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Find the information gap and profit from it
Mohit Satyanand, Outlook Money | November 06, 2006
One of the recurrent themes of financial papers in the last month has been the globalisation of Indian corporates. The Tatas grabbed the headlines, first with Tata Tea's investment in the US beverage brand Glaceau, and then with Tata Steel declaring its interest in the premium steel maker, Corus.
The theme is playing out across the sectors, and across market cap -- whether a Ranbaxy or an FDC, a Satyam or an Aztec -- Indian firms are buying into delivery capacity across the world.
Such news brings out my patriotic streak -- 50 years of economic isolation have been hard on the poor, but another symptom is the fact that a country of over one billion does not have a single internationally-recognised brand. Compare that with tiny South Korea -- Daewoo may be in trouble, but there's still Hyundai, Samsung and LG.
But, before I begin cheering from the sidelines, I remind myself that merely acquiring brands or factories will not do the trick, as two Chinese biggies have recently learned. A couple of years ago, cell phone maker BenQ's advertising was highly visible in India, and their discount pricing seemed ideal for our market.
Internationally, they had climbed to a 6 per cent market share, and in their hunger for growth, bought the phone business from Siemens. They couldn't digest the meal, and today are struggling to hold a 2 per cent slice of the handset business.
Similarly, Chinese TV manufacturer TCL bought Schneider and Thomson, two large European operations. For a while it had the largest TV manufacturing capacity in the world. Today, they are struggling to stay afloat in the face of rapid technological change and fragmented markets.
Now, I'm not wishing this kind of luck on Indian MNCs and I sincerely believe that the best of these are led by sophisticated managers who will successfully steer their internationalisation. In fact, the top three firms in the portfolios I manage are Tata Tea, NIIT and KPIT Cummins Infosystems.
But caution is warranted, and if the Indian investor is going to take a bullish position on such businesses, then he needs to carefully monitor the companies' progress as they spread wings. As yet, the investor is not being aided by institutions that support financial decision-making -- chiefly the stock exchanges and the financial dailies.
As companies go global, their corporate structures become more complex; an increasing share of their turnover (and hopefully profit) comes through subsidiaries and cross-holdings. These do get reported in their financial results, but under a separate section, Consolidated Results.
For a relatively mature international player like Tata Tea, less than 50 per cent of its turnover, and two-thirds of its earnings per share, come from its Indian operations. Yet, if you visit the BSE website, numbers for Tata Tea represent only the Indian operations. Similarly, a typical newspaper will report its P/E at around 22, whereas factoring in the international operations will make the stock much more attractive, at about 14.
Whatever the company, the gap between the Indian stand-alone numbers and the global figures can be the difference between a 'Sell' and a screaming 'Buy'. Till your pink press and the stock exchange websites make the change, you will find the relevant data only in the companies' press ads that carry quarterly results, and online.
For my part, I have two responses to this information gap. The first is that of the arbitrageur, namely if I have information others don't, I have a purchasing advantage. The second is that of a reformer, which is to point out such anomalies to those who can steer change. But until changes are made, find the information gap, and profit from it.
The author is an investment advisor to a select group of clients. He can be reached at firstname.lastname@example.org