Anand Krishna’s musings

Given the continuing uncertainty in the financial markets (especially equities), the upcoming Q4 results of  India, Inc. become very important as a signal of “the India growth story”. Advance tax collections are higher and there are signs that Q4 results will be OK. However, the markets will focus on specific bellwether stocks from each industry. How TCS, Infosys and Wipro perform (and what guidance they give for Q1 of 2008-09) will be seen as a barometer of how much outsourcing is likely to be affected by the US slowdown. Some relief of course comes from the relative let up in the Rupee’s apreciation vis-a-vis the US$-but that can all change in one day. Already, there are concerns that Satyam, which did so well in Q3, may be impacted by what has happened to Bear Stearns, which was a Satyam client. HCL too is likely to be somewhat impacted. Pretty much every company in the IT services space will be impacted- including the Big 3. The question is by how much? And whether they can compensate for a slowdown in the BFSI space through growth elsewhere. And if so, to what degree the offset will happen.

Stocks like ICICI Bank will be under pressure, given their investments in derivatives that have soured. And because of the massive and unwarranted run-up in stock prices through much of 2007,  stocks like Reliance, BHEL, Bharti and Reliance Communications will find it hard-pressed to bounce back up to their early January levels.

All in all, the next month or so will be critical, as results start flowing in. Let’s hope for the best.

India capitulated meekly to some disciplined bowling by Ntini and Steyn on Day 4. Starting at 468/1, with Sehwag being in a rampaging mood, one would have been forgiven for thinking that India would take a healthy lead of 150 runs or so by tea and then ask Grame Smith and Neil McKenzie to see off the new ball in the last sessions of a day where they had to brave Chennai’s heat and humidity for most of the day.

But no such thing happened. Sehwag departed early, after being frustrated in his attempts to get the strike by some dour defending by Dravid. Granted that Dravid scored his 25th century and also became only the third test player after Gavaskar and Tendulkar to cross  10,000 runs in test cricket. However, one was left with the feeling that he was not playing for the team- something that vintage Dravid could never have been accused of doing.  Bottomline- India lost 9 wickets with an addition of only about 160 runs to their Day 3 score (playing for most of Day 4) and ended their first innings at 627- a relatively modest lead of 87 runs.

South Africa rose to the challenge and although they lost Smith, Amla and McKenzie were scoring at a pretty brisk pace, ending the day with 131/1- effectively, 44 runs ahead.

Chepauk’s reputation of being a spinner’s track on Days 4 and 5 have so far been belied, and the match seems headed for a draw, with the only excitement coming from Sehwag’s swashbuckling 319.

After months of waiting (during which time, naturally, valuations, strategy discussions, turnaround plans were being formulated/refined), the Tata group has finally acquired Jaguar and Land Rover from the beleaguered Ford. This is indeed testimony to Ratan Tata’s vision and execution.

The $2.3+ B paid for the acquisition is no small amount, and only time will tell how well or to what degree the Tatas have been able to extract value. As I see it, they will probably do one or more of the following (in no particular order):

1. Use JLR technologies and people to design better cars (just as they did with their acquisition of Daewoo’s truck manufacturing) so that Tata’s cars become even better.
2. Use the overseas manufacturing facilities to make the Nano and sell locally.
3. Leverage the JLR dealer network to penetrate western markets like the US and UK.
4. Use the JLR stickers to raise expectations and hence, prices.
5. Pump in much needed resources to rev up Jaguar and Land Rover sales.

Look forward to someone else’s comments!

Till today, Sir Don Bradman and Brian Lara were the only two members of a truly distinguished cricket club: they were the the only two to have scored two triple centuries in test cricket. Today, Virender Sehwag made history by becoming the third member of that elite club. He did so by scoring an imperious 309 n.o. against South Africa at Chennai.
Sehwag also rewrote the record books for at least the following reasons:

1. He overtook VVS Laxman to become the highest Indian run-scorer in a test match in India. Laxman’s epic 281 against Australia at Kolkata a few years ago denied Australia a victory. Let’s see if Sehwag can go one better and actualy help India win.
2. He scored more than 250 runs in one day, which must surely be a pretty rarae feat.
3. He scored the 3rd fastest double ton and the fastest triple ton (beating Hayden’s 300 off 362 balls)
4. I believe his last 10 centuries have all resulted in personal scores higher than 150- which is an unparalleled feat in the annals of cricket.
5. He is India’s only triple century scorer (In fact, he now has two under his belt). This is especially commendable because he has played most of his cricket along with greats like Sachin, Dravid, Ganguly and Laxman.

His performance today is amazing for its sheer speed. His 300 came of just around 280 balls- a strike rate of over 100 in a test match. He scored 41 fours and 5 sixes. That alone comes pretty close to 200 runs!

Accolades came not just from Indian selectors and former cricketers- even South Africa’s coach Mickey Arthur described it as the “best test match innings I’ve ever seen”. Shane Warne too was quite liberal with his praise.

Whether he was motivated by Paddy Upton or Gary Kirsten, or he was trying to prove a point to the selectors and Dhoni is a moot question. What is undisputed was that Virender Sehwag, the “Nawab of Najafgarh” aka the “Sultan of Multan” played an absolutely cracker of an innings. He has single-handedly brought India to a point where, if he continues where he left off today and lasts till tea tomorrow, India could even win the match- provided the pitch crumbles and turns, as is widely expected to do on the last day and a half of the test match. Be that as it may, if Sehwag remains unbeaten at tea tomorrow, he will surely overtake Lara’s 400- the highest ever score in test match cricket. Now, wouldn’t that be just terrific?

South Africa ended Day One of the first test against India on 304/4, after winning the toss and electing to bat. A solid start in any circumstances. Neil McKenzie was unlucky to have missed out on a century, and only tomorrow will tell if Hashim Amla will get to his ton, after ending the day on an unbeaten 85.

The flat track at Chepauk was a bowler’s nightmare and India’s pace attack (Sreesanth and R P Singh) went wicketless. The limited success was due entirely to Kumble and Harbhajan.

If we can get a few quick wickets early tomorrow and maybe get them out by tea and bat on till stumps without losing a wicket, I’d say we’d be even. Traditionally, the pitch at Chepauk favours spinners and India will have to bat 4th. Not a fun prospect- especially if we have our backs to the wall.

But well done, Proteas. You can rest easy at least tonight.

And Gary Kirsten- you must be a worried man tonight!

The 6th Pay Commission, headed by Justice Srikrishna, has proposed an upward revision in the salaries of central government employees as well as those serving in the armed forces. Note that this is only a proposal; it is upto the government to accept the proposal in toto or in a modified form. Already, the media is going to town, tom-tomming the news about a 40-100% hike in salaries.

Comparisons are always odious, and the comparison between the salaries and perks of government officers and private sector executives is no less so. A leading TV channel commented that a senior IAS officer in Delhi enjoys the benefit of living in a bungalow in a prime location, and valued this at Rs40 lakhs per month in terms of rent. That figure may well be the going rental. But does the private sector also not offer its CEOs and MDs large, furnished flats in Malabar Hills or Carmichael Road in Mumbai? In both cases, the key point being missed is that most of these properties were leased or purchased years ago, at a fraction of the current market value.

The other point that I thought the media missed is the fact that annual compensation increases in the private sector can be as high as 100% (if you also consider bonuses, profit-sharing etc.), while the government pre-specifies the “salary scale” and thus caps annual increments. Of course, government servants enjoy DA, free use of a car and driver, telephone etc. And the “status” or “power” and pelf they enjoy just cannot be monetized. Who else can keep an Ambani or Birla waiting but a senior government official? But do not forget that the private sector is free to revise its C&B even more often than once a year, whereas the Pay Commissions present their recommendations only once every 5 years or so- during which time, the gap between private sector and government salaries keeps widening. There is also, of course, the reality of inflation.

Personally, I think the government must accept these recommendations, if only to attract and retain talent. An exodus, especially of mid-level bureuacrats, can cripple the entire administrative machinery and hence hamper policy formulation and implementation. It is also important that the government sector attracts talent so that we as a nation benefit from good governance, innovation in policy-making and so on. Finally, if the “legal “compensation offered is attractive, one hopes that the bureaucracy’s tendency to seek bribes will also diminish.

Of course, the question of a “secure job” in the government vis-a-vis the “hire-and-fire” culture of the private sector, given its “peformance” expectations is a completely different story altogether. And let me also add that government salaries are paid at least in part by taxes collected from the private sector!

To stimulate growth or to rein in inflation. In the current global economic scenario, that is the question most Finance Ministers and Central Bankers are grappling with.

Take the example of India. Till a couple of months ago, a 9% GDP growth was very much on the cards. Inflation was fluctuating, no doubt, but was well under 5%. But now…? Inflation has inched up to almost 6%. It is clear that our GDP will not grow any more than 8.5 or 8.6%. To be sure, these are growth rates to die for, by most countries’ yardsticks today. It is close to triple India’s own historic “Hindu rate of growth”. But a less than 9% GDP growth rate upsets many calculations. Stock markets assumed that companies and indeed, entire sectors of the economy would grow fast enough to support an aggregate growth of 9%. But now that will likely not happen- at least for the next year. Sustained 9% growth for the next few years would mean that as a nation, we would start winning the war on poverty. Again, that won’t happen as quickly as many of us would like, because of a slowing growth rate.Is the growth rate in any one individual’s control? Clearly not- and even less so in a globally inter-connected world.

Growth needs capital to fuel it. And not everyone has enough of their own money (equity) to put into their business and grow it. Ergo, they rely on borrowings from friends, banks or even money-lenders (debt). But there’s a problem. Debt must be serviced regularly via interest payments and repayment of the principal. And as inflation rises, interest rates rise. Of course, inflation also increases the returns equity investors expect (so that their real rate of return is not adversely impactred). But unlike debt, equity investors take a bigger risk. They may not get to see dividends every quarter or indeed, each year. And there is no rule that says that the stock must appreciate by a certain percentage each quarter or year.

So there lies the nub of the trade-off. Should monetary policy be aimed at reining in inflation (so that credit does not become more expensive, in turn impeding growth)? Or should fiscal policy be used to provide tax breaks so that more money is put in the hands of consumers and hopefully, this money goes either into consumption (thus stimulating demand for goods and servcies) or goes into savings, and thus exerts downward pressure on rising cost of debt)?

I don’t know the answer…. if I did, I suppose I’d be a central banker or Finance Minister somewhere!

If we are serious about getting our hockey back on track, we need to design and implement a program that will start with 10 year olds, nurture their talent and coach them for the next 15 years or so. District level talent spotting efforts need to be supported with physical and mental conditioning, adequate nutrition and of course, fitness regimes.

The question is not whether a foreign coach can do the job better than an Indian coach. What matters is that whoever is selected to coach the team should know the way the modern game is played- not just in India but also in strong hockey-playing nations like Australia, Germany, Holland and so on. He should be able to meld the individuals (from different parts of the country) into a coherent fighting force.

The recent controversy around Ric Charlesworth’s role in rejuvenating Indian hockey is another example of India’s  hockey establishment being either unable to take the right steps or unwilling to. Either way, it does not bode well for Indian hockey. It should not be about finger-pointing either by former hockey players or current administrators of the game. All sides must put aside their personal differences and work together for Indian hockey- if they are serious about raising the standards. If not, let the Sports Ministry write a requiem for Indian hockey. Let even the limited resources currently being spent on hockey be re-directed to other sports.

Charlesworth was a formidable opponent on the field in his playing days during the seventies and eighties and Indian hockey teams from those periods have often been drubbed by Aussie teams playing under Ric. He probably does have quite a bit to offer Indian hockey, provided we are willing to accept it. However, if Indian talent is uncovered from rural India, and these players are not comfortable with English, we are adding another communication layer/overhead betwen the coach (Ric) and the team. And how well the interpreters do their job will be key. Speaking through interpreters may also inhibit free and frank interactions.

But at this time, we have to start somewhere and I am sure we can do worse than Ric. But the IHF should empower him adequately; else it will only be setting Ric up for failure and after one year, there will be calls for his ouster.

I wonder why corporate India is not more active in supporting hockey. It may be an investment with a 3 year gestation period. But if things go well, the ROI will be manifold. Is any CEO from India Inc. listening? Or should I say, reading this piece?

India’s win against Australia in the Commonwealth Bank series is already a few weeks old. It is time to move on. South Africa has arrived in India, after recent successes in Bangladesh and Pakistan before that. The Proteas have proved their ability to play- and win- in “sub-continental” conditions, and India cannot afford to take them lightly.

Sadly, South Africa’s selection policy has kept out Andre Nel. No doubt several black and “coloured” cricketers from South Africa were denied the opportunity to play for their country for much of the late sixties, seventies, eighties and early nineties, under the abhorrent apartheid regime. But is the current policy really not doing the same thing, except that now, it’s the “white” cricketers who are being kept out? Two wrongs can never make a right. The recent selection controversy in South Africa has also resulted in Charl Langeveldt (who was picked ahead of Nel) withdrawing from the tour because he is not in the right frame of mind given the selection fracas (after all, the selectors have all but said that he was in the team because of his colour and not skill- which is hurting to anyone, and Langeveldt is no exception). In the final analysis, South African cricket has lost, as indeed, has the overall game.

Dale Steyn has emerged as South Africa’s frontline fast bowler. In the time since India toured South Africa in 2006 (was it early 2007? I can’t recall), Steyn has acquired pace and he dangerous ability to swing the ball. That he is lethal even on the sub-continent’s flat and dusty wickets is now known. What is unknown for the moment is how India’s top order batsmen negotiate him.

At 27 years of age, Graeme Smith has had almost 5 years at the helm. During this time, he has performed well (and consistently) both as batsman and as captain, proving that young age per se does not preclude a shrewd cricketing brain.

As is often said, getting to the top is easier than staying on top. And India have to beat South Africa if they are to move forward towards achieving the stated ambition of being the top test cricket team in the world.

I am sure cricket fans are in for a treat. As always, may the better team win!

PS: I am sure the visitors will miss the all-round ability that “Polly” (Shaun Pollock) brought to the party.

Bear Stearns, one of Wall Street’s leading investment banks (it was ranked 5th in the US, I think), collapsed dramatically last week. This is so far the biggest corporate victim of the current financial crisis triggered by indiscreet lending, as it were (the so-called “sub prime crisis). Bear’s clients withdrew over $17B in two days, amid fears of a cash shortage. Bear was on the verge of declaring bankruptcy. The Fed intervened to prevent a larger, systemic collpase of the larger markets and virtually forced Bear to sell out. JP Morgan Chase, one of America’s largest banks (by assets) was the “white knight”, as it were, and agreed to buy Bear’s stocks.

Prima facie, it would appear that the “system” is working. So what’s all the fuss about? Several reasons, as I see the situation:

1. Should Bear not have warned the Fed and SEC earlier?
2. Should the Fed have loaned Bear enough to tide over the crisis (it seems to have agreed to loan money to JP Morgan Chase)?
3. Was it right to have given Bear just a day to find a buyer?
4. Was it right that JPMC was allowed to virtually annihilate Bear’s shareholder interests- they paid $2 per share, when the book value was closer to $80? To offer another data point, Bear stock was trading at $170/share just an year ago.

I think this situation is symptomatic of a bigger malaise. Although regulators and fiancial institutions around the world are talking more and more about “Governance, Risk Management & Compliance” (GRC), the “system” is still leaving a lot to chance. Some of it may be a case of looking the other side even as “financial engineers” come up with newer and newer “products” that are supposedly designed to offer investors a wider choice of risks and returns. But some of it is possibly because the underlying information systems in the financial services industry are not as “real time” as we think they are. Or perhaps executives responsible for GRC do not monitor their “dashboards” as often as they should.

Perhaps financial services companies should focus more on strengthening their GRC capabilities in the next few months, instead of spending money on “improving customer experience”. After all, no customer can experience anything more painful than being told that his/her investments are worth far less than the capital s/he had originally invested.

Just as importantly, regulators around the world should evolve a global GRC standard (before you say ‘Basel II’, let me point out that adherence of Basel II norms varies betwen Europe, America and yes, Asia). And then work hard at making sure people adhere to these standards.

Last week, Eliot Spitzer, the Governor of New York state, resigned because his romps with Ashley Alexandra Dupré, reportedly a “high class hooker”, became public. According to reports, Spitzer paid close to $4500 for the pleasure of her company. For the record, she was called “Kristen” and he was just “Client 9″. Of course, all hell broke loose when Ashley discovered who she was “doing” and announced her discovery at the agency she worked through.

Spitzer, who went after Wall Street firms a couple of years ago and is credited with quite a bit of cleaning up in the world of high finance, was spoken of as a potential presidential candidate. Sexcapades per se are not uncommon among public figures; in this case, the fact that he was a married man and had painstakingly built a facade of being clean and above board is what led to his undoing. Another example of momentary lapses in judgment destroying a promising career.

While Spitzer’s career might go down in flames, Ashley’s career seems to be on the ascent. Her album sales have gone through the roof and reportedly, she has a $1M offer from Hustler magazine.

For lots more of the gory details, visit:

http://www.huffingtonpost.com/2008/03/12/eliot-spitzers-kristen-_n_91162.html

Till about two months ago, Indian stock markets were the toast of not just investors in India, but around the world. The rise of the BSE Sensex from about 12000 to over 20000 happened at breakneck speed, in perhaps 18 months or so.

And then the January effect happened- yet again. Fueled by the sub prime crisis, rising crude oil prices, worries about the US slipping into recession and so on, Indian stock markets have lost over $500 Billion in terms of market cap in the last 2 months or so. Individual stocks have declined by as much as 50%.

“The long term India story is intact”, say analysts, almost unanimously. But to paraphrase John Maynard Keynes’ famous observation, we’re all dead in the long run!

Personally, I think we’re in for an extended bear phase. At least till the US elections are over and there is clarity on who the next President will be, I don’t think the Sensex will stay beyond 18000 for any meaningful period of time. Hopefully, by then, the dust will start settling on the sub-prime home loans. Just keep your fingers crossed that credit card loans and consumer loans don’t start souring!

And with Indian inflation steadily inching up, interest rates have to go north too. And inherently, that will put more pressure on equities. Oh joy!

The chaos surrounding Bangalore’s new airport would have been amusing, but for the fact that I am a Bangalorean and have to suffer the consequences. With less than a couple of months to go before its scheduled inauguration, various people suddenly realized that the road connectivity to Devanahalli is inadequate and a lot of time would be wasted in travelling to and from the airport.  Oh really?!  After years of dilly-dallying, the location of the new airport was frozen several years ago. Construction has been on for over 3 years. And the so-called intelligentsia realizes just now that the new airport is not easily accessible? For God’s sake!

Not that the state government is innocent- for years, it has dragged its feet on improving road conectivity, knowing fully well that the airport is scheduled to “go live” in March/April 2008. And now, the road will be constructed in a hurry, with scant regard for quality. In less than 3 months, the carriageway will be pockmarked with potholes (a la the rest of Bangalore). So much for making Bangalore an international city.

Bangalore has grown so rapidly that the existing airport is not adequate to meet demand. Which is why the need for a new airport was felt in the first place. I agree that the move to a new airport will not be easy. We will all pay the price. Hundreds of thousands of litres of fuel will be wasted in travelling to & from Devanahalli. Thousands of productive person-hours will be irretrievably lost. Tempers will fly as vehicles jostle to reach the airport on time and even citizens who do not need to go to the new airport will be inconvenienced because of the traffic restrictions imposed.

But even with all these drawbacks, is it even worth debating whether the existing airport should continue- whether for short haul flights, domestic flights etc.? What about Bangalore’s aspirations (or should I say, pretensions?) of becoming a world-class city? Or is it that “world-class” should only start outside the airport? What about the legally binding agreements that the State & Central governments are signatories to? If BIAL decides to file a case, it could well win, for the time to think about “public interest” was before signing the agreements, and not weeks before the new airport is scheduled to open. And think of what the news of the government reneging on a concession agreement could do to future investments by the private sector- not just in Karnataka bu across the country? And would we be OK losing investments to Andhra Pradesh just because Hyderabad has a better airport? Should any of these happen, I can guarantee that these very same members of the intelligentsia will carp about Bangalore not living up to its expectations and the sad state of “infrastructure”. And may I point out that even though the HAL airport is closer to the city centre, during peak hours, it can take upto 1.5 hours to get to/from the airport to many parts of Bangalore.

The last few weeks have already seen discussions about a high-speed rail link, extension of the regular railway line, etc etc. I think the debate should focus on how best to improve connectivity to the new airport and force the government to act quickly. Bangalore needs an international airport quickly.

The strike, Standing Committee directive, cries by industry leaders to continue with the HAL airport- frankly, it’s all much ado about nothing.

PS: I do not own any real estate at or near Devanahalli!

The Bhagavat Geeta talks about treating joy and sorrow the same, just as we should treat profit and loss with equal detachment, or indeed, victory and defeat. And yet, the national outcry in the last 2 days since the Indian men’s field hockey team lost to Britain and hence ceded its right to compete in the Olympics deserves some sympathy. Not since the 1920s has India not been in the fray. To be sure, we have systematically worked our way down the world rankings over the last 35 years or so, but this, surely is plumbing new depths. Little wonder that the nation is badly disappointed, just days after celebrating the victories of the Indian cricket team.

With Carvalho as coach, there were signs of a turnaround and the team had acquitted itself quite well during recent matches against Australia, Germany etc. There was cautious optimism that the best team would be selected, and the oft-public in-fighting that has riven Indian hockey teams over the past decade or so would be a thing of the past. But all that seems to have been a flash in the proverbial pan, as the team just could not (or at any rate, did not) perform when it was crucial for them to deliver.

The media and former hockey players (during whose time also Team India had lost much of the sparkle and sizzle associated with Indian hockey for much of the 1950s, 60s and even 70s) seem to suggest that removing KPS Gill and Jothikumaran will address the malaise. I think the rot is not limited to the IHL leadership, although that layer is certainly most visible. Indian hockey is plagued by a serious lack of resources. Compare hockey with cricket in India, and you will see what I mean. Right from talent spotting programmes to training- both in the skills of the sport and overall physical fitness, mental toughness etc. the BCCI has done much more than the IHF has. But equally, the BCCI has resources that are several orders of magnitude higher than what the IHF has.

The public is to blame too. We prefer watching cricket or tennis matches, and are no longer willing to even watch hockey when it is shown on TV. What then is the motivation for youngsters in India to take up hockey seriously? Does it not make more sense for them to play cricket, make their millions even if they play only a handful of matches, and then retire?

And let us not forget that finally, it is not the IHF officials who played against the focused British team; it was supposedly the best 11 India could field. Every individual can- and does- have an “off” day. The ignominous exit from the Beijing Olympics will still serve a valuable purpose- if all stakeholders learn from their errors of omission & commission and work together to rejuvenate Indian hockey.

Perhaps even Bollywood did not think that they can spin a dream around the Indian men’s hockey team. Which is why the movie “Chak de India” celebrates the success of the Indian women’s hockey team.

In a globally integrated financial system, it had to happen, I suppose. I am referring to Indian banks being affected by the US sub-prime crisis. In the last day or two, news is trickling in that a few Indian banks have had exposures to US housing loans that have now gone bad. It is not that these banks have lent to borrowers who have become delinquent. What has happened is that the original lenders have parcelled off bundles of asset-backed loans into what are called “Collateralized Debt (or Mortgage) Obligations”. The cash flows and hence returns from these CDOs/CMOs are derived from the cash flows and returns generated by the underlying assets- which are the lender’s receivables against the loans. That is why these are derivatives. And almost always, lenders package a mix of loans into each CDO “package”- some good, some more risky, some of relatively short term, others of longer term etc. The trouble is that investors do not fully understand the associated risk- manifested either as creditworthiness of the borrower and/or quality of the asset used as collateral. The problem becomes compounded when the original loan is made, say, in Texas, and the investor in the CDO is a bank in India- due diligence is that much harder.

Some estimates of the sub-prime crisis suggest that well over $1 Trillion is at risk. So far, only about $100B of write-downs have happened. Do the math yourself ($1 Trillion is roughly the total market cap of India’s equity markets). And start worrying about where your mutual/hedge fund has made investments, given that it promised to take advantage of investment avenues in global markets to deliver “superior returns”.