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LEADER Crisis Of Confidence The crash of US 64 has shaken the faith of investors like never before. And with other investment opportunities-be it equity, bank deposits, or real estate-either sliding or stagnating, the small investor finds herself between the devil and the deep sea. By Ashish Gupta
The shock, according to Prithvi Haldea, Managing Director, Praxis Consulting and Information Services, was much more pronounced in the case of US 64 because it had come to be identified as a sovereign (read: government) scheme that provided an assured return of 14 per cent every year irrespective of the market conditions and created a false sense of security. The clear signal from the fiasco, then, is that no institution or entity can consistently provide higher guaranteed returns than the prevailing market return. ''If the small investor is looking at consistent dividends, he cannot expect it from a fund which is investing 70 per cent of its assets in equity,'' points out Pradeep Dokania, Executive Vice-President, DSP Merrill Lynch. Worse, traditional vehicles of investment are becoming unattractive. A two-percentage-point cut in the interest rate on the popular public provident fund (PPF) and national savings has part-killed the investor's appetite for small savings. Other small saving schemes such as the National Savings Certificate (NSC) too have lost their sheen since they are now down to single-digit returns. Even at banks, the savings rate is down from 10 per cent 9 per cent. Says John Band, CEO, ask Raymond James and Associates: ''The general malaise that investors are suffering from is a lack of good investment opportunities.'' Band isn't exaggerating. Real estate no longer excites retail investors because, for one, the economic downturn has kept prices soft. The property market tends to do well during a bull run because there's plenty of money floating around and sentiments are positive. A downturn particularly affects real estate, since it is more illiquid than, say, stocks or bonds. Appreciation in gold has not been large enough to merit an investment by the retail investor, although there is a huge social value attached to it. A back-of-the-envelope calculation shows that during 1989-99, the price of gold appreciated by only around 3 per cent annually. Thus, a person who had invested Rs 10,000 in gold would have got back only Rs 13,474 at the end of 10 years against Rs 34,873 a company deposit would have fetched in the same period. To strike gold, the investor should have invested in Sensex scrips, which returned more than 500 per cent in the 10 years. The result: A clear shift in the saving pattern of the smaller investors. Elaborates Arun Kaul, CEO, PNB Gilts: ''Small investors are deserting stockmarkets to invest in time deposit schemes of banks, open-ended income funds and in debt-linked mutual funds.'' Kaul says that between March and June this year, bank deposits grew 19.3 per cent, and on June 15, bank deposits touched the Rs 45,000 crore mark. A cash pile up at banks could boomerang on investors. Since banks need to make money on deposits to be able to pay interest on them, idle money could force them to lobby for further cuts in deposit rates. In fact, during the middle of last month, some chiefs of public sector banks met the finance minister to win support. They were categorical that unless the deposit rates were reduced, there was no way for the banks to reduce the prime lending rate to 11.5 from 12 per cent. However, there is the bigger problem of credit-offtake. Says S.S. Kohli, MD, Punjab National Bank: ''In the current scenario, the banking sector has few avenues for investment apart from government securities.'' Don't be too surprised if bank rate cuts do come along. That could also be the finance ministry's way of forcing money into mutual funds and, thus, the stockmarkets. Says Vivek Reddy, CEO, Kothari Pioneer Mutual Funds: ''While in the short term confidence may generally suffer, it is the right time for small players to invest in mutual funds. We have the right mix of equity, income and liquid funds to cater to the requirements of 90 per cent of the population.'' Better the devil you know? PENSION FUNDS The move to allow private players into pension fund management will not just ease pressure on the government, but also benefit consumers and stockmarket investors.
Between Rs 150,000 crore and Rs 326,000 crore. That's how big the pension fund market in India could be in the not too distant a future if the Insurance Regulatory and Development Authority (IRDA) clears the final guidelines for pension sector reforms by the end of this October. At present, seated in his finance ministry office in Delhi's North block, the chairman of IRDA, R. Rangachary, is preparing the roadmap to implement ''Project oasis''-an acronym for Old Age Social and Income Security. The report, authored by founding chairman of the Securities and Exchange Board of India (SEBI), S. A. Dave, has recommended the setting up of a new pension system based on individual retirement accounts (IRAs) to target the remaining 89 per cent of the workforce (around 283 million people) outside the pension safety net. The new plan, which is based on the highly-successful Chilean model, would allow individuals to save money in the IRA and, following retirement, use the pension asset to draw a monthly income (the government will not have to contribute). For professionals and other high-income individuals, a voluntary pension fund scheme is to be offered. Today, only the Life Insurance Corporation (LIC) and the Unit Trust of India are allowed to offer pension products. But the plan now is to let private players, including insurance companies and asset management firms, into the sector. Industry experts believe that the move will trigger a boom not only in savings, but also in stockmarkets, besides giving a solid foundation to the nascent insurance industry. Says Deepak Satwalekar, Managing Director, HDFC Standard Life Insurance Company, which plans to launch its pension schemes September end: ''Our interest in the pension market is a logical extension of our insurance business, since both of them (insurance and pension) have many commonalities like long-term investment management skills and application of actuarial practices.'' Experts such as R. Vaidyanathan, a professor at IIM-Bangalore, expect pension funds to churn out Rs 326,000 crore by 2005, although some others like M. R. Ramakrishna, former Executive Director of LIC, expect the figure to much lower at Rs 150,000 crore, that too given the next 15 years. But there's little doubt what even a small percentage of this fund can do when it finds its way into the capital markets. Initially, however, fund managers will be allowed to invest the IRA funds only in three main schemes: the safe income plan, the balanced income plan and in the high growth plan. Implementing oasis will present certain unique challenges. A new pension system covering more than 300 million (if existing plans are also rolled into the new one) would be the world's largest. Moreover, since a majority of the participants are poor, it would be an uphill task to incentivise them to save. Besides, pension accounts will have to be portable to move with workers from job to job. This will jack up the cost of transactions. Considering the meagre fees proposed for the fund managers (0.25 per cent of pension assets per year) by the Dave Committee, institutions might wonder whether it is worth their time and effort. Despite such concerns, action is very much afoot. Says Sanjay Sachdev, CEO & MD, IDBI-Principal Asset Management Company: ''We have already done a substantial amount of legwork on the product development side as well as on the market assessment, and plan to apply for licences once the guidelines are announced by the IRDA.'' So, don't be surprised if, suddenly, your nest egg becomes the most sought-after commodity around. —Ashish Gupta SMALL
BUSINESS Asia's largest industrial estate, Peenya, is decaying to death.
In the first flush of liberalisation Subash Reddy, 47, quit his secure job with a PSU to start Bharani Precision Components. In addition to chipping in with Rs 20 lakh from his meagre savings, Reddy borrowed Rs 42 lakh from Karnataka State Financial Corporation to purchase machinery. The first three years brought success. The auto components maker employed 62 people, and took additional loans to expand. Then, the automotive sector nosedived, and so did Reddy's fortunes. Today, all of his workers have been laid off, production has stopped, and a petrified Reddy is mired in debt worth Rs 1.13 crore. But that isn't the only tragic story at Peenya, a 36-sq-km big industrial township near Bangalore, believed to be Asia's largest. Developed by the state government way back in 1971, Peenya houses 3,000 small and medium industries ranging from fabricating units to foil manufacturers to garment and leather exporters to component manufacturers. But today almost a third of these have downed shutters, and another 15 per cent is on its death bed. ''If no help is forthcoming from the state government, the others may die too,'' says Prakash N. Raikar, the outgoing President of the Peenya Industries Association. What ails Peenya? In a word, competition. Most of the units here are too small to stand up to national or international competition. The industrial estate-which employs 1.80 lakh workers-has also been badly hit by infrastructural problems such as non-existent roads, erratic supply of power and water, as well as harassment from tax authorities, say some owners. The state has promised Rs 50 crore in help to all small industries, including Peenya's. But for an industrial unit drowning in a sea of trouble, that's a weak straw to clutch at. —Venkatesha Babu EXPORTS Small software firms aren't caving in. Rather, they are pulling in some big numbers.
First, hear the cassandras speak. Circa, April 2001: ''If Infosys is projecting a 30 per cent growth, how will small companies survive?'' Now, look at the numbers: Of the Rs 28,350 crore racked up by the software industry last year, the top four (TCS, Wipro, Infosys, and Satyam Computers) accounted for 16.36 per cent. The rest came from nearly 1,300 other companies, with an average turnover of Rs 18 crore. Better still, the share of STPI (Software Technology Parks of India) units, which are typically small, is on the rise. Their share in overall exports has jumped to 70.73 per cent last year from 67.68 per cent in 1999-2000. And while the industry grew at 65 per cent, the STPI units clipped 8 per cent faster. Officials say that a large number of offshore development centres coming up at software parks has helped. ''IT-enabled services are also beginning to show healthy exports, which has helped offset any fall in export figures of the offshore development centres,'' says Manas Pattnaik, the Delhi-based Director of STPI. The exports of STPI units also grew by 72.75 per cent against the overall 65 per cent growth of exports. But since some of the orders did not translate into revenues for Indian companies this year, caution is still the word for NASSCOM. Says Arun Kumar, Vice-Chairman, NASSCOM: ''The quarters ending June and September should give us an indication of what to expect in the future.'' The first quarter has been good for Infosys and Satyam Computers. But the next quarter could be another story. —Ashutosh Sinha TRACTORS The downturn in the tractor industry is beginning to take its toll on some of the top players. Besieged by overcapacity, shrinking demand, and cut-throat competition, the tractor industry is slowly, but surely, headed for a shakeout. Even as tractor majors pin their hopes on a good monsoon towing the sector out of recession, analysts fear worse days ahead. The reason has to do with food procurement and farm income. The Food Corporation of India is sitting on 46 million tonnes of foodgrains, equivalent to four years of public distribution system (PDS) supply. ''There's a structural problem, and not merely a cyclical problem,'' says a Mumbai-based analyst. Most manufacturers feel the situation is not so grave. A.S. Mittal, CEO of International Tractors, which saw its volumes grow by 50 per cent last year, albeit on a small base, says that there will be a shakeout, but it will be long drawn. Some companies are already taking more heat. The Pinjore-based HMT saw its volumes shrink by 18 per cent; the Delhi-based Eicher, took a 20 per cent hit, and the Chennai-based TAFE was worse off, losing volumes by 31 per cent, during the fiscal ending March 2001. The reasons why these companies have been affected are not hard to see. They don't have either enough models or marketing reach. HMT, for example, has had its tractor division on the block for some time now, but has failed to find a buyer. As a result, vendors have stopped supplying parts. In the case of Eicher, it has traditionally concentrated on the sub-25 hp segment, which enjoyed Excise concessions. With the sops gone, the segment has been shrinking. Last year, Eicher's volumes in this category were lower by 35 per cent. It has tried to offset that by launching new models, and has been rewarded with a 54 per cent growth in the 35 hp segment. But its distribution network continues to restrict growth. TAFE, which has traditionally been strong in states like Tamil Nadu, Rajasthan, Punjab, and Gujarat, has recorded a big drop. Part of the reason is last year's drought in Rajasthan and Gujarat, but part is competition too. For instance, in the 30 hp segment TAFE has lost volumes to an aggressive M&M. While M&M, Escorts, and Punjab Tractors have been incrementally affected, they are better placed to weather the downturn. Escorts has a strong balancesheet, PTL is debt-free, and M&M has an auto division to draw synergies from. Between 1978 and 1998, five manufacturers ceased to exist. This time round, the list could be smaller. But HMT, Eicher, and TAFE will have to fight hard to stay out of that list. —Ranju Sarkar
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For
investors like you and me, the past year has been annus horribilis. Barely
had we recovered from the second round of the securities scam, courtesy
Ketan Parekh and some other unscrupulous banks and brokers, that the
capital market's holy cow, the Unit Trust of India's US 64, has made us
once again wonder if investing is our cup of tea at all. Why not, for
instance, just hoard money under the floor of your kitchen? Unless you get
robbed soon after an earthquake, there is little chance of the money
disappearing as it seems to do in the hands of fund managers? The view may
sound hysterical, but there are very few investors who have not, at least
fleetingly, entertained this idea in the past few days. For, as far as
eyes can see, it's a question of having to pick between the devil and the
deep sea. If the equity market doesn't kill you, the piffling returns on
debt instruments (after accounting for inflation) will make sure life is
no picnic.
