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Mahindra Finance: Geared for growth

The company offers a range of financial services to people residing in semi-urban and rural regions and it aims to build on this thrust in the near future

Mahindra & Mahindra Financial Services (Mahindra Finance), promoted by Mahindra & Mahindra, offers a range of financial services to people residing in rural and semi-urban regions in India.

The company provides loans for sports...

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The dangerous subsidies bubble

Governments around the world, from Saudi Arabia and Indonesia to China and the United States, use subsidies to solve perceived social problems. By artificially warping demand, they change things not only in their economies, but also in others, often creating bubbles

All investing concerns a bet on the future. To determine the future, investors rely on all sorts of economic and financial forecasting tools. Most of these assumptions are based on the normal market mechanisms of supply and demand. Around the world, governments are making a determined effort to be sure these assumptions are incorrect. Their main instruments of distortion are subsidies.

Subsidies are as loved by politicians as taxes are loathed. What politician anywhere wouldn't like to tell either constituents or restive populations that they are getting a free handout? It sounds great to most citizens, because they often only see the benefits without assessing the costs, which people assume are borne by someone else. The reality is that subsidies are always borne by taxpayers in one form or another. For investors, the dangers are always the unintended consequences that subsidies produce.

For example, the Baltic Dry Index (BDI) is a measure of freight rates for shipping iron ore, coal and grain. For much of its 26-year history, the BDI has accurately been described as the supreme cyclical indicator. Normally it tracks the prices of commodities, but over the past four years it has gone haywire. The cause is simple: China. As China's economy begins to make up an ever larger share of the world's economy, demand from China makes up an ever larger share of the demand for commodities. If Chinese demand were based on a straight market, it might be predictable, but it is not.

Freight rates have plummeted recently. Capesize vessels, those 1000-ft vessels that are too large to go through the Suez and Panama canals, used to rent for more than the smaller Panamax. But since July 2009, they have been launched from shipyards at the rate of 15 a month, increasing the capacity of the global fleet at an average annual rate of 20%. Although 3.7% of the current fleet will be demolished this year-a record proportion-the Chinese state controlled and subsidised shipyards have increased new capacity by 15%. Why? The Chinese government wants cheap freight. The result of this subsidy is the distortion of the index beyond all relation to the real state of the global economy.
 
China is also suffering a shortage of electricity. Some economists might conclude that this has to do with a vibrant economic growth, but it is really about a misguided subsidy. The Chinese electric companies are state-controlled as are the electricity prices. China is facing an enormous problem with inflation, the result of massive state mandated bank loans flooding the economy with money. The companies are facing financial pressure as the global energy costs increase. But Beijing keeps prices low to control inflation.

To avoid losses, the companies tell the authorities that they will produce electricity at full capacity, but privately they cut back supply. Without reliable power, manufacturers and businesses use diesel generators for electricity. This, of course, increases the demand and the price for diesel and helps to fuel inflation.

Ethanol is subsidised in the United States to encourage the growth of the local industry, farmers and to create renewable energy. However, it distorts the market for grain, because the subsidy diverts one-third of America's maize harvest. It also cannot compete with Brazilian ethanol made from sugarcane, which has been the cheapest biofuel for years. But with the billions of dollars leaking into emerging markets from the American Federal Reserve's programme known as QE2, the dollar is exceptionally weak and the Brazilian Real is very strong. So US exports of ethanol to Brazil have soared during the past year, which has undermined the competitiveness of Brazil's domestically produced biofuel.

The Saudis subsidise petrol, which costs only 12 cents a litre, less than the cost of bottled water. As a result, the Saudis have no reason to use less, so petrol consumption is growing rapidly. This year they will use 3.2 million barrels a day domestically, or about 36% of present domestic production of 8.8 million barrels a day. If the current consumption rate continues, the Saudis should use up their entire production at home in 17 years.

Energy subsidies are common across emerging markets. Iran, with its massive reserves of oil, also spends 20% of its GDP on subsidies. Indonesia spends $11.4 billion a year to subsidise domestic energy, four times what it spends on health.

All around the world, governments are using subsidies to solve perceived social problems. What they do not understand is that the global economy is an interwoven ecology. By artificially warping demand, they change things not only in their economies but in others, often creating bubbles. The inevitable crash will create more problems when the subsidies have to stop and that is simply a matter of time.

(The writer is president of Emerging Market Strategies and can be contacted at william@emergingmarketstrategies.com or w.gamble@alrroya.com.)

User

COMMENTS

S H Subrahmanian

6 years ago

True, Pramod ...
But I'm sure time will come soon, when we start requesting for 'subsidised air' (instead of 'free polluted one') often and before each poll and start paying for the same! Let's praise our 'so called leaders for doling out 'toothless RTI and 'equally toothless Lokpal'!
Long live Annas and Ramdevs! The silver lining is: 'the govt is fearing them'! I feel Karuna is finished now. RTI brought out a Laloo- He's free though! And he's become a IBM and research material...!

Pramod

6 years ago

I think its time we start paying fro our meals. How long can we have "cheap" meals and praise our so called leaders for doling out subsidies?

Market drop trips companies which have pledged shares

ICICIdirect research says that with stock prices having fallen significantly over the past few months, several firms that have pledged their shares would have to top up the margin requirements, failing which lenders could sell the shares leading to a further drop in prices

The significant erosion in the value of shares in the market fall over the past few months, will require promoters who have pledged shares for loans to increase the quantum of pledged shares to maintain the margin requirement, according to a research report by ICICIdirect.com.

The Sensex has corrected by more than 10% over the past few months and the value of shares of most companies has fallen. The research report suggests that in the event that promoters default in fulfilling the margin requirements, this could result in the sale of pledged shares by the lenders and could cause a further decline in the share prices and promoters’ holdings. This in turn could pull the market further downward.

ICICIdirect estimates that on an average 8%-9% of the promoters’ shares has been pledged during the period March 2009 to March 2011.

Most promoters pledge shares to raise working capital or to bring in new investors. This is a method of taking a loan against shares, where the value of the promoters shares pledged is two to three times of the loan amount sought.
As for the lenders, if the company’s share price goes below a certain level, the company will have to make immediate payment in cash or pledge more shares. If the company cannot do this, the lenders will sell the shares to recover the money.

This may appear beneficial to both promoters and lenders, as the promoters have an easy way to raise capital and the lenders have the right to sell the shares, whose value is about twice the loan amount if the promoter defaults or if the value of the pledged shares fall.

Though promoters pledge shares on a regular basis, this may not be a very good sign. This implies that the company’s financials are weak as it is cash-strapped for even working capital and the only way it can raise money is through pledging its shares. Consequently, the share price of a company usually falls after the announcement of shares being pledged.

An example is Malwa Cotton which has increased the quantum of shares pledged by 44% from the December 2010 quarter to the March 2011 quarter, while the company’s share price has dropped by 27% from Rs51.85 on 31 December 2010 to Rs38 on 24 May 2011.

Royale Manor is another company that has increased the number of shares pledged by 39% in the last quarter-on-quarter period, while the company’s share price has lost 25% in five months. (See table, 'Shares Stumble'.)


Table

User

COMMENTS

Shibaji Dash

6 years ago

Pledging of shares is and should always be a matter of concern for the ( minority ) share holders.Does not mean it should be alarming in all cases. It all depends upon the reputation of the promoters.Moneylife certainly did a very right thing by posting the news alert. The report is unbiased and only informative.

kora

6 years ago

the observation has the following flaw's .. since the shareholding gets reported at the end of the quarter and that too after the results ...

1) "as an example is Malwa Cotton which has increased the quantum of shares pledged by 44% from the December 2010 quarter to the March 2011 quarter, while the company’s share price has dropped by 27% from Rs51.85 on 31 December 2010 to Rs38 on 24 May 2011."

since Malwacotton shareholding pattern is avaiable on 30 APR 2011 .. for the research purposes it makes sense to take the returns from 1MAY2011 to till date ....

and the same excercise needs to be done for the above stocks ....

2) the QoQ difference also needs to calculated from the total shares ... as a promoter pledged 1 % shares outstanding in the Q1 if increases his pledged shares to 2 % of the total shares outstanding , then the QoQ figues looks inflated ( something like 100 % increase ) ... so take the QoQ increase as 1 % and redo the excercise ....

Vinay Joshi

6 years ago

MDT,

Ms.Sucheta your MDT has put up but opine irrelevantly!?

MDT, in no way intended to disparage, neither, notwithstanding, any external aspects.

MDT/ Ms.Sucheta, earnestly request you to answer me – what relevance pledging of ‘Z’ category co’s promoters shares will have on the market? Please I await, Ms. Sucheta your earliest response, to me, if you must.!

Which of the listed co. as per ICICI survey will collapse? As of now more than 10/20K regd.cos have vanished into thin air!

Why Winsome Yarn has doubled [+99.17%] or for that matter Man Ind. 62.20% resp, over a period of five months? WHAT THE INDICES REFLECTED?

EIH, Oberoi had pledged, today revoked.

RIL overleveraged sought $1.5Bn bonds seeking more!?

MDT, slightest of an idea of FCCB redemption in the offing? How it will be met?!

Consider that, their Balance Sheet strength, cash balance & in which manner 7bn can be redeemed, time is ticking, another FY.

THIS WILL IMPACT, NOT ‘Z’ category co’s promoters pledge, neither having CRISIL/ICRA rating.

MDT, kindly do your homework before opining on indices.

Regards.

Govind Shanbhag

6 years ago

Dear Sir - Banks are to be blamed for such scenario. How can they accept shares of such companies who are susceptible to fall of 50%. I have handled corporate finance for a long period and mind you company is sick and never promoters, they have adequate wealth, investment in India and/or abroad. Financing companies should insist for listed shares of A group and these with good fundamentals even if rates come down they generally recoup faster.

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