When Carlon Ghosn, the CEO of the Renault Nissan Alliance, first met Bajaj in 2006 he was so impressed with the three- wheeler maker that he coined the word 'frugal' engineering as a compliment to Indian ingenuity. Although Renault Nissan's and Bajaj's technical alliance fell apart in 2009, Bajaj Auto MD Rajeev Bajaj went ahead and Indianised the vehicle. The result was RE60, a 15-bhp 200-cc four wheeler. Rajeev was careful with his words while referring to the vehicle. "We are an anti car company and the world does not need any new car company," says Rajeev Bajaj.The vehicle has a DTSi four-valve rear engine that can speed up to 70 km per hour and give 35 kilometres to the litre. It is even supposed to be eco-friendly generating only 60 gms per kilogram of carbon dioxide when compared to 100 gms per kg CO2 emitted by other cars. The marketing tag line for this car — "over 100,000 Indians die a premature death because of air pollution. Vehicles account for 70 per cent of the pollution in cities." — is built on its eco friendliness. The weight of the car is apparently only 400 kg. "The vehicle will target three-wheeler users and yet it will not cannibalize our three-wheeler market," says Bajaj. The company sells 200,000 three-wheelers in India and 300,000 globally. The company adds that it will produce the vehicle in the Aurangabad plant where the monthly capacity is 45,000 vehicles and will be built along with three-wheelers. There are plans to export the vehicle to Sri Lanka first and then Africa. However, the company will bring this vehicle into the market in the second half of this year."They make good three-wheelers at a low cost. This is what we need to learn from," Carlos Ghosn had told BW. Staying true to the top man's statement, Bajaj managed to pull something out of its three-wheeler DNA. However, this vehicle will be made available to Renault Nissan to be marketed under their names if they want to. That said sources say that Renault Nissan are already out of this project. Apparently only one Renault engineer worked on the project for three years. Differences over the design and safety element turned the friendship sour.Then again Bajaj has showcased something that could change the market dynamics locally. Currently there is no four-wheeler below the Rs 1,30,000 range and the intention of the company is to place the product at that price. "The pricing decision will be made when we have a product ready for production," says Rajeev Bajaj. He adds that on any such product the EBITA earning should be close to 20 per cent.The Tata Nano, which is a 600cc engine, is the closest competition to the vehicle selling over 80,000 vehicles. But Bajaj thinks that great truck makers cannot make great small car makers. "We are like Apple Corp, we want to make niche successful vehicles," says Rajeev Bajaj. The RE is a thee wheeler from the Bajaj stable and the new four-wheeler will be sold through the existing commercial vehicle network of 162 sales points. The market for this vehicle will be more in smaller towns and the strategy is clear, to create new buyers. The company also showcased a CNG version of the vehicle.If Steve Jobs is the inspiration behind the RE60, hopefully the inspiration will not eat into the core of the company's business, which is bikes and three wheelers. After all, the Rs 17,386-crore Bajaj Auto controls 60 per cent of the three-wheeler market.
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Dear Finance Minister,I started a business almost two years ago. And on several days since, I've wanted to crawl under my bed and hide. On many others, I've wanted to throw in the towel. Entrepreneurial endeavor has its moments, but often it's one darn frustration after another. And now your proposed Union Budget is giving me a few more gray hair.My business is at a point where I am hoping to raise money from investors. But my venture capitalist friends tell me that the business is too small to be of interest to them. And banks won't touch me - or any business younger than three years - with a barge pole. So my hope has been to ask friends and family to be an angel and invest some money in the business.Your proposed amendment to Section 56(2) will make things difficult for my fledgling business. The amendment asks start-ups to calculate their Fair Market Value. And any investment made above Fair Market Value shall be taxed as income.Now Fair Market Value is hard enough to calculate for large, listed companies: witness the manic gyrations of the stock market that make companies like Infosys or Reliance lose or gain a few percentage points in "Fair Market Value" in a day. Equity value is a bit like beauty: it lies in the eye of the beholder. Start-ups are exponentially worse off. They are often little more than an idea and sometimes not even that. To put a Fair Market Value on them is asking for the moon. To be blunt, does my business even have a Market Value – fair or otherwise? It is so small and unstable; would anyone buy it off of me? So why do I continue to slave on in this company? And why would any sane investor want to invest in this unsellable business? Because of hope and promise. To paraphrase those famous words, I too have a dream. And my angel investor is willing to bet on my pig-headedness to actually try and work towards that dream. So my angel investor and I agree on a Fairy Market Value… fairy, angel, get it? But let me confess that I am secretly delighted at the proposal… though don't tell my fellow entrepreneurs. They are quite upset about this amendment and I don't want to be at the receiving end.The reason for my glee is this: I know of one example, and am reliably informed that there are several others, where the income tax department has threatened to tax the equity invested in a startup as income. The battle drags on in the courts. And it's my nightmare that I could be in their shoes soon.The proposed amendment if enacted, will hopefully, fend off the unwanted attention of the income tax department and give legitimacy to all venture capital investments. And you've been kind enough to remove the sectoral caps from venture capital investments. So all is not gloom and doom.Yet it isn't hunky-dory either. My only hope of an investment in my startup lies with friends and family. And your amendment will dash that hope.Any angel investment or investment from friends and family will value my business way above the face value of the shares. And the income tax department will promptly tax that money.So may I suggest an amendment to your amendment?a. Please postpone the amendment for a year.b. During this time, ask all who wish to act as angel investors to register with Sebi. Perhaps the registration requirements for angels can be less onerous than for venture capital funds. The aim being to have transparency on the source of the funds being invested.c. And put an exemption limit to the angel investment. For example, investments below Rs 10 crore may be exempt from such registration requirement.Your current proposal will put an end to all angel investments and send several start-ups to an early grave. And that's not even counting the serious negative impact on entrepreneurial activity in the country.Don't get me wrong. I'm glad that you, unlike Greece, are not asking for my stool-sample* to start a business. And I do sincerely appreciate your efforts to curb money laundering. But please consider an alternative to throwing the baby out with the bath water.Sincerely,Amit Wilson*A Tale of Greek Enterprise and Olive Oil, Smothered in Red Tape(Amit Wilson runs StoreMore.in, a personal storage service, and Reliable Records, a records management service for corporations)
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Some of you would have watched the telecast of the movie, Players, on Zee Cinema, last week. Those viewers, who grew up when television meant Doordarshan, would have also instantly related the frozen frame during the movie telecast to the "sorry for the interruption" message, when DD ruled the airwaves.But this time the more-than-pregnant-pause on screen, especially when the film's hero Abhishek Bachchan's close up was on air, had a commercial ring to it — as it was the cue for beverage brand Mountain Dew to play its commercial voice-over, by pausing the junior Bachchan on screen.The innovative way of delivering an advertisement definitely caught the attention of many a consumer. But was it an attempt to circumvent the rulebook? After all, channels running ads as scrollers on the screen during the duration of the programme, have often run into rough weather with advertisers who lock horns with broadcasters since they have paid hefty amounts to telecast commercials during the actual commercial break.Did the ad run the risk of irritating the consumer by intruding into his entertainment space? "An ad should not detract from the content for which the consumer is there in the first place," says Ashish Bhasin, chairman India and CEO South East Asia at Aegis Media. Other industry experts such as Punitha Arumugam of Madison Media add that, while a brand needs to be disruptive to engage with consumers, at the same time one has to be careful to ensure that the brand message is relevant to the context in which it is shown. Did Mountain Dew play by these rules? Or did it throw the rule book away, staying true to its brand philosophy of 'who dares wins.'
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The decision of the Supreme Court of India in the 2G scam case is perfect illustration that it is a whole lot easier to rant and rave about corruption than to actually do anything about it. Recall that when fixation with revenue losses was at its peak, the Controller and Auditor General of India estimated that telecom minister, A. Raja, had lost the government Rs 1, 76,645 crore. The Central Bureau of Investigation paired this down to Rs 30,984.55 crore. So while everyone cheered when the Supreme Court intervened, we now stare at the spectre of a government with accumulated potential liabilities it may not be able to sustain.As the situation stands today, the government is liable to return all the license fees it has collected from these companies. We have Russian telecom company Sistema, which risks losing Rs 12,500 crore spent so far in acquiring the licenses and rolling out the service, seeking to protect its investment under the Indo Russian Bilateral Investment Treaty. C. Sivasankaran, who bought out his foreign partner, wants to be paid the Rs 1,700 crore that was put in by S Tel. Loop Telecom wants to be paid Rs 1,454 crore to surrender its licenses. Telenor is issuing masterly understatements about its investments of Rs 6,100 crore in equity and Rs 8,000 crore in corporate guarantees. Another dozen companies have spent varying hundreds or thousands of crore each in acquiring licenses and rolling out networks. Which loss is greater now: Raja's choices or the 2G judgment?The legal heart of the issue is simple. If your counterparty commits a crime and your contract with this party is terminated by a court, are you entitled to compensation? Forget about losses to the exchequer, the Government of India is down in a hole for more money than anyone has cared to count just yet. You could well ask the question: did the Supreme Court see what was coming? In truth, the Supreme Court was not terribly concerned with the fate of the companies who stood to lose their licenses. It set out to answer this question: could the government transfer natural resources without following a fair and transparent policy? In answering this question, it reasoned that spectrum is a national asset entrusted with the government for use in the public interest alone. In its allocation, all applicants must be treated equally. It observed that this has two aspects. First, equality demands that the people must be fairly compensated if a natural resource is converted to private use. Second, the government cannot adopt a procedure that is unjust, arbitrary, opaque or discriminatory between similarly placed private parties.That finding took the court into an examination of the government's policy on the point. It noted that TRAI itself believed that the current criterion for allocation of spectrum and its pricing was deficient. It determined that to allocate spectrum at 2001 prices in these circumstances was illegal. The court noted that while spectrum was "gifted" to certain companies, these same companies then off loaded stakes to third party foreign companies at fantastic mark-ups thus reaping super profits.Whether spectrum can be allocated on a first-come-first-served basis was the third question considered by the court. The court held that the element of chance inherent in such policy catapulted anyone with special access to government to the head of the queue. The court also suggested that the government has engaged in some suspect internal manoeuvres in order to achieve a pre-mediated result. On the face of these facts, the court was then left with no choice but to quash the award of spectrum. Bear in mind that the court did not decide that spectrum allottees had purchased their licenses by a back door. It did not determine anyone's culpability. How then could companies be penalised for crimes they did not commit?In point of fact, these companies did raise these issues. They argued that the policy was public knowledge for months and there was no question of anyone jumping the queue. They argued that many of them had applied in 2004 and 2006, and had nothing to do with Raja's shenanigans. They argued that if the 2001 first-come-first-served policy was unconstitutional, then every license granted since 2001 should be cancelled. They argued that licensees had managed to get in vast sums of money by way of foreign investment to build networks in remote areas which would benefit vast numbers of deprived people. They argued that they had invested thousands of crore in infrastructures and cancelling the licenses was not in the public interest. The court either completely ignored these arguments or perfunctorily dismissed them out of hand. The issue was decided on the basis of policy and the question whether these companies should take a bullet in the gut was not addressed. Unfortunately, this is indeed how the law works. We have been there before.Recall that in May 2011 (see Pandora's Real Estate Box), the Supreme Court cancelled the acquisition of vast swatches of land in Greater Noida on which residential and commercial developments were already well underway. The government had colourably invoked its power to pre-emptorily acquire land that was not required for the purpose for which it was acquired. Allegations of vast payoff by builders to the government of the day were in common circulation. Even so, the fact of the matter was that these property developments had been presold to end customers. If the land acquisitions were cancelled, the property buyers would get it in the neck. Given how the law is structured, the Supreme Court cancelled the allotments without factoring in the property buyers. Did this mean that property buyers got their money back with interest? Did this mean that the original owners reclaimed the land, tore down the partially built structures, re-established their farms and went back to their utopian rural paradise? Of course not! The farmers took more money and settled the matter, the builders passed on the added cost to the end purchaser and all the players in the game save the buyers lived happily ever after. Something similar is inevitable in the 2G case. The mechanism by which this will happen will become clear in the days to come.What is clear already can be shared. As matters stand, the government faces huge potential liabilities for the sins of its minister. Suing the government is not what many foreign investors come to India to do but their difficulties have to be addressed. In the long run, with some policy tweaks, the government may be none the worse for its predicament. If you go by the loss-to-exchequer numbers, the government is in for a bonanza. Circumspect experts argue that with banks now unwilling to take further exposure, spectrum bids are likely to be modest. Other experts suggest that the government could pick up Rs 65,000 to 75,000 crore in a fresh auction. It seems to me that the government's first task is to make sure that Raja's licensees get spectrum as soon as possible because the government must avoid potential liabilities flowing from the 2G judgment. It has already made this move by telling the Supreme Court that it is simply unable to auction the spectrum any time soon. In effect, it is now trying to claw back the termination of the licenses. If and when it does auction the spectrum afresh, at whatever cost, you can be sure that the additional cost will be passed through to the customer. Given these realities, you could ask yourself what the Supreme Court was doing getting Shahid Balwa's Rs 200 crore back from Raja and hitting the people of India with a bill of Rs 75,000 crore. Thus, the difficulty with questions of the type raised by the 2G case, become easier to see. Every policy, administrative or judicial option imposes a cost: somebody or the other pays the bill. If you give away spectrum cheap, companies tend to benefit but if competition drives down prices, the consumer is always the gainer, stimulating the economy as I have observed (see Scam Mela). On the other hand, if you sell spectrum expensive, you pass this bill back to the mobile phone owner. In this day and age, that could be the Lamborghini driving real estate super brat as easily as it could be your dhobi. The government no doubt would be a whole lot richer but that still leaves open the question where it would spend the money. Will it spend it on building highways and hydro projects? Will it instead give the money to legislators to spend on "development schemes" in their constituencies at their sole discretion? Or would it spend the money on some rural upliftment scheme the benefit of which we know will never reach the intended recipient? This is existential angst of a common Indian variety.To add to the misery, this existential angst applies across the board to all 'public' decisions. Seen thus from inside and above, most options confront the decision maker in shades of gray. So when next we speak of policy paralysis, political impotence, bureaucratic vacillation or judicial reluctance, we must remember that most of the time, it comes down to who gets the free lunch and who gets to wear the dunce cap. This is quite apart from the fact that by the time the Law of Unintended Consequences works itself out, no one will remember what it was that we had set out to do. The author is managing partner of the Gurgaon-based corporate law firm N South and author of the pioneering business book Winning Legal Wars He can be contacted at rcd@nsouthlaw.com
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If it is January, then it is time for the auto expo, one of the most awaited events every year. Auto Expo 2012 was kick-started with a curtain raiser ceremony on Tuesday (3 January 2012). This year, the theme is Green Technology and Clean Technology - Mobility For All — with special emphasis on safety and the need for environment-friendly fuels and vehicles, technological advancements and innovative designs in vehicles.The 11th Auto Expo 2012 organised by the Automotive Component Manufacturers Association (ACMA), the Confederation of Indian Industry (CII) and the Society of Indian Automobile Manufacturers (SIAM) is being held between January 7 and 11, 2012 at Pragati Maidan.Over 1,500 participants from 24 countries including Canada, China, France, Germany, Italy, Russia, Japan, Korea, the UAE, the UK, the US and many other countries will be present at the 11th Auto Expo.Over 600 automotive component players will be showcasing their latest technologies. Innovative products including fully built off-the-road vehicles too will be unveiled by a few.The automotive industry will be looking forward to launching 50 new vehicles including cars, two-wheelers and commercial vehicles to a range of electric and hybrid vehicles, besides modified vehicles.Global companies such as Polaris (USA), Triumph (UK), BMW (with Mini and Motorad range), Vespa, PSA Peugeot, Nissan, Ssangyong (Mahindra Group), Paccar (from the Netherlands) and almost all the Indian car makers are launching new variants.The debut of South Korea's Ssangyong, owned by Mahindra & Mahindra, and product launches from Toyota Motor Corp and Renault SA will underline the country's importance to the world's biggest carmakers.BMW AG, market leader in the luxury segment, will unveil its Mini brands in India for the first time.Carmakers are also set to muscle in on India's popular SUV segment, which fared better than smaller cars last year, with an offering from Maruti, a widely-anticipated four-wheel debut from motorcycle experts Bajaj Auto, and a multi-utility model launch from South Korea's Hyundai Motor Co.Luxury carmakers, riding 40 per cent annual sales growth in India, will use the expo to increase their product lines, with Daimler AG's Mercedes Benz and Volkswagen AG's Audi rolling out new SUV and sports car models.Rajive Kaul, Chairman, steering committee, Auto Expo 2012 said: "This edition of auto expo would strive to boost the auto sector in spite of negative growth in the passenger vehicle and three wheeler segments in the last quarter of 2011. The auto expo thus begins with a positive note for the industry.The organiser has launched a few new facilities for its visitors. The gate number 10 of Pragati Maidan will be open especially for metro commuters and tickets will be available at metro ticket counters as well. Gate number five will be open for those who buy tickets from bookmyshow.
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Respect got a new meaning, as the who's who of Corporate India gathered to attend Businessworld's Most Respected Company awards on 8 February at the Oberoi in New Delhi. The awards were given away by finance minister Pranab Mukherjee in a ceremony witnessed by some of the most prominent names in Indian business.Spread across many categories, the awards covered sectors ranging from information technology to infrastructure to banking to telecom. The awardees were short-listed from a competitive pool of peers. The awards were based on a survey among 700 individuals (mostly senior management) across different industries, who rated peers on parameters such as innovativeness, depth and quality of top management, financial performance and returns, ethics and transparency, people practices, global competitiveness, etc. The differentiating factor of the awards was the idea of focusing on how a company is perceived amongst its peers, apart from a measure of its financial success and strength.Highlighting the relevance of such awards, Mukherjee said, "There may be different ways of measuring respect, but the central point is that we have to recognise the importance of issues like ethics, governance, transparency, accountability and the role of plenty of other indicators like sales, profits, etc." Addressing the august audience, ABP group managing director and CEO D.D. Purkayastha introduced the awards. "Businessworld's MRC is the only award in the country that measures respect that a company and its leaders have earned. And respect is something that is built over the long term. While respect is earned over years, it can also be lost in a short space of time because of a single mis-step."Praising the dynamism and extraordinary personality of the finance minister was Rajkumar Dhoot, member of Parliament, who said: "Our country has gone through a lot of ups and downs in the recent past… it is because of honourable Pranab Mukherjee that we have not only passed the phase, but have done extremely well in the global context."Rashesh Shah, chairman and CEO of Edelweiss — the title sponsor for the evening, said: "In our industry, we understand how respect and trust is the fundamental driver for any financial company much greater than its asset base or market-cap. At Edelweiss, we try to imbibe this aspect in our culture." In his address, Businessworld editor Prosenjit Datta said: "Respect is not something that can be earned by super normal revenues or profits alone. To gain respect, a company not only has to perform well in financial term, but also develop a way of working that makes its peers look upon it with respect."With this, the awards were announced and given away by the finance minister. The first category of awards for aviation went to Kingfisher Airlines, followed by automobiles (four-wheelers), which was bagged by Tata Motors. In the two-wheeler category, Bajaj Auto took the lead, while auto components award went to MRF. State Bank of India received the award for the banking sector, while the cement category went to UltraTech Cement, and consumer durables was won by Nokia. In the hospitality segment, ITC's hotel division emerged victorious, and in engineering, Siemens out-did competition. Britannia won in the FMCG category, while L&T bagged the infrastructure award. Infosys retained its top slot as the most preferred IT, ITES and BPO company. The most respected company title in the metals segment was awarded to Tata Steel, while that of oil and gas was given to ONGC. GSK won in the pharmaceuticals category, and in the power category NTPC received the award. In the real-estate segment, the award went to industry giant DLF, while the retail sector saw Shoppers Stop take away the award. Vodafone Essar emerged as the winner in the telecom sector.These were followed by announcement of the awards in the overall category, which went to Infosys. Present on the occasion was K. Dinesh, co-founder and member of the board of Infosys. "This is a great honour for us. For us, true success is gaining respect. We want to be the most respected company rather than the biggest company, with this award," he said.First runner up in the overall category, L&T's K. Venkataramanan, member of the board & president (operations), said: "L&T has always stood for respect, integrity and values, and, therefore, Businessworld honouring that alongside the performance is a great feeling." Tata Consultancy Services was honoured as the second runner up in the overall category. Representing the company was Ajoyendra Mukherjee, VP Human Resources, who said: "This (award) goes out to all the 186,000 employees at TCS."The award ceremony was followed by the unveiling of Businessworld's Most Respected Company special issue by Pranab Mukherjee, ABP Group's Editor-in-Chief Aveek Sarkar and Prosenjit Datta.In his closing remarks, Pavan Varshnei, president (English magazines) of ABP Group said: "I hope this initiative will encourage more organisations to strive for excellence in their business and achieve greater heights globally."The presenting sponsor for the event was Edelweiss and the principal associate was Videocon Group. Bloomberg UTV was the television partner for the event.(This story was published in Businessworld Issue Dated 14-02-2011)
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The Indian equity market ended the year on a subdued note with the Bombay Stock Exchange (BSE) 30-share Sensitive Index (sensex) losing nearly 2 per cent during the week to end at 15,454.92. The market lost ground on low volumes following low interest among players that stayed on sidelines due to lack of positive triggers in the domestic as well as global markets. The average daily turnover during the week in the BSE cash market dipped by nearly 28 per cent to Rs 1,376 crore, compared to last week's average daily turnover of Rs 1,904 crore. For the calendar year, the Sensex lost nearly 25 per cent.The low turnout is not surprising as most of the investors, especially foreign institutional investors (FIIs), are usually on vacation during this period of the year and return only by the first or second week of January. This is the time when they usually make fresh country-wise allocations.Meanwhile, the Indian market can be expected to remain range-bound in the coming week. Though most of the bad news regarding the rising fiscal deficit of the government has already been discounted, news that government borrowing during FY2011-12 will exceed by 25 per cent is going to keep the market subdued. Next month, the government will borrow an additional Rs 27,000 crore from the market taking its total fiscal deficit for FY12 to Rs 5.1 lakh crore, compared to the budgetary estimate of Rs 4.17 lakh crore.Going ahead, all eyes will be on the upcoming state elections, particularly Uttar Pradesh, which goes to polls on 4 February 2012. Says Amar Ambani, head of research at India Infoline, "The outcome of state elections in Uttar Pradesh could have a significant bearing on the policy decisions of UPA II, including the Union Budget. It might also change some political and strategic equations at the Centre."One has to see whether the government gathers enough courage to implement important economic reforms. The market will keenly watch government finances, corporate results for the third quarter ended December 2011, the IIP numbers on 10 January 2012, inflation data, liquidity position in the financial system as well as rate cut expectations. This will also mean there will be volatility across markets –equity, bond and currency. Equity market may remain jittery following bond auctions in Italy and Spain starting in the first fortnight of January. These important events will underpin the markets' direction next month. Any positive will act as a trigger for the Indian market.The Week That WasAs expected, the week started on a positive note following above than expected new homes sales in the US. Last Friday, after the close of the Indian market, US reported its sales of new homes. For the month of November, the new home sales rose to a seven-month high of 3.15 lakh, up 1.6 per cent, showing the housing market was stabilizing. This encouraged the Sensex to move up, crossing the 16,000-mark on Tuesday. Though the market couldn't hold on to its high, profit- booking at higher levels pulled the Sensex lower. Reports that Indian and Mauritian tax officials have begun talks on revising the double taxation avoidance pact between the two countries also added to the market's woes. According to reports about 40 per cent of FII inflows and around 42 per cent of the foreign direct investment (FDI) in India are routed through Mauritius. Several companies take advantage of the double taxation avoidance pact between the two countries and escape paying taxes in both the countries. Concerns are if the concessions are removed, it could hamper FII flow which to large extent is the driver for the Indian equity market. The fall in the Sensex was also due to the selling in frontline stocks particularly index heavyweight Reliance Industries (RIL). During the week the stock RIL lost nearly 9 per cent to touch its new 52-week low of Rs 690. On Friday, the stock ended at 692.90. The stock fell on news that the gas output from the KG-D6 gas field has declined to a new low at 38.66 million cubic meters per day. The fall in RIL also pulled down the Sensex that ended the week at 15,454.92, down 284 points from its previous week's close of 15,738.7.Nothing much has changed in the last week. Markets don't like uncertainties and the existing domestic and global uncertainty has kept most investors on the sidelines. Though the negatives including poor third quarter results by Indian corporates as well as downgrades of European banks are discounted in the price, policy reforms by the government will be the trigger that can be expected to help the markets to move up. However, in a sutuation where pessimism and fear rule, there is a high probability that the market may get into a panic mood, further pulling it down. It could be the right time for investors to slowly start building their portfolio by sticking to blue-chip stocks.
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Equity has been a key component of Bhupinder Sethi's investment and he continues to invest through the systematic investment plan (SIP) in his own managed funds. Talking to Businessworld, the head of equities at Tata Mutual Fund feels the markets can always correct a little bit post a sharp run-up, but he would be a buyer on every correction though on a more stock specific basis. He feels the current rise is a good opportunity for investors to reduce holdings in companies with deteriorating economic fundamentals, poor business models and questionable governance practices.His short-term strategy in the current market condition would be to go down the cap-curve into buying some better managed mid-caps across sectors as mid-caps tend to outperform large caps in an uptrending market. At the core of the portfolio, he remains biased towards sectors with secular growth prospects and superior return ratios like consumer staples and discretionary, software, pharmaceuticals, private sector banks and upstream oil and gas. However, he feels for the index to cross the 18,000 levels, the triggers would be fiscal consolidation in the upcoming Budget in March 2012, the government shedding policy paralysis and moving ahead with infrastructure and investment thrust.Excerpts from the conversation:Do you think the recent rally in the equity market will continue and why? What is your take on the Indian equity market and why? Will you be a buyer in this market and why?Over the last four years, while our nominal GDP has grown by around 80 per cent, BSE Sensex at 18,000 is down by 14-15 per cent from the peak level of 21,000 it touched in January 2008, which gives a sense of the value that has crept into stock prices as businesses have scaled up over this period of time on back of overall economic growth. The BSE Sensex is up by around 20 per cent in the first one and half month in the current calendar year and at 18,000 it quotes at 14 times 1 year forward earnings. Post the run-up. The extent of undervaluation has definitely reduced but the market is still quoting below the long-term averages by around 10-12 per cent. The markets can always correct a little bit post a sharp run up and while I would be a buyer on every correction but now on an even more stock specific basis.What is your view on the overall financial market? Do you think crisis in Europe is behind us and why?Since the global financial markets have increasingly become inter-linked, the overall financial market's health would continue to be dictated by what happens in Europe. ECB's lending to European Banks three-year money at low cost has helped bring down the yields on Euro-zone sovereign bonds. Now there is an expectation of a second round of lending by the ECB. In the immediate near term, the biggest issue is the Greece debt rollover in March 2012. Our view is that given the improving situation thanks to ECB's flooding of the market with money, every attempt would be made to avoid a disorderly default by Greece even though there would be hard bargaining and tough negotiations till the very end. So while the ECB's recent actions have averted the European crisis in the near term, the longer term structural problems remain in Europe and would need to be addressed.What is your view on the overall corporate performance of India Inc? Have the December-ended quarterly results that have been declared so far been in line with your expectations? Which are the sectors that you are bullish and bearish about?The sales growth for corporate India continues to be very robust at over 20 per cent even in the last quarter of calendar 2011, amidst a slowing economy. The slowdown in the economy has become more broad-based with it spreading from investment related sectors to some of the consumer discretionary sectors as well.The earnings for the quarter ended December 2011, have been largely in line with the beaten down expectations with a marginal positive surprise. The operating margins showed signs of stabilization on a sequential basis, though they were down on a year-on-year basis. Profit growth continued to lag the sales growth by a big margin because of continuing high interest costs. Consumer staples, information technology, private sector banks and some industrials surprised positively. The disappointments were mainly from sectors like utilities and telecom. The key takeaway of the earnings season is that the earnings downgrade cycle seems to be bottoming out, whereas in previous three quarters, the downgrades were prominent.At the core of the portfolio our bias remains towards sectors with secular growth prospects and superior return ratios like consumer staples/discretionary, software and pharmaceuticals as also private sector banks and upstream oil and gas. On a complete cycle basis, these sectors can be expected to deliver good returns. Incrementally though, given the improving macro economic conditions and possibility of rate easing cycle, we are also looking at stock specific opportunities in interest rate sensitive sectors which have been underperformers over the last year. The actual recovery in business may take time for some of these sectors, but the fact that the stock market is a discounting mechanism; the stock prices are moving up ahead of the event.From the valuation perspective, some of the consumer stocks are richly valued. Given the high quality of capital efficiency, prospects of robust, structural growth over long periods of time, the sector lends itself to a bullish view from a medium to long term perspective. However, in the near term, the sector may underperform given the high valuation divergence with the rest of the market. The sector would still be part of our core portfolio, though tactically we have reduced our weightage.Why is the market neglecting the fact we are in a slowdown?The tops in the market are made very often amidst bullish news and the markets bottom out typically when the news flow suggests all gloom and doom. Also, at times, the equity markets can move up if the valuations become very compelling, even though the economy may be undergoing a near term slowdown.The valuations had definitely become very attractive and significantly below long term averages in December 2011 and a "risk on" trade globally was all that was required to spur the market. What are your concerns for the equity market?The biggest concern is that the government fails to live up to the now raised expectations on either of fiscal consolidation or push for investments. Also, while inflation is coming down, we believe that some of the structural issues around our economy having a tendency to have high inflation haven't been addressed. So, even if the Reserve Bank of India (RBI) does start the rate cutting cycle, the market may be disappointed with the quantum of rate cuts.While currently the Euro-zone situation seems to be in control, any deterioration or any disorderly sovereign default by a Euro-zone member country or a further flare up of oil prices because of escalation of geopolitical tension would be a major dampener for the equity market.In current market condition, where will you advice investors to invest? Currently where are you investing your own money? And why?To exploit the power of compounding, my advice to investors is that they make equities a core part of their overall asset allocation plan, since equities have delivered excellent long-term returns. At the current juncture too, investors should continue to invest systematically in equities in line with their long term asset allocation plan. Systematic investment in good quality companies and investing though mutual fund schemes with good long term performance track record is what should help create long term wealth.Another advice to investors would be that generally an uptrend is always a good time to reduce holdings in companies with deteriorating economic fundamentals, poor business models and questionable governance practices. That's what the volatility in the market should be used for, to buy strong businesses on dips during market turmoil, and to treat up-trending markets as cleansing opportunities.I personally am sticking to my asset allocation plan, in which equities are a key component. I continue to invest in the equity funds I manage through systematic investment plans (SIPs).I like equities as an investment avenue because equity shares of well managed companies, with good growth prospects and who do not dilute equity often and therefore are not easily replicable, should over the long term hold and advance in value vis-à-vis currencies which are easily replicated in the printing machines of the central banks.As a fund manager what call will you take on the overall portfolio of the mutual fund? What will be your short-term strategy in the current market condition?Short-term strategy in the current market condition would be to go down the cap-curve, into buying some better managed mid cap companies across sectors, as midcaps tend to outperform large caps in an up-trending market. In your view, what will be the next trigger for the Indian equity market? And why? And when do you see it coming such that we break the 18K levels?The triggers for the Indian equity market would be fiscal consolidation in the upcoming Budget in March 2012, government shedding policy paralysis and moving ahead with infrastructure and investment thrust, resolution to some of the problems facing the power sector both on the fuel supply side and the distribution side and start of the rate cutting cycle by the RBI. Also, globally, the current "risk on" trade has been triggered by ECB's lending to European Banks three-year money at low cost. A second round of lending by the ECB would keep the animal spirits alive. Smooth passage of the Greece debt rollover in March 2012 should also be favorable for the equity market.
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