This is how I look upon the subject: until only a month ago, no shareholder of Indal was demanding value and was quite content with a price of less than about Rs 70. The same shareowner finds himself in an enviable position today: Sterlite offered to pay Rs 90 for his share, Alcan responded with a counter-offer of Rs 105 -- and the stock market said wait a minute, we will pay Rs 125 a share (recent peak).This is happening in other places too. A European fashion house eyes Arvind Mills. Mitsubishi thinks Videocon is cheap. Tomorrow, it could happen to Tisco or Telco. Before I theorise, let me quote another example. Raasi Cement has been one of the conservative cement companies in the country. The management has seldom exuded positive confidence, it has never been too favourably inclined to meet analysts, its annual report is telegraphic (I am being polite) and has been run like a fiefdom. Ironically, India Cements -- definitely better managed but again, creating no waves on the shareholder value front --has made a bid for Raasi. The result: all those who hold Raasi are in a position to encash one of the biggest killings of their investing career since the cement stock has jumped from Rs 50-odd to over Rs 300 (and this may not be the end). Shareholders will make the equivalent of at least 125 years of dividend (assuming that Rs 2 per share was paid each year from 1998 onwards!). Now, who wouldn't be smart enough to sell out of the Raasi stock.
One has absolutely no tears for either Raasi or Indal. Reason: what have they done for the shareowner? I find Indal more guilty in this regard. It has a foreign parentage, its parent has been exposed to the ways of the developed world with reference to investor relations and value -- and see how much of it trickles down to Indal. Nothing. The company has done precious little in educating investors on its operations -- the annual report is probably written by an in-house PR department which doesn't know that investor servicing is not the same as calling the media tohigh tea to announce results. No corporate effort in the last few years has ever been directed at the stock price. Indal's managers have, in the face of its year-long meltdown in its market capitalisation, been oblivious of the fact that those who hold their shares have lost value. Interestingly, the biggest advance that Indal's market capitalisation has made over the last year has come through the company making a bid for it -- Sterlite. The best part is that two public financial institutions demanded to know what plans Alcan had for Indal (implying that if it didn't then the institutions might consider selling their stake to someone more dynamic).
Let me put it more bluntly. Companies will have to pay greater attention to their existing market capitalisation, instead of pretending that they only run their companies and leave the `speculation' to the rest of the market. I have two recommendations for the annual reports of companies:
The concept of Economic Value Added has begun to appear in theannual reports of only a few companies and it is time that this became an established feature of most reports in the country.
Companies must discuss whether their market capitalisation increased or decreased during the course of the financial year under review.Why this market capitalisation is a bigger tool for corporate growth than most people imagine is simple. Had Hindustan Lever been quoting at Rs 200 (not Rs 1,500), it would not have been able to make a nonchalant offer for Lakme. The fact that it quoted at a p/e in excess of 50 conveniently facilitated the absorption -- and created room for corporate growth. This is the most effective financial engineering that we have seen.
What amazes me is how most other corporates have overlooked this and have not devised a strategy of getting over this hump. It is shareholder value and wealth which will play a critical role. Even a company like Reliance stated that its goal was not setting up big plants but doubling its marketcapitalisation over the next five years.
The takeover `tamasha' in India will create interest not only from the point of industrial trend and profitability but will also draw attention to asset values in the process. I must highlight ACC here. With an equity of around Rs 140 crore, the company owns more than nine million tpa of cement capacity. At its current market capitalisation, the controlling interest of 20 per cent will require less than Rs 750 crore only -- which is the capital cost for building a two-million-tonne cement plant. Now you understand why the future is bullish for the Indian stock markets -- for a different reason than booms and busts and cyclical trends. Now, only if the buyback becomes a reality once the new government does.
