TRENDS (Page 1)

L E A D S T O R Y
Going Cheap

For one set of promoters in corporate India, the run up to Diwali must have proved harrowing. Instead of planning sales strategies to cash in on the festive spend-as they usually do around this time of the year-they were busy trying to save their companies from pin-stripe marauders. For, in the past 20 days, four high-profile real or mock takeover dramas played out, with Bombay Dyeing's Nusli Wadia and Ballarpur Industries' L.M. Thapar defending their companies against the uninvited attention of jute baron Arun Bajoria. Then, the Delhi-based realtor, A.H. Dalmia, mounted a raid against the Sheths-controlled GESCO Corporation-a real estate company. In between, stockbroker Harish Bhasin-again Delhi-based-mopped up shares in the cement and construction company, Jai Prakash Industries. And just when you thought that was it, a piqued P.R.S. Oberoi of East India Hotels made his panic known when rival ITC picked up shares in his company.

It's hard to say why all these events should have happened in the short span they did. But there's no doubt why they happened at all. The common thread is the same: complacent promoters sitting on poorly valued companies with high real assets, and apparently doing nothing to enhance shareholder value. Take a look at Bombay Dyeing, for instance. The textile company's average market value is around Rs 250 crore, while its assets and free reserves together tot up to Rs 1,450 crore. But the point is that investors did not think its management, headed by Wadia, was doing enough to unlock that asset value. Therefore, before the Bajoria story hit the headlines, Bombay Dyeing's stock was quoting at an abysmal Rs 45.

Similarly, the real estate company GESCO Corporation's market capital around the middle of this year was around Rs 40 crore. But it owned real estates worth Rs 90 crore. A person like Dalmia, therefore, knows that GESCO company at its current price is a great bargain. Which is why of all the four fights, this is proving to be the only real takeover battle. The Dalmias, who've already mopped up 13 per cent of GESCO Corporation's equity, have made an open offer to buy another 45 per cent with a war-chest of Rs 70 crore. The Sheths, who hold just about 12 per cent, are planning to make a counter-offer.

Should tears be shed if the real estate company, created over two years ago (by splitting Great Eastern Company into two) by the Sheth family, passes into the hands of an arbitrageur? Economic sense says no. In a mature economy, any owner-manager with just 12 per cent stake and little results to show by way of stock-value appreciation, would have been ejected in a matter of a few quarters. The institutional and public shareholders would have insisted that a more result-driven executive team be put in place. But in India, the state-owned financial institutions-who also happen to be some of the largest shareholders in most companies-have a policy of not disturbing incumbent managements as long as, typically, the company's net worth has not been eroded. But is that policy helping either the promoters or the (public) shareholders? Hell, no.

Take a look at some of the top 100 companies in the BT-500 list. At least 26 of them have a market value that is less than 11 per cent of their total assets. That's like somebody offering you the Rs 60-lakh Mercedes S-class for a bare Rs 7 lakh. (Now, can you blame the Dalmias of the world for turning predators?) And, mind you, we are not talking about some non-descript companies here. On our list (See Could These Be The Sitting Ducks?), the cheapest-priced company has a tag of just Rs 42 crore, although it owns assets worth Rs 2,400 crore. Guess what the company is: the Guptas-owned Lloyds Steel. Want to buy Arvind Mills? It's yours if you can rustle up Rs 95 crore. Or may be you fancy Indo Rama Synthetics? Its Rs 2,300 crore of assets will be yours for just Rs 125 crore.

Sure, part of the poor valuations could purely be due to the stockmarket's romance with the so-called new economy stocks. But, then, you also have old economy companies like Hindustan Lever, ITC, and Reliance Industries that are among the 10 most valuable companies in India. What corporate India's pre-winter chill means is that any management's single-biggest task must be to consistently add to shareholder wealth. For every Bombay Dyeing or GESCO that fails to do so, there will ten Bajorias or Dalmias waiting to make a kill.

-Dilip Maitra

O F F - B E A T
The Growing Divide

The first flush of second quarter results is out, and it doesn't bode well for the traditional manufacturing companies. Economy-sensitive sectors like auto and cement, where some of the bigger players have reported their numbers paint a dismal picture. Industry major Telco, for instance, posted a staggering Rs 146-crore loss compared to a net profit of Rs 34 crore in the same period last year.

Cement major Gujarat Ambuja took a hit too, showing a 50 per cent drop in net profit to Rs 25.06 crore. The silver lining was TISCO, which surprised analysts with its strong performance. Its topline grew 9.7 per cent despite a slowdown in user industries; its net profits, by 75.9 per cent. Says Vetri Subramanian, Chief Investment Advisor, Sharekhan.com: ''Based on the initial results, the outlook does not appear bright.''

In stark contrast, champagne was flowing in the ice companies. The 34 of them in BT's sample of 120, posted a staggering 84 per cent jump in net profits. Their toplines soared, too, by 69 per cent, racking up an aggregate of Rs 2,871 crore. The sector bellwethers, predictably, bettered expectations. Infosys reported a 134 per cent jump in pat to Rs 154 crore, and its revenues also more than doubled to Rs 446.1 crore.

Satyam Computer Systems' performance was a shade poorer, with the topline reporting a 74 per cent gain. But impressively enough, its pat more than doubled to Rs 67 crore.

The most impressive gains in the sector were scored by HCL Technologies, whose bottomline ballooned 164 per cent to Rs 96 crore. The company attributes its performance to two critical factors: a non-linear growth model and a strong focus on emerging technologies. Says Shiv Nadar, Chairman, HCL: ''This quarter's result is linked to our sustained effort in strengthening our internal systems and processes to increase the revenue earned per employee.''

The slowdown in the manufacturing sector has skewed the initial performance assessment. For instance, despite the spectacular growth in the infotech industry, the BT sample posted just a 4 per cent rise in net profits and an 18 per cent growth in sales. Says Subramanian of Sharekhan.com: ''The defensives (pharma and fast-moving consumer goods) have delivered on their promise of steady growth, though it's nothing spectacular.''

The FMCG behemoth, HLL, witnessed almost stagnant sales during the quarter ended September 30, 2000. In certain categories such as tea, personal wash, skincare and haircare, HLL saw poor growth. But its net profit increased by 16 per cent, thanks to improvements in product-mix and supply-chain management. In contrast, Nirma posted a 40 per cent growth in sales to 563.45 crore and a 7 per cent jump in net profits.

In consumer durables, product categories like CTVs and washing machines were badly hit. Sales of CTVs from April to September slipped to 24.6 lakh units compared to 27 lakh for the corresponding period last year. Says Rajeev Karwal, President, CETMA: ''There was a drop in agricultural production, floods in four-to-five states, the marriage season was dismal, and no big event was there to stoke demand.''

But Diwali seems to have added some glitter to lacklustre consumer durables sales. Companies like Samsung and LG have witnessed brisk CTV sales. But what's worrying analysts on Dalal Street, of course, is the fact that the worst may not be behind corporate India.

-Vinod Mahanta

S T O C K M A R K E T
Money With Morals

Hard-nosed investors would probably sneeze at it, but the concept of ethical funds has arrived in India. JM Morgan Stanley, chaired by Nimesh Kampani, is launching India's first ethical fund by end November. Called the Heritage Fund, the socially-conscious fund will, by choice, not invest in businesses that deal in meat, meat packing, sericulture, leather goods, liquor, tobacco, hospitality, and pesticides.

Some of the investors that the Heritage Fund is targeting are the Jain trusts, temples, and other religious trusts. Says K. Vijayan, CEO, JM Mutual who does not expect the fund to raise more than Rs 15 crore: ''There is a large segment of the market which is concerned about unethical treatment of animals, tobacco, and liquor, and we are providing them with an investment vehicle that will match their beliefs.'' But what scrips is the fund going to be looking at? While Vijayan isn't willing to divulge any details at this point in time, he says that the sectors would include software, pharma and FMCG. In any case, the fund is promising an annual return between 15 and 20 per cent. Says K.V. Ramaswamy, Head, Sales, JM Mutual: ''These funds are not aggressive and the investments would be more diversified.''

Happily for ethical investors, the infotech sector is not necessarily excluded from the list. In the US, there is a benchmark index-Citizens Index-which includes sectors like telecom, technology, consumer products, food, and agriculture. Apparently, this index has outperformed the S&P 500 every calendar since 1995. Ethical funds have been around for almost three decades now. They first emerged in the US in the wake of the Vietnam war. Canada joined the bandwagon sometime in the mid seventies, and the UK in the mid eighties.

JM Morgan Stanley will set up an independent committee of eminent persons which will oversee the investments made by the scheme. N.M. Raiji & Co, the auditors of JM Mutual, will certify at regular intervals that the funds are invested in approved securities. Talk about clean money.

-Roshni Jayakar

M O N E Y M A R K E T S
Bonds of Faith

Late last month, the State Bank of India's much-publicised India Millennium Deposit (IMD) raked in an estimated $4 billion. That's good work by the SBI, because with the rupee touching an all-time low of Rs 46.74 to a dollar, foreign institutional investments slowing down, and oil prices soaring sky-high, there was a need to bolster India's foreign exchange reserves.

Typically, foreign borrowings are raised from open markets. But early last month, Standard & Poor downgraded India's credit rating. Therefore, borrowing from the market would have meant paying a higher rate of interest to make up for the increase in perceived country risk. Rather than do that, the finance ministry decided to tap the India diaspora. Says D.H. Pai Panandikar, Economist, RPG Enterprises: ''With the government borrowing and paying in dollars, there's no currency risk for investors. Plus, the NRIs have some confidence in India. There was some kind of a mild India wave created by Vajpayee's US visit, which the government decided to capitalise on.''

Fashioned after the Resurgent India Bonds (1998), which raised $4.2-billion, the IMD received a good response, simply because the interest rates are relatively high (ranging between 6.85 per cent and 8.50 per cent) and there are tax-saving opportunities too. But is the cost of capital too high? Bibek Debroy, Director of Rajiv Gandhi Institute for Contemporary Studies, thinks so. Says he: 'The effective cost of capital works out to around 9.5-10 per cent. I think this is very expensive.''

More importantly, did India really need the money? Sure, the higher oil import bill has shrunk forex reserves by $2.7 billion in the last six months, but they are quite comfortable at $34 billion. The cost of money assumes importance in view of the returns. While SBI says that it will invest the money in infrastructure, the funds are typically parked with the RBI, which invests them in a confidential list of T-bills overseas, earning a 3-4 per cent return.

Indeed, experts argue that it would have been a good strategy to let the rupee depreciate. Adds Debroy: ''A downward pressure on the rupee is good as it offers protection to domestic industry without need of resorting to QRs and protectionism, and makes exports more competitive.'' The six-month forward premia on the rupee last month was around 99 paise, indicating that another round of depreciation was expected.

Besides, the rbi's volte-face in the wake of a Cash Reserve Ratio (CRR) hike in August has surprised economists, some of whom also feel that IMD proceeds entering the market will fuel inflation. Says A.V. Rajwade, a Mumbai-based forex expert: ''If the total amount collected is $4 billion, this would directly add Rs 20,000 crore to the liquidity in the market.'' Others, however, believe that the funds will be parked in a separate account, thereby avoiding any impact on inflation. Hope they are right.

-Ranju Sarkar

I N V E S T M E N T S
Steady and Secure

They are back with a bang. Thanks to a wayward Sensex, investors who had flocked to Dalal Street are queuing back up at fixedville. Here's proof: The Housing Development Finance Corporation (HDFC) has recorded a 65 per cent growth in fixed deposits in the past six months; the Delhi-based Bajaj Capital, which vends corporate fixed deposits, has reported a 50 per cent surge in business, and even banks like the Bank of Punjab have posted a 25 per cent increase in fixed-deposit mobilisation. Notes Rajiv Bajaj, CEO, Bajaj Capital: ''Fixed-income instruments are back in favour because all other investment options have disappointed investors in the last six months.''

For instance, the Bombay Stock Exchange Sensitive Index is perilously close to a 18-month low. And thanks to stockmarket volatility and interest rate hike there was a fall in bond prices in the secondary market and a lowering of the NAVs of debt-oriented funds. Says Tejbir Singh, CEO, Bank of Punjab: ''The hardening of interest rates has boosted bank deposits.''

But, here again, company fixed deposits have an edge over bank deposits as the yield on the former (10-14 per cent) is 1.5-3.5 percentage points higher than those on the latter. A three-year deposit with a medium-size private sector company, like BILT, could fetch an annual return of 13 per cent, compared to a bank deposit's 10 per cent. The downside, however, is that stretched corporate earnings-as the second-quarter results seem to indicate-could make redemption difficult. The upside? Unlike equity, debt investments don't tank overnight.

-Ranju Sarkar

C O N S U M E R P U R C H A S E
Cracker of a Diwali?

Was the sparkle of the festival lights brighter? Did the crackers sound louder? Were the chocolates more melt-in-the-mouth? Ask that question to consumer goods companies and the answer for some-based on initial sales estimates-is a clear yes.

According to Samsung, it has been witnessing booming television sales. LG, apparently, also has been laughing its way to the bank on the back of impressive sales of microwave ovens and frost-free refrigerators. Philips claims it has been deluged with such a demand for its CD-based audio products that there is a shortage of these products in the market now.

The big push for Samsung, apparently, is coming from its Plano and Metallica range of 21-inch television sets. That's good news for the CTV segment, considering that sales were actually shrinking. If the trend-line stays up during the last quarter of the calendar (the marriage season begins shortly), Samsung hopes to corner Rs 500 crore of sales for the quarter-double that of last year-compared to the Rs 800 crore worth of products it sold in the first three quarters.

Interestingly, the spurt in demand for durables has come in the near-absence of discounts and deals. Samsung and LG have decided against offering any discounts to customers. ''We want to let the consumer know that there is no free lunch,'' says Ajay Kapila, Vice-President (Marketing & Sales), LG Electronics.

The car market, though, does not seem to be having a ride as smooth as the consumer goods sector. The festivities at Maruti, battling a protracted strike at its plant in Gurgaon, have already been spoilt. A spokesperson says that the physical sales have been 10-15 per cent lower than normal, explained by the 50 per cent drop in the 1,450 cars that it churns out on normal days. Hyundai's Santro sales (7,000 in October, 2000), were 650 more than what it sold same month last year. Says B.V.R Subbu, Director (Marketing), Hyundai Motor Company India: ''Growth in some parts of the south Indian market has been slower this month.''

The good news is that the marriage season is just round the corner. And car makers are hoping that it will bring their share of the bang.

-Ashutosh Sinha