In India, this breed of passenger vehicles has grown impressively

Management guru Stephen Covey had quoted "Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning If we remember correctly, it was Steve Jobs who once said that you can't ask customers what they want. Because by the time you build it, they will want something new. With the kind of path breaking products Apple has churned out over the years, Jobs has certainly walked the talk. By the way, there is an altogether different industry and that too in India that also seems to have taken this lesson to heart. And the industry is none other than the auto industry. Previously, most of the owners of small cars who looked for upgrades could do so by opting for sedans or hatchbacks. But in a move reminiscent of Apple's maneuvers, car makers took to launching new SUVs (Sports Utility Vehicles) and compact MPVs (Multi Purpose Vehicles), segment that customers barely thought of. Did the move work? Brilliantly we believe. This new breed of passenger vehicles has taken the market by storm. So much so that manufacturers are finding it hard to meet demand. What more, they have also given the struggling auto industry something to look forward to.

GDP growth in June 12 quarter

                                                                                Data Source: The Economist

After slowing down to 5.3% in the March 2012 quarter, India's GDP growth showed no signs of picking up in the June 2012 quarter as well. Growth during the quarter came in at around 5.5%. However, as above chart shows, when compared to its peers, India fared much better as it was ahead of countries such as Russia, Japan and the US.  Although it lagged behind China, the latter also displayed signs of a slowdown as growth came in lower than 8%. Japan saw some growth led by reconstruction activity post the earthquake and the tsunami that hit the nation last year. Not surprisingly, the Eurozone witnessed a dip in growth as debt problems continued to mar the countries in the region.       

Do you fall for this common management trick?

We humans have evolved to possess absolutely first rate linguistic skills. Our math skills in comparison look significantly underdeveloped. So much so that most of us come across as useless in something as basic as fractions. An evidence of this is routinely found whenever we go out shopping during the discount season. Imagine being faced with the prospect of choosing between a 50% increase in quantity and 33% discount in price. Most of us could end up choosing the former even though the two offers are exactly the same. Or take the hypothetical example of choosing between a 33% extra free and a 33% drop in price. While on the surface they appear the same, a deeper look would reveal that the discount is a better proposition than the increase in quantity.

If you thought such tactics are adopted by retailers and shopkeepers alone, you are certainly wrong. For even the field of  stock investing is known to use this trick and rather generously at that. Take the practice of issuing bonus shares or implementing a stock split. You will routinely hear management talk about how the share price of the company is on the higher side and how doing a stock split will make it more affordable for small investors. Not only this, even stock bonuses are given under the garb of rewarding shareholders for their long term association with the firm.

To make matters worse, investors more often than not fall for this trick and even send the stock price of the company under consideration soaring. What they fail to take into account is the fact that although their number of shares may have gone up, the share price is reduced proportionately. This thus leaves their total investment the same as before. Besides, the management that focuses mostly on bonuses and stock splits rather than trying to improve the long term profitability of the company should always be viewed with suspicion. The management's efforts at all times should be directed at improving the fundamentals of the company. For if profitability improves, share prices will automatically follow. Trying to artificially improve the share price through frequent bonuses and stock splits is not the mark of a good management we believe. And investors should always steer clear of such companies.

Borrowings of top 10 corporate group in a country

                                                          Source: The Economic Times

There have been reports doing the rounds that the  Indian banking system could potentially be sitting on significantly more NPAs (non performing assets) than those being reported. Above chart is perhaps one of the key reasons behind the same. As highlighted, the concentration of loans to top corporate groups is the highest for India amongst some of the other countries of the world.  This is not to say that most of these loans would eventually turn bad but such a high level of concentration is certainly risky for the long term health of India's banks and efforts should be made to lower the same.

This word is a cancer for India's economic health!

Most of India's state owned enterprises are currently on life support. Even by conservative estimates, these contribute at least 15% of the country's GDP. Hence there is little to explain on the critical state of India's economic health. The Indian government has left no stone unturned to ensure that the profitable PSUs bleed as much as unprofitable ones. As a result, not just the railways and state electricity boards, but also listed companies are piling up losses. Companies across sectors have not minced words about their dire state of affairs. Be it energy major Oil and Natural Gas Corporation Ltd. (ONGC), power major National Thermal Power Corporation (NTPC) or banking major State Bank of India (SBI). However, blinded by its political compulsions, the government sees little option than destroying public wealth.

But one quick fix solution that the government has adopted over the past few years has become the cancer for the economy's health. It answers to the name of debt 'restructuring'. Loans taken to fund agricultural losses, bleeding PSUs and loss making infrastructure projects have had this single remedy. The financers have been allowed to 'classify' the loans as standard as against writing them off as NPAs. Being just an accounting gimmick it allows the government to project all parties being financially sound. The loss making PSUs and the banks that have lent to them get away without taking the losses upfront. Moreover the PSUs get to borrow more despite their dire state of finances. If this was not allowed, several electricity boards, PSUs in oil, aviation and financial sectors would have declared bankruptcy by now.

But despite the risks of such a malpractice the government is set to put its seal on yet another 'restructuring' initiative. As per Bloomberg, a draft proposal by power ministry has sought to restructure US$ 35 bn (Rs 1.9 trillion) worth of loans. Held by power utilities, restructuring of these borrowings by banks will supposedly avert a power crisis in the country. Part of the loans will be transferred to state governments as well. Not that the financial condition of the state governments is any better. But with cash losses having widened 15 times over three years to Rs 288 bn, the state electricity boards are unlikely to find any lenders otherwise. The state governments are equally to blame for their stoic approach to raising power tariffs for years. As a result, the difference between the average cost of supplying electricity and the average tariff has almost doubled in last 11 years. Meanwhile transmission and distribution losses remained stagnant at 27%.

We believe that by offering an easy lifeline to such incompetent entities, the government is sealing the future of Indian PSUs. It is only a matter of time before the 'restructuring' bug devours what is left amongst India's so called 'navratnas'.

Market share of Indian aviation companies

                                                                    Data source: CAPA

The government has denied any plans to stall the operations of cash strapped avaition company Kingfisher Airlines. More concerning is the fact that it will alow the airline to be airborne, even if it means compromising the safety of passengers. Meanwhile the competitors of Kingfisher are looking to grab a share of its pie in the aviation space. As seen in today's chart, the likes of Indigo and Jet Airways that control 46% of Indian aviation space, can be key beneficiaries of some competition being grounded.

Are Indian banks' bad debts bigger than what is stated?

The global financial crisis did not affect Indian banks the way it impacted global banks. The major reason for this was the strict set of Reserve Bank of India (RBI) regulations that these banks had to adhere to which prohibited extensive use of securitization and derivatives. But that does not mean that Indian banks are completely out of the woods. Indeed, they are facing problems of another kind. Notably that of bigger bad debts.

The Economist points out that India has a bigger bad debt problem that is not in line with what is stated by the rather stable level of banks' official 'non-performing' loans. But the quantum of this debt is difficult to judge because many have been labelled as 'restructured'. This means that the terms of the debts have been softened, but they are not formally recognised as bad debts. These restructured loans were estimated at US$ 43 bn in March this year amounting to around 2% of India's GDP. Restructuring loans by itself is not such a problem simply because the borrower has not defaulted but simply requires easing of the terms of repayment. But the important thing to note here is that this facility should not be misused. For instance, take the case of struggling airlines such as Air India and Kingfisher Airlines. Both of them are saddled with massive debt. While they may not have technically defaulted so far because of restructuring of these debts, they are certainly in no position to service or repay the debts.

Also, the burden of these debts has been greater for public sector banks than their private peers. The Economist has estimated that 93% of restructured loans are on the books of public lenders. They tend to be in poorer shape than their private rivals on account of lower capital levels, lower profitability, higher bad debts and lower provisions held against those bad debts.

However, it would be too early to presume that the  problem of restructured loans could blow into something very big. At least we hope that the central bank which has been rather vigilant so far will ensure that this issue does not blow out of proportion. Moreover, since Indian banks (even PSUs) are comparatively better capitalized as compared to their Western peers, they are in a better position to tide over difficult times. Having said that, a consolidation in the sector cannot be ruled out. Overall, what banks need to ensure is that they do not stop lending to genuine borrowers just because they have been bitten by a few bad ones.