Global Markets – Riding high on sentiments


Worldwide markets are echoing bullish sentiments.

The US Dow Jones Industrial Average index has surpassed its 2007 high and continues to make new all-time highs. The Standard & Poor’s 500 Index too is trading at post-2007 highs. Asian & European markets are rallying too based on cues from the US market. Indian markets are recovering from February lows.

All this barely a week after the US sequestration set in on March 1, 2013!!

The bullish markets have revived positive sentiments and created excitement, but it also warrants cautiousness.

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Market Reaction to new CEO announcement


On 21st Nov, Indian generic drug maker Cipla Ltd. announced its plans to acquire South African firm  Cipla Medpro. Subsequent to the announcement that is likely to boost its prospects in Africa, and is expected to be accretive to earning, Cipla Ltd. shares rose by more than 3 % after the announcement and were trading at Rs 390 on NSE.

On 22nd Nov, Cipla Ltd announced the appointment of Mr. Subhanu Saxena as Chief Executive Officer. Mr. Saxena has rich work experience of over 25 years, in industries as varied as FMCG, consulting, banking and pharmaceuticals. Following the announcement of the appointment of new CEO, Cipla share fell down during the day while the NIFTY index showed a upward movement. Cipla share price clearly did not follow the pattern in sync with the movement of NIFTY.


This weak movement of the share price on 22nd Nov could have something to do with the announcement of new CEO appointment. Generally some market reaction is expected around the announcement day of a CEO appointment. In considering CEO candidates, boards of directors and selection committees are almost always concerned about the market reaction on the company’s share price.


At times markets tend to react unfavourably to the announcement of a new CEO, as investors may anticipate some amount of uncertainty involved with the change in CEO. There are other instances when there have been positive abnormal returns around the announcement of an outside CEO appointment. In such cases, results suggest that new outsider CEO appointments can be considered as beneficial to investors because they bring in knowledge from other organizations and can objectively evaluate and challenge the current strategy of the company and incorporate new and fresh ideas.

Though the initial market reaction is in anticipation of  the CEO’s likelihood of success, however a  latest research by HBR shows that there is no positive correlation between how a company’s stock fares upon the announcement of a new CEO and the share price over that CEO’s tenure so the initial market reaction should not be considered an indicator of the CEO’s likely performance.

Irrespective of the initial market reaction, it will only be evident over a period of time how the new CEO steers the Cipla towards higher levels of growth and creates value for the shareholders.


Challenges facing India’s Infrastructure Sector – Part II

In my last post, I had written about the challenges faced by infrastructure sector in India. If we were to look into the reasons behind the challenges in India’s Infrastructure sector, we see that the problems can be broadly categorized into structural or procedural in nature.

Structural reasons:
  1. Faulty incentives: Government organizations as well as the concessionaire are wrongly incentivized while implementing the infrastructural projects. Government contracts are generally awarded on the basis of lowest price and this encourages private players to undercut each other in prices for winning the contracts, thus resulting in poor quality bids and shifts the focus from long term viability of the project to short term gains, while transferring the risk to debt owners or the tax-payers.
  2. Oligopoly of project proponents:  Infrastructure projects require very high capital contribution and bank funding. Since India is still young in terms of numbers and complexity of infrastructure projects executed, at present we find only a handful of companies bidding and being awarded with projects in the country leading to a situation of “managed competition” where projects theoretically can be “distributed or shared”.
  3. High cost of funding : High cost of borrowing both from bank loans and bonds, has off late increased reliance of companies on ECB to reduce cost, which exposes the project to currency volatility, underestimates cost over the project period and increases the risk of correctly forecasting cost of borrowing subsequently when refinancing.

Procedural reasons:

  1. Underassessment of risks: The quality of data/ information on which key assumptions are based have a great role to play on the integrity of the project. Underassessment of risks due to faulty assumptions, allows the bidder to quote low price for end users charges, which after a while may not be sustainable as can be seen in the cases mentioned in my last article, leading to situations where the concessionaires attempt to re-negotiate contract, citing some excuse, often soon after being awarded the project. Government agencies with the responsibility of evaluating the bids, need to take a objective view of the nature and severity of risk involved. On solution could be that the Government agency entrusted with the implementation of the project could fix boundaries for various parameters including end user charges, so that bids are within band in which bidders compete on the basis of better understanding and forecasting of risks, efficient use of resources and quality of management, rather than reckless gambling.
  2. Reduction of promotor’s stake in risk and reward:  As is the international practice, in project finance/ PPP projects, some of the consortium members and equity contributors are also providers of goods and services for execution of the project. Such companies always have some room to recover their investment through innovative pricings of sub-contracts much before the cash waterfall would allow payback to equity providers. If such a thing does happen, it leaves the founder companies with virtually no risk and creates ground for them to be opportunistic during subsequent bargaining for revision of prices.
  3. Delay in fixing accountability: The slow judicial system in the country causes delays in enforcing liabilities in case of mistakes committed by companies or when companies try to put themselves at an advantageous position vis a vis other stakeholders. Delays can cause erring parties to get away with playing around in the grey zones of the contractual agreement and passing on the burden to the end users and tax payers
All these factors point to the need for a more favorable environment, with institutions, mechanisms and improved governance standards to bring in the required efficiencies for allowing PPP to evolve and mature.

Public Private Participation in India – Issues & Challenges

Infrastructure development had been identified as a critical prerequisite for sustaining the growth momentum of the Indian economy. Given the huge infrastructure deficit that India is facing, government has increased the target for infrastructure outlay during the twelfth plan period (2012 – 2017) to one trillion dollars, about half of which is envisaged to come from the private sector, including an annual $30 billion in foreign direct investment (FDI) inflows. Attracting such astronomical sum of investments will require the government to create a conducive environment with robust institutions and improved governance standards to ensure consistency and predictability of returns for the investors and to mitigate the risks of financing. Ensuring improved governance standards has so far emerged as the main challenge in meeting the country’s infrastructure shortages.

The infrastructure projects, though significant for the economic development, are highly capital intensive, require investments with a long time frame and hence are fraught with uncertainty. So Public Private Participation (PPP) are being seen as an efficient way to bridge the country’s infrastructure deficit, by engaging both the public and private sector and thereby distributing the associated risks.  PPP projects are basically implemented in Project Finance mode where the liabilities of the company are non-recourse. The projects are usually undertaken by a consortium of developers who execute the project and a consortium of lenders who provide debt. Such projects may require a number of rounds of financing during its life time. The greatest challenge in PPP projects is to understand the risks and adequately distribute and manage them to make it beneficial for all the key stakeholders involved in it.

A series of events bring out the flaws in execution of PPP projects in India.

  1.  Independent Power Producers/ Ultra Mega Power Producers including those promoted by powerhouse like Tatas and ADAG have appealed for upward revision of power off take price much before the contracts are due for renewal. The steep increase in tax introduced by major coal exporters like Australia and Indonesia, have severely impacted the cost of operations of the power plants using imported coal. It is apparent that the project developers had failed to reasonably assess this risk at the time of submission of their proposals.
  2. There have been reports of violation of Concession agreements in toll road projects including few cases where the concession agreements were terminated. Many such cases have gone into litigation. In highway development, most of the disputes have arisen due to controversies in payment and collection of toll for finished projects and rolling of credit and interim payments as concessionaires missed completion deadlines in projects under execution. According to the National Highways Authority of India (NHAI), the Gurgaon Expressway Project, that was supposed to be the showcase for tolled highways in India has everything going wrong with it — corruption in toll collection, substandard construction and maintenance, chaotic traffic management and unsafe ride.
  3. The Airports Economic Regulatory Authority (AERA) approved an increase of 346 per cent in airport charges by Delhi International Airport Limited (DIAL), to help them recover the cost of operating the airport. This has adversely impacted thousands of passengers and resulted in Delhi being the most expensive airport in the Asia-Pacific region. Both domestic as well as major international airlines operating out of India have challenged the steep increase in airport charges and dragged DIAL to court.
  4. Airport Metro Line in Delhi, used by over 15,000 commuters daily, was suspended after safety concerns of the elevated tracks were raised by Reliance Infrastructure-led consortium, which operates the line. As a public-private project, Delhi Metro Rail Corporation (DMRC) has built the civil structure on the Line and Reliance Infrastructure is responsible for operations and maintenance. There operations have been incurring losses; this has led to the speculation if financial losses are the reason for suspension of services. .

While the concerned parties do have a right to protect their interest, repeated disagreements and litigations point to basic faults in the way PPP is being implemented in the country. So one would obviously ask- why the project developing consortiums were unable to predict the turn of events and did not provide for it in their bids and why did the Government accept their overtly ambitious and faulty bids.

In the next section, we will further analyze the issues facing the infrastructure sector in India.

Invisible Innovation In India

TurtleOver the past few decades, India has become a global hub for back office services and software development’. This has created a common belief in the west that people from developing countries such as India are generally good as software developers.

As Indians too, we often wonder that why as a country we have not been able to produce to produce world class innovations like a Google or an Apple so far. What is lacking in the country that holds back innovation?

Dr Nirmalya Kumar, Professor of Marketing and Dr Phanish Puranam, Professor of Strategy at the London Business School say that a part of the answer lies in how we look at innovation.

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How far will the Jaguar leap? Corporate Turnaround of JLR

Tata Motor’s acquisition of Jaguar Land Rover is one of the most discussed cases of a successful outbound acquisition by an Indian company. 

Since the past few years, Jaguar Land Rover Plc (JLR), the UK based subsidiary of Tata Motors has consistently been the major driving force behind the revenue and profits for the company and has helped the company to plug losses in the domestic business. The trend continues, with Tata Motors’ profit having tripled in this quarter of 2014, on strong Jaguar, Land Rover sales.

Such splendid performance of the acquired company was almost unimaginable for many in 2008.

JLR Corporate Turnaround

Flashback to June 2008. Tata Motors had acquired two iconic British brands – Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. This was the biggest buy-out in the automobile space by an Indian company. Ford Motors Company (Ford) had acquired Jaguar from British Leyland Limited in 1989 for US$ 5 billion. After operating it for losses for few years, in June 2007, Ford had decided to divest the brands as a part of its restructuring strategy. Tata Motors was interested in acquiring JLR as it would reduce the company’s dependence on the Indian market and facilitate Tata Motor’s entry into the luxury segment. In addition to the US$ 2.3 billion it had spent on the acquisition, Tata Motors had to incur a huge capital expenditure as it planned to invest another US$ 1 billion in JLR.

JLR being a British powerhouse brand, people questioned how Britain could allow Jaguar to be sold first to Ford, and then to Tata. The deal was not very well perceived due to the Indian ownership and the fears of outsourcing of jobs, technology and the brand to India. Analysts feared that Tata had made a mistake. Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors as it had increased the earnings volatility during the difficult economic conditions in the key markets of JLR including the US and Europe.

In 2012. JLR, a business that was battling for survival three years ago, reported record annual sales and a 35% increase in pre-tax profits to £1.5bn due to surging demand in China.


How did Tata Motors manage to achieve such a remarkable turnaround for JLR?

To begin with, cash management and cost management were identified as the key priorities. A three-tier model was developed with the help of Roland Berger Strategy Consultants. First, a short-term goal to manage liquidity with the assistance of KPMG was put in place. A cash management system was built to manage cash on an hour to hour basis. Then came a mid-term target to contain costs at various levels and the formation of 10-11 cross-functional teams. A number of management changes, including new heads at JLR, were made and the workforce was reduced. Finally, a long-term goal that runs until 2014 was drawn up, focusing on new models and refreshing the existing ones.

Tata had also acquired the IP and skills from JLR that enabled them to locate a substantial part of production and supply chain in South Asia. This helped in bringing down the cost of production. Tata Motors divested stakes in group companies to raise cash. The proceeds were channelled for innovation and product development. A separate IT ecosystem was set up for JLR. JLR was always considered to be top end high end luxury brand but Tata added new products like Evoque which made the brand image a bit soft and targeted towards urban people, while still keeping the luxury branding intact. This brand image change by Tata worked in favour of JLR, helping it not only to survive but also to become an international powerhouse once again.

Tata’s footprints in South East Asia helped JLR to diversify its geographic dependence from US and Western Europe. After the downturn of 2008-09, JLR made its first operating profit in the quarter ending September, 2009. The profits continued in 2010, with an increase in Ebitda of 50% q-o-q. In 2011, JLR posted record annual profits of more than £1bn.

Given Tata Motor’s annual investment plans of £1.5 billion for JLR to impart the brand with a sustainable competitive advantage, analysts and investors are enthused to see how far Tata Motors will make the Jaguar leap.

Marriage Made in Heaven – Post Merger Integration

With the announcement of merger between Mahindra Satyam and Tech Mahindra yesterday, analysts are upbeat about the future prospects of the company. The combined entity will become the fifth-largest IT company in terms of market capitalization. It will cater to more industry verticals in comparison to the standalone basis. So it stands a good chance of getting bigger business and more clients and breaking into the top tier of Indian infotech companies.

The benefits of the merged company will be made possible by a successful integration between the two companies. The company management foresees a period of six months for completion of the ‘complex’ post merger integration (PMI) process.

The integration process may touch upon several areas. It will entail the integration of the MIS platforms of the two companies. It appears that Satyam had close to 190 MISs earlier, many of which were not integrated, resulting in manual intervention for transposing data from one system to another. According Mr Vineet Nayyar, Chairman of Mahindra Satyam, this left scope for discrepancies in many cases. The MIS systems at Mahindra Satyam will now be integrated with the Oracle- PeopleSoft platform being used at Tech Mahindra. The post merger integration of the two organizations may also result in removal of significant duplication of corporate functions besides synergising sales and operations. Thus synergies will be realized through integration, by achieving cost reductions or bringing about revenue enhancements.

It will be an equally long drawn process to measure the success of integration. It is to be remembered that while organizational integration is necessary to reap synergies, but it also results in disruption due to uncertainty associated with organizational change, loss of motivation, turnover, changes in power dynamics and independence of decision making. Net gains from integration will accrue only when the benefits from collaboration exceed the costs of disruption.

Since integration is always costly, it will be crucial to have competent implementation and decide carefully on appropriate integration level such that for any given level of integration, gains are realized with lower costs of integration.

The other issue that impacts integration is the cultural alignment between the two organizations, which at times is very hard to bridge. Having worked with both the organizations, I can say thankfully that in this case though, the cultural alignment should not be very difficult to achieve owing to similar culture between the two organizations. However it still pays to be aware of any subtle cultural differences that might exist.  Overall a well communicated implementation strategy should be good.
As said by the management, “the Mahindra Satyam-Tech Mahindra merger appears to be a marriage made in heaven, and if they can execute their future business properly, one can expect the ‘honeymoon’ period to last longer.”

Building Blocks – Reliance Capital

Reliance Capital, one of India’s leading Non Banking Financial Companies, is in news for chalking out a profitable growth path and de-leveraging its balance sheet. Reliance Capital is a portfolio company with different lines of businesses such as asset management, life insurance, general insurance, broking and commercial finance. All these lines of businesses are individually headed by their respective CEOs, who in turn report to the Corporate CEO.

In a recent news statement in the Business Standard, Sam Ghosh, CEO – Reliance Capital has said that his objective is to make each line of business profitable by using different strategies for different business. This statement leads to a very basic question. If each of the individual LOB is to become a profitable entity, what then would be the requirement for having a corporate portfolio company over these LOBs? Initially the corporate office served the purpose of capital infusion to the individual LOBs. However when these LOBs become profitable and self sustainable, capital infusion from corporate office may no longer be needed. One could wonder what purpose the corporate office will then serve. Will the corporate office simply be an overhead, with no revenues, removed from the individual businesses? Is this corporate structure created only to play the role of a ‘Big Brother’ for imposing corporate reporting restrictions and/ or bringing about cost savings by the way of shared services? Or does it add some value to the LOBs other than compliance and the shared services?

The answer lies in the notion of corporate parenting. Among the different types of corporate parenting activities, some are geared towards core compliance purposes while some activities are classified as shared services – i.e. providing services to multiple units in order to gain savings by obviating the need to replicate the service within each unit. Other activities fall under purview of ‘Value Added Parenting’.

Corporate advantage is created if the combined portfolio structure results in improvements in profits greater than the sum of the profits of the businesses operating individually. This draws on the idea of “synergies” that is closely linked to the idea of related diversification. In diversified business, corporate advantage is created if synergies can ensue by applying resources or combining capabilities across businesses to either reduce costs or enhance revenues.


As in the case of Reliance Capital, we see that beyond compliance and the shared services, synergies within an organization may be derived by applying common management capabilities at the corporate level to different businesses units, thus helping the businesses to pick on appropriate strategies, unlock value and promote self-sustainable and profitable growth.

Impact of policy environment on funding start-ups in India

Funding has always been the biggest challenge that every venture has to face. Particularly the technology and knowledge based start-up enterprises that are based on intangible assets such as human capital and an entrepreneurial idea. In absence of physical assets, such start-ups find it difficult to secure bank financing and they need to approach equity financiers such as angel investors or VCs. Mostly start-ups do not even have access to working capital loans; though some finance companies offer collateral-free working capital loans to small enterprises with at least three years of operations.

Like any other investment, the investment in start-ups is influenced by the policy environment prevailing in the country. The current policy environment in India is reasonably conducive for start ups, but still leaves a lot more to be desired. Domestic money to VC/PE funds are either restricted or prohibited in current regulatory framework. For example SEBI regulations for Domestic Venture Capital Funds do not permit registration of a fund which would have corpus of less than Rs.5 crore ($ 1 million). This makes it difficult for angel groups and seed funds to get registered and raise funds. Pension funds, which are the biggest source of money worldwide, are not allowed to invest in VC/PE funds. Insurance companies are allowed to invest in infrastructure funds only; even banks’ exposure to VC/PE funds is severally controlled.

The National Innovation Act that proposes tax incentives for angel investors is likely to be passed by the government. The Department of Industrial Policy and Promotion (DIPP) in India also plans to incentivise venture capitalists (VC) who invest in small and medium-size enterprises (SMEs). It is anticipated that with implementation and stabilization of Goods and Services Tax (GST), the environment will be more favourable for promoting entrepreneurship and business.At present, for a business, planning to set up manufacturing units in India, the existing complex and high taxation structure consumes a large portion of the available cost arbitrage. Though the manufacturing cost of most products in India is nearly half than in the west, but due to tax levied at various stages, the cost advantage is reduced by almost 50%. The existing multi tax structures often compel manufacturers to base their inventory and distribution decisions on tax avoidance rather than on operational efficiency. The implementation of Goods and Services Tax (GST) is expected to reduce the hassles associated with the existing tax structure and facilitate investment decisions to be made purely on economic concerns, independent of tax considerations.

The policy environment in India is gradually evolving and regulations are expected to evolve in a manner that encourages more investment bringing it at par with that in the mature markets. However the timelines by which these proposed policy changes will be implemented and the overall impact on the VC community is yet to be seen.

First in the Race – Apple and Samsung

Apple and Samsung are embroiled in several legal fights; both are contending for global leadership of smartphone and tablet market, with Samsung poised to surpass Apple in the race in 2012. Smartphones are an interesting example of a product category where the second or third movers have considerably learned from the experience of the product innovators. Long before Apple launched the iPhone in 2007, IBM had released the first smart phone called Simon in 1993.

Often the pioneers spend a lot of resources to come up with new and innovative products, demonstrate it to the users and test the market. In the meanwhile, newer companies that are more agile and are quick to see the opportunity, understand the product – market fit, learn from the mistakes of their predecessors, make a big bang entry and harvest the potential in the market already created by the earlier explorers. They survive and even make it big.

Samsung, for example, has perfected the game of being the second mover. They study the market leader meticulously, copy every aspect of the market leader’s strategy in minute details, and further improvise on the execution of the strategy.  They end up not only in catching up, but even surpassing the market leaders. It was the success of the iPad that made Samsung roll out the Galaxy Tab. Even the Galaxy Note was preceded by the Dell Streak.

On the other hand, there are companies such as GE or Siemens that have been successful in retaining the first mover advantage and in creating next generation products in a continuum while phasing out the older ones. One of the parameters of strategic health for GE is the proportion of revenue earned by products which have been brought out in the previous 2 years. It means that such companies need to have a whole range of next generation products in the pipeline. This is relatively easier for companies that cater to the B2B market, where customer expectations can be understood within a reasonable time frame, due to existing contractual relationships with the customers. It is more difficult for the companies to gauge the customer expectations in the B2C scenario, though the B2C market offers the advantage of high volumes.

This brings us to an interesting question that why the pioneers with all their obvious advantages such as a brand image, a customer base and a dealer network in place to push the new product, are still not able to retain the market leadership. Going back to the Kodak story, what could they have done differently so that having been the pioneers in digital technology, they would have continued to be so.

This steers the discussion towards a very important trait of executive leadership – the ability to foresee the horizon of changing technology and customer expectations. An organization has to be futuristic, open to accept that the world can change overnight and the confidence to believe they can be the leader in the changed world too. It requires the tenacity to persevere, understand the market’s perception of their products, support R&D to improve on the products and make required changes to their products or their marketing approach in order to sustain the market leadership.

The path to achieving this trait could be through corporate entrepreneurship, if promoted in a true sense within an organization. This group would need to be supported and backed by the topmost authority in the organisation and would have to be reasonably separated from the current culture of the organisation, to encourage them to think differently and foster a culture of innovation. This may also, at times, require convincing the shareholders and the board to take a dip in immediate returns for long term gains.

This leads to an interesting question next. Which of the items of mass consumption today is most likely to into oblivion replaced by a newer generation product in the next three to five years? Who knows? Plastic money could be one! Already some companies are developing mobile payments solutions that focus on the convergence of online (e-commerce) and proximity (face-to-face) payments.


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