The 'Ten Blunders' to avoid when markets are touching all-time highs

The euphoria is unpalpable, The anchors at the top TV channels have already printed T-Shirts of “Nifty - 21000”. The Nasdaq is about to finally breach (or atleast it was just a few days ago) its life high in a few days and there has never been a better time to believe that “This time it’s different”

I have been in markets since 1993 and like most 50 yr olds have seen a few booms, busts, scams and a few financial crisis. As a fund manager – when sometimes my clients ask me - markets are at all-time highs and making new highs everyday why are you not investing our money and simply holding on to cash.

I give all my clients 2 choices – Take Your money Back – Or be patient. But I ain’t changing my philosophy because of the pressure of capital deployment.

Even though I am always fully invested (personally), in markets (Levered to 120%) I am still almost always fearful, as Socrates keeps knocking within me subconsciously with his words – “Fools are always confident and the wise are always in doubt”

Perhaps I am a mad raging bull in a bear clothing. The bull in me keeps me hopeful and the bear allows me to be patient, cognizant of risks and to be non-greedy when everyone around me is convinced that this time its different. Perhaps that’s why our portfolios have been least volatile and have beaten markets with least amount of palpitations for our clients over a long term.

But the 10 lessons that I have learnt over the years and tried to imbibe in my investing style are as follows.

1. Be bullish not foolish

If the world is progressing and must keep moving ahead (with inventions, technology, opportunities, AI et al) markets will always go up over a long period of time. That allows us and encourages us to be a perma-bull ala Rakesh Jhunjhunwala. Sensex at 60,000 seemed like an impossibility some 10 years ago. Today its 66000. So being a bull almost always helps in the long run.

But in the short run becoming a muppet in the hands of commentators is the worst punishment one can allow oneself to be inflicted with. The narratives that emerge at the seeming peak of the markets are always almost misleading and suicidal.

Lesson

When a stock, an idea or a sector is being pushed feverishly – AVOID.

2. Breakout Stocks

Finfluencers are running paid courses on breakout stock strategy and thousands of gullible retail investors fall for this trap.

In the long run everything is driven by fundamentals without an exception (or else Yes Bank wouldn’t have become a No Bank and Suzlon would still be a blue chip) but in the short run, everything is driven by operators and insiders. How else do most shares start to perform or go down just before a major corporate announcement. Examples are galore not only in Indian markets but US as well.

Stocks break out not because the companies have become fundamentally adroit. They break out because too much money and fear is chasing too little items available. And that can make any s*** break out. Sub 1000 Crore companies that suddenly get new narratives built around them, coupled with incessant peddling of ‘the new promise in the lala land’ on social media and sometimes on business channels always prove to be  a trap and wealth destroyers. Its surprising that almost all breakouts happen only when markets are peaking.

If Infy or ICICI or the likes of it break out, its great and merits attention but when stocks break out because of positive news (in most cases planted) while promoters are happily offloading their stake, not only should you be fearful, but you should also contemplate sitting out of the markets for a while. As Buffet famously quotes “Only when the tide goes out do you discover who is swimming naked”.

Lesson

If you are a superman and can get on a bullet train (thats running towards an abyss) and get off it - just in time, breakout investment strategy is ok. Else you will almost always get scorched.

3. Beating the estimates

When rivers start flowing above the danger mark, the powers that be, worry little about the river or the impending danger. They just raise the danger sign by a few feet so that the river remains below the danger mark. Such is the story of the estimates by analysts. All estimates are always beaten because estimates are not based on the FCF or Earnings Yield. But based on a collective intelligence of sub optimal and mostly clueless analysts who are experts in guesswork.

And sometimes estimates get beaten because of a low base effect, one off income etc etc. For this one needs to delve deep into the financial statements. But beating the estimates is one of the most specious narratives to misguide the DIY and the gullible investor.

Imagine Nykaa listed at a peak valuation of some 1,16,000 Cr (Nearly 15 Billion USD) and analysts hailed it as a profitable company going into IPO while the Nayars privatized their profits and socialized the losses. Its present EPS is some 7 ‘paise’ while its trading at 70% below its listing price and still discounted more than 2200 times.

Over the long term there are just 3 things that matter for a strong stock performance that has any likelihood of creating wealth for shareholders. Valuation, Free Cash and Management intent.

Lesson

Stick to the basic principles of investment that have been in existence for decades. Analysts and their estimates can be great entertainment not the bedrock of sound investment strategies.

4. Feeling good about bad data

Bad data is bad and good is good. However markets have started interpreting this inversely. Can you imagine that if the US jobs and inflation data is good, markets react negatively and vice versa. Eventually the reality will catch up and markets will realize that job losses aren’t good in the long run as data leads the reality by a few months and yet in the short run bad data almost always pleases the market till it doesn’t.

Lesson

If data is correct then trust the data and not the convenient interpretation of it. (eg. Bad data will lead to interest rate cuts and party of excesses will continue). Eventually something that’s good for the economy will manifest itself into goodness and something that’s bad will manifest itself accordingly in not so distant future.

5. Discounting the distant future in the present valuations

Decision of a Capital Expenditure by a company, or establishment of a new factory or a newly acquired business contract spread over multiple years almost always takes the stock price to tizzy heights. And human mind is wired to feel bullish on news that has not produced a single cent yet and no one really knows when it will – These traps are best avoided as euphoria almost always fizzles out. Does anyone remember the infra theme of 2006-2008? Most of those companies aren’t even listed anymore. The present defense theme is no different. Be cautious when buying into future stories.

Lesson

If a company is good it will keep creating consistent shareholder wealth. And any prudent investor will make money in that company’s lifecycle. (Buffet invested so late in Apple’s lifecycle – And How - he didn’t miss any bus or opportunity). Don’t invest just on the promise of a rosy future. Wait for your time.  

6. The FOMO factor

History is replete with examples – and I have experienced it personally. If one really is in love with a stock and wants to create a position, the irresistibility upon hearing TV commentators and news flow is intense. But almost always every single stock that you want to buy today will almost always be available a bit cheaper few weeks or months down the line - Even if it’s the HDFC’s or the Bajaj’s of the world. All one needs is a bit of patience to wait and build a stronger conviction while the target or lower price is achieved. If FOMO could be quantified, its directly proportional to the level of indices. Most bitcoin retail aficionados invested between 50000 – 68000 USD. If Bitcoin is really a store of value why aren’t they doubling down at 20000 USD?

Lesson

Investments made in a state of FOMO are never sound investments. Date your stock, understand it better, observe it for a few Qtrs and then say Yes. You will never go wrong.

7. Recency Bias

Anyone who has vivid memories of 2000 and 2009 and remembers Pentafour Software, DSQ, HFCL, Global Tele and JP Associates, would resonate well with the perils of recency bias. When most of these shares fell from (approx.) Rs. 3000 levels by 20%, people rushed to sell their family silver and real estate to capture the opportunity of owning these blue chips of those times. Well eventually all of these companies got delisted and JP is now at an unfathomable level of Rs 8.

The point to remember is that a stock at Rs 1000 can well become a penny stock and the adage “how much more can it fall” is stupidity.

Lesson

Not only should you never catch a falling knife, don’t invest in story stocks. Companies that peddle stories and not profits will always destroy their shareholders’ wealth.

8. Herd Mentality

Speciality chemicals was as crowded a trade, 18 months ago as Banking is now. Finfluencers were allowed to blatantly push narratives on TV Channels and the entire sector has destroyed a considerable wealth over the last 2 years. Indian Banks are trading at reasonably rich valuations while the CEO s of the same banks are subtly raising red flags on growth and margins yet the BAAP (Buy at any price) brigade is relentless – and while banking sector is the bedrock of economic growth of any country – valuations do matter.

Lesson

When everyone is chasing the same theme – it almost always spells trouble. DotCom in 2000’s, Housing in 2008’s had the same fate. AI is the new darling theme. Lets see what happens to AI and chip companies a few qtrs down the line.

9. Cutting the flowers and watering the weeds

Peter Lynch famously quipped the above adage. I know more than a dozen people who are in love with Yes Bank and Vodafone rather than ICICI Bank and Bharti. A large number of DIY investors feel that the chances of a penny stock doubling are far higher than a respectable and a fairly priced stock. The ‘averaging on the way down’ brigade of Yes Bank, Unitech and JP Associates will continue to sell their winners while collecting mountains of trash.

Eventually such investors get ejected out of the markets forever.

Lesson

The performance of a company gets reflected in numbers and numbers get reflected in the Balance Sheet and the BS gets reflected in the stock price. Stocks are where they are for a reason. A red black on a roulette table offers a better probability of winning than holding onto The Yes’s and Vodafone’s of the world in the hope of they springing a magic.

10. Falling in love with stocks, promoters or commentary

I recently heard a well known fund manager mention in a podcast how he was in awe of Mr. Gosh and Bandhan bank. This adulation towards a particular management clouded his ability to see the turning fortunes for the worse at the bank and eventually he had to exit the investment at a big loss to his investors.

It is easy to fall in love with stocks/sectors which have given good returns in the past. But this should not blind one’s rational thinking towards changing times. One key TV commentator keeps peddling the idea that the next HDFC bank is the HDFC bank itself, while the stock underperformed Nifty by a huge margin in the last 2.5 years and ICICI snatched the mantle of growth and consistency in the Indian Banking space.

Positive Management Commentary is another trap that most investors love to fall into. Bias clouds their judgements and the performance as well. And most investors get sated by just commentary. Which promoter will ever say that his future is bleak or give a negative commentary?

Lesson

Don’t cling onto stocks where data or price isn’t supporting or where the business model could itself face a headwind. If at all - cling onto relationships, great friendships and emotions – not stocks and commentary.

11. Checking the price and not value

We all aspire to upgrade our standard of living (Car, House, Holiday destinations, etc) and happily pay a premium for superior quality and size. But some of the most prudent investors and sometimes fund-managers as well, take refuge of substandard – low priced stocks (penny stocks) in the hope of dramatic turnaround or a story that’s likely to unfold in some distant future. The propensity to indulge in this investment strategy is directly proportional to the index levels.

Lesson

If there is 1% chance that your investment behavior is vaguely similar to gambling, you are most likely to get into trouble. The probability of landing a multibagger amidst an ocean of crappy stocks is like finding a unicorn in a herd of donkeys.

If one could just avoid stupidities in ones investment journey over decades, there is no force that can stop you from compounding your wealth at an appreciable rate. And compounding – the eighth wonder – is everything isn’t it?

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Air India – The looming waterloo for the TATA Group

Warren Buffet famously quipped - “If a farsighted capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.”

I have always found the middle eastern airlines (Qatar, Emirates, Etihad) alarmingly consistent, punctual and hospitable. But this time while returning from SFO, I booked a direct flight to Bangalore and Air India’s AI176 seemed like a great option. While the old bitter memories of the erstwhile Air India (Pre Tata) were still fresh, the general pride about Tata’s taking over a fledgling business, the full page ads of welcome back et al, encouraged me to demonstrate my loyalty towards a home brand.

I made 4 naïve assumptions and had only 4 expectations when I boarded.

Assumption 1 / Expectation 1

Tatas know what they do and have the capacity to affect immediate incremental improvements. So it was obvious that I expected that the basics ( Hospitality, Welcome, Charm, Friendliness, Food, Cleanliness ) will be comparable to the best airlines.

Assumption 2 / Expectation 2

With IHCL as a halo brand, TATAs must have transferred a great guy from IHCL or Vistara to do the most basic quickfixes that are customer facing, ( Uniforms, welcome greetings, body language etc ) to demonstrate that the ailing Maharaja is now being taken care of and is returning back to a reasonable flyable health.

Assumption 3 / Expectation 3

TATAs reek of over-the-top propriety towards their employees, customers and shareholders. So whatever happens their communication will always be transparent and truthful. And when you buy a TATA product, or own a TATA company – as a shareholder, or use their airline, you will always hear the truth – and nothing but the truth. The 12 excruciating hrs when they ripped my peaceful world apart was exemplary.

Assumption 4 / Expectation 4

Things go wrong – that’s natural. But great companies and great brands that love to last generations, make the wrongs - right. They say sorry. And they know how to do service recovery. And lastly they mend and make an aggrieved customer happy. 

This ill fated flight and my ‘mera Baharat mahaan’ kind of loyalty not only proved me wrong, but also convinced me that conglomerates that become too large, that aren’t nimble to quickly evolve and improve, that don’t really treat their customer as GOD, sort out the temporary mess at whatever cost (to protect the brand promise like Amazon does), eventually fade away into sunsets of oblivion over a period of time.

And Air India will bring the entire house of TATAs down. Just like Kingfisher did Mallaya.

“How dare you board my aircraft”

I have been the CEO of some of the best rated hospitality brands and can spot good/bad body language of associates from a mile. “How dare you……” needed to change on Air India on DAY ONE – but it didn’t. If someone has travelled enough, understands hospitality, and knows what a true welcome entails ( as I learnt through my close association with Relais and Chateaux during my corporate life ) AIR INDIA 176 was an epitome of tired and disinterested crew.

The Indian ‘Namaste’ has a form and function and its grace was appreciated all over the world – esp during pandemic. But the namaste on AI 176 was an insult and disgrace on the Indian tradition of lifting ones folded hands and greeting someone with a welcoming smile.

If camera recordings are in place and Mr. N Chandra and Mr. Campbell Wilson take the trouble of summoning these recordings – and I assume that they get what I am alluding to – they would ground the entire airline till they get the Namaste right.

The AIR INDIA namaste presently seems as if a 23 KG weight has been tied to the hands of the welcoming crew that prevents their hands to be lifted above the hip level and each one has been briefed by the famous Mary Shelley with every gesture of welcome expressed with such disdain that the first few minutes on the airplane seem like an ordeal.

“How dare you board my aircraft – did you not have anything better to do”

“How dare you expect a clean seat and a clean aircraft”

The first thing a passenger would do on a 17 hr flight would be to empty ones pockets and relieve oneself of phones, gadgets and pocket accoutrements into the sleeve / pocket at the front. And entire microcosm of food trappings, grains of biscuit, food residue plastic and paper was amazing. It just seemed that the last time a vacuum was used on that seat was when the aircraft left Everett – years ago. I felt really sorry for the invisible bacteria and viruses in that ecosystem. Disturbing their peace and years of evolution seemed criminal. That little pocket seemed to ask me. Are you real? Did you not have anything better to do than to use this pocket to keep your stupid gadets? I almost felt sorry and derided myself at having disturbed the calm and quiet of that microcosm.

I vowed to myself – never ever to try and use the airline seat pocket if I ever happen to travel AIR INDIA again.

The start of the real story

The flight that was originally scheduled to depart at approx. 2030 was rescheduled to 2330 a couple of hrs before the departure. Its really quite understandable that flights get delayed. But passengers plan to reach the airport as per original schedule because of lack of alternatives in a fast moving, busy city like SFO. So when I reached at the usual 1730 (standard 3 hrs before an international flight) I struggled and was refused a check in as the check in time had also been pushed away by 3 hrs. So basically you are on your own for 3 hrs without food and water (SFO doesn’t have anything wrt F&B before security). The three efforts that I made to speak to a seemingly senior AI employee were met with retribution as she was busy briefing her staff rather than making an effort to respond to a passenger, who was just trying to request her to give some clarity and request for a check in because – I was hungry and tired..

When we finally checked in and I boarded many hrs later, all I wanted was to put my ear plugs to use and sleep.

After discharging my duty towards protecting the microcosm in the crevices of the seat pocket, I hoped that I would wake up in Bangalore and requested the hostesses not to disturb me through the flight with any food or alcohol service.

The mystery of the luggage mashup

There was a time in my life where I would take a flight every 3^rd day but never did I ever hear that luggage of another flight got boarded onto mine. But when the captain announced nearly 2 hrs into my slumber, without a take-off,  that there was a mashup with the luggage of another flight – I thought – wow India is so much better – to have never encountered an incident like this.

About to take off for a good 3 hrs.

After hearing a few times that things are going to be just fine and we are taking off in minutes, we finally got to know at nearly 0300 hrs that the flight has a technical issue and stands cancelled. So much for customer communication.

One of the life and career lessons I have learnt after being in customer service for decades is – Don’t keep your customer in dark. Tell him all that you know, keep him informed and if there is a screw up – be honest about it.

AIR INDIA needs to learn that.

What happened next was the mother of all Eff Ups

The 8 ordeals that no passenger should every go through

Whilst  The Maharaja ensured that I did

I must confess that I have never ever encountered a cancelled flight and had checked in all my jumpers and puffers as I am very familiar with home (Bangalore) weather and assumed that the cabin blanket (provided by the airline) would suffice.

 1.      While deboarding ( without a jumper at 0400 hrs approx ) I shared my predicament with the hostess and requested to take one blanket even if I had to pay as I didn’t have a warm clothing and offered to hand over the same to the ground staff the moment I got my luggage. The hostess presented my request to another lady and she came across so harshly as if I had requested her for her kidney. She almost made me feel as if she had caught me stealing the same in front of the other passengers. If I had just decided to pack it in my hand baggage ( because of the exigent circumstances ) the matter would have been over.

2.   2.   On my way out I saw staff and some enthusiastic selfie obsessed individuals taking fotos of the plane from the aerobridge – and I learnt (unverified) that the main issue was that the plane was pushed back without disengaging from the aerobridge etc that damaged it to a point of un-flyable.

3.   3.   The station manager or the lady in charge was clueless about ways to handle nearly 400 passengers and infants and senior citizens. The commotion at the check in counter (where we all were advised to go) was a mess and there was no solution or an alternative. All she said was – you can find alternative flights – find hotels and basically what she meant was – I don’t know what the hell to do.

4.   4.   There are tens of hotels in the vicinity of SFO International airport. All that was required was for her to call a nearby hotel ( I refuse to believe that airlines don’t have a connect ) and book 100-150 rooms – only on ‘pay if one uses basis’ – any hotel at that hour would have firstly given a great deal to Air India and secondly this was the most commonsensical thing to do. All that needed to be done was to tell all the passengers that you can land up at this hotel, show the boarding pass and the passport and your bed and breakfast is taken care of.

5.   5.   Imagine parents with wailing children at that hour – some travelling with wheelchair bound parents, having to book hotels, taxis and figure out what to do.

6.   6.    A paper was handed – an unsigned paper which said that all expenses, hotels , taxis and diff of fares for the booked flight will be paid upon submitting the claim to the email address (dutymgr.sfo@airindia.com) here.
Could the station manager not have shown some initiative to give 3 – 4 flight alternatives to all the passengers (everyone had the same destination – Bangalore) and an offer to figure this out – rather than leave everyone in a lurch.

7.  7.    If someone is awake for nearly 23-24 hrs, not able to reach ones home, not knowing how and when one would – the mind and body starts reacting in a diff manner. Being tired, sleepless, helpless and solutionless at the hands of The Maharaja is not only frustrating – but immensely disappointing.

I haven’t stopped cursing myself for the choices of travel I made by taking this flight to get to my home.

8.   I finally had the nicest and punctual experience with Qatar to get back home.

9.   8.   This ordeal could have been forgotten as a blip in one’s busy life if The Maharaja would have just said sorry and paid off all the expenses, sent an email to the aggrieved passengers and brought the ordeal to a closure. But its been nearly 20 days. I have sent 3 emails to this (dutymgr.sfo@airindia.com) address and raised a ticket on the AIR India website 3 times with 3 follow ups on the ticket raised. None of the emails have bounced. And there is no response whatsoever. I have got no acknowledgement and I don’t really know who is the real custodian of AIR INDIA – Its definitely not the present CEO.

Its safe to assume that @TCS would be managing the IT setup of AIR INDIA and its rather surprising that there is no internal redflag in the entire system since nearly 20 days that a customer is struggling just to get a basic response and resolution to a situation.

A company that’s running “On the mercy of the almighty” , guzzles capital, operates in a hypercompetitive  environment, has recently placed the largest order for aircrafts in the history of aviation industry better get its Namaste and basics right or someone in TATAs will have to find a villa next to Lady Walk Mansion in not so distant future.

Long Live The Maharaja.

How USA can trigger a decade long economic winter?

I have always had a diminutive stature and as a kid I cannot forget when I was first bullied in school by a guy who was bigger, pretended to be invincible and for some reason managed to instill a belief among all of us that if we don’t toe his line, our future would be bleak and sustained existence – questionable!

But obviously there comes a realization when enough is enough and the 8 of us got together and decided to give it all back to the big B. The next few months were excruciating. The Bully wasn’t ready to concede and did all that it took to create many disruptions in all ways, irrespective of whether they were fair or unfair, and we figured out that that fellow is just a pretentious bully who didn’t stand a chance in front of our cohesive group.

Well, the economists and the global observers reading this piece would have already figured out that this analogy above is scaringly congruent to the US and its present situation on the global arena. As the most powerful and influential country on the planet struggles to find a balance between the devil (inflation) and the deep sea (recession) while grappling with the unmanageable excesses of the Modern Monetary Theory, it has to face the consequences of the bully getting cornered by the bullied.

When a large part of the world was struggling with the unknown unknowns of the Covid in the 2nd half of 2020, my friends in the US were buying new houses, cars and Rolexes as they started receiving direct credits because of the largest expansion of US debt. ‘31.5 Trillion and Counting’.

Corporations were being doled out unconditional lines of credit and the economic activity was pushed by liquidity rather than a fundamental demand momentum.

And this released the inflation genie out of the can that’s seemingly impossible to put back.

The quantum of liquidity unleashed in the global markets, the QE1,2,3,4 – The Balance Sheet expansion by more than double in less than 2 years are all a matter-of-fact data available in public domain but lets look at how we are staring at an economic winter triggered by the US of A.

And the reason behind this is that US is such a large consumer of everything on this planet, wields so much economic and military power, is the epicenter of almost all inventions, that if US sneezes, the world won’t catch a cold now – it will suffer from pulmonary pneumonia.

1. Going off the Gold Standard

When Nixon realized as early as 1971 that there isn’t as much Gold (the original norm) as the money printed to expand the economy and make the US economy a consumer driven rather than production driven (like Germany), the alleged path of “print your way to prosperity” became the new norm. And money is like cocaine addiction – You can’t ever reduce the dose.

When elections are won on the premise of false prosperity, writing off loans, rescue of debt ridden citizens – this has to go on and on as there is no going back.

It’s an irony that countries such as India that have far more robust Balance Sheets are rated lower by American rating agencies as compared to their own Balance sheets that are standing on the precipice of disaster but are still rated AAA+.

The US dollar held its ground as long as the music was going on but US never anticipated the consequence of other formidable nations ganging up to jointly make an effort to de-dollarize the global economic activity – so suddenly, so soon.


2. Hopelessly trying to be a global policeman & Underestimating others 

Jury is still out whether Russia s military invasion of Ukraine is right or wrong. It would require a delve into history and analysis and ramifications of ‘NATO s promise to Gorbachev’ or the ‘Cuban missile crisis’. But if America was completely dependent on Russian Oil and Gas like Europe is – America might have actually allied with Russia to help it accede Ukraine. While all other misadventures, Vietnam, Iraq, Afghanistan have failed miserably, US has successfully pushed the entire Euro region (in the name of allied cooperation) into an economic turmoil that factories are going bankrupt, utility bills have shot up 5-6 times and the middle class is being pushed to what’s called energy poverty and people are struggling to barely keep themselves warm.

And no country supporting Ukraine to fight this surrogate war even as much as fathomed or anticipated that Putin might just change the world order because he controls the largest nuclear arsenal, largest natural reserves, has been accumulating gold for last 10 years to challenge the fiat currencies of the west, is teaming up with other brats – China and Saudi, has bypassed the SWIFT system of payment and while all other currencies cant seem to find the bottom on their way down, the Russian Ruble is up 40% as compared to its long term averages.

By sanctioning the foreign reserves of Russia (which were obviously in dollars and Gold) US has fired a bullet, albeit holding the gun backwards where it has scared every other nation that US can freeze the so-called global reserve currency at its own whim and fancy and all the central bankers are now securing and upping their gold reserves and selling American Treasuries thereby hedging themselves against the US Dollar and the whims of US of A.

Can one even begin to imagine that if dollar begins to lose its status of being the reserve currency, what will happen to an average American who barely has a thousand dollars in bank while the nation has a per capita debt of ~92000 dollars.

And what might be the consequence on the rest of the planet when the world’s most voracious consumer doesn’t have the buying power to import and other countries that have created humongous capacities to feed the US, no longer have a market anymore.


3. The dance between QE and QT

Almost infinite and uncontrolled QE took every asset price on the planet thru the roof in the last 2 years. Creative guys were selling NFTs of the most obnoxious things that one could fathom and they found a thriving suckers market for the same. Second hand Rolexes were being sold at double the price of the new ones and house prices in some favorite districts in the US shot up by 200 percent. It’s almost obvious – when the interest rate is zero or near zero the value of the underlying asset could be infinite.

And almost everyone believed that this would go on forever.

Uncontrolled inflation is a bane for any nation. Venezuela, Iraq, Pakistan and the erstwhile Weimar republic are great case studies and US will have to do whatever it takes to bring in price stability.

475 bps of interest rate increases later, the inflation is still far from being tamed. And while prudence demands that inflation must be brought down to levels that are appropriately mandated to the FED, the destruction of businesses, banks, Private Balance Sheets along the way will take years to recover and will kill demand and in turn - global businesses.


4. All it takes effort – to cling on to power and to maintain supremacy.

We have seen with the Portuguese, The Dutch, The British – that all thru the history the loss of power by one empire/nation is hard for it to accept and empires/nations do whatever it takes to cling onto the power at whatever cost. This is likely to create larger quantum of conflicts over the next decade as Russia, China, Saudi and India start to ally with each other and challenge the hegemony of the erstwhile superpower – The USA.

In turn USA will try and do whatever it takes to protect its economic and military turf and I would love to be completely wrong here but no other nation needs a global conflict of a massive proportion more than the US today. A global conflict, as history teaches us, is almost a sure shot way to create a much required distraction and to end a recession. A global conflict is seemingly the only solution that might give US the much required runway that its almost run out of.

Markets reaction to the QEs, Covid, Russia war and now QT has been sanguine so far. S&P 500 is only some 15% away from its highs. The chills that the Fed chairman, Powell tries to infuse in every Fed meet has been taken lightly by the market ( market always almost says through its reaction that – ‘Powell is lying’ )but will most likely will lead to a long winter for the global markets ahead. A 400 bps interest rate increase by Fed between 2004-2007 led to financial meltdown in 2008 and orchestrated Lehman like collapses Et al, and a much quicker 475bps increase in rates from March 2022 till date is unlikely to have any different outcome. Fed has almost run out of the bullets and even if it finds one, its holding the gun backwards.

The bullied have become the bully and the erstwhile bully is clueless and hapless.

This article originally appeared in cxotoday.com https://www.cxotoday.com/specials/how-usa-can-trigger-a-decade-long-economic-winter/ 

ITC - And The Story Of The School Crush

I was surprised they didn’t sue Dr. Ashwath Damodaran when he opined that ITCs bestdays are behind it.

We have all had crushes during our school days and almost always our crush would just create a flutter, never materialise into anything meaningful, we would try and attract the person’s attention, protect them fiercely (without the same mattering to the subject), it would always remain a sweet memory, would eventually fade into oblivion without giving any carnal or emotional happiness but You won’t ever hear anything against it.

Well that’s the story of ITC’s shareholders and how this amazing company with an infinite potential will eventually take an entire generation of dividend lovers down with it and would become a case study just like The General Electric.

History is replete with examples of companies that got consumed by hubris because they had no real owner, no one was answerable, shareholders had no say, the management had no skin in the game and the board was only self-serving to ensure that their own compensation was secure – to hell with shareholders.

Now a few of You while reading this would be euphoric about this momentary surge in the share price over the last few months and the celebrated dividend yield. Little realising that when shareholder’s equity/capital is invested, the purpose of the same is to consistently enhance return on equity at an attractive IRR, but not set the foundation for permanent capital destruction.

General Electric, Enron, Indiabulls, …. (the list is infinite) are just a few examples where dividend yield kept the hopes of the romantics (shareholders) alive while consistently destroying shareholder’s wealth.

There are more than many companies that provide adequate capital protection, better corporate governance, great dividend yield and ‘far far’ better capital allocation strategies – but that’s for another day.

For the longest period of time GE was the most respected company, Jack Welch the most celebrated leader (the folklore goes that his Salmon for lunch would fly in from Norway in Company’s private jet - obviously at the shareholder’s expense), could do no wrong. His word was the gospel truth in management and leadership, people loved the dividend yield and yet he set the stage for its eventual demise. This got discovered much after he was gone.

And while there were so many instances of 30-40% surge in its share-price since 1990, GE eventually reached where it was destined to - NOWHERE.

And anyone thinking that ITC will create any shareholder wealth, will have an ever-increasing ROCE, will be disappointed and this piece will go down in history as the most momentous piece. For no amount of defamation suit can possibly muffle the logic or the sound reason behind a compelling argument. And the liberty provided to me by my constitution u/s 19 is obliged to fiercely protect this right.

I was amused when ITC gave a 10 hr investor presentation last year. Companies that cant face shareholders, give 10 hr long “one-sided” presentations that can barely pass the muster of being more than a new employee orientation presentation, one-way communication trying to justify the underperformance in the garb of future potential.

Most Promoters would resonate with what I am talking about - when employees hoodwink boards and shareholders by their specious Annual Operating Plans by presenting a 10 year vision and a large part of that vision would reach fruition only towards the later part of that plan. As someone clichédly said “more fiction is written on PPT’s and Excel Sheets than by Rowling or Dan Brown”.

I actually have very vivid memories of a sales professional who worked for me (not too long ago), who would always promise a brighter future just a few years down the line. I had the luxury of knowing that person for 8-9 years so would always end up musing about the missing results of the actions that were taken 9 yrs ago that were to fructify into profits/performance 6 years ago – the saga went on and on. But yes, companies and professionals on their eventual irreversible decline almost always say that the worst is behind us, all is sorted, future is bright and everything will fall into place just a few months before the superannuation.

Readers of this piece who invest in the markets and have reasonably good memory can well relate to “the worst is behind us” narrative peddled by a PSU bank and an automobile company. Unfortunately, for years and years this narrative alone has been enough to mislead the shareholders. (This for another time and another piece).

But let this all not just be a narrative. Let’s get to the numbers and the real performance because numbers don’t lie.

For the longest period of time ITC has been peddling false narratives about their capital allocation (masked destruction) and a faraway lala utopian land. Most of my argument against their questionable narrative perpetrated over time has been called out in my 2 earlier pieces

 

10 Blunders – One arrogant company ( Millions of Shareholders Suffering ) – The story of ITC

And

Magic Illusion or Just trickery – The story of ITC

 

But really as a minority shareholder i can see and strongly opine, if ITC was to just sell out their entire gamut of FMCG and Hospitality businesses to either Nestle, Britannia, Adani or Unilever and hotels to IHCL or Oberois (Under the blessings of Reliance) they can probably save the company – but the self-serving board of  ITC would technically become redundant if they actually put the company on the path of propriety … Simple.

The chart below is a glaring evidence of abysmally low return ratios in the hospitality business and the FMCG business. One wonders, had the cigarettes not been subsidising everything else, the managers would have successfully bankrupted these 2 divisions long ago. To be fair to the line managers including the CEO’s of the divisions, they are nice guys – professional – but completely out of control because they can’t handle the burden of their division’ legacy and bloated balance sheets.

Most of the alleged growth is coming from Agri Business over the last few years – at ever depleting margins. For the record the Agri business operated at an abysmally low EBIT of 5.5% in H1 FY 23, 6.6% in FY22 vs 7.1% in FY21 – Margins are consistently shrinking when the entire corporate world had the best of the last 2 years. This is a reflection of poor managerial governance.

Agri Business (as per H1 FY 23 B/S) is ~Rs. 6,000 Crs in assets. Assuming it is a depreciated value at 12% per year for last 10 years, the real capex made is ~Rs. 22,000 Crs. [ 6,000/(1-r%)^n)]. Assuming this capex was done equally over last 10 years, at an IRR of 13%, this would have been ~Rs.40,000 Crs worth of equity, but currently it is only generating Rs. 1,200 Crs of annual EBIT at 3.0% efficiency whilst the GOI bonds are generating upwards of 7%. It doesn’t take an expert to figure out what this means and what these numbers are hiding.

 

Taking credit for increase in cigarette sales.

Can a well-meaning manager at ITC take credit for more people converting into smokers or a smoker, smoking more cigarettes than ever before. And if cigarettes sales are increasing thereby increasing profits – it’s just plain luck for that division’s P&L and Balance Sheet.

 

ITC is doing exceedingly well and turning around while generating a handsome dividend yield.

This argument is pushed more than often by all analysts and Fund Managers in media.

The other side of the same argument very convincingly sounds –

ITC has lost the plot because after investing Rs. 1,77,000 Cr of shareholder wealth and putting it in jeopardy,  (Numbers and arguments in the later part of this article), ITC is still at the bottom of the stack in all operational metrics.

 

CHARTS

Top FMCG companies when compared with ITC

 

 

ITC’s EBIT Margins continuously lag due to highly commoditized products (Atta), subdued margin profile as other product lines are category challengers (Biscuits, Noodles, Cosmetics etc.). Koi puche inse – bhai muddat ho chali hai – kar kyaa rahe ho jo itna boora haal hai.

 

Top listed Hotel companies compared with ITC Hotels.

 

EBIT and EBIT Margins continue to lag when compared with the peers, for e.g. in FY21 and FY 22, it has the highest EBIT loss and EBIT Margin is negative, implying higher fixed cost structure and lower operating leverage. Also, even after the industry’s pent-up demand since Feb’22, the EBIT Margins still reek of inefficiencies.

The only solution to all this is a cluster of some serious, young, experienced and well educated outside professionals on the board that put a stop to the empire building and stop the equity haemorrhage thereby protecting shareholder’s interest.

Personal empire building must stop and the adage “Our Ex Chairman liked hotels” must be replaced by a cutting edge uncompromisable quest for Return on Equity. Division heads should be clearly told to operate and expand without dipping in papa’s pockets. That’s when ITC and its downstream divisions will come off age.

But then the party must stop for inefficient managers. Is ITC ready for that? In my opinion it never will be - till they reach a stage where they don’t have sufficient cash to pay liberal dividends and dividend yields start to plummet.

 

Disrespect For Free Cash

Take for example the acquisition of Mylo (a company involved in digital marketing?) at a valuation of 400 Cr. A company that presently does Rs. 3.4 Crs in sales with a PAT of Rs. (minus) -15.9 Crs has been valued at 400 Cr. And ITC wasted 40 Cr of shareholder wealth for 10% of equity in this company for what? Could India’s best digital marketing company not be given a professional contract for the same value add with quantifiable deliverables? Is Mylo giving any service for free to ITC? My only recollection of Mylo is Jim Carrey’s puppy in ‘The Mask’.

 

Delve deep through discovery of data and I would not be surprised if some vested interests are at play.

 

Hotels

Hotel Assets (as per H1 FY 23 B/S) are Rs. 7,500 Crs. Assuming it is a depreciated value at 12% per year (blended for the purpose of brevity) for last 10 years, the real capex made is ~Rs. 27,000 Crs  [7,500/(1-r%)^n)]. Assuming this capex was done equally over last 10 years, at an IRR of 13%, this would have been worth ~Rs. 50,000 Crs of Shareholder’s Funds, but currently this investment is only generating Rs. 227 Crs of TTM EBIT. Which incidentally includes all the revenues from all the expansion and chest thumping management contracts that are being signed to masquerade itself to be a fast-expanding hospitality brand.

 

FMCG Division

Assets (as per H1 FY 23 B/S) is Rs. 13,000 Crs. Again, assuming it is a depreciated value at 12% per year for last 10 years, the real capex done is of ~Rs. 47,000 Crs [13,500/(1-r%)^n)]. Assuming this capex was done equally over last 10 years, at an IRR of 13%, this would have been ~Rs. 87,000 Crs worth but currently it is only generating Rs. 1,000 Crs of annual EBIT.

 

Destroyed Capital

If this Rs. 1,77,000 Crs (approx. 21.5 Billion USD)  (Agri : Rs. 40,000 Crs + Hotels Rs. 50,000 Crs + FMCG Rs. 87,000 Crs) was simply put in govt of India bonds with annualized 7.5% per annum, the same would fetch ~Rs. 13,275 Crs viz a viz the present cumulative ~Rs. 2,475 Crs per annum with underlying capital/capex permanently destroyed unless monetised at a later stage.

The only viable solution out of this persistent and incurable inefficiency is to respectably monetise its hospitality division and sell it to either IHCL (a far more efficient organisation) or to Oberois that really know how to efficiently manage hotels, create cutting edge globally recognised brands and are on a sustainable expansion spree. I believe even Lemon Tree would do a better job.

And Unilever / Nestle would be happy, in the interest of scale, to acquire, and probably pay a respectable premium for the FMCG division of ITC. But above all there would be no better suitor than Adani Wilmar or Reliance Retail for which ITC-FMCG will provide a much-needed backward integration (largest retail chain), efficient operations and a respectable exit / face saving for ITC.

 

Here is another prediction 

The Board of ITC will never ever demerge its divisions because that will put an end to the party that has been going on as division heads will have to become self-sufficient, raise capital, manage debt and above all answer to shareholders when industry benchmarks of performance aren’t met.

 

History will be unkind to BAT, LIC and SUUTI with combined ownership of 52.66% (BAT : 29.22% LIC: 15.57% and SUUTI : 7.87% respectively) which continue to see a gradual haemorrhage of the intrinsic value of this company that has amazing potential and an opportunity to resurrect itself from the path of permanent destruction.

If ITC doesn’t get its act together, doesn’t stop muffling the voice of reason and logic, continues to waste its cash on lawsuits, the day isn’t far when the dividend yield might still remain an attractive 5%, but the share price is much much lower and expense on defamation suits would be a significant line item in its expense statement.

 

Price vs Reality

Dr Ashwath Damodaran, popularly known as the God of Valuation, was hailed when Zomato exactly touched the price that Dr. Damodaran put as its fair value. And according to his metric as per the valuation lecture of July’2019 valued ITC at Rs. 170

(https://pages.stern.nyu.edu/~adamodar/pdfiles/country/val2dayIndia2019.pdf). Using the same methodology, we arrive at a price of Rs. 206 as below.

Sum of the Parts Valuation as on date :

The cottage industry of the ITC memes might not be dead yet and the thunder of these memes' last laugh might yet be heard.