Wednesday, August 08, 2012

Who’ll call warren’s bluff?

He’s bluffing. Period! The man is a master of contrarian logic and knows how to call a spade an ox and even gets away with it. Warren has no intentions to give away his position in Berkshire and all talk about a successor should be relegated to the bin. Steven Philip Warner in a delightful analysis...

The last time I tried to meet up with Buffett to convince him I could be the one, I was stopped at the New Delhi airport itself (alright, I’m lying; I couldn’t even afford the air ticket). But think about it; we’ve all been had. A handful of months back, when we ran Warren’s (and his son’s) exclusive interview in B&E, we had forecasted bang on that Ajit Jain (Berkshire Hathaway’s Reinsurance Business Head) was amongst the nine probable candidates who could be successors to Warren Buffett. And we’d regimentally recommended to Warren that he should give up his position sooner than later. Oh, how dumb could we have been...

“I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came-in that should have caused me to re-examine my thinking and promptly take action...” Thumb sucking adjectives aside, these are the actual words of confession from Warren Buffett in his annual letter to Berkshire Hathaway shareholders (Purely due to ethical journalistic policies, I have not bought Berkshire’s shares; one share cost Rs.60,00,000 last year; they say it’s down this year).

But what left me sucking my thumb (sorry Warren, if you can use it, then this is a global usage now) was his one announcement in the above mentioned letter to his shareholders (where he also made the confession written before) where Buffett overtly praises Ajit and paints a picture that most definitely points towards Ajit donning the top hat at Berkshire. In his own words, “There is no one like him and his business is never the same. Ajit came to Berkshire in 1986. Very quickly, I realised that we had acquired an extraordinary talent. So I did the logical thing: I wrote [to] his parents in New Delhi and asked if they had another one like him at home. Of course, I knew the answer before writing. There isn’t anyone like Ajit...” And guess what, it is Buffett’s custom to call up Ajit Jain every evening to discuss ‘business matters’. I never could imagine that I’d live to see the day when Warren would be doodling over a guy. Has Warren finally fallen in love? Well, despite my unfathomable bubbling eagerness to say yes, the answer is a clear no. This is Warren at his impressive bluff best.

Surely, every person even slightly informed about the world’s richest man knows that succession planning has always been questioned critically when it comes to Buffett. Realising that he himself goes against many imperative corporate governance policies (separation of ownership from management, for one), Buffett too cleverly chooses to keep the beach bikini on, revealing much frivolous skin, but hiding the most essential parts. “There are four potential successors to me within the company, but I would never discuss their names,” is what he gloatingly told Daily Telegraph some years back, “I have got this letter which actually goes out the day I die. And it says: Yesterday, I died. That’s bad news for me, but it’s not bad news for you, the shareholders of Berkshire...” Yeah, right Warren! And we all can then go meet up with Monica Belluci!

But for argument’s sake, let’s move to the realm of logic. At present, Ajit heads Berkshire’s Reinsurance business, which is only the ‘third-largest’ amongst Buffett’s insurance empire – indeed a small fragment of the vast Berkshire empire. And if you considered that insurance segment contributes to more than 50% of Berkshire’s annual revenues in 2008, we would rather have Tony Nicely, CEO of GEICO (Berkshire’s largest insurance player) or Joseph Brandon’s successor at General Re (the second largest in the segment) as the more ‘logical’ choice. As far as leadership and manpower count is concerned, Ajit only has 31 people in his company. For records, that is just a negligible 0.01% of the total count of manpower at Berkshire Hathaway! Can a person with that little ‘leadership’ experience head a group with more than 300,000 people?

Alright, if we play to the grandstand – as Warren has mastered over the years – and simply choose Ajit because “Warren has mentioned him in his letter,” then allow the blundering me to inform you, Warren does that ever year. Not counting this time, Buffett had flattered Ajit 5 times in the past 13 years (in his annual letters to his shareholders)! And if I go by the same logic, then the world would have had 21 prospective Berkshire CEOs since 1995. Wonder how? Besides praising Jain 5 times, the grandiose Buffett has praised Tony Nicely (CEO, GEICO) 9 times, Kevin Clayton (CEO, Clayton Homes) 2 times, Richard Santulli (CEO, NetJets) 3 times, Joseph Brandon (Former CEO, General Re) 2 times! If efficient succession planning policy was to be decided on the count, all is lost.


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Friday, August 03, 2012

Malnutrition in Africa is more of a political conspiracy – Ethiopia is a crying example

Malnutrition is neither a disease nor is it a phenomenon. It is a man made conspiracy, leading to genocide as, unlike other social malaise, malnutrition does not kill the victim instantly but drives him closer to a life of destitution and ultimately death, with every passing moment. It is a chronic and permanent shortcoming that not only destroys an individual’s future but cripples the entire demography of the nation. Conventionally, malnutrition and other similar problems are attributed to climatic changes, natural disasters and other uncontrollable factors, but then a detailed analysis makes it evident that such a problem creeps up only on account of policy failures and political reluctance. I would like to go a step ahead and blame it on the conflict between the scientific and political community, and more on the growing greed for ownership of resources amongst the underdeveloped nations, wherein the incidence of malnutrition is also the highest. To put it in simple words, it is relatively easier to own resources in a country that is socially challenged rather than in a nation that is otherwise. This is what is happening in the whole of African continent.

The dark clouds of hunger in Africa are ever more ominous as the rulers themselves have turned their backs towards their own countrymen! Dr. Robert Mwadime of Uganda Action for Nutrition inferred the problem by commenting that “children don’t vote”, there is no urgent need felt in the rulers to feed their hungry mouths! This very outlook has escalated the food crisis situation in Africa – with a staggering 50.9 per cent of the population of sub-Saharan Africa living with below $1.25 a day! Drought in Africa this year again has caused havoc with 14 million pushed to the edge of starvation and malnutrition! Most of sub-Saharan Africa is facing an emergency with an immediate need of 270,000 metric tonnes of food – no more than 120,000 metric tonnes is available! Sudan, Uganda and Somalia are the worst affected apart from Ethiopia. The World Food Program (WFP) has penetrated deep into South Kordofan with food from Humanitarian Aid Commission (HAC) reaching out to 4,000 displaced people in Kadugli and 3,000 in Heiban in Sudan. For the records, there are an estimated 60,000 Internally Displaced Persons (IDPs) in Sudan, and this number is continuously increasing! Uganda, to a large extent, depends on international aid for adequate food supply – because of the lack of livelihood diversification, reduced wages, and over dependence on agriculture! Thus, a drought in the region (as is the situation at present) leads to large scale food insecurity and malnutrition. The clutches of famine penetrating deep into Somalia have created such trepidation that tens of thousands of Somalis are fleeing to neighboring Ethiopia. But then, conditions in Ethiopia are something that is beyond what words can describe.

In Wag Hamra district of Ethiopia, more than 10,000 children under the age of 5 died between 2001 and 2006 because of malnutrition and hunger, while tens of thousands were found massively suffering malnutrition-related diseases. On an average, 50 per cent of all children in Ethiopia are malnourished. Most of these children do not have the fortune of finding the easy escape of death, but get stuck in the grasp of chronic malnutrition and related diseases. Their physical and mental growth gets decelerated and most of them end up spending years in dilapidated hospitals and ill equipped clinics. The saga doesn’t end here. Even if a child struggles and reaches school, his/her performance is very dull and slow. Most of the children, due to lack of nutrition, find it tough to concentrate and learn, and thus fail to get promoted to a higher grade. This results in early dropouts and incomplete education. As of 2010, around 25 per cent of elementary school students quit schooling (between grade 1 and 8) and 7.3 per cent of all students failed to get promoted to the next grade compared to 5.3 per cent in 2005. This clearly indicates the dwindling education level of the nation. Moreover, given the fact that these poor areas have no industries and Ethiopia at large is a backward nation, these children – even if they manage to grow up safely – find it tough to make a living. Also, since the nation has more labour-intensive jobs, which require physical fitness and strength – most of these children are left jobless even at their productive age.

With Ethiopia’s population growing at 3 per cent every year, the per capita availability of resources is getting increasingly sparse and dispersed. However, the bigger problem here is about the population distribution and population density. Population in Ethiopia is not homogenously distributed, but is the exact converse. Around 40 per cent of all Ethiopians prefer staying in the Oromyia region, thus increasing the demand of resources in this very place. Around 25 per cent of the population resides in the Amara region – where the food shortage is at its peak; and the rest are scattered all across the nation. These two regions, in particular, are more vulnerable to diseases and malnutrition. Overpopulation (high population density) has increased the burden on the local administration. The huge food shortage and increasing unemployment have worsened the situation here.


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Tuesday, July 31, 2012

The Sensex, change is the only constant factor

At the Sensex, change is the only constant factor. B&E presents a quick analysis of some new behemoths, those whose positions are under threat & some potential new entrants

Amongst the other strong newcomers are names like TCS, Bharti Airtel, NTPC, HDFC Bank and Sun Pharma. TCS is another interesting tale. The rise of IT exports from India did help it become a part of the Sensex (joining the likes of Infosys and Wipro) starting June 6, 2005, but it was its unique focus on better cost and profit management (to make management more efficient it is the only Indian IT firm to deliver fragmented IT services, and use earned-value based profit centres for evaluating performance and a fixed-cost project delivery model which allows projects to get overloaded by 10-15%) that has made it the current darling of investors. While ONGC has become a case study of how to overcome successfully the declining production of oil and natural gas by timely investments on offshore explorations and technology upgradation, despite having stayed away from an integrated model (a regular feature of big oil companies), there are two firms which rightly deserve their place in the Sensex for having reflected the growth of India in their respective sectors – Bharti Airtel (telecom) and Sun Pharmaceuticals (generic drugs). While Bharti’s rise in mcap was accompanied by its sustained growth in subscriber base (becoming the 5th largest mobile operator in the world in terms of customer base), for Sun Pharma, it is the efficiency factor which makes heads turn – the company’s profit margin at 0.79 is the highest in the industry, higher than the top three drug sellers in India - Ranbaxy’s 0.32, Cipla’s 0.22 and DRL’s 0.26. Last year, it was India’s 10th largest drug seller (sales of Rs.19.33 billion), but the most profitable (bottomline of Rs.13.84). Investors love profits. Sun Pharma is proof. While speaking to B&E about Sun’s arrival on the Sensex stage and creation of wealth, Uday Baldota, Sr. VP, Sun Pharma, says, “Being known as a company that features strongly in the Sensex is not very critical for Sun. But we work towards maximising long term shareholder wealth.”

There are however some new entrants which stand in danger of being removed from the Sensex (based on the Scrip Selection Criteria), if the list is refreshed as of date (as on September 9, 2011). Some of these names include the likes of DLF, Maruti and JP Associates. While the fortunes of DLF and JP Associates are dependent on the vagaries of the realty market, that a sword dangles above the neck of Maruti is an outcome of the slowdown in the auto sector that began in Q2, 2011. When B&E questioned Mayank Pareek, Managing Executive Officer Maruti, on the weakened sales which has got investors worried, he replied, “We cannot mindlessly target volumes and compromise on profitability. We are a Sensex company, and it is our duty to keep the shareholder interest in mind.” Another element to watch out is the potential list of companies that may enter/reenter the Sensex list. And names like IOC, NMDC, Axis Bank, HZL, MMTC, GAIL, SAIL, Axis Bank and Nestle, are the favourites in this regard. Going forward, the transformations will continue. Some will waffle, some will come unscathed from the worst of market conditions. And needless to say, a decade hence, the Sensex will look much different. But as in the past, there will be new faces, those which radiate calm in the stormiest of business cycles. For panic only destroys investor faith.



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Monday, July 30, 2012

Policy-COAL: DEMAND & SUPPLY

Amidst tight global supplies and price rise, it’s imperative to reassess the management of our coal resources and its impact on our energy security 

Coal imports to India reached 90 million tonnes in 2010 and are further expected to touch 110 million tonnes in 2011 despite the current high prices. This is due largely on account of the growth in the economy through expansion of infrastructure and electricity supply. But it is also a result of continued insufficient quantity and inferior quality of domestic coal available. According to a PwC report, India currently imports 12% of its coal supply due to inefficiencies in coal transport from mining regions to coal plants located in the coastal regions, low quality domestic coal and slow reforms within the coal industry. The report adds that by 2030, total coal imports in India will exceed coal imports into the entire European Union by 10%. And with the current annual shortage of 142 million tonnes staring us in the eye, the question remains as to how India will address this shortfall to meet the growth in domestic demand.

In order to satisfy the burgeoning coal demand, the Indian coal industry needs more investment and private players to raise its production level. At the same time environment clearance and rehabilitation and resettlement (R&R) issues that create serious roadblocks for private companies have to be removed. “A comprehensive policy is required to be formulated for the purpose of effective and efficient utilisation of the nation’s coal resources. The abundance of coal promises to provide energy at affordable prices and can be a substitute for expensive imports to a significant extent,” says a CLSA report on the sector. Without doubt, the coal mining sector in India needs structural overhaul to attract investments that can help the sector meet the growing needs for raw material and power, steel, cement and other usages.

The Government has indeed made strides in this direction by allowing captive mining for various approved end usages. Although a number of coal blocks have been allotted since the 1990s to private players in the power, steel and cement industries for meeting their captive requirements, the progress made in bringing these blocks to production has been quite dissatisfactory till date. According to the Annual Report, FY 2010 of the Ministry of Coal; of the 208 coal blocks allotted to various companies including ultra mega power projects till FY 2010, only 25 mines have been commissioned till the fiscal year-end and were producing coal at nominal levels of 7-8% of the country’s total production. The problems being faced by the corporate sector (except coal mining companies like CIL) include lack of experienced manpower with a track record in commissioning large coal projects.

Among other recent initiatives by the government to reduce the demand/supply gap is the drafting of a new policy for auction of coal blocks, which will replace the existing system of allocating blocks for over a year. However, industry professionals argue that there is a need for streamlining the allocation process as also a need to monitor the progress of project implementation more closely. At the same time, the coal-mining sector needs incentives to encourage innovation and adoption of cutting edge technologies, which would not only make underground mining profitable but also boost quality and output besides serving the purposes of environmental risk mitigation. Failure to do so would be akin to shutting one’s eyes to what may turn into a grim reality – India does not have adequate extractable coal reserves either to meet current incremental demand or make long-term supply commitments. If we remain in a state of denial, we will not take the urgent and necessary steps to augment our coal reserves.

Read more....

Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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