Defaults, defaults & defaults, what is happening to India

For the last few years, we have been going through continuous defaults by corporates in our country. More than 10 lakh crores of NPA’s & more can come. It can be agreed that there will be a few weeds in any stack, while not all of them or major part them are useless, right. Kingfisher went down, Jaypee group sank, Jet Airways is now blinking towards a collapse, Air India is in the ICU since long & now recently the IL&FS default.

Does this mean that, as a country we are a population which is not fit to do business? We are 20% of the world’s population and are most of them useless? It makes us think about the condition in a different manner. Was there something that is forcing these corporates to not perform or giving them room to think of cheating the system?

IL&FS is saying that the Government did not pay them on time, even though the amount that it has to receive from the government is only about 17% of the total default of 91K crores. Yet, these amounts if they had come on time, it could have helped save some losses in the form of interests.

In the KFA case, we had the FDI issue which did not allow funds to come in and support the airline. Later that was relaxed, after the air line collapsed. Our system was adamant to not change until we had one calamity. This change made Jet Airways to forge alliance with Ethihad, now it has gone nowhere. Here what will be the reason? GOK.

Most of the infra projects that are draining huge amount of capital in various forms like capital infused, serviced borrowings in the form of interest. Capital expenditure lying unused losing value are due approvals and clearances where the government is involved.

In most of the defaults, if we go deep to find the root, it is the Government that is responsible in one or other manner for the collapse. Next question – why is government not able to deliver & has been party in creating so much loss of wealth. Are they not accountable?

Non- competence, irresponsible people in the system who are running the departments is the reason. Why did our Public Sector Banks go into the condition where they are now, devastated? Very low responsibility of the people who managed these banks, more than work, job safety was the bigger priority for the employees. Even the top management did not question.

Compare private banks with PSB’s, in private if target is not met he or she is kicked out in 3 months. In Public, one need not do anything, come at his or her convenience, do some work if they have time after their multiple tea breaks and chit chats.

The other day there was a service tax scrutiny in one of my known sources business premise. The chief officer who came from the department team was comfortable ordering tea and snacks for his team, getting temperature in the room arranged for comfort. Other than this work he did not do anything. They had a plan of doing audit for 2 days, fortunately it got completed half way through the second day. The whole team packed off to their homes after having lunch. Half day’s salary for the team is to be paid by the citizens of India.

In the same manner one of my other friend had some work to be done from the corporation office. At 11.30 am there is only skeletal staff in the office on a week day. Only 2 women employees in the whole office, one is dozing off on her desk & the other is busy with her kid. When approached to submit the application requesting some rectification work, it was said to give it outside and outside there were only tables and chairs, no human being. All of them are either out to have tea or are in the rest room.

This is the way our government departments work and we should not be surprised if a couple of lakh crores are lost from our system. Until the system is flushed out of these non-productive resources our country will continue to have defaults. Many of the smart brains either gets sucked into the same group or gets lost of all their life time effort.

I don’t say that all the corporates who lost money were genuine hard workers, there can be crooks in them too.

Market Crash 2018, how much more it will go?

Why this correction? Re-categorization by MF’s brings divergence between Mid Caps & Large Caps, closing in of the divergence with triggers from Currency depreciation, Crude Oil price increase along with IL&FS, DHFL debt crisis brings steep correction to the markets. How long it will last? We are close to a bottom & support. Should I take out my investments? No, hold on. Should I stop SIP’s? Please continue, they are unique in capturing volatility and average your investments. Next best sectors – Pharma, Manufacturing & PSB’s. Look at equity for long term like real estate, else it will burn capital.

Petrol Prices Cut brings more trouble

The whole country was crying foul on the rising fuel prices where government was taking a big share of the price increase by way of duties. These duties were increased when crude prices dropped so that government can use the funds to meet some of its immediate expenses while people at large have already been used to high fuel prices.

After the down cycle got over in Crude and prices moved up, the additional excise duty gave equivalent amount of revenue to the government. Many state governments have become so used to this income that now if it is removed, many of them will not be able to pay salaries to their state government employees.

So as a nation, people are indirectly helping governments tide through their challenges which has been mostly caused due to their inefficiency.

Now, when government decided enough of public outcry and reduced the excise duties on petrol by taking a hit of ₹1.50 to the centre, asking the OMC’s to take a ₹1 hit and requesting state governments to chip in with a reduction of ₹2.50 per litre of petrol. The loss to the exchequer is 10500 crores.

Within minutes of the announcement, now the media is talking about what the country will lose due to this cut in duties. Ayushman Bharath program will get impacted. Subsidised Kerosene and LPG will now cost more. Funding or Air India and sinking banks might be a challenge & direct tax collections will not meet the shortfall which will increase our deficit. This thought brings to picture where the money was going. In one way when people drove around the country using fuel, they funded the poor and needy.

From saying that, the government is adamant of not reducing duties as the common man is suffering due to high petrol prices’ to now saying “because of reduction in prices poor man will not get many of the facilities that is about to come to him.” Looks like the distress needs to be there in some way of the other, which one is best will come out soon.

State governments that are ruled by parties other than that at the centre (the BJP) have gone against the cut and have announced that they will not reduce taxes. Now, this will play out to the favour of BJP in the upcoming elections. Probably the expectations of the wide section of the population today about the 2ndterm for BJP at the centre might be a reality.

Own the businesses of products you consume

Investing into stocks for dividend income was one of the passive income sources. In similar manner own the businesses that produces the products that you consume in your daily routine. This actually brings confidence to be invested. For example – Say your grocery bill always has a couple of maggi packets in it. You regularly buy Good Day biscuits for your kids at home. You use Dove soap.

You know the reason why you are consuming these products and can relate to similar usage pattern among other users. So, it will bring confidence in you that this product is going to stay for long. In such a condition if you have a few shares of the companies that produce these products like Britannia for Good Day, Nestle for Maggi, Hindustan Lever for Dove soap.

For every purchase you make, you get a small portion of the money spent as your profits because you are a part owner of this company. And as you see more and more people in the stores consuming these products while you are doing your purchases, you really feel very proud that your business is growing.

Many such regular products of consumption which are available in the markets for users to own them. A few among the list would be TITAN, BATA, MARUTI, BAJAJ AUTO, ITC, DABUR, NESTLE, GLAXO etc.,

So the next time you buy a product that you have been consuming for a long time, turn the packet to find the company which is manufacturing it, find if the company has listed its stock. Along with spending on your consumption purchases, also spend some amount to buy a few shares of the company.

Believe me, after you have a good number of companies in your investment kitty, while you walk on a busy street, you will be trilled that you own many of those businesses. As you see people buying products of your company, your pocket is getting filled with money.

Dividend as passive income

Dividend from investments into listed companies forms one of the passive income streams. Whenever this concept of dividend as income is talked, that too from shares, the immediate thought is that, it will be very less returns and the next one is, how to rely on a company for a longer period. Because every person who has a fairly good period of exposure to stock investing will know in their memory itself, many companies have vanished from their business.

Whereas, on the other side, there are people who are having dividend as a regular income stream. A couple of years back when the Tata Sons board had a thought of reducing dividends, there was big concern raised by elderly people who said that, they had commitments in their life based on the dividends and reducing it will impact their lifestyle.

What this shows is that, there is a possibility to have dividend as regular income which can take care of our livelihood expenses. In that case, how is it sustainable if a company gives ₹5 as dividend for a stock that is quoting ₹250. The dividend yield comes to only 2% of the investment.

Yes, most of the good, familiar and companies that have long track record of existence generally pay out about 2% of their prevailing value of the stock as dividend. While these are companies that are growing in their business consistently and that growth takes the stock price higher as time passes.

So, today if we buy a stock for dividend the return will be lesser, whereas holding on to that stock for a longer period increases the value of the stock as also its dividends. A ₹250 stock will become ₹2000 over a period and at the time the 2% dividend will work out to ₹40. So you will be getting ₹40 as income from your original investment of ₹250, which becomes attractive.

Only criteria here is to chose a stock that has been there in the market for a fairly long period and also continue to be in existence for an even longer period. Do we have businesses like that in our country?

Yes, there are many. Like ITC, BATA, TITAN, Hindustan Lever, Godrej, Bajaj Auto, Maruti to name a few. Look at these names, most of them or producing daily use products that you and I consume. When will we stop consuming and these companies can run out of business? For example, ITC has been there for more than a century now. In almost every corner of your city you will find Bata store, probably you will be using a Bata product too.

Investing in these kind of businesses will help get a good dividend income over a longer period and these investments will become legacies which you can leave for your children. If not to have all your income coming from dividends, one can look at having a portion of his or her income from dividends.

This is passive, because you are not required to put any kind of effort in making these investments work, people consume & growth these companies. So long the consumption continues, your investment grows and keeps giving you returns.

I did a working on ITC to find if it is viable. The stock price of ITC was about ₹850 in 2000. Over the last 18 years ITC has given many bonuses and splits in its stock price. If someone had bought 100 shares of ITC in 2000 by investing ₹85000. His dividend in 2001 was only ₹1000. It is just a little above 1%.

After all the splits and bonuses, today the 100 shares have grown to 4500 shares and the stock is priced at ₹300 today. The value of ₹85000 invested in 2000 is now ₹13.50 lakhs. The dividend that came for these shares in 2018 is ₹23500.

₹85000 investment in 2000 is now fetching 23500 per annum which is close to 30% of the investment & it will keep increasing.

If you have thoughts of having dividend as one of your sources of income in your retirement years, you can think of accumulating stocks like ITC to create a legacy. One more advantage is that, the feeling that you own a part of the countries economy. As you go across town in your older days, as you keep seeing brands across and people consuming, your mind will say, “I own a part of these businesses and every minute it is earning me income.”

What a feeling right?