Random Walk

Why should the Vodafone Tax Ruling by Supreme Court be cheered

2012-01-30T22:08:00.000-08:00

The Vodafone verdict has been welcomed by the industry. But there is a section of people who have raised flags and see this in a negative light. For me the argument is simple. Consider the following:

The government allows deduction of investments of up to Rs 1 lac (One Hundred Thousand) to an individual from one’s taxable income, under section 80C. Thereby providing you a perfectly legal way to avoid paying tax on Rs 1 lac.
This is fantastic. Government is encouraging you to invest therefore you make investments eligible under this scheme and spent this 30 thousand you saved on taxes (lower TDS) during the year.
However, next fiscal when you filed your return, the tax man comes knocking on your door and says that the scheme is retrospectively withdrawn, as this was avoidance of tax on 1 lac of income, and avoidance of taxes is to be discouraged.
How would you feel about this? Is the government justified in doing this?

This is the problem with retrospective changes. Vodafone (and Hutch) made investments though a perfectly legal and allowed way to invest in telecom sector in India. The tax department wants to retrospectively change this and tax these investments. Well frankly they were not even changing the written law.

The Supreme Court has called it correctly. If India wants to be taken seriously, we atleast have to honor our written laws. We have to make the laws clear and transparent and cannot leave them open to interpretation. Invite people in and then trap them. No one likes uncertainty. The judgement is a welcome relief and upholds the letter of the law and is rightly being cheered by the industry.

My Equity Portfolio

2012-01-06T03:06:00.000-08:00

IIM Placements are like cattle fairs?

2011-12-20T12:36:00.000-08:00

While the country debates the moral hazard of politicians in making a strong Lokpal, I would like to draw your attention to another instance where a similar moral hazard is always ignored. If you are a young graduate, or any one else looking for a job your would know what I am talking about. You guessed it right, this is HR professionals telling them to not focus too much on the money part, or to sticking around for a long term and career vs job BS. Another personal anecdote is a recent rant by a the HR head of a certain reputed group, frustrated because he found not takers for job offers from his group companies at India's premier B School, comparing placements to cattle fairs.

One would do well to try to identify agency costs to what one reads or hears in the media these days.

Jubilant Foodworks - Dominos India

2011-12-08T23:10:00.001-08:00

Feel cheated by Dominos India. Had recently ordered Pizza Mania (which a a set of 4 pizzas). To our surprise there was not cheese on the pizzas but was loaded with mayonnaise. When we called up the store, the store person at first refused to agree but when we pressed him he agreed that the cheese had been replaced with Mayonnaise.

Their reason for using it is that it is cheaper than cheese. However it is taking unsuspecting customers for a ride. Mayonnaise is 50% Oil and 50% Egg, so they are not only feeding you more fat but even god won't help you if you are a vegetarian. Nowhere on their menu or website is this fact disclosed. Had they done this is the US, they would be facing huge class actions and criminal suite. Now I am okay with mayonnaise, however if this is their standard of disclosure than I am not sure what kind of chemicals they are putting in their products.

While the stock of Jubilant Foodworks has been shooting for the sky (Its market cap which is over $1 billion, is interestingly 50% of the market cap of the parent company - remember Jubilant Foodworks is India franchisee of Dominos, as it gets a high PE multiple) I am not going to order any more pizzas from Dominos.

Is Cyrus the best choice for Chairmanship?

2011-11-27T06:03:00.001-08:00

We have all read glowing tributes about Cyrus Mistry, the new Chairman in waiting, of Tata Sons, India's most respected business conglomerate. He is not too old but is mature enough, has the right credentials, comes from a certain community and represents the largest shareholder. All very good and he may turn out to be a good Chairman, however I have seen no analysis of why he is the number one choice. As a small minority shareholder, I would like to know

Who all were considered for post of the Chairman? After all a committee was formed for the search
And why is young Cyrus, best choice out of all the others considered or not considered

Why is there so much secrecy on the process? After all Tata's are supposed to be transparent and open. Or maybe I am expecting too much?

Sachin misses out again on his 100th hundred

2011-11-27T05:52:00.001-08:00

Arrhh! he missed it again! Twice!!!

Everything was aligned

No pressure test with India already up 2:Zip in the 3 match series
Perfect conditions for batting
Huge run chase
Home conditions
Thousands of cheering fans

He came close, but could not get past the nervous nineties in the first innings. The cricket gods even gave him a second chance, after the pitch surprising started to spin on the 5th morning and WI collapsed in their second effort to give India a whiff of victory. All nicely set up to for Sachin to blast a ton and take India to victory with his 100th International hundred.. But it was't to be. Sachin missed, getting out early to a delivery that stopped on him. And India could not close out the win despite useful contributions from a number of other players.

Australia, here we come...

Sachin Scores 100th ton at Wankhede in Mumbai?

2011-11-24T01:49:00.001-08:00

As if truck loads of talent and some luck wasn't enough, Sachin, it seems has additional help for scoring his 100th century at his home ground in Mumbai. The powers that be have made sure that pitch curators craft a perfect pitch to make sure he gets to the landmark at his home ground.

When it comes to Sachin, every thing else is secondary.

Vikram Akula resigns from SKS Micro Finance

2011-11-23T22:47:00.001-08:00

Vikram Akula, the star face of Micro finance movement in India. has quit the board of SKS Micro Finance, a company that he founded. Akula's company changed thousands of lives for the better, freeing them from the monstrous local money lenders by providing them seed money to start or support their micro enterprises. However, with one strike of regressive policy by the state government of AP, where SKS had majority of its 'tiny loans' business, brought down the company to its knees.

When SKS was listed last year, there were many detractors who said that an MFI should not be run with a profit motive. Would be interesting to find out, what have these guys done to provide financial inclusion to the underprivileged. To be sure, SKS was making loads of money, but it was pumping it back into the system to provide more loans to the poor. Any money that shareholders would have made would not have been from the pockets of the poor (No decent sized listed company in India has high dividend yields).

If government, wanted to decrease the interest rate charged further, then the right way would have been to encourage creation of hundreds' of more SKS'. Increased competition would have brought down interest rates by forcing these companies to innovate and reduce their costs or perish.

Perhaps the trigger was malpractices by some unscrupulous players and unfair collection processes deployed by some lenders.The solutions was to identify culprits and put them behind bars for violating the law of the land. But with its poor regulation the government has thrown the baby out with the bath water.

Cricket loses out to Kabaddi?

2011-11-20T21:05:00.001-08:00

The recent cricket matches between India and England and now India -WI have drawn poor response from spectators. While some of this was expected due to the heavy cricket calendar and string of defeats in England immediately preceding, the nearly empty stands have been surprising. While, I pretend to care less about the results (vs earlier) I still am saddened to see India lose and am egging them on to win from the comfort of my living room. In contrast the IPL drew huge crowds. This raises important questions for the administrators and players alike

1. Are the glory days of test cricket over, despite continuous cries for the purest format from the players because at the end a sport would survive only if there are spectators?

2. Is ODI format destined to become irrelevant with Players wanting Test Cricket and Spectators wanting T20's?

For India, importantly, this may be a chance to try popularize other sports. People are already trying to innovate in hockey to revive the game. Similarly there is brewing interest in other traditional and non-traditional sports. Kabaddi, for example. It was interesting to witness huge in-stadium crowds for the kabaddi world cup organized in Punjab. While a part of the crowd may have been herded in by the gov't, it was massive.by any standards. Also, it helps, if team India is doing well. India emerged world champs in Kabaddi, on expected lines.

Perhaps, real acid test for cricket in India would be the series down under. India need to do well to stem decline of interest in the game

Everonn close to raising $100 Million from PE?

2011-11-17T20:50:00.001-08:00

As reported by BS, Everonn may be close to raising $100 million from private equity players including Carlyle and New York Life capital partners. If true then this would be among the largest PE investments in education sector. At current market price of Rs 298, it has a market cap of about $115 million dollars. However, I would be surprised if Everonn is able to pull it off due to the following reasons

1. Carlyle has burnt its fingers in the past in another Indian education company, which it self has fallen out of favor due to fears on corporate governance. With Everonn's recent problems, including arrest of the former CEO and also deferring of the open offer and poor Q2 results, PE players won't get any where near the company

2. The open offer was to be at Rs 528, almost double the current price. The sharp decline in price would prevent any preferential allotment due to SEBI restrictions on pricing (higher of average of last six months or last two weeks)

Also, NIIT, which is a venerable Indian education training company, is three times the size of Everonn and is available at less than $100 million after adjusting for its 25% stake in NIIT Technologies. And, Educomp, despite concerns on debt is also available at a lower PE of 6.5.

The deferring of the open offer is really worrisome and could see the stock really tanking to lows seen in 2009.

Everonn Q2 FY12 Results: Revenues slump 26%, PAT in negative territory

2011-11-15T01:40:00.001-08:00

Everonn announced its results for the the 2nd quarter (July-Sept 2011) for FY12. The effect of the recent turmoil was visible in the results. Revenues dipped 26% YoY to Rs 79.5 Cr from Rs 108 Cr last year. Decline in revenue and massive increase in depreciation and interest costs pushed Everonn into a loss with a PAT of negative 3.7 Cr versus 15.5 Cr of profit in the corresponding quarter of FY11.

After Educomp, Everonn is the second education company to disappoint the market this week with poor results. Everonn's share price fell over 5% in today's trade. Educomp's stock has already fallen 25% over the last 3 days.

Educomp Q2 FY12 Results: Profit slumps 78%

2011-11-11T01:29:00.001-08:00

Educomp today reported Q2 FY12 results and surprised negatively on the profits. The profit after tax came in at Rs 13 Cr which was 78% lower than corresponding quarter of last year (Q2 FY11 PAT was Rs 58 Cr). This despite the 16% increase in revenue.

Profit was impacted by 37 Cr of forex losses and an almost fifty percent jump in interest cost to Rs 31 Cr for the quarter What is of concern is Rs 1908 Cr of debt on the books of the company and the muted growth rate in the School Learning Solutions which consists of the flagship smart class business.

Further the jump in debtors, inventories and provisions is a matter of concern, as is the increase in Loans and Advances.

Post Script: Educomp reported 28% growth in smart class segment which is impressive, but overall numbers are a matter of concern and do not inspire confidence. Given the high debt, investors are likely to stay away from this counter till FCCB's are paid off and overall debt comes down. The de-leveraging would keep growth rates low in the short to medium term .

Aptech For Sale?

2011-09-26T04:11:00.000-07:00

The news of Aptech being up for sale has been doing the rounds for a few days now. Here is my (re) take on why the deal would be difficult. Bulk of Aptech's 600 Cr market cap can be attributed to its investment in China (22% stake in BJB career education). Buying Aptech would be tough for a strategic investor (unless BJB itself were to buy out Aptech to gain entry in India)

Any private equity investor would face two scenarios
a) No clarity on IPO of BJB career education: Private equity guys hate uncertainty and and since Aptech has a minority stake in BJB Aptech would have a limited say in getting it to IPO. Also, a PE investor in Aptech would not be able to perform due diligence on BJB which forms the major part of the valuation making the deal virtually impossible

b) There is certainty on IPO of BJB Career Education: In such a case, Rakesh Jhunjhunwala is better off waiting for the IPO to happen rather than selling out pre IPO.

In my view, best case scenario for Aptech, if possible, would be to sell off its stake in BJB pre IPO to a private equity player (would happen at a discount to IPO price). Pay out the proceeds as dividend and then sell the company. Selling off stake in Aptech before the above happens would be very difficult unless done at a discount to current market price.

Google Doodle Wants You To Try Google Plus

2011-09-20T23:07:00.000-07:00

Google is making a big push for Google Plus (Google+). Just sign in to your google account and go to google.com. Notice the big arrow, almost forcing you to try out Google+. This is communication/marketing at its unabashed, purest best.

Buffett Tax

2011-09-19T13:45:00.000-07:00

President Obama intends to impose a Buffett Tax on wealthy Americans after Warren Buffett said he found it absurd that his tax rate is lower than the tax rate of his secretary and that he is willing to pay more. Obama's new proposals seek to impose minimum tax rates and remove loopholes in tax code by lowering deductions available to people with over 1 million in annual income.

The president hopes to increase effective tax rate for wealthy Americans. Even though those earning more than 1 million dollars annually fall in the 35% tax bracket, income from investments is taxed at 15%. Given that major part of earnings of the wealthy is from investments the current effective tax rate is lower for them.

However, there is also a line of thinking that the effective tax rate, calculated as above is not correct as the companies (where the wealthy have investments) are themselves taxed at much higher rate (marginal rate is 40%) and the 15% taxes on dividend income is over and above the corporate tax already paid on income earned. In effect, the actual effective tax on income from investments is as high as 40% + 15%*(1-40%) = 49% and not 15% as calculated by Buffett (unless his companies are exempt from paying taxes)

Why is the world facing an economic crisis?

2011-09-17T14:23:00.000-07:00

Just trying to make sense of the current economic turmoil that the world faces today.

1. The developed world has a problem of low growth. What makes things worse is that many of the developed economies are over-leveraged.

2. Because of the de-leveraging there is going to be lower cash for reinvestment delaying the onset of growth.

3. Given the fact that many countries (in the developed world) are trying to de-leverage at the same time compounds the problem. The world is counting on China and India to pick up the slack in demand but that may not be enough.

4. While China is large much of its economy is dependent on exports to the developed world and exporting to China is not the simplest thing to do. And India is struggling with high and sticky inflation and policy makes are having a tough time trying to reduce inflation as well as maintain growth.

5. While the world may have the capability to emerge from this crisis without a string of defaults, given that the alternative is on the table makes it even more difficult to do so. This is like a bank which may have capability to avoid bankruptcy but is likely to fail because even a perceived risk may cause a run on the bank.

6. There is risk of sovereign default by a number of countries in Europe with many even predicting a default by United States. The fact that many large economies are in a similar position a default by one could trigger a contagion by triggering pulling out of money by investors or raising borrowing costs even more. While United States may not technically default as it can print its own dollars, monetization of debt would lead to severe devaluation of currency and cause havoc

7. And so the cycle continues.

Governments worldwide are trying to breakout of this vicious cycle, through injections of Quantitative Easing but last couple of rounds have not helped and because of the already high debt there is only so much these countries can do.

The Curious Case Of Manipal University!

2011-09-12T23:46:00.000-07:00

Manipal University has inducted Mohandas Pai to help turn itself into a global business of scale. Only time will tell whether Mr Pai (former CFO of once revered Infosys) would be able to do that at Manipal only time will tell. However there are more than a few things that I am amused as well as curious about.

First the company (for profit) that is being talked about is Manipal Universal Learning (MUL) and not Manipal University (MU)(not for profit trust) so its amusing to find the two names being used inter changeably in common and business media. Another curious thing and partly amusing is that the valuation of MUL (in every media report) is still one billion dollars. I have been hearing about this for the past 4 years and it is still the same. During the period, Educomp rose from $ 0.5 billion in terms of market cap to over $2 billion in valuation and has come crashing down to less than $0.5 billion despite growing the business to over 5 times . Wonder what MUL has done during the period. But I guess being unlisted has some advantages in preserving valuation

Was reading a recent article on moneycontrol (http://www.moneycontrol.com/news/features/manipal-universitys-new-courseaction_585036-1.html) on Manipal's new course of action. What amuses me is that the very same things (capitation fee, NRI quotas, profit in education) that are derided elsewhere are very conveniently made to sound like panacea for the education sector. May be they are, I am not passing any value judgement however I am amused at the contrast of views expressed with such ease.

To be sure, for-profit companies in India still cannot legally (atlease not directly) run formal education institutes. Even MUL mostly owns universities outside of India (50% of the business on last count) . Of the remaining majority comes from running learning centers for Manipal Sikkim University (legal on paper but not sure if it is in the spirit of the law).

Also given the deficit of corporate governance in India's education sector wonder if MUL would gain more from Mohandas's clean image thanks to Infosys or Mohandas's image would be affected. I am curious if he would gain anything from speaking to a certain JJ Irani about his recent experiences at at the helm of a listed education company, that was increasingly being touted to be the next big thing.

JJ Irani Resigns as Chairman of Everonn

2011-09-01T21:23:00.000-07:00

JJ Irani, who was roped in by the company to improve its image in terms of corporate governance, has resigned from the Board following allegations of graft against the MD.

Its a huge blow to the company. The stock is stuck today at the 20% lower circuit with no buyers.

Everonn MD arrested by CBI on graft charges?

2011-08-30T08:54:00.000-07:00

NDTV and WSJ reported that MD of Everonn, P Kishore has been arrested by CBI in an alleged case of bribery and tax evasion. This brings into sharp focus the corporate governance practices(or lack of it) at Indian companies at a time when corruption is a hot topic around the country and Investors are likely to jump ship at slightest hint of any malpractice.

Everonn has been consistently performing well in the recent past in terms of its financial performance and had improved its image with induction of J J Irani as non-executive chairman of the Board. If true, these reports are a huge blow to that effort by the company.

Google Motorola Deal

2011-08-17T00:32:00.000-07:00

Google has agreed to acquire Motorola Mobility Holdings Inc (MMI) for over 12 billion dollars. This comes on the heels of Google losing its bid to acquire Nortel's 6000 patents which were sold to a consortium of its competitors for $4.5 billion. Deal amount of 12 billion for Motorola's potentially 25,000 patents seems to be a great deal for Google. The operating company, with close to run rate of over 12 billion (with consensus 13.5 at billion dollars for the year 2011) in annual revenues, is virtually free.

This is a great deal for MMI's share holders as they got more than 60% premium to the the closing price prior to deal announcement.

What I suspect however, is that Google will spin this out in a couple of years, post it has had a chance to seal rights to these patents and bought these off MMI. Google is not a hardware company and should remain that.

So why did US Treasury yields drop post the ratings downgrade?

2011-08-10T11:19:00.000-07:00

So if US treasuries are not risk free, then why are the yields falling and there continues to be a huge demand for US government debt?

The answer is that it is not about absolute but about relative levels of risk. The perception (or reality) is that if the US government is risky, then lending to any other government is perhaps riskier. And the difference (in perceived risk) just became even more pronounced.

What is probably going to happen is that US domestic funds would continue to buy treasuries (as they would have a tough time trusting any other country) even though investors from outside of US (and their respective central banks) would start to pull out of reduce incremental exposure to US debt.

US Downgrade and its Implications?

2011-08-07T02:07:00.000-07:00

S&P downgraded United States this week confirming what the world already knew that lending to the United States is not entirely risk free. One does not need to be an economics PHD from Harvard or have the seat of power in Wall Street, to know that one cannot keep taking debt forever to finance excess spending over one's earnings. While the United States may not default, at least technically because it can inflate away its debt by printing money, the resulting loss in value of the dollar would essentially mean a default to the lender.

The fact that Moody's and Fitch have not downgraded their credit rating has no meaning (weren't these the ones, including S&P, which were merrily rating stacks of sub prime junk mortgages as Triple A and when the bubble burst testifying that the rating was merely their opinion and investors were essentially foolish in believing them). Confidence has been shaken and that is enough to strike fear in the hearts of the investors.

Now, in the last few years during each recession, the risk averse investors took shelter in US treasuries. Where will they park their money now? Gold is one easy choice. Emerging markets anyone?

Aptech Is Up For Sale?

2011-08-02T03:53:00.000-07:00

CNBC reported today that Aptech may be up for sale, and that its promoters may be eyeing partial or complete exit. Rakesh Jhunjunwala, often dubbed India's Buffet, holds over 32% in the company and stands to make a decent return over his investment of 6 years. At its current price of 135.80, the company has a market cap of Rs 6.62 billion (Rs 662 Crore). However, I believe that any deal would be tough and here is why:

Aptech, which acquired MAAC last year, to increase its leadership in the multimedia training business in India, derives bulk of its valuation from its investment in China (BJB Career Education) where it holds about 22 percent stake. BJB had filed for a US listing but plans were deferred due to market conditions. It was also rumored that BJB's recent performance (or lack of it) and material difference in numbers on translation of accounts from statutory to US GAAP before filing may have been the real reasons the listing did not go through.

Which is what makes any deal very difficult. Even if a private equity or strategic investor were to believe that it can drive the India business of Aptech (which would be difficult, as it faces tough competition from market leader NIIT and a string of other new players with deep pockets, including Pearson (JV with Educomp) and Everonn), it would not have any control on the destiny of the China investment except hope to cash out, as and when the IPO happens. A portfolio investor can take such a bet but not a private equity or strategic investor which wants control.

Sticky Inflation In India - Quick Question

2011-08-01T23:33:00.000-07:00

This may be a novice economics observation but I am curious to know if the current monetary tightening in India is going to solve the problem of inflation. It is oft-repeated that prices have risen because of supply side issues. The logic of monetary tightening is that it would lower demand, lowering pressure on price. However, if it is supply side constraint, demand may slide down but supply would be further lowered. This would lead to sticky inflation even as growth (proxy for demand) expectation gradually decreases, as we are witnessing today.

There is probably no magic wand, but India need to work on the structurally improving supply by improving infrastructure and eliminating delays and inefficiencies in the system. With government muddled in one crisis (read scam) after another, reform process has come to a screeching halt.

Corruption in India - Quick Question

2011-07-28T11:52:00.000-07:00

This question may be quite irrelevant, however I am curious to know if the level of corruption has systematically gone up (versus say 20 years ago, and not just in terms of quantum of amounts involved ) or is it more visible these days because of greater media scrutiny? I am inclined to believe that it is the latter however the former appears equally likely.