Interest Rate Cycle Peaks

Interest Rate Cycle Peaks

Hi Friends!

The Reserve Bank of India has just cut the CRR - without even waiting for the review due on March 15, 2012. That too by a "more-than-expected" 75 basis points.

This indicates a few interesting points about the thought process of the RBI:

• RBI thinks that the liquidity situation is quite tight.
• RBI feels that due to the Advance Tax payments next week, the liquidity situation will become even worse in the immediate future.
• RBI feels that the danger of slowing-down of GDB growth rates is very live and real. Enough to act, and act decisively.

While this may not result in an immediate reduction in the interest rates for home loan borrowers (and other borrowers as well), this is as powerful and as strong a signal as any that the Interest Rate Cycle has peaked in India. There's no doubt about that.

How does this impact us? A few ways in which it is likely to impact us:

• Market performance of interest-rate sensitive companies (like banks, automobile companies, infrastructure majors, real estate & construction companies, etc.) should do well in the months and quarters ahead. Hence, every dip in share prices should be used to load up shares of such companies. Obviously, we should focus on those that have been beaten down the most while the interest rates were moving up.
• Loan rates are certainly unlikely to go up significantly any longer. On the contrary, the interest rates on loans should start inching lower in the quarters ahead. Home-loan & Car-loan customers can heave a sigh of relief.
• Those who are planning to take a loan in the immediate future MUST take only a floating rate loan (even though, I'm sure, many banks would love to tempt you with supposedly attractive fixed rate loans). After all, once the interest rates start going down, they are likely to keep going down at least for a few quarters before taking a turn upwards.
• Those who are having fixed deposits (or planning to open fixed deposits) should use the presently prevailing high rates to lock-in their money in fixed deposits for as long a duration as possible. There are some good public sector banks which accept deposits for a period as long as 10 years. This would come in handy especially for recently retired senior citizens.
• Growth is likely to be back for Indian corporates - After tightening the belt for almost 4 years, chances are bright that you'll see smiles on the faces of CFOs. This should, hopefully, indicate increased job opportunities - both for freshers and for people looking forward to switch jobs to greener pastures.

Let's wait and watch the budget - and see if the Finance Minister also gives us reasons to cheer.

Regards,

N

---

Kingfisher - Fit case for "Breaking the Corporate Veil"

Kingfisher - Fit case for "Breaking the Corporate Veil"

There has been a major hue and cry over whether or not to bailout Kingfisher.

In the entire discussion, an important aspect has been broadly ignored by one and all. Certainly by the Government of India.

Kingfisher has apparently been deducting taxes at source (TDS) but has conveniently chosen not to deposit it in time with the Income Tax authorities.

Income tax authorities have frozen a few bank accounts of Kingfisher airlines and are awaiting settlement of their dues.

There has been a stunning silence from SEBI and the Ministry of Corporate of Affairs.

Let's look at the facts - They are quite simple:

• Kingfisher Airlines has apparently deducted TDS while paying salaries to its employees (perhaps while making payments to its vendors as well)
• Kingfisher Airlines has apparently failed to deposit the TDS so collected with the Income Tax authorities.

Let's look at a hypothetical scenario in a very small kirana store or a small scale industrial unit or a small transporter owning a couple of trucks:

• Can any of them stop payment of salaries for a few weeks without the explicit knowledge, consent and instruction from the owner/promoter?
• Cany they refrain from depositing the TDS collected with the Tax authorities without the explicit knowledge, consent and instruction from the owner/promoter?

Chances are exceptionally bright that no owner can ever claim ignorance of these situations. Nor can he/she wash of his personal responsibility and accountability on such serious acts of omission and commission.

My contention is that if TDS deducted has not been deposited in time with the tax autohorities by Kingfisher, it is very clearly a wilful, conscious act on the part of the top management, most likely with the explicit knowledge, consent and instruction from the owner/promoter. Knowing the hands on style of functioning of Vijay Mallya, my hunch is that he is extremely unlikely to have been unaware of the acts of omission and commission.

This obviously involves treating the money belonging to other legal entities (such as the individual employees, the tax authorities, etc.) as money belonging to Kingfisher Airlines (for running routine day-to-day operations).

If Vijay Mallya and/or his top management have chosen to ignore the sanctity of the distinct legal entities involved in the matter, the law enforcement agencies under the Ministry of Finance & Ministry of Corporate Affairs must, likewise, explore the possibility of looking beyond the corporate veil of Kingfisher Airlines. They must explore the possibility fo breaking the Corporate Veil. They must look at legal options of holding Vijay Mallya and/or his top management personally liable for the payment of TDS deducted but not deposited.

There is no excuse. The time to act is NOW!

Regards,

N

---

What ails the Airline Sector - and what should the government do about it?

What ails the Airline Sector - and what should the government do about it?

There has been a major hue and cry over whether or not to bailout Kingfisher.

There are two parts to the entire Kingfisher saga:

• Macro issues pertaining to the airlines sector

Obviously, there is much that ails the sector - not just locally, but globally. After all, other than a rare Southwest Airlines, virtually no airline across the globe makes profits consistently, year after year. This can only be due to two reasons:

• Improper pricing - If all the players of the industry choose a suicidal pricing strategy which makes their business model unviable, there's little that can be done about it
• Cost management - Considering the glamorous nature of the industry, the players don't focus enough on the cost structure.

Considering the above, every government across the world has to take a call on whether the sector is a strategically important one for their respective country. If it is deemed to be strategically important, the concerned government should either provide enough fiscal incentives, subsidies, etc. to keep their airlines alive. Or they should nationalise their local airlines and run it themselves. If airlines are viewed as just another business which is not strategically critical, they should simply let go of any idea of micro management. Instead, they should encourage free entry of all global airlines into their country and enjoy the fruits of crazy undercutting by all the players. Just restrict their own roles to collecting reasonable taxes, ensuring passenger safety, enforcing rules for connectivity for the entire country in lieu of licences for operating in key business centres, etc.

• Micro issues pertaining to Kingfisher

We must remember (and insist on remembering) that nobody forced Mallyas to start Kingfisher Airlines. If Vijay Mallya wanted to spend his money on running an airline, that's his choice. If shareholders chose to invest (or punt) in Kingfisher shares, that's their funeral. If banks have chosen to lend money, that's their headache.

If PSU banks have been "pushed" to lend, however, the government may consider protecting the banks in a manner that would be appropriate without any element of a moral hazard. For this purpose, the government may perhaps appoint an independent panel led by a banker of impeccable repute like a Deepak Parekh or KV Kamath. Ideas and recommendations generated by this panel could perhaps be used for protecting the interest of the PSU banks - to the limited extent of safeguarding loans that were given to Kingfisher under duress.

So far as Kingfisher is concerned, there should obviously be no bailout of Vijay Mallya. All shares belonging to the promoters should be taken over by the lenders at a mutually agreed valuation as part/full repayment of their debts. A professional management directly reporting to an independent board should run the new Kingfisher. The lenders should get a veto power on

• Top managment compensation including variable pay
• Dividend declaration by Kingfisher Airlines

Employees of Kingfisher should not be artificially protected or "propped up" in any way whatsoever. We must realise that unlike landless labourers working in farms or construction workers employed in the unorganised sector, at least 98% of Kingfisher employees will be well-educated employees who have consciously chosen to be employed by the airline. Kingfisher employees are obviously reasonably well-paid white collar employees. They are not innocent victims by any stretch of imagination. They will all have a well-studied employment contract which will provide the terms of their employment and termination. Any emloyee who is terminated should simply be "taken care of" in accordance with his/her employment contract. No tears should be shed for them beyond this. We must remember that we are not living in the days where the maximum corporate salaries are pegged at artificially low levels. If the employees have chosen to be part of Kingfisher, just like they enjoyed the benefits of a "full-sized life" during its heydays, they must bear the brunt of the logical downside when the company goes under. Sad, but that's the reality of life in a market economy.

The government's role??? Certainly not to protect Vijay Mallya. Just ensure that the law of the land prevails, as the laws exist today. If at all any laws are being changed to accommodate Kingfisher, the changes should be applied only prospectively and should be applicable for the entire sector. In fact for all other sectors as well. I'm sure that people like employees of all BIFR cases would gladly join the queue for a bailout.

We must certainly not have a situation that encourages private profit and let the taxpayer bear the losses. Not even once.

Regards,

N

---

A Collector of Gems - Views of Charles T Akre

A Collector of Gems - Views of Charles T Akre

Came across an interesting interview with Charles T Akre ... ... ...

• Collector of Gems (Source - Value Resarch Online)

A brief excerpt from the above interview:

 

Charles T Akre on trading in and out of stocks to catch the peaks and bottoms: Will I be better off if I sold them at the top and bought them at the bottom? Of course! Am I able to tell when that is going to be? No. My life experience is that if the stock is at $40 and I think it is worth $25 and I sell it at $40 because I want to buy it back at $25, my experience is that it trades down to $25.05 and then goes to $300 and I don't ever get my position back. Therefore, we are always trying to make sure that we own the compounders.

Charles Akre may very well be a great investor, but in the Indian context, I'm forced to disagree. And disagree strongly. Perhaps if I knew about other markets, I may disagree about those markets as well.

My rationale and line of thinking:

• Ordinary investors like you and me are likely to have a reasonably diversified portfolio and if we miss the Jilebi, we'll catch the Laddoo.
• There is a broad range of Market PE within which the indices tend to move over a long period of time. In the Indian context, it tends to move between a PE band of 15-25 on a trailing basis. Hence, when the Index PE approaches 15, we ought to start accumulating and start getting out when the same PE reaches around 25. Just check out the Top & bottom of Harshad Mehta's time, Dot-com time, Lehman Brothers time, etc.
• Even during the long period of consolidation in between, individual stocks tend to swing wildly within a very broad range.
  • We just need to have
    • a broad basket of shares - say, 8-10 shares
    • identify the broad range for each share within the overall index range
    • and keep going in and out of pretty much the same set of 8-10 shares
  • And ensure that we stick to our broad "Asset Allocation" at all points of time.

Listen to all the masters, learn their "style of operations", "line of thinking", etc. Finally arrive at your own individual strategy that suits you. And execute that strategy meticulously.

Happy investing!

Regards,

N

---

Evaluating a stock based on different perspectives

Evaluating a stock based on different perspectives

Different people evaluate a stock using different parameters. After all, if there is only one model of evaluating a company, the share prices would not fluctuate on a daily basis. At best, it will keep changing once in a few weeks or months.

While browsing the net, I came across this wonderful write up illustrating the extent to which valuation differs based on one's perspective.

Take a look:

• 8 Points of view for evaluating a stock - by Sanjay Bakshi

What's impressive is that the author has described things in a language that's easy to understand for anyone with a basic understanding of finance.

Thanks, Sanjay Bakshi. What's important for you is to actually take a look at all those balance sheets that you'll start receiving in a few weeks from now - Perhaps you'll find some gems among them. And some junk. You'll be far better off by dumping the junk and deploying any surplus funds in the gems.

Take care!

Regards,

N

---