What’s Wrong with Tata’s Global Footprint Strategy

Tata aggressive stance of acquiring companies globally and developing global presence has gone wrong. Tatas are now painfully recognizing the fact that they in for more trouble for their overleveraged acquisitions of giant steel and niche automotive player. Tata’s Jaguar & LandRover (JLR) unit has already asked for the £1 Bn of loan from the government, there were also news of Tatas picking up money from the market at higher interest rates to keep its JLR unit afloat. Tata Corus is already on cost cutting spree and has asked Dutch government for its staff realization program.

So, what went wrong with Tata’s strategy of developing Global presence and become a world player in almost every spree of its business?

Tata’s core strategy was evading regional and nation business cycles, to implement this strategy Tatas needed to generate revenue from world over and setup manufacturing units to ratonalise the cost. Tatas made assumption that if business cycle in a country/region goes through trough then its companies can survive on demand and revenue from other regions. Tata never thought what would happen if different regions go into recession simultaneously. The thought of global recession never concurred to Tatas as “decoupling theory” was very popular at that point of time.

The other major mistake that Tatas did was it has been unable to accrue production cost benefit from its takeover. It invested in highly niche automotive companies like JLR, which can’t be produced world over thus production cost are difficult to rationalise. The other acquisition, Corus, runs on thin margin and high costs; Corus hasn’t been able to cut costs yet, though it may be able to do it successfully in future but it is taking toll of Tatas.

Who Will Save Large US Banks?

The US banking giant, Citibank, is once again toying with the ideas of acquiring banks though it’s domestic regional banks now. But with large number of banks still on the FDIC’s list of bank with riskier assets and monthly new additions to the failed banks list (Security Pacific and Franklin Bank, this month), consolidation in the US banking sector has become a needless exercise.

As the US economy scenario is expected to deteriorate further, the number of banks going bust is likely go to higher. A large number of these failed banks are likely to be acquired by big US banks, some of the directive of treasury. This is bound to add more trouble to the large banks, which are already facing credit crisis. The imminent question is- what would happen when these large banks would be on brink of bankruptcy? Will government let them fall?

No. the government already has minor stake in several leading banking firms but this would not their reason for the survival. The US government has put some legislation that almost guarantees the survival of such large firms and puts the “onus” of safeguarding and protecting such organizations on the government. In 1999, Gramm-Leach-Billey (GLB) Act aka Financial Services Modernisation Act was passed that repealed key parts of Glass-Steagall Act. Section 108 of GLB Act states that “Use of subordinated debt to protect the financial system and deposit funds from ‘Too big to fail’ institutions.”

At this moment it is not clear if federal government is pushing large banks to acquire smaller ones knowing that ultimately they would have to save them, or it is these large banks which interested in creating “too big to fail” institutions.

Montek and Chidambaram mock India’s Economic Scenario

Montek Singh and Mr. Chidambaram for past few days have been giving some really exaggerating statements about the economy. They continue to assert that Indian economy will grow at 8%. Now, how that suppose to happen. The global credit lending is expected to come down drastically during next year and India desperately needs it to continue its infrastructure and capex. Indian companies were already raising debt for international market as credit rates in India were high. How are Indian companies expected to grow at same rate in this inconducive economic environment? Plus they were quick to add how fundamentally strong Indian economy is.

How come economy be fundamentally strong where commodities are playing havoc to the economy, crude prices have endangered the aviation sector and is pushing inflation, housing boom is about to go bust with high credit rates and our exports are threatened due to global slowdown. They were not done yet, they made another comment on liquidity situation.

Yes there is liquidity problem, there are not many ready to lend to consumers and corporates are finding it hard to credit at lower rate (which is next to impossible). There is credit problem in the economy, but what about the money that FIIs have brought into the market by selling share and converting them into dollars! The problem, we don’t think is of liquidity in the capital markets but of leveraging and speculation on cheaply borrowed money. Now that it is difficult to leverage and get cheap credit there aren’t many players to do so in the stock markets. So, we have more and more selling and less numbers of buyers.

Is P-Notes revision aimed at Realty stocks and Politico’s investment confidence?

P-Notes are back. After government cracked down on P-Notes last year to tame the bull-run, now government has revised it guidelines to enable foreign institutional investors to issue Participatory Notes where underlying asset is derivative. SEBI has also struck down the rule which limited the FIIs capacity to issue P-Notes only up to 40% of the value of assets held by a foreign fund.

Is the present move by government to remove restrictions on P-Notes aimed largely at Realty companies? Realty stock index on BSE has declined by 77% since the beginning of the year. It is the biggest decline amongst the sectoral indices on BSE. Last year’s favourite sectors i.e. Realty, Banks and Metals and Capital Goods all have been thrashed in the market this year.

Realty stocks gained prominence in last two years when large number of companies came out with IPOs and soon they were reports of politicians and their families having stakes in these real estate companies. Also, a number of politicians parked their money through hawala channels, which entered the market through P-Notes. Ever since the restrictions were imposed on Realty index has continued to slide. Financial crisis in the US took the shine off from FII and Hedge Funds, which had invested heavily in the real estate companies. P-Notes restriction took the toll of real estate stocks and they started falling like house of cards.

As the politicians lost most of their investments in stock market and the value of their real estate stocks came down to one-third of the investments, the government suddenly felt the need to bring back P-Notes, which it had describes as ‘Hot Money’ that created volatility in the markets. The much despised instrument, which was blamed for the skewed investment trend, is now the rescue measure to resurrect the market in same old way that had led to irrational exuberance in the market. Every one in the government is gung-ho that it will restore the “investors’ confidence”, it is really matter of concern for the individual investors that which ‘Investor’s’ confidence government wants to restore now.