ANNUAL REPORT 2000-2001
TATA INVESTMENT CORPORATION LIMITED
CHAIRMAN'S STATEMENT AT THE ANNUAL GENERAL MEETING
Dear Shareholders,
1. May I begin where I should, viz, by extending to you a warm welcome on
behalf of both myself and my colleagues on the Board of our Company.
2. One wishes one can write a poem about the year under retrospect. One
cannot. Neither at the level of the overall economy nor in the operation of
the stock market itself has there been any room for joy. At the broad
economic level after nearly 13 years, it has happened that all the three
major sectors of the economy took a simultaneous downward plunge, even the
exalted Services Sector - in one year alone. No doubt, other macro economic
factors have behaved well - interest rates have fallen, so has inflation,
and foreign exchange reserves are rising. These are forces of strength and
need to be noted even in an otherwise gloomy picture.
3. More specifically, the year in retrospect viz. 2000 - 2001 will go down
in the history of the Indian stock markets as one of the most memorable and
certainly one of the most depressing.
* The BSE Sensex fell by nearly 28% in the fiscal year 2000- 2001 and
indeed if the first quarter of this year is to be taken in consideration,
it has fallen by 31%., wiping out nearly Rs. 6,20,000 crores of market
capitalisation. More relevant in case, the BSE 100 index declined by 43%
during the year 2000 - 2001.
* The Indian stock market registered almost for the first time the most
savage impact of globalisation - the feel good budget" introduced by our
Finance Minister this year was wiped out by the collapse on the Nasdaq
whose impact was transmitted faithfully and immediately to the Indian stock
market, affecting most of all our Tech-Stocks which declined by as much as
80% to 90% in same cases.
* Nonetheless all credit must be given to our Regulatory Authority for the
courage shown in introducing several measures of reforms. In the most
depressive year, it introduced more revolutionary reforms than ever before,
as evidenced by the abolition of the Badla, the introduction of Options and
of Stock Futures.
* It is hardly surprising that the stock market has witnessed a revolt
against the cult of Equity. There has been a flight from Equity to Debt
instruments for, as the saying goes 'one just never knows what is the true
bottom of the stock markets '. Financial analysts have gone wrong so
continuously during the last year affirming or predicting the bottom that
there has now emerged a crisis of credibility. Even the best run Mutual
Funds have had to register the impact of the savage decline in the Equity
market and predictably it is their Debt funds which are now in demand and
not Equity-dominated funds.
4. Coming to our own Company, our Shareholders will be happy that in the
midst of so much gloom-and-doom, we have thought it fit to repeat the
dividend of 60%. We of course took a beating in the market capitalisation
of our quoted shares - who didn't? But we repeatedly assured our
shareholders that though we are not a high-profile financial organisation,
our steady but rewarding policies of conservatism will continue to benefit
our shareholders. Today, in the midst of the stock market debacle, our
earnings per share have increased from over Rs. 18 to over Rs. 25 during
the last two years. We know our shareholders will keep all this in mind
when they ask us questions about our proposed Rights Issue of Zero Coupon
Convertible Debentures of which more later.
5. Coming to the first quarter of this year, there has been
(superficially!) a sharp decline in our profits compared to the quarter of
last year. We should not come, hastily, to a sweeping conclusion about the
decline in our profit in this quarter to nearly Rs. 9 crores from Rs. 25
crores of the previous quarter of the last year. We would ask our
shareholders to recall that last year was a special year in which the major
part of our annual income from dividends was received in the form of
interim dividends declared by most companies in the first quarter to take
advantage of the lower dividend tax rate. In the current year, however this
rather abnormal phenomenon was not repeated and therefore most dividends
would be received in the normal course during the second and the third
quarter, as they did in previous years. We do expect, therefore that by the
end of the second quarter, the position regarding our profits and hopefully
our earnings for the six months ended September would catch up.
6. Much as we may be annoyed with foreign rating agencies for saying the
same things about our economy that we are saying, we have to come face to
face with the fact that several countries are taking a lead over us in
several areas. We shall not even compare ourselves with China but
illustratively the Foreign Direct Investment (FDI) flowing into India at
2.6 billion is not only way behind the 10 billion that we targetted 10
years ago - it is barely 30% more than what South Vietnam and Angola have
secured a year ago. Again "Privatisation" is proceeding in our country, and
all credit must be given to the Government that in the face of so much
political opposition, it is pushing ahead with such programmes. But at the
end of the day, despite great efforts, thins are simply not moving, or
moving at a snail's pace.
7. The truth is that our financial system is under great strains not only
because of the much-publicised scams but, even more importantly, because of
the financial position of the Indian Corporate sector. The small-scale
sector is reeling under the impact of competition; the medium and large
scale sectors, despite great leaps in productivity in recent years, are
unable to withstand the impact of over-capacity, over-crowding and over-
manning. In a few cases, this is transmitting huge losses not only on the
Companies but on the financial system.
8. What does one think when five steel units of our country register a loss
of Rs. 1000 crores in a matter of three months ending June, 2001 ? What
does one think when two financial institutions have to provide over Rs.
5,500 crores for provisioning of bad and doubtful debts? What does one
think when during the two months of May and June 2001, there are no capital
issues to fund investment projects? All this is apart from the sharply
declining rate of growth in industrial production and, dare we say in
industrial profit buttressed so often by "Other Income"?
9. It would be all to easy in this situation to give way to a mood of
unalloyed pessimism just as we had in the past given way to a mood of
unrestrained euphoria. In the latter case, even shares of worthless
companies were quoted at fabulous premia but where pessimism abounds, it is
natural that shares of companies which are basically sound show good
profits and show long term promise, come to be severely undervalued.
10. From this situation emerges a number of quirks in our stock markets;
from this situation also emerges opportunities for sensible and profitable
long-term investments.
In a situation of euphoria, theories are invented to justify fabulous
prices (recall Harshad Mehta's "Revaluation of Assets" theory) but in
reverse in a situation of utmost pessimism, there are always theories and
reasons to explain why shares should remain or be undervalued. We have some
striking illustrations:
* A share which for 3 three years in succession has been earning more than
Rs. 85 per share is confined to a PE ratio of 7-8 times; reason, it belongs
to the "Commodity Sector", it is therefore cyclical at both the national
and international levels and in any case, the company management ensures
that neither a bonus nor a generous buyback will take place. A sterling
performance which has made the company internationally competitive at a
time when most Indian companies find themselves internationally
uncompetitive has been ignored on the grounds of the above reasons.
* Another company universally rated as one of the best performers among the
new companies found itself suddenly rated (or de-rated?) as a "Commodity
company", in consequence the share lost 40% after this new classification
made by a prominent investment outfit. Once again there is always a good
reason to keep the share undervalued.
* The share of a company that shows a profit of nearly Rs. 500 crores is
quoted only Rs. 20 more than that of a company that shows a loss of Rs. 500
crores.
* A whole group of companies which have gone through the painful period of
restructuring and have atleast right now begun to show substantial recovery
are yet put in the dog house, this time because even though these companies
themselves are doing very well, the industries to which they belong are
faring badly as a group
* There are some public sector companies whose performance has been
outstanding, but they must be undervalued (a) because like GAIL they may
become victims of erratic policies of privatisation and (b) because two
years down the road, their monopoly power may collapse under the weight of
competition.
11. The question often asked whether the shares on our stock markets have
reached the bottom, can therefore only be answered by a specific evaluation
of the competitive strengths of the companies concerned and it is in this
area that there are, in our opinion quite a few (not too many) shares which
need to be looked at and which, in our opinion, may command a much higher
price as and when the turning point arrives. But when will this turning
point arrive?
12. THE CONNECTIVITY IS NOT THERE!
Before we come to this central question, another crucial question arises.
If our Indian economy is forging ahead with a growth rate of 6% which is
one of the highest in the world, how come sectors after sectors of the
Indian economy, and certainly the stock markets, are in such a state of
despair and depression? There is something missing in the current analysis
of the Indian economy which does not ask why this paradoxical situation
prevails.
13. The answer lies in the fact that the fastest growth sector of our
economy viz. the Informatics Sector and to some extent the
Telecommunication and the Entertainment Sectors are obviously not
generating the growth impulses for the Indian economy as fast and as wide
spread as they should. We rejoice, as indeed we must, that our Informatics
Sector this year will touch atleast 8.5 billion dollars of earnings but why
is it this impact not felt on the several sectors of the Indian economy
which are struggling with very low rates of growth and indeed in some cases
with very substantial losses? And why is it that in the Informatics Sector,
a projected growth rate of 30-40% (phenomenal for any sector) now deserves
P/E ratios of only 3 or 4?
14. Imagine if our rural income rose by 8 billion US$, what would be its
impact on Indian industry; imagine again if the revenue of Indian Industry
rose by 8 billion US$, what would be the impact on the whole Indian
economy, on the tax revenues, and indeed on our fiscal deficit itself. By
contract the gains in the Hi-tech sector have not had an impact on the
recession-struck areas of the Indian economy and certainly of the Indian
industry. No doubt, Indian industry has its own ills - that of over-
capacity, over crowding and over-manning but the dynamic growth sectors of
India have little or no saving grace for the large sectors of Indian
industry which are crying out with the pangs of over- capacity and
subsequent deficiency of demand.
15. It is richly ironical that the Indian economy after having reduced
agriculture with its huge population to having not more than 25% of our GDP
relies on this relatively small income segment to carry the day for it. 150
years ago, a British cabinet minister said "The Indian economy is a gamble
in monsoons". Now the accepted wisdom is that this time we can see no other
favourable factor on the horizon other than the favourable monsoon. A 150
years later, we say the same thing ! There is a difference however. When
the monsoon impact was noted a 150 years ago, Indian agriculture accounted
for 75% of India's GDP; today it accounts for 25%. To expect agriculture
alone to carry the day for the remaining 75% of India's economy is a little
too imaginative. Obviously it will have to be combined with substantial
capital expenditures particularly in the area of infrastructure and
hopefully with the presumption of a broad political stability throughout
the country, particularly such stability as will permit substantial
privatisation for the raising of resources for the Governments.
16. Again, several studies have pointed out that the easy going assumption
that the favourable monsoon will automatically mean increased rural income
may not hold true this time if only because there is already a surplus of
foodgrains to deal with, nor is it so certain that higher rural income will
automatically translate themselves into a higher demand for most of the
products of Indian industry. Equations which did hold valid 50 years ago or
even 20 years ago, may not now be automatically valid unless combined with
other policy measures.
17. This does not mean that there are specific industries and specific
companies which will not feel very early in the day the beneficial impact
of the monsoon. But when one speaks of Indian industry as a whole, for
which we are predicting a turnaround, a number of time lags and gestation
periods will have to be borne in mind. Our own belief is that if the good
monsoon is combined with major public works programme and a fair measure of
political stability, the beneficial impact may make itself felt by around
March of next year.
18. As and when the turning point for industry as a whole does arrive, we
believe it will be very swift and rewarding. There are many reasons why
this will be so but easily the most important is the enormous over-capacity
which exists in almost every single industry. This will mean that when the
pick up does come, without any substantial new investments by way of
capital expenditure, a sharp increase in industrial production will be
possible rewarding the economy with substantial increases in production.
There have been repeated regrets expressed about "investment famine" in
Indian industry, but by and large, in most cases and in most companies, the
substantial over-capacity already exists. The real area where the effects
of an investment famine will be felt is in the area of infrastructure
facilities and services. But for a period of a year or two, industry as a
whole will be able to show substantial increases in production and
hopefully in sales, as and when the turning point arrives without any major
increases in capital expenditure. 19. Another factor that will greatly
assist the speed and strength of the recovery will be the substantial
increases in productivity that have been secured by a number of companies
in the recent past. These gains have been virtually obliterated in most
cases by the penalties of unutilised capacities. In other words, to the
extent that production has been secured, there have been considerable
productivity increase but to the extent that there has been unused or
unutilised capacity, these gains of productivity have been virtually wiped
out. Once increased capacity utilisation becomes the order of the day, the
gains of productivity will now be more apparent benefitting the Indian
consumers and the Indian tax revenues alike in a number of ways, apart of
course, the economy as a whole.
20. We therefore conclude that we have a longer period to wait for the
turning point than December this year, but as and when the turning point
does come (by our rough estimate around March/ June, 2002), it will be both
in speed and in strength a very major recovery. Hence, we in the Tata
Investment feel that in advance preparation, we should replenish our funds
for the benefit of our shareholders through the issue of Zero Coupon
Convertible Debentures of Rs. 100/- each of the value of Rs. 32.82 crores.
These debentures will be issued in the ratio of 1 for every 5 ordinary
shares and in effect will mean that for a price of Rs. 100/-, 2 shares of
the Company will be made available together with a sum of Rs. 20/- over the
period of the next 11/2 years. We have issued this particular scheme before
to your great advantage and we repeat that this time again it will be
hopefully to your advantage both from the points of view of high yield and
prospects of capital gains.
Mumbai, August 16, 2001. Chairman