that one up. But, I am yet to get the comparison that Michael Geoghegan had in mind when he referred to these diverse economies as civets. 

MINT: Mexico, Indonesia, Nigeria, and Turkey. Fidelity came up with this one. These 4 countries are also on the list of the Next Eleven countries (more on that interesting species in a while). “All have very favorable demographics for at least the next 20 years, and their economic prospects are interesting”, according to the guy who propagated this term.  

MIKT: Miffed with MINT? Check out MIKT. Take out Nigeria from MINT and then add South Korea, the output is called MIKT. Nigerians went so livid when they were left out of this one. My concern was mostly with the use of K in South Korea for the acronym. I would have batted for MIST, by using the logical S in South Korea. And then add Oman to the list to make it MOIST! (The crowd would have gone wet!) 

Oman is a very important country for neologisms, as I will demonstrate later on. The rule of thumb for neologism is to make the acronym attractive – which country you chose does not matter – you can add or delete, when the timing is just right. 

E7: No, it’s not a listing of Euro zone countries. E is for Emerging.
The E7 includes BRIC + Mexico, Indonesia, and Turkey. Nigeria still continues to be pissed, and this time they have the South Koreans and South Africans for company. You cannot blame smarting South Africans for thinking they were at the forefront of emerging markets after they were attached to the big one - BRIC with a capital S?

The Next Eleven (N-11):  Bangladesh (29), Egypt (34), Indonesia (77), Iran (37), Mexico (97), Nigeria (16), Pakistan (13), the Philippines (60), Turkey (86), South Korea (157), and Vietnam (98). Goldman Sachs (same guys who came up with BRIC) came up with this one too in  2005. BEIIMNPPTKV would have been tough to pull off, so they stuck to N-11.

Wiki says “The criteria that Goldman Sachs used were macroeconomic stability, political maturity, openness of trade and investment policies, and the quality of education.” Really? Btw, the numbers in parentheses are the 2013 rankings according to the Failed States Index maintained by the United States think-tank, Fund for Peace. Out of 178 countries, the N-11 has four of them in the worst category (Alert), six in the next to worse category (Warning), and one in the stable category. The Failed State ranking is based on social, economic, and political indicators. Tell me what were the N-11 formulators smoking?

The lists go on: Four Asian Tigers, Tiger Cub Economies, Gx, and so on and so forth. Let’s just wind up with an interesting play that might take the ticker headlines away from emerging markets, unless they have done so already. Ladies and Gentlemen, please welcome the……. 

Frontier Markets: A fad, way below the standing of grandiose emerging markets, these are countries which could potentially witness the inflow of hot funds in the next few years. Includes countries such as Trinidad and Tobago, Cyprus (yes!), Mongolia (micro-base effect), Malta, Côte d'Ivoire, Macedonia, Botswana etc.. Exotic stuff, like Elbonia! 

I use Scott Adams' work without permission. I don't think he would care.

As a parting note, try the latest neologism:

ARSEHOLE: It includes Afghanistan, Rwanda, Somalia*, Egypt, Haiti, Oman^, Libya, and Eritrea. This one was coined on February 9, 2014. These are economies that (a) have been so oversold that there’s no downside left (as in shit has already hit the floor) or (b) have never been sold/bought because there are no exchanges (so we do not know their intrinsic value).
 
^Oman is an outlier that was added to the list as it is the only country to have a name that starts with the alphabet O – a very useful alphabet for neologisms.

*Sudan, Syria, and South Sudan were strong contenders, but there is only one S possible in the acronym, unless of course, you make it plural. Get it? You neologist financial engineering a*******s?

Time to short!

Sahara Housing Finance, Sahara One Media & Entertainment. These might go down a long way.
And all of Sun network stocks (careful about Spicejet).
Buy Tilaknagar Industries.

New BPL Caller Tune

I thought it would be a good day when I woke up. The weather was pleasant, I nursed my morning tea, picked up the newspaper, kept the pillow on my sofa, and lay down on the soft cushion anticipating 30 minutes of peaceful reading. But what I saw in the paper almost made me spill my cup of tea over it. The Indian government, in its infinite wisdom, is apparently planning to announce a scheme on  independence day to provide free mobile phones to all below poverty line (BPL) families, in order to enhance producivity and usher in a new era of economic development.  Cost: Rs. 7,000 crores (approximately $1.27 billion)

The naysayers like me can spill tea or coffee over it, but the government of India (in its infinite wisdom) has put in a lot of thought into it.  They knew that critics would scoff at the idea, because BPL families may not have the money to recharge their phones. To silence them, the Government of India will provide free talk-time worth Rs. 200 every month for all BPL families. Ha!

That said, the bigger issue for the government may not be the phone recharge, but the basic charging of the phone itself - in a country where electricity is not available in a good chunk of rural households.

The plan of action also involves sending messages to these phones extolling UPA government virtues and aam aadmi programs (those damn critics say that this is a populist measure aimed at a third term for the current circus). The critics are crazy because the bulk of BPL families don't know how to read or write. For all you know, they might see BPL in those texts multiple times and confuse it with BJP. In all this my BP is shooting up - aakhir UPA ki baap ka paisa hai kya? As tax payers, we are entitled to some answers.

No wonder the planning commission had earlier this year set an income of Rs.26 a day as the poverty benchmark. After all, we want to limit the number of phones given away free, don't we?

Meanwhile, the government is also in talks with service providers to make sure that the caller tunes are provided at a subsidized rate to BPL families. Now that was something I cooked up, but didn't it seem plausible in all this madness?  Oh! Tughlaq was such an honorable man.

Tamasha - India's favorite genre

El Nino, Lost crops, La Nina, IMD,
We didn't start the fire  
No we didn't light it  
But didn't try to fight it

Now, I'm a big fan of the Billy Joel song, but I had to edit the last line (and the first one). India (and Indians, by default) could well be headed for it's worst  year in the last decade. No matter what our meteorological department says, we haven't seen rains this year, at least in the south. August rains are predicted to be pretty strong, but the precipitation lost in the last two months could be costly. Though it may have sounded like one, this is not a weather update, and this could have major implications on our lifestyles in the coming months.

Sugar hovers at around Rs. 33-35 a kilogram. How about sugar at Rs. 60 or 70? The whole of India (especially the North) would go into a tizzy. The present Sheila Dixit dispensation in Delhi got the first real taste of success after the onion price rise in the run up to the elections that brought down the incumbent BJP government. How about aaloo at Rs. 50 per kilo? And how about Rs. 60 for a kg of rice? If you thought the Food Corporation of India and their rotting warehouses would save us from a stratospheric price rise in food grains (like the Strategic Petroleum Reserve and their salt domes filled with oil in the US), you could be in for a rude shock.

Why is this important except from a pinch-on-my-wallet perspective? Well, the RBI has its first quarter review of the monetary policy on July 31. There are a bunch of analysts that are expecting surprises like interest rate cuts (India's Reserve Bank has surprised analysts more than any emerging market central bank in recent times). That my friends, is wishful thinking. I could be wrong, but at some level, I think the analysts could be in for a surprise. How about a hike in key rates? 

A possible drought and the consequent food grain price inflation will be textbook whipping boys for raising or retaining key benchmarks. Fair enough! But coupled with a lame government, this is a disaster that India is waiting for and walking into with a devil may care attitude. Reduced industrial activity, thanks to high borrowing costs and zero-luster reforms, will ensure that our RIP as an attractive investment destination is written in glowing letters.

Oh, and since we are on the topic of governance, the only policy action that got some sound bites recently is the Karnataka government's decision to spend 17 crores on poojas (prayer ceremonies) to appease the gods of rain. Seriously? I prefer the central government's inaction to this paleolithic state intervention!

In all of this, our currency will continue to fall. Unless crude falls substantially, I do not think there will be any real kicker for global growth. The only Au lining in this otherwise dark cloud is the deluge of superhero movies. I think they are some kind of a leading indicator of the markets bottoming out - too much pessimism- the paranoia being overdone. I would like to believe that, but if I had to put my money where my mouth is, I would short our currency, our government, and our central bank.

As for tomorrow, look at the way our benchmark indices moved today - big rallies with the Sensex rising about 300 points and the Nifty a 100 points, anticipating positive cues from the RBI. They're setting us up for something. Like I said before, I could be wrong, but (I'm gonna stick my neck out) the indices will see red tomorrow.

The slew that failed

RBI came out with a slew of measures today to arrest the Rupee fall. The piddly nature of the slew meant that markets tanked, and the Rupee hit a fresh low. Actually the steps announced by Mr. Rangarajan (RBI top honcho) reminded me of the battle scenes from Ramayan telecast on DD in the 90s. The battle lines are drawn, and the crowd is expectant. Mr. Rangarajan lifts his bow and lets outa slew (the third slew in this para) of arrows. The arrows fly in tandem towards the market. (music dhanadang dhanadang dhanadang in the background) Before reaching the target, the arrows stop and fall in one shot. Camera zooms back to Mr. Rangarajan who bangs his chariot in disgust and disappointment.

C'mon, if these are the aces up your sleeve at least don't make any grand announcement that we are going to take some majjjor steps. Just announce in a business as usual manner. Without the pressure of expectation built in, markets might take to them in a kinder fasion.

That said, in the blue corner, headlines declare that analysts' consensus estimate is that the Rupee will fall to 60. (This time I'm tempted to join them. That would complete a bear picture.) But you know what the usually means, correct?

Depreciating Cs

Well, the two Cs are depreciating. In the middle of simmering fuel prices, Crude oil has depreciated by about 17% in the last one year. Indians should have rightfully expected some relief from higher fuel prices. But our Currency decided to play spoilsport. Indian Rupee fell by a staggering 27% during the same period, wiping away crude price gains and further burning holes in our pockets.

The RBI announcement last week to remain hawkish further spooked the markets sending the Rupee closer to the retirement age in government jobs. A few more jabs, and it will touch 58 to the US Dollar. RBIs hawkishness, twin deficits, high inflation, and a frozen government are all things that we are used to by now.

What surprised me though was what RBI deputy governor Mr. KC Chakraborty said when asked whether falling crude will help arrest inflation:  "The fall in crude prices has been partly offset by depreciation of Rupee. In rupee terms, oil prices have not gone down much". Thank you very much Mr. KC. There you go - a text book answer. He should have been in a classroom. And while he was at it, he could have sidestepped the question about how hawkishness in some way contributes to the falling currency.

He also went on to make a case for people who save - and how low interest rates in a high inflation environment could hurt those who save money. I'm not going to say anything about that, because I don't have anything left to save after paying my bills. All I can say is that we need more doves than hawks in RBI now. So sing with me, Kabootar ja ja ja ....