Thursday, 27 January 2011

Balaji Amines - Results Update

Balaji Amines came out with their quarterly results today.

Sales grew from 63.67 cr to 96.69 cr (growth of 51.86%)
Operating profit grew from 9.18 cr to 15.99 cr (growth of 74.18%)
Net profit grew from 4.21 cr to 8.72 cr (growth of 107.13%)
EPS has grown from (1:5 split adjusted) 1.3 to 2.69 (growth of 106.92%)

Note: These are yoy Q3 comparisons.

Tuesday, 25 January 2011

Employee Guarantee Scheme-A follow-up post

The points raised by Anupam's comments are all valid arguments. Let's try to take a look at them in a bit more detail.

1.    “You imply that it effectively becomes a free transfer because of corruption and inefficiency – but that can be said of most public (and we might add a lot of private) resources in India .... the solution must be to put in place ways of ensuring accountability in government to ensure that the money is actually put to use. ”

For a policy to be meaningful it needs to take into account the reality at the grass root level. India's reality is that as a country we are highly corrupt (as per Transparency International's 2010 rating we are ranked 87th out of 178 countries in corruption). So, to say that we have devised a policy which looks fantastic on paper but fails the moment it is implemented is ridiculous to say the least. Its better not to have such policies at all. Corruption-proofing has to be a primary consideration while designing any new public policy.

If you look at the areas where India has done well (namely, IT, Telecom..well unfortunately nothing else really comes to mind!!), you will see that it is where there has been minimal government and bureaucratic interventions. In contrast, think of all the areas where there has been active government involvement and you will only find pathetic mediocrity.

Another aspect that we can see that has worked wonderfully in India (and elsewhere in the world) is by giving tax incentives (or disincentives) to corporates or individuals. Companies and people will do anything to save tax. A recent not very well-known case in point - Indian government gave depreciation benefits to set up “green” energy plants, so companies who have no experience or business related to power are setting up wind power plants!!!

One thought that I have is, that the government should float tenders for projects which it wants done. These tenders should be free for everyone to bid for. The terms should ensure that a fixed percentage (say 60% or 70%) of people employed for the project should come from a target population section (maybe rural poor, urban poor etc). The implementation should be open to audit by independent reviewers and any misrepresentation of facts would result in non-payment of project costs. I am sure this also can be misused, but something on these lines, with inputs from people who know and understand these things better could probably yield better results that just doling out cash.

2.    “About the deficit and the impact on inflation, it is true that the deficit needs to be tackled, but that needs to come from elsewhere. The budget is full of flab – subsidies that cater to all kinds of interests who won't let go of their chunk of the pie. It is time to reduce expenses there instead of saying there isn't enough pie going around to give the poor their rightful share (which they need to work for under NREGA).”

This is, in fact, exactly the problem. The reduction must always come from “elsewhere” and not your pet constituency!! So, petrol/diesel wallas  will not let you reduce their subsidy, fertilizer wallas will not let you touch theirs and the story goes on. Add to this list now, the NREGAwallas!!

Also, your argument is based on the assumption that people have to work for this subsidy, which to my mind is not the case. The money is being collected without much of developmental or constructive work to show for it.

Also, I do not agree with your statement of anyone having “their rightful share”. That again is an entitlement mindset. We disparately need to get out of it. You cannot have a system where people just expect outputs without putting in their share of inputs. It just does not work in the long run. So, just because I am poor does not entitle me to government largesse. What the government can and should do is to provide basic services well, like education, healthcare, law & order. Then let the the ecosystem (mostly called a “market” in a market-driven economy, but I think its sends a wrong message to people) take care of the distribution of wealth and other benefits.

3.    “How about the middle class paying full prices on their gas guzzling cars instead of piggybacking on diesel subsidies meant for farm production. How about looking into why the GDP-to-tax ratio is actually falling in India.”

I agree with you on this one. Private diesel cars should attract a huge price premium in terms of up-front taxes so it acts as a disincentive for people who buy them. I see no reason why people who can afford a 3 million rupee Mercedes cannot pay full price for the fuel. Tax to GDP ratio is falling simply because no government has the courage to tax agricultural income! So, you have millionaire “farmers” paying no tax. (On a lighter vein, that's also why you have someone like Amitabh Bachchan suddenly realized that he is a farmer a few years back!)

4.    “The poor will now eat more with the money they have earned, leading to food inflation? So they should starve so that food prices are down? Disposable income is not spent on food – food is a necessity, for the most part.”

Again, the point I was trying to make was not that poor people should starve so that I can have cheaper onions!! I was simply trying to say that when you distribute cash from helicopters (NREGA is a variation of this approach) then you increase buying power for the people. Since, these people are predominantly poor, the first thing they do is to buy food, as opposed to some others who rush to buy iPads and 3D TVs with their corporate bonuses. So, the consequence of this is that the price of primary food articles will go up due to basic demand-supply mismatch.

My point was that the inflation we are saying for the last couple years is due to this and cannot be fixed by tweaking interest rates in the monetary system. At most, it will create incentives for stashing away the cash into bank deposits for some, but for those whose primary need is food, in all probability they lie in the un-banked segment of society and will fail to have any impact. So, they need of the hour is to look at increasing farm productivity (better farming technology, increase R&D spending in agriculture, irrigation and removal of the Land Ceiling Act, encouraging contract farming etc.) and setting up cold chains and better storage facilities across the country. This will need a lot of co-ordinated effort between the state and central governments and is likely to take a few years to show any results. That is perhaps why no one wants to take it up.

5.    “On #2, I think the teeming population of India is still far from the stage where unskilled labor becomes unavailable. What the corporates are griping about is that the amount of surplus they can extract due to the overabundance of labor has fallen. NREGA tweaks the supply demand chain by effectively setting a minimum wage for labor.”

Again you are right on this. Simple, economics suggest that if you pay more you will get these people to work for you. The issue is, as you say, by setting a floor price, small and medium companies are finding it very difficult to get adequate labor on time. For example, the rubber cultivators in Kerala, are finding it very difficult to get casual labor during harvesting season at a reasonable. So, they have had to pay a lot more. This (and a lot of other factors) have resulted in prices of raw rubber to double in the last two years. This has a ripple effect everywhere rubber is used – from tyres to construction to chemical industries, prices have gone up as input costs go up. Again, setting up the inflationary cycle.

So, what I wanted to highlight is that “consequences of consequences”. One small change has a ripple effect in areas where it was not intended for.

Phew!! That was a long response. Let me know views (bouquets and brickbats are both equally welcome).

Sunday, 23 January 2011

Employment Guarantee Scheme - An Economic Disaster

Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) or better known as the Employment Guarantee Scheme has been running since the current UPA government came into power. The intention for this scheme is to to provide a minimum guarantee of work for Rs 100 a day. And the idea is to provide work which is required at a block or panchayat level. The idea is indeed noble. To provide (lets say distribute) income to the poorest of the poor. I will not get into the sociology or political angle of the program. My comment is however the economic and psychological aspect of this scheme and its devastating impact.

This largesse by the government, unfortunately, is being run by increasing India's current account deficit. In simple terms it means we as a nation spend more money than we earn in a year. The only way this can be done is by taking on additional debt. Again in simple terms, it means the government floats debt paper (fixed deposits) and the banks, institutions and the public buy it using their savings. Think PPF, NSC, KVP, Infrastructure bonds, T-bills etc.

This whole affair is not sustainable in the long run unless the country starts printing more paper currency thereby boosting inflation. And inflation, my friend, is the poison that kills slowly. Coming back to the employment guarantee scheme. The practice of giving away money  (Rs 10,000 = 100 days x Rs. 100) to people is never a good idea. I am saying giving away because India's corruption is institutionalized so I am more or less certain that very little actual work is happening to justify this expense (refer: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/28/MNVB13VKMC.DTL).


In such a scenario, there has been a multifaceted impact. Here are the main ones:-
  1. Beneficiaries of this scheme are consuming more (primarily food) as they now have more disposable income resulting in spiraling food inflation.
  2. Unavailability of unskilled labor for most industrial and real-estate work thus jacking up the cost of most labor intensive production processes.
  3. Setting an extremely dangerous precedent for people that it is their right to get paid without having to work for it. This is another subtler version of the subsidy scheme and very very difficult for successive governments to remove and attract the "anti-people" tagging.
Points 1 and 2 are, to my mind, what is actually causing the high inflation numbers we are seeing. Tinkering with monetary policy by the FinMin and RBI is unlikely to help as it does not address the core of the problem. Point 3 is not easy to demonstrate but is likely to have the most adverse impact over a longer term.

As a populist policy, this will probably win some votes but economically it is bringing the country a bit more closer to disaster!

Wednesday, 12 January 2011

Supreme Industries - A strong company (both fundamentally and technically)

Supreme Industries is a very large part of my portfolio. A few weeks back someone I was discussing stocks with asked me why. We discussed the fundamental story for Supreme. But there is another reason why I hold such a large percentage in my portfolio. If you look at the last six months chart, you will realize that the stock touched 165 before its split and has subsequently been consolidating. It does not move down with the Index which provides great comfort. And this has been true in previous minor market corrections also. It simply moves in a very small range but refuses to go down substantially. You need some stocks like these in your portfolio to cushion market movements.

Monday, 10 January 2011

Markets Correcting: Should I buy or Sell?

ttA frantic phone call on my mobile today from a friend from Pune, India today got me thinking. The Sensex has corrected by nearly 1350 points in the last 5 trading sessions. The market participants are appearing on TV and pronouncing gloom and doom. Interestingly, these same people saw nothing wrong with the market a week back!
So, here is the gist of what I had to say to my friend today.
  1. I have no idea if the market will go down further from here.
  2. I have no idea if the market will go up from here.
  3. Think from a overall business ownership perspective and not a stock ownership perspective. The last time I checked Ratan Tata had not sold his stake in Tata Motors or Tata Steel when the prices had collapsed in 2008, neither did Mukesh Ambani or Sunil Mittal. So, why should you start thinking of selling with every 1000-2000 point decline in an imaginary index?
  4. If you are holding good businesses in your portfolio, then keep holding them. 
  5. Use this decline to add to your holdings. Sure, the prices may go down 10% from here, but it may also go up 20%. I know of people who sold stocks around 18000 (Sensex) thinking that the market was getting overvalued. Unfortunately, for them, the index is still not back to that level. It may get there or it may not. Stop playing this game of prediction. It is a game no one can win.
  6. When you invest you need to have a strategy. One which identifies when to buy, what to buy, when to sell and how much of cash to keep in your portfolio. If you have a proper strategy that answers all these questions, then just follow it. Please keep some cash aside to use for better opportunities that may come in the near future.
It has been best said by Warren Buffet, "The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values."

Happy Investing.

Monday, 3 January 2011

Andhra Sugars - A quick look

A friend of mine suggested I look at Andhra Sugars. I took a quick look and here are my observations.

Andhra Sugars is mainly involved in manufacturing sugar, alcohol & alco chemicals, aspirin, chloro alkali, sulphuric acid and super phospate. To support its operations, the company has its own power generation capacity including a wind power generator.

There is some traction in its sugar and caustic soda areas. Caustic soda prices have gone up by nearly 30% in the last few months and sugar prices are also firm.

The company has initiated carbon credit trading benefits.

Financials:-
1. Overall, the company's financial numbers does not inspire much confidence. The revenue growth over a 5-year period is nearly flat.
2. The same situation is present for both operating earnings and Net Profit. The FY06 to FY10 EPS CAGR is 2.57%.
3. There has been no equity dilution in the last 5 years
4. The company pays a healthy dividend and the yield is nearly 4% (Rs 5 on CMP of Rs 120) although the payout has been fluctuating and has been Rs 7.5,6,5,6,5 in the last 5 years.

Observation:-
The company may well perform in the near term due to its twin engines of sugar and caustic soda price realization, but I would be very reluctant to invest here as this is purely a commodity business and it results are hostage to the various commodity cycles. So, if you decide to invest, you need to track the commodity prices closely and pick ear;y signs of topping. That, too me, is a lot of work which I am not very good at.