Partners Column -March, 2017

Dear Friends,

I would like to share a few thoughts on areas troubling  corporate minds and our country in general.

Capital Allocation / Buy back

There has been a lot of discussion around capital allocation policy of large Indian listed IT and other companies who are sitting on loads of cash.  Few proxy advisory firms and investors  have  demanded buy back of stock by these companies so that excess money can be given back to the shareholders and improve return on equity. Finally, TCS announced buy back and Infosys has called for shareholders’ approval for bringing in suitable provision in the articles of association.

I have been reading Warrant Buffet’s letters to his shareholders of Berkshire Hathway Inc over the years and offers fantastic insights into investing in businesses and making money for the stock holders consistently for a long period of time.  His letter dt 25th Feb 2017 for the financial year Dec 2016 offers his views on capital allocation and buy back, thought it would be appropriate to reproduce here:

  • ‘It is important to remember that there are two occasions in which repurchases should not take place, even if the company’s shares are underpriced. One is when a business both needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt. Here, the internal need for funds should take priority. This exception assumes, of course, that the business has a decent future awaiting it after the needed expenditures are met.
  • The second exception, less common, materializes when a business acquisition (or some other investment opportunity) offers far greater value than do the undervalued shares of the potential repurchaser. Long ago, Berkshire itself often had to choose between these alternatives. At our present size, the issue is far less likely to arise. My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, “What is smart at one price is stupid at another.”
  • One final observation for this section: As the subject of repurchases has come to a boil, some people have come close to calling them un-American – characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn’t the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I’m not aware of any enticing project that in recent years has died for lack of capital. (Call us if you have a candidate.)”

Trump Impact

Donald Trump has won US Presidential  Elections by surprise to many and took oath as a President on 20th Jan 2017.  Basis his election campaign, he is likely to rewrite US policies towards business, investment, immigration, jobs etc., One of his first executive orders was on banning people coming from 7 nations for 90 days despite their holding valid entry permits. There has been huge hue and cry by various corporates, academic institutions against this ban. The latest move being suspension of premium processing service for HIB visa. The Indian Information Technology Industry and Pharma have been thriving on US market over the last two decades, the latest moves by US is likely to impact these industries significantly. Given US has been a very open economy, encouraged skilled immigrants over decades and has helped them innovate, grow and create huge wealth for US economy.  I would like to share excerpts from Warren Buffet’s letter on his articulation of US:

One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

It also puts pressure on our governments and business to reinvent our models, get our priorities right like skilling our youth, domestic manufacturing, creating employment etc., Lets hope we as a country and our business weather these challenges and become more strong and sustainable.

Ease of Doing Business in India

This is the most debated topic over the years and has become lot more prominent with the current government under the leadership of Hon Prime Minister Shri Narendra Modi. I have been advocating ease of doing business over a decade and following world bank ranking on this. I am happy to see credible and sustainable moves being made by the central government in this direction and few recent initiatives are:

  • Registration of Company: SPICE Incorporation effective from 1 Feb 2017 – Simplified Proforma for Incorporating Company Electronically (SPICe) – with mandatory PAN & TAN – This enables Company to be registered in less than 24 hours and also provides tax identification number (PAN) and Withholding Tax Number (TAN) in one go, which used to take 3-4 weeks as they had to be done consequently. We are happy to witness this happening in reality while there were few challenges initially due to tech integration issues among departments.  This is likely to cover lot more registrations going forward.
  • Trademark registration: New Trademark rules have been notified effective from Mar 6, 2017 which have reduced number of forms from 74 to 8 forms.
  • Labour Laws: The ministry has notified the Ease of Compliance to Maintain Registers under various Labour Laws Rules, 2017 following which 56 registers under nine central laws have now been merged into five registers. Besides, under the easier compliance regime new registers have only 144 data fields as against 933 data fields earlier.

SME Listing

SEBI introduced SME platform for SME IPOs 5 years ago to encourage small and medium enterprises to raise money through equity markets and get listed on SME platform. BSE and NSE have created separate trading platforms for SME scrips. Over the years 165 companies have been listed on BSE SME platform (20+ companies have migrated to main board) and over 30+ companies listed on NSE platform and couple of companies have migrated to NSE main board. The journey so far has been very encouraging, these companies have collectively raised over INR 1600 crores in the IPOs and market cap is around INR 12000+ crores. Few areas need attention to further enhance value of SME markets are: – (a) Larger participation by institutions in the primary and secondary markets; (b) Reducing minimum subscription amount from Rs. 2.00 lacs; (c) Creating more visibility in the MSMEs, investor community.

Wishing every woman, a very happy women’s day. Indian woman is a  true example of leadership, multi-tasking, perseverance, patience, planning, sacrifice which I continue to take inspiration from.

With best regards
Raghu Babu Gunturu
Co-founder & Partner
R & A Associates
Dated 7th March 2017

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