Where will the Rupee go, was a common query, in the past few weeks? As if the Rupee had feet. It is an inconsequential question for a common investor. It is important for a hedge fund. It is important for an importer. It is important for a currency trader. It is important for the government as it subsidizes diesel and kerosene. For all others it is just intellectual masturbation.
How does the dollar appreciation affect you as an investor? That is what you should be asking. The plus is that FDs in banks offer a higher rate of return. So people who are risk averse and normally invest only in Post Office Schemes and FDs of banks, it may be a good time to lock in for long duration.
For stock market investors, whenever interest rates go north, the stock prices go south. There is an inverse correlation. Therefore, stocks were on sale in the week ending 24 Aug on Indian bourses. Intelligent investors would have been buying. Do you remember the fundamental law of an intelligent investor, I wrote in my earlier blogs. To buy from a pessimist and sell to an optimist. Does the Dollar appreciation reduce the income of a business like cigarettes, or liquor or a toll tax? The consumers of these businesses are creatures of habit or necessity. They will still pay to use the service or product. Look at those businesses.
When a storm comes in a sea, the bigger ships take longer to recoup, the small dinghys are up and about in an hour. Same is true for good businesses. The tsunamis of speculators hit all businesses listed on the stock markes, but the businesses which are sound and secure get going fastest.
I now personally invest only in debt free companies. Howsoever, attractive a business may be, debt kills most of them. Look at the airlines, textiles, power sector, infrastructure. They look very attractive and are tomtommed by analysts on TV and the papers because they echo the theme of India and emerging economies and consumers and deficiencies which will have to be made up and how India is hungry for such growth. But end of day, they are all penny stocks.
All the growth vanishes in a second and debt is the reality which remains. Revenue for a company is variable, costs and interest payments are constant. You may get an order once in three months, the payment may be realized after another 9 months. But during those nine months, you have to pay the employees, the suppliers, the vendors, the tax man, etc. That is a business reality. Add to that the fact that 90% of business men and 99% of policy makers in India are unscrupulous, and the probability of all that growth and returns vaporizes like a dream.
There was a frontpage newspaper report in The Hindu today that Reliance is paying a total of $2.74/mbtu to extract gas based on financial statement of Reliance Industries for FY 2011-12 and the govt has recently revised the rate of price to be paid to Reliance to $8.4/mbtu from the earlier contracted $4.2/mbtu. A straight jump of 100%. I as a common man do form an opinion that some big money has been made by someone in the establishment to give this long term benefit to the company. The tax payer’s money, that is yours and mine is paid to make things costly for us only. What a circus! And we keep getting fooled. Reliance will sell costly gas to all consumers at $8.4/mbtu, on that gas power producers will pay more as input costs and pass on the cost to consumers by revision of tariffs on power and electricity per unit for the common consumer. And you and me end up paying that without a whimper. One brother raises tariff on raw material, the other raises tariff on power. Funny. Why should the govt bother about “We the people”. They were always fools right from the days of Marie Antoniette. We just replace Maries by Indiras and Sonias and Mayas. The kings of yore have been replaced by Rajas of today.
As a business Reliance is undervalued. But if I add corporate governance as a parameter, it is an over riding factor for me, I personally will not buy the share. I am more comfortable with the Mindtrees and Infosys of the world. And more often than not I have been proven right. A business man who can short change the partner will shortchange anyone. A businessman who can give bribes and take bribes for his personal gains, can always shortchange the investors. I usually stay clear of them. So, I sold off all my Reliance holdings a few years back. I am more comfortable with a Piramal Enterprise than a GMR for that simple reason. Better be a tortoise than a hare. A lesson learnt the hard way. But than experience and wisdom grow late in life.
So stop worrying about Rupee/Dollar/Rupiah. Buy good businesses run by relatively honest guys. Whether in India, is there a completely honest business? The jury is still out on it.