Who says companies are spending more on salaries?

Employee costs to sales is a metric which gives an idea of how much a company spends in terms of salaries when compared to the generated sales. For Indian companies, over the last ten years, employee costs have been quite range bound, and even as it seemed like payrolls had risen quite rapidly during the boom years of FY05 to FY08, as can be seen, sales of companies in general had risen even faster, thus keeping the ratio low even during those years!

* Represented by 274 of BSE-500 companies that have released their FY09 annual reports so far

Now do you realize, why do coffee vending machines keep on buzzing till late at night?

How does the INDIA story look [from a Debt-Equity angle]

The debt-equity ratio, is one of the key metrics which is used to get a snapshot of the riskiness of a business. The fixed charges in terms of servicing high debt obligations can be extremely burdensome, especially when business is down. History is full of examples of otherwise good businesses getting overwhelmed by the excessive weight.

The chart below shows that companies in India have made the smart move of taking advantage of the upturn in the business cycle to increase the amount of equity financing in their business, thus lowering their D/E ratios from a high of 1.4 at the end of FY03 to 0.8 at the end of FY09. Though FY09 has seen a slight increase when compared to FY08, the long term trend should thus indeed inspire confidence in FIIs.

ROE for Indian Stocks…

Return on Equity is considered as one of the key metrics for identifying a good or a bad stock. A constant and high ROE denotes high quality and a unstable or low ROE rings warning bells. One of the foremost reasons of stocks in India been given high valuation during the boom years of FY04 to FY07 was that Indian companies were earning the best RoE among their emerging market peers.

As of date the average ROE has fallen significantly (to 17.3% in FY09) from a peak of 24.1% in FY07. With profitability remaining under pressure for at least FY10, one should not expect the ROE to rise again. This should also keep under pressure, the valuation that investors assign to Indian stocks in general.

Real Estate on FIRE, yet again!

Real Estate sector was riding the market wave yet again, today. Just like the arrival of tiny birds called 'swallows' marks the beginning of summer, the arrival of a phenomenon in the Indian real estate market is also known to signal the beginning of a season. The season of a rise in property prices that is. And what is this phenomenon? Well, it's nothing but the tendency of brokers to start underwriting more and more properties so that a perception of scarcity can be created.

As per a leading daily, the nexus between the builder and the broker, which pushed property prices to record highs in 2006 and 2007 in the NCR (National Capital Region) is back in business and hence, buyers better watch out.

How has Reality stocks performed in the stock markets? After a quick analysis this is what I found…

The below chart shows the degree of speculation that has led to the rise of realty stocks since the broader rally began on 9th March 2009. While the realty index has surged by around 187% since then, the average P/E multiple of the index has risen by almost 423%[oops!!!], or a multiple of 5 times the P/E that these stock were trading at in March! Thus to conclude, it's entirely the case of P/E expansion that has caused the rise in realty stocks while corporate earnings have remained under pressure. The same conclusion, though to a lesser degree, also applies to metal, power, pharma, and small-cap stocks. Is this sheer speculation or the undervaluation correcting itself? More a case of the former than latter is what I think.

Park your vehicle with ease, because you are in INDIA

My yesterday’s analysis might have made you mood make a nose dive. But don’t worry as every new day brings a fresh story with itself. My office is in the heart of Bangalore city, i.e. on M.G Road. As per my last organization, we don’t own the full building here, which means that the parking space is also not free. Though the company pays for the senior management’s parking, the middle and the lower management has to shall out Rs.15/hr >> Rs.130 a day >> Rs.3,120 a month >> Rs.37,440 a year. On an average if an employee works for 5 years in the co. (I am taking 5 years because the company is in a manufacturing industry where attrition levels when compared to IT Industry is comparatively low) he/she pays Rs.1,87,200 (and this is after assuming, there will be no hike in the parking fees for the next 5 years, which I know, is quite impossible)!!!
So this made my dynamic mind think, about the parking rates around the world. As usual, I opened Mr. Internet Explorer and typed in the KING of KING’s url www.google.com! Some search and this is what I found:


So guys and girls, CHILL as parking rates are the lowest in India. Now, I hope that you will carry a S.M.I.L.E (for the whole day) after reading this POST!
After today’s finding, I can proudly say, yet once again, JAI HO!
This survey came in The Economist's July 18th'09 edition.

The story with 2 TITLES!

You might find it a bit weird, but this post has 2 Titles attached to it:

I was wondering as to why the WEST comes to EAST for all its IT needs? As obvious my DataCenter immediately threw the answer that OUTSOURCING is the only reason for it, as hourly pay when compared shows a titanic difference! That’s when the whole idea to write this story popped to me.

The other part of the story came to my mind when I saw a FIRANG [later, I came to know that she is from Israel  ] listening to her iPod while on the treadmill. This is the time I thought as why don’t I have the same and then my brain’s rate of recurrence again started fluctuating. Some more research and I got the connect for the 1st part of my story.

The story, here it is:

Why companies in the Western world will continue to look towards India
OR
Compare your salary to your counterparts in other nations

PART 1: These chart(s) are a clear indication of why companies in the Western world will continue to look towards India for cheaper outsourcing options. As the below chart shows, an employed employee in Mumbai earns gross wages of around US$ 1.3 an hour, just around 5% of an average guy working in New York. And if it assumed that New York won't be the right comparison considering that most employees out there work for high paying financial firms, let's compare Mumbai with Rio de Janeiro (Brazil) and Beijing (China). Wage levels there are still 4.3 times and 2.5 times respectively of what an employee in Mumbai earns per hour.

Surprised? Don’t be, as Part 2 is yet to come!

PART 2: To look at these data points in a more interesting way, see the chart below. While an employee in Beijing has to work 73 hours to earn enough to buy an iPod Nano, the amount of work for the same product to be put by an employee in Mumbai is 177 hours!

I am out of words now and all I can say is JAI HO!

Fixing the Satyam problem

As the Satyam saga unfolds, it is interesting to read the various reactions and theories as to why what happened did happen.
Some of my friends asked me how I could call Mr. Raju a crook when he is not proven guilty by the courts. My explanation: he has confessed and told us that he is a crook. The law, the legal system, and the government machinery may take its own course and decide one way or the other over the next few decades. For now, there is the confession letter which says that he has done something wrong and illegal. Whether he did it to save Satyam, to give a better valuation for the ESOP holders, or just to save himself - that is not relevant. A crime was committed. A voluntary confession has been tabled.

Keep the business - change the ownership
Satyam - as many in the software industry have qualified - has 53,000 employees who did nothing wrong. Their founder has done something wrong and affected the financials - and survivability - of the company. As far as I know, no client of Satyam has come up and said: "Hey, this company did a lousy job of my software project. Shut them down!"

From a client’s perspective, the clients paid money to Satyam and Satyam delivered the product. The employees of Satyam got their salaries. So where is the danger of Satyam shutting down? Whether they made a 3% operating margin or a 24% operating margin is a problem for the shareholders in Satyam stock - including the employees who own the shares. It has no material impact on the client or his decision to hire Satyam. Have you stopped buying Toyota and Honda cars because they are losing money? Have you stopped shopping at Pantaloon because it may lose money as a store? Have you stopped flying Jet Airways because it is losing money?

But, Satyam is in trouble - the danger exists. Because of the way the government is reacting. The government is confused between trying to save the company - and trying to save the shareholders. There are 2 distinct issues here: shareholders who have been cheated because of a dramatic oversight from the still silent audit firm of PricewaterhouseCoopers, PwC - and the fact that Satyam has done satisfactory work for its clients.

Panellists on TV channels, commentators, and industry experts are all howling about the "Satyam problem". The international press is barking about the terrible business practices in India - but they forget to focus on the fact that the auditor, PwC, is part of a global company.

The solution, in my opinion, is pretty simple:

1. The government should take over Satyam at the market price of Rs 30 or so - the level it is bouncing around at. Some mutual funds may howl but as an investment professionals and must take the price of a bad call. And we have the freedom as investors to file our lawsuits against PwC, the audit firm.
2. The government should send a one-page letter to all clients that Satyam is under government ownership for the next 3 years and it is business as usual from a client-project perspective - Satyam will be IPO-ed in the stock market after 5 years and it will be run by a professional team with a completely independent board of directors. The government will have no say in the business decisions. And if some foreign government or press reporter asks whether government ownership disqualifies Satyam from any business - please ask them to look around the mess in their own country and list out businesses and banks which are now owned by their governments. And please inform them that these government-owned banks and businesses are still winning business contracts in India.
3. The government should extend a line of credit to Satyam which is equivalent to 2 years of working capital needs (staff salaries, travel expenses, rents) and charge Satyam the cost of interest for this line of credit.
4. They should hire a CEO from within Satyam who, along with a new set of auditors, should review all supply and marketing contracts that Satyam has to ensure that there is no "leak" in the system.
5. The equity owners of Satyam - fund managers or employees - take the hit that they anyway have taken. There is no escaping that. The employees, though, will still have their ESOPs in place. If Satyam succeeds as a company over the next 5 years, they will again be rich - this time with a "real" share price.

It is important for the government to understand the problem at Satyam: a real company with real people and real clients - but an unreal founder. And investors who put real money behind fake numbers verified by PwC. This will allow the government to "fix" Satyam.

We know there will be more terrorist attacks and Satyams down the road - we need to know how to deal with them efficiently and quickly.

Be prepared

As a boy scout, we were told: Be prepared.

Well, Satyam has fired the warning shot.

Because we all know there are larger companies out there which are more corrupt than Satyam. Which have thrived - and bribed - on the strength of their government connections. Companies where the founders have drained large amounts of money to further their personal wealth. Like Pakistan’s treatment of terrorists - branded as an "international migraine" by former Secretary of State Madeleine Albright - these emperors of corruption are the biggest obstacles to India’s growth. Their acts may deny India credit flows that it deserves to fund economic growth.
Of course, these corporate thieves have "given" some of it back to us all in the form of higher share prices - just as Mr. Raju did. But we should be smart enough to know - just as the Satyam investors now realise - that all this "giving" can vanish in one day. And the shares we own will be useless.
Who are the companies we need to stay away from as investors?

We are scared to mention their names because, for all we know, we may be raided by some friendly government agency or shot and dumped in some side street. Or maybe even shot in broad daylight in a busy area.

Not that dying is a problem, but writing what one thinks when one is dead would be a problem.

There are many companies that are built on the connections and influence of the founding families - enthusiastically called "entrepreneurs" for discovering more ingenious ways of institutionalising corruption. Many in the media shower them with accolades and awards. They glamorise them as business barons we should all aim to emulate. The emperors of corruption, meanwhile, shower the media with advertisement money.

Money is power. The powerful are even part of business associations. When I hear representatives of FICCI or CII or ASSOCHAM talk about corruption in government and the exposure of the political-business nexus because of the Satyam episode, I laugh at that pathetic hypocrisy. If these associations disqualified all their member companies who paid bribes or bought favours, I am afraid there would be a very short list of companies that they would need to represent.
But it would be a quality list. A list that we could, as investors and stakeholders, scrutinise for further investment. That would sure make our life easier. Today, we have to go through all the muck that the Indian stock markets have to offer in the guise of "business houses" and "business barons" and "future leaders".
"Be realistic," these businessmen would argue, "this is India - we need to survive. We cannot take this impractical stand."
That is why, as investment managers and advisors, we take the practical - and difficult - stand of staying away from companies and managements that we suspect.

Be careful where you work

In most companies that thrive on corruption or fraud, many of the employees are not directly involved in the corruption angle. But they do receive the benefit of the licenses obtained and the monopolies granted in the form of a salary or bonus. Many of the employees know what their bosses do to actually get the business contracts. When the next terrorist strike comes from corporate India, they don’t deserve sympathy. These employees are part of the problem. They have knowingly joined a company that has a reputation for crooked dealings. Like the street sellers who help the drug lords sell their stuff. When the drug lord is exposed, would you feel sorry for the distributors? Would you try to rescue them and give them jobs and ensure that the banks still gave them loans?

Satyam is unusual in that it has not bribed its clients to get contracts. Or bribed the government to get any special benefit which other IT companies do not enjoy. Well, at least no client has come forward to say that. (The World Bank has debarred Satyam because of a corruption issue but the World Bank is another animal and is reportedly going through its own overhaul process to weed out corruption in within.) By and large, Satyam has competed in the market space and won contracts. It has real employees (whatever the number may be) who have not joined a corrupt company - but it was run by a crooked person.

The Satyam episode exposes the government’s lack of preparedness on how to deal with a crisis. Just like it has been exposed during the terrorist attacks in Bangalore, New Delhi, or Bombay.

The government needs to have a crises management in place. For companies like Satyam - with mostly innocent employees - and companies (like the ones I cannot mention) where most of the employees know their bosses are crooked and willingly sign on to be part of some greater India mission.

Can we stop corruption? Of course we can. As investors, employees, business heads we need to continue to work with honest people in a dishonest world. That will truly make India "sundaram".

P.S. An airplane with 155 people crash-landed into the Hudson River just west of New York City at 1 am Friday, India time. I am watching the scenes on news channels. Ferry boats, police boats, and some sort of crane boat rescued every passenger. La Guardia airport was closed for a while and reopened for normal traffic in what seems like 90 minutes from the time the plane hit the river.

Let’s assume a plane takes off from any Indian airport and lands into a river. The plane moves in fast currents, in freezing weather, in below-freezing water, and is sinking as it fills up with water. How many passengers do you think would have been rescued?

Maybe buying shares of companies listed on the Indian stock exchanges is still a safer proposition!