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May 24, 1997


'The national p/e is the price at which each country decides to market its ability and assets. India is pricing itself lower than its merit'

There is a great danger facing this nation. And it does not come from Pakistan. To understand the subject in its breadth one will need to go into a bit of financial history.

Because the stock market was strong a few years ago, the country created a vast amount of corporate paper. Most issues were sub-standard. Since they were hardly backed by fundamentals, their equities weakened.

Buyers lost money. The value of their holdings vanished. Wherever they were offered as collateral, the lenders lost their principal. The peripheral commodity and real estate markets plunged. Political uncertainty, the perennial bugbear of Indian business, made a big comeback. The velocity of trade and commerce eased. Money became scarce. Investible surpluses dropped. The stock market receded further. Soon one had an imploding spiral on one's hands.

Result: a severe bear market. And probably the cheapest Indian market that analysts have seen in their memory. Greatest investment opportunity ever? A number of observers may make sense of this.

I don't. I think this is a large-scale aberration. Resulting in probably the greatest investment opportunity that India faces and one of the attractive country-plays the world over.

Look at it this way. The coalition government still survives and even though the previous prime minister had to make way for a new one, the finance minister has been retained, emphasising just how important finance is over politics.

Despite having to soft-pedal on a number of aggressive economic issues, the coalition government has presented perhaps the most dynamic budget in the history of the nation. Even the Congress at its most liberal could not do this. This proves that the process of reform is safe.

The rupee has held ground. Looking at this would you say there is a crisis in the country? I wouldn't. But if you got me to look at the earnings capacity of many underrated companies in the B1 group on Dalal Street and their respective p/e multiples, you could fool me.

The stock market has been hammered out of shape over the last couple of years (this may not be evident in a cosmetic reading of the Sensex but that is a different story). Equities are a fraction of their all-time highs. There are more stocks below their issue price than at any other moment in the economic history of this nation. Yields are at an all-time Indian high. Merchant bankers have retrenched their staff. There are probably more near-bankrupt stockbrokers than prosperous ones. The sub-broker community is almost extinct. Nobody thinks there is a career on the stock market any longer.

The spin-off which concerns us is this: most Indian companies are available for a fraction of their asset value.

Of course, the counter-argument to this reasoning is: surely, one cannot expect companies to sell their assets and distribute the net surplus to the shareholders.

I agree. But my argument is different. It is like this: the world is a bazaar with each country having a shop to itself. The national p/e is the price at which each country decides to market its ability and assets.

Some countries that have long-term competitive strengths price themselves higher in the bazaar. Others with reasonable strengths price themselves accordingly.

But there are others which are pricing themselves much lower than their true worth and merit. India is one of them.

Have we no self-respect? In fact, I am going to ask something daring: Don't we have any pride in our ability? Have we discounted ourselves so much that in the global marketplace we are prepared to discount our intelligence and acumen?

Let me give you a few examples. There is a highly successful automobile component manufacturer in Delhi whom I admire. It is a near-monopoly producer in its segment and is a growth story in terms of sales and profits. The amazing thing is that the post-interest profit of this company for 1996-97 is expected to be more than twice its equity - and the stock quotes at a price-cash ratio of less than two!

I might have consigned this too-good-to-be-true bargain to the growing heap of such opportunities which after some time evokes the standard response in people like you and me: "Yes, but there are so many others like these? So what makes this one special?"

I might have said the same thing, had it not been for a stray comment that a foreign fund manager in Boston made to me: "We would ideally like to buy the company outright - and take it private. If that were possible."

That set me thinking. If the majority of cash list stocks quoted in the p/e band of 1 to 5 (based on the results of the first half of 1996-97), then perhaps most global moneybags would think this way: buy the companies outright and apply for delisting. Extend the argument a little further and you have a scenario our forefathers fought against: colonisation.

Exaggeration? Getting carried away? Wait a minute. I would have said so too had it not been for a newspaper article a couple of months ago. GE Caps bought out the promoters of SRF Finance, a leading and respected non-banking financial company, for Rs 480 million.

Having got the big fish out of the way, GE Caps announced it would be buying out the remaining shareholders. That is, once it got a stake in excess of 80 per cent, it requested the stock exchanges to pull the company off the listing roster. In other words, once the company goes private, all the wealth generated by it through its operations in India will be for the benefit of its majority shareholder. Not us.

If a visible corporate in the country could be snapped up and possibly extinguished from public recognition, think of what could happen to a number of other companies in the country where the management has no money, where the promoters are on their last legs and the level of technology needed to survive in the big bad world is far beyond their pocket and vision.

In such a scenario either company would have to be eaten by the bigger fish. Or make an alliance.

The big danger is that a number of Indian companies would be losing their identities in the coming years. And the irony is that it took the 50th year of our Independence to make us realise that this could actually happen.

Or we can interpret the scenario differently. See the phenomenal upside, play bull, lift our collective p/e cum self-respect out of anonymity and save this country from colonisation; round two.

Why the hell are we so apologetic about it?

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