Sunday, June 29, 2008

Governance issue at Ranbaxy?

In today's TOI, Gurcharan Das has this to say about the sale of the promoters' equity in Ranbaxy to Daiichi of Japan:
For some years now I have been on the board of Ranbaxy and have watched with admiration as the company transformed itself into India's first real multinational. I have seen it inspire a dozen other companies and helped create a world-class generic drugs industry that is feared by western giants for aggressively challenging their patents and admired for lowering the cost of medicines around the world. How, then, was I to respond to the announcement by Ranbaxy's CEO, Malvinder Singh, that he wanted to sell his family's stake for Rs 10,000 crore to a Japanese company, Daiichi Sankyo? The family was equally shocked. A CEO's ability to keep months of negotiations secret in a country afflicted by verbal diarrhoea speaks of the company's character.

Das' comments suggest that, as a board member, he had little inkling of the deal until it was announced in public. Are we to conclude, then, that the deal was not approved by the board? If yes, is this appropriate?

This is not a case of any investor selling off his stake. The dominant investor is also top management. The decision of the promoter to sell his stake thus implies a decision by top management to let another company acquire Ranbaxy. Can such a decision be taken without the concurrence of the board? It does look as though there is something here for Ranbaxy's shareholders as well as Sebi to ponder.

Thursday, June 26, 2008

Media hype is a threat to growth outlook

Seeing the coverage of the rise in inflation and the reactions to it, you might think the Indian economy is in the midst of a crisis or headed towards one. Relax. Take a few deep breaths, pinch yourself nicely and chant thrice: this economy is growing at 8%. Done? Now, read my latest ET column, Inflation threat is exaggerated. Let me elaborate on why I am fairly optimistic.

A top CEO told me a couple of days ago that most firms are "investing like there is no tomorrow". Existing projects will be not be delayed or cancelled. Any hesitation will relate to future projects and fresh fund raising. This means investment will continue to drive growth this year. That is one reason for optimism.

Another is corporate profitability- PAT growth of 40-50%! In most economies, this would be regarded as a fantasy. That gives enough scope for absorption of price increases. The consumer will not face much higher prices, so consumer demand, while being moderated, will not be undermined.

Thirdly, extremely low leverage, thanks to strong profit growth in the recent past. With such low leverage, interest rate increases can be shrugged off by corporates.

Fourthly, the runaway increases in salaries- these make it possible for the real spenders to keep spending. The distributive implications of inflation are another matter. Inflation will not affect growth but will demolish the UPA's chances especially if it relates to food inflation.

Most analysts take the view that cost-push inflation is a threat and the RBI needs to clamp down even if it means putting the brakes on growth. I disagree. The impact of supply shocks on the price level is not clear enough, although we can say with some assurance that large supply shocks tend to raise the inflation rate.

I go with the view that inflation is primarily a demand-side problem. This is true of our present situation as well. Aggregate demand is much too strong for comfort. If the Indian economy accelerates in the second half of the year as global problems recede, we may find growth in the region of 9% plus, which I would regard as the 'overheating zone'. So, in my view, it is the prospect of too rapid a growth rate for the sixth year running that provides the rationale for a rise in interest rates, not cost-push factors.

It is not interest rate increases that pose a threat to growth. The biggest threat to growth is posed by media hype on inflation, the global outlook, etc- the continuous blast from news channels may come to be taken seriously at some point by investors and consumers, which is when the problems will begin.

Sunday, June 22, 2008

Soaring cost of living- yuppies feel the pinch!

The Indian Express on Sunday had a story about this IT professional, Srijesh Nair, who's struggling to make both ends meet because of the home loan burden he is carrying.

Nair's annual income is Rs 14 lakh. His home loan monthly payment is Rs 17,000. The increase in interest rates in recent months meant an additional Rs 2000. Nair says that he found it difficult to maintain his standard of living in consequence. Nair disposed of stock options and other assets to shrink the home loan outstanding.

I read the story in some amazement. Nair's annual pay translates into a monthly income of around Rs 1 lakh (assuming that Rs 14 lakh includes company contribution to PF). Take away income tax of Rs 34,000. That would leave Nair with Rs 66,000. The home loan at the increased rate of interest would mean a deduction of Rs 19,000. So, Nair would have had Rs 47,000 to cover his monthly expenses. Evidently, this was just adequate, giving Nair's standards of living, so Nair has no savings to dip into.

I do not for a moment wish to question any of this- I accept that Nair's predicament is for real. The question that troubles me is: if this is the situation with somebody making over a lakh of rupees a month, what about millions of others, including salaried employees, who make a lot less? The Arjun Sengupta committee on the unorganised sector showed that the majority of workers were making barely Rs 20 a day or Rs 600 a month.

The question is particularly troubling at a time when the inflation rate is rising. For millions, even a small rise in prices, especially of food, is the difference between subsistence and starvation. When you read stories like Nair's, you begin to understand why a rising inflation rate spells doom for the government of the day.

Business media boom

This is boom time for the business media and business journalists. A business journalist recently filled me in on what is going on:

Mint, the HT publication, is said to have crossed the 2 lakh mark in circulation. Financial Chronicle of the Deccan Chronicle group is also said to be doing well.

The buzz now is about the entry of Financial Times into the Indian market. This should be cause for worry for its present partner, Business Standard, which has positioned itself in the quality segment. Another foreign entrant that can be expected to pose a threat to Indian journals is Forbes magazine of the US.

TV channels for business news are also proliferating. UTV has launched UTVi, its business channel. The Economic Times is said to be readying to launch a TV channel. The Sahara group has plans for a business paper in Hindi.

All this is great news for business journalists. Salaries have spiralled. Journalism in general and business journalism is no longer an underpaid profession- it has become highly lucrative.

Thursday, June 19, 2008

CMIE growth forecast is 9.5% !

As readers of this blog and my column, I remain upbeat about growth prospects in the current year (2008-09) despite the combination of financial market shocks and oil shocks. But the CMIE forecast for this year takes the cake- they see growth at 9.5%! This is driven by a huge investment boom.

I agree that investment will be a big driver but my own assessment was that growth would be moderated by interest rate rises and would settle at 8-8.5%. If the CMIE's forecast is borne out, Indian growth would be an astonishing achievement. It would demolish once and for all the thesis that the recent growth boom was a cylical phenomenon, driven by foreign inflows, cheap credit and global demand. It would confirm the view that many of us hold that growth is structural in character.

Secondly, if underlying growth is as strong as CMIE believes, that gives the RBI so much more elbow room to tackle inflation. The inference that would follow is that there are strong demand pressures in the economy and monetary policy needs further tightening.

Thursday, June 12, 2008

Bank consolidation not a priority in India

Some people get a terrible complex when they look at the size of Indian banks. Too small, they say, compared to even banks in China. We have to do something about this. Indian banks must consolidate.

I have long been sceptical about this proposition and have written about it at length. My scepticism was reinforced when I had a chance recently to compare the market caps of Indian banks with those of the world's top banks. The comparison is quite revealing.

India's top two, SBI and ICICI Bank, are not very far from the world's top banks in market cap. Both are valued at over $20 bn today. This is not bad compared with $110 bn of Citigroup or about $53 bn each of Barclays Bank and Deutsche Bank. Only HSBC with a market cap of $200 bn looks distant.

Two factors are responsible for Indian banks drawing closer to the world's top banks in market cap. The proximate factor is the sharp decline in share prices of international banks consequent to the sub-prime crisis. Indian banks too have seen sharp declines in prices. But the effect has been to narrow the absolute difference in market cap. Citigroup is down from over $250 bn to $110 bn. SBI is down from nearly $50 bn- which was one fifth of Citigroup's market a year or so ago- to $23 bn, which is close to a quarter of Citigroup's market cap today.

The longer term factor is the wide difference in earnings growth. Indian banks are growing earnings at 20-25%; the world's top banks consider themselves lucky if they touch 10%. This is bound to draw the top Indian banks closer to the world's majors.

Can Indian banks then hope to make international acquisitions? Unlikely, I am afraid. Financial muscle is not the only thing that counts, you need solid managerial capabilities. Most banks lack this. ICICI Bank may just bring it off but not public sector banks.

More on this in my ET column, Banks' asset size is not the issue.

Wednesday, June 11, 2008

Six new IITs- will 'merit' be a casualty?

Today TOI carries an article by Swagato Ganguly on the proposal to set up 6 new IITs. Ganguly finds fault with the idea of starting IITs without campuses. Later in the piece, he indicates they may not have the requisite faculty either given the huge shortage of faculty.

What is the government to do? Should it wait until full-fledged campuses are set up and the country starts generating enough faculty? IIMA started off in a small building and with a small complement of faculty. So have the newer IIMs such as IIM (Indore). Over time, these problems came to be addressed. The point is: you get started, you muddle through for a while and then things start happening. I am optimistic about the new IITs and the contribution they can make.

Let me add: you can have spanking infrastructure, you can pay faculty very well and yet you may not have a good institution. In many private business schools, neither of these is a problem but the institutions don't count for much in academic terms.

The concerns about faculty and infrastructure may be valid but from there Ganguly wanders off into reservations and their potentially malign impact on IITs. He seems to suggest that the new IITs are all about pandering to caste politics:

The human resources minister, in particular, has turned the IITs and IIMs
into a tool of his political ambitions. A 27 per cent OBC quota is being rammed
down their throats, yet the number of open, non-quota seats has to be preserved.
It was decreed, after doing the math, that the total number of IIT seats
have to be expanded by 54 per cent, with next year's Lok Sabha elections setting
the general deadline. Therefore, the phenomenon of building- and facility-less
IITs, in one case even a homeless IIT which doesn't know where it will be
eventually plonked down.

Sorry, I don't get the connection. You can have OBC quotas by expanding seats at existing IITs by 54%- the government was under no obligation to set up new IITs. Having new IITs expands the availability of seats for the general category as well, so I can't see what the complaint is.

Ganguly warns: "If IITs are made to jettison merit they, too, will be forced to their knees."
As an ex-IITian, he should know that IITs have long had SC/ST reservation. Over 50 years of such reservation, the IITs have built up a formidable brand. I rest my case.

Tuesday, June 10, 2008

Oil prices in India

Two notions about oil prices in India need to be debunked.

One, the notion that the consumer is being subsidised. True, the consumer is being charged a price less than what the price would be tax is added to oil companies' selling price. But this is only because the duties are stiff. The consumer today does not bear all of the duty but he is still paying a price above the oil companies' selling price. This means he is being taxed, not subsidised.

Two, the notion that oil in India is still very cheap. The Economist compares petrol prices at the retail level in several countries. India ranks seven in a list of 15 countries- China, the US, Malaysia, Indonesia all have lower prices than we do.

Monday, June 09, 2008

Secession of the Indian elite

Gated housing enclaves, private guards, exclusive clubs, private aircraft.... the Indian elite has known how to insulate itself from the masses. But when industrial barons decide to hope from their helipads to private airports they propose to build for themselves, they have taken a truly gigantic leap.

Ronald deSousa, director of the Indian Institute of Advanced Studies, Shimla, has interesting thoughts on the subject in an article in ET:

Three basic arguments have been forwarded for private airports. The first concerns simple pragmatics. It will reduce congestion at a time when our airports are getting overcrowded and since private planes take longer to land, by moving them out we will save landing time of the other aircraft. The second relates to safety. The aviation authorities will ensure that these airports will maintain the highest safety standards and so, for the flying public, there is no cause for anxiety. The third is a version of ‘he who pays the piper calls the tune’. As long as they pay for it they can have it.

......When seen from a host of other perspectives the policy seems perverse. Take the secessionist argument which holds that the policy encourages the super-elite to live life in a bubble. From the helipad at the top of the corporate headquarters, to another helipad in the factory complex, to perhaps a private airport for a journey to Delhi, the captains of industry can journey across the country without having to meet, or rub shoulders with, or even see the ordinary Indian, let alone experience the minimal existential reflections on the lives of those who live in the slums they have to drive through on their way to the airport
Those people, in many cases, might be their own workers. They will thus never know the possible causes that have reduced to a life of indignity those who beg at red-light crossings, or the conditions of the villagers who have to walk for miles for water, or the anxieties of our rural youth as they search for a space between the rural and urban

There is more to private airports than elitism or snobbery. At a time of soaring oil prices, we would like to encourage public transport as a substitute for private cars. Private aircraft as a substitute for public ones seems the ultimate obscenity. Finally, as always, there is always the issue of land, as deSousa points out:

There is another important concern. Private airports will require a lot of land. The country has just witnessed political movements on the SEZ policy requiring the government to take corrective measures and in some cases reverse its decisions. Again the poor farmer will have to give up prime land with the Land Acquisition Act being used to get (let me get it right) private land for a public purpose for a private airport.

Thursday, June 05, 2008

Managing versus teaching management

"Those can, do; those who can't, teach." There is profound truth in the old crack. But we need not be ashamed of it. Teaching management and managing require very different skills and temperament- and rarely shall the twain meet.

Accepting this fact would save us all unncessary vexation. The question is frequently asked: if management professors know so much about management, why can't they do a good job of managing- starting with their own institutions? For instance, B-schools have renowned professors of strategy who go out and advise corporations on how to win. Why can't they apply more of their expertise indoors?

The story is told of a finance professor who was asked by a senior executive in a training programme, "If you are smart, why aren't you rich?" To which the prof retorted," If you are rich, how come you are dumb?"

I argued in my last ET column, Can management gurus manage?, that this is a pointless debate. Knowing something in the sense of being able to conceptualise something is very different from translating it into practice- the translation requires implementation skills, people skills, high energy levels, commercial acumen, etc all of which management gurus are liable to lack.

By the same token, we cannot expect managers to come into the classroom and excel. They may have done a great job of managing but putting things in a conceptual framework is a discipline in which professional teachers excel, not managers. My own experience with inviting senior executives to offer sessions has been less than exhilarating. Many can't do better than recount anecdotes. ("I was having lunch the other day with the prime minister of Singapore...). The ultra-bright types at the B-schools can recognise bullshitting when they hear it and quickly switch off.

How can managers contribute to improving the quality of teaching at B-schools? My column offers a couple of suggestions.