Category Archives: Management Quality

Recognizing and Reacting to A-Grade Tomfoolery

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Air India and Kingfisher Airlines (KFA) … can you name two things these two have in common?

They’re both loss-making airlines.

Furthermore, there’s lack of will-power to make them profit-making, from the very top.

The problem with a government job is that you can’t kick the government servant out. The government servant thus enjoys complete job-safety and total lack of accountability. That’s been India’s recipe for ineffectivity and loss-making government institutions for decades. In Air India’s case, add to this massive subsidization by the government. Whenever the Maharaja can’t pay his bills, which is like every month, the government of India chips in with tax-payer money. There’s no real policy being pushed through to effectively earn something. Government servants travel free, big-time. If there’s a shortage of seats, honest, real-money paying citizens are off-loaded and left stranded to accommodate the highly evolved souls that rule our country.

Seriously, why do you still travel Air India? Because it’s cheap? Don’t you see through the tomfoolery? Are you blind? They might wake up upon sensing a complete lack of interest amongst travellers. Until that happens, and until they start performing with no ad-hoc cancellations and off-loading, travellers need to give them that wake-up call by using other airlines and by not subscribing to any money-raising gimmicks or IPOs that the company might come out with.

Cut to KFA. What’s wrong with Mr. Mallya? Unpaid pilots, unpaid fuel bills, unpaid taxes, seriously!?!

Vijay Mallya’s story is not about lack of efficiency. It’s about flamboyance. At the cost of his shareholders? Perhaps.

His liquor business is performing well. A little hand-holding through initial turbulence would have seen KFA through. One pays one’s pilots. Period. You don’t just hire scores of great pilots and buy a huge fleet of aircraft, and then stop paying your pilots. Such flamboyance is going to result in a loss-making enterprise for a few years, isn’t that common-sense? In that period, the hand-holding comes into play from the promoter’s other profit-making enterprises, right? Does that seem to have happened here? Unlikely, looking at the current status of KFA’s balance-sheet. Quarterly losses of 100 million USD and growing coupled with a burgeoning debt, Jesus Christ…

The airline industry involves a very precarious vicious-cycle. If you can avoid falling into it from the start, you are through. Prime example is Indigo Airlines.

The first signs of letting up tighten the noose one more notch. Unpaid pilots result in strikes leading to delays and cancellations. A traveller who has been bitten once decides to travel with the competition. Numbers fall. Now, fuel bills can’t be met. More problems, more delays and cancellations. Finally, you can’t pay your taxes. That’s when the tax department steps in. Headlines go ballistic. Huge bad publicity. Twitter battles. What was that? You want the same mollycoddling as Air India? You want government subsidization? Which world do you live in? Not happening!

Money needs to flow into KFA, not loaned money, but clean money, out of the parent-group’s own coffers. Any usage of KFA revenues to fund the parent-group’s activities is a strict no-no. For example, if the Kingfisher Formula 1 team or the group’s IPL Cricket team were even partly funded by KFA revenues, that would be a huge, huge red flag, given the financial condition of KFA. As of now, shareholders need to see some will-power emanating from the top to control the bleeding. The Street can even short the KFA stock down to zero if the promoter’s attitude does not change. Perhaps such an image-beating would be a wake-up call for the promoter.

Watch Out for Bottomless Pits

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A shareholder-friendly management?

Forget about it.

Very difficult to find, nowadays.

Gone are the days where you’d see an Azim Premji driving his 800, or a Narayana Murthy travelling economy class.

These legends believed in increasing the shareholder’s pie. And this they did, big time. Ask any Wipro or Infosys shareholder. These legends were very clear about one thing: there was no question of pumping in useless expenditure into their public limited company at the cost of the shareholder.

The norm, btw, is totally opposite. Public limited company managements live it up at the cost of the shareholder. Very few promoters are actually bothered about their shareholders. It is the norm to put medical bills, day to day living / wining / dining / entertainment costs, personal property purchases etc. into the company. Why should the promoter bear such costs when there is the public limited company to put these and such costs into? Logical?

Don’t expect too much from your average promoter. He’s not in the game for you.

Where does all this leave you, by the way?

Firstly, you need to look out for, and avoid bottomless pits. These are companies that bear huge amounts of expenditure emanating from the whims and fancies of the promoter. For example, the total sports sponsorship bill for Kingfisher Airlines is staggering. Then there’s this huge red flag in their balance sheet – the company is in under a mountain of debt. On top of that, this company just reported almost a 100 million USD Q2 loss. Math doesn’t add up for you to be investing in such bottomless pits, does it?

In your search for idealistic and shareholder-friendly managements, you might come up with a handful of names. Next you’ll find that it’s no secret. If there’s an idealistic and shareholder-friendly promoter around, people can see this in his or her deeds and of course in the balance sheet of his or her company. Savvy early investors make a beeline for such companies, with the result that by the time you get there, the concerned share-price is already quite inflated. You’ve identified a good investment, but you are not going to enter at an expensive price. If you do, you’ll not be able to sit on your investment for the long-term. Even slight volatility will shake you out of it.

Instead, you choose to wait for the right price to arrive, and then you enter. Well played.

The deal is, that more than 90% – 95% of managements don’t play it like an Azim Premji, or a Narayana Murthy, or an Anu Aga for that matter. However, shareholder-unfriendly promoters sometimes own companies that are lucrative investments. This can be due to niche, cycles, technology, crowd mentality, whatever. When do you buy into such companies?

As a long-term investor, you wanna be buying such companies at a deep discount to real value. My thumb-rule is a single-digit price to earnings ratio. You can have your own thumb-rule. You might have to wait a long time to get this kind of a price, but that’s what long-term investing is about.

As a trader, you buy into such a company with the momentum. You can buy after a resistance is broken. Or after a high is taken out. Or upon a substantial dip after the first burst of momentum. As a trader, what is far more important for you is to know when to let such a company go. Know the level by heart below which or at which you will exit such a company. In trading, exits are far more important than entries.

The mistake you don’t want to be making is to invest in a bottomless-pit, no matter how cheap the share price is.

As Ponzi as it Gets

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Charles Ponzi didn’t dream that he’d become one of the most copied villains in the History of mankind.

Ponzi was a financial villain. His ideology was so simple, that it was brilliant.

Lure the first set of investors with promises of huge returns. Transfer the first few return payouts. Lure more and more investors as the news spreads about the scheme with great returns. Transfer few more return payouts to old investors from the investment principal of new investors. Lure a peak level of investors ultimately. Then vanish with all the collections.

As Ponzi as it gets.

I hardly read the financial newspapers. Technical trading finds news to be more of a burden. Earlier, I used to gauge sentiment from the news. Now, my Twitter-feed is an excellent gauge for sentiment. Also, with time, one starts to gauge sentiment in the technicals. Candlesticks are a great help here.

Yesterday, in a loose moment, I picked up the Economic Times. Normally, it’s not delivered to our house. Yesterday, a supplement of the ET was included in our normal newspaper. Probably a sales gimmick. Anyways, I glanced through it. Was shocked to find that 25 recent Ponzi schemes had been unearthed in India alone.

What is it about us? Can we not understand what greed means?

The sad fact was that all the investors who were trapped were retail small timers.

Education, people, education. Are you financially literate? If not, please don’t enter the markets. No amount of regulation can save you from being duped if you are financially illiterate.

When you’re putting your money on the line for the long term, you’re looking for quality of management. A track record is something you want to see. Average returns are great returns if they promise safety of the principal.

Where there’s promise of huge rewards, there are also proportionate risks. If you really want the thrill of very high returns, all right, fine, go ahead and risk a miniscule percentage of your portfolio size in a risky, high yielding scheme. Tell yourself that the principal might or might not come back, and for heavens sake, don’t bet the farm here.

These financial times are as Ponzi as it gets, people, so TREAD CAREFULLY.