U, V or W- What Shape The Economic Recovery Will Look Like ?

Recession is passé now. So it seems. If one looks at the recovery in the stock markets the world over. It looks like recession was a 2008 event and 2009 is well ready for a recovery. The BSE Sensex in India has moved from 8200 on March 9th to nearly 14500 now. A growth of over 80%. Many stocks have doubled and some have even tripled in this period.  

Does this mean that the bad news is behind us? Is the recession over? Will the real economy go back to the heady days of 2006-07 or early 2008? On that the opinions are varied.

One simple method to predict the shape of the recovery is the shape of the curve based on the shape of the alphabet. The most optimistic of the economists and analysts predict a V-shaped recovery, in which the lowest point can be considered as Nov-Dec 2008. The optimistic analysts prognosticate that there is still pain left; hence the current recovery from March onwards is just a bear-market rally. The markets will go down again and only in 2010 will the real bull market start again, hence the shape shall be a W. The pessimists indicate that the stock markets are out of touch with the real economy and the real economy will revive very gradually over the next 18 months. The shape of the curve is hence a U. The doomsday analysts say there will be no recovery at all for a long-long time like the way the Japanese economy went through in the 90s, hence the shape of the curve will be like an L.

Jamie Dimon, the CEO of J P Morgan in an interview to TOI  says, he is unsure what shape the recovery will be. He says :

“Of course, the world went through a deep recession—call it a Great Recession—and it was much worse in the US or Europe than in China or India. But I think the world is on course to stabilisation. You see it in consumer spending, business plans, confidence levels, inventory balances, purchasing indices. Sectors like housing in the US are still getting worse, but at a much slower pace. So we’re actually seeing a global bottoming out. But I don’t think anyone knows whether the recovery will be V, or U, or W-shaped. I’m not going to spend a lot of time guessing on that.”

Maybe Dimon does not have time to guess the shape of the recovery. Without using any tools or surveys, my instinct tells me that this rally is unreal, but the market and the economies will bounce back. I am betting on a W shaped recovery.

What letter are you betting on?

- G. Mohan

Is Tata Nano Booking Figure Anything To Crow About ?

Tata Motors has announced the booking figures for Tata Nano which closed on April 25. The company has issued a press release that they received 2.03 lakh bookings. Since the company will issue allotment dates for 1.0 lakh cars only, it can be said that the oversubscription was more than two times.

However, given the hype surrounding the model and the media projecting it as a game-changer, the response received is rather lukewarm. Tata Motors had sold over 6 lakh forms through their various channels, yet only a third of the applications were submitted. Industry analysts had estimated that there will be at least 5 lakh bookings. Even BusinessWeek in a recent story titled “Why Indians are thrilled about Tata Nano” had estimated that the bookings will be over  3.5 lakh. The actual numbers turned out to be far less.

In terms of the models preferred, the most expensive LX model got 50%, 30% for the mid-priced CX model and only 20% for the lowest priced model. Readers may recall, it was the lowest priced model which came close to the Rs 1.0 lakh dream car of Mr. Tata.

Some of the reasons which may have led to the poor response as analysed by TOI is as follows:

It is believed that the high booking amount fixed for the Nano, as well as almost no chance for any customer to test-drive the car, could be among the reasons for this subdued response. Uncertainty among people on whether they would be selected in the draw of lots, considering that Tata Motors will deliver only around 50,000 units in the first year (starting from July) and that too on a scattered basis, could also act as a dampener. The fear associated with buying a new model, that has not yet proved its actual road worthiness, might be another reason.

In addition, to the above reasons, I would like to add the huge uncertianty surrounding the survival of Tata Motors because of its debt overhang may have been weighing in the minds of some of the buyers. Also, the fact that Tata was going to use the booking advance to build the Nano factory did not go down well with some buyers. Tata was acting like a typical real-estate developer, who shows a model flat, takes bookings before even starting construction and then using the booking amount to build the flats using the customer’s money. 

 

The premium LX version getting better response than the base version also indicates that the analysts and Tata himself expecting that millions of two-wheeler owners will aspire for a low-priced car like Nano seems to be a myth. Nano for the present is only snatching away market share from Maruti-800/ Omni and second-hand car buyers and not from the two-wheeler market.

 

When Nano comes on road and the factory starts producing to full-capacity, it will be interesting to watch the market dynamics.

 

- G. Mohan

ICICI Bank : No Woman, No Cry

ICICI Bank reported poor results for the Q4-2009. Its Q4 net profit declined by 35.29% to Rs 744 crore versus Rs 1,149.8 crore in the same period of last year.

The bad news at the ICICI Bank doesn’t stop there.

The well developed top team at ICICI Bank seems to be coming apart, as the current CEO, K.V.Kamath retires this April. By choosing Chanda Kochar as his successor, Mr Kamath seems to have set a cat among pigeons.

The two other contenders for the top-post were Shikha Sharma, MD of ICICI Pru-Life and Renuka Ramnath, the MD of ICICI Venture, the private equity arm of ICICI Group. Both of them are slated to leave the  ICICI Group. Ms. Sharma has already been appointed as the CMD of Axis Bank. Ms. Ramnath is rumored to be setting up her own PE firm. Visakha Mulye is tipped to be her successor.

The churn at ICICI has set me thinking about women managers. In a recent INSEAD study, it was reported that

The good news is that in a study of executives, women did better than men on several measures. The bad news is that women fell significantly behind in one key area: vision 

 Apart from the vision problem, it looks like women managers may have great difficulty in working for a woman boss, specially if they had been peers.

 - G. Mohan

If B Ramalinga Raju were to Write a True Confessional…

Imagine the following  as a letter that B.Ramalinga Raju could have written to his wife on 9th June just before his arrest.

 

Dear Nandini,

 

I am writing this mail sitting in this farmhouse, outside of Hyderabad , waiting for my arrest. I know the events over the last one month, have been so overwhelming, that we haven’t been able to have any meaningful conversation at all.

 

Even you must be wondering about the actions taken by me and also the sharp reactions from the media and the world around us. For someone like you, who had got used to basking on the reflected glory from me, it must be a huge shock. Probably, you thought fame was a one-way street. Even I thought so.

 

Let me tell you that though I am not demonstrative about my love to you or to our sons, the family’s interest was always paramount while I took my decisions. I thought how I could protect our family’s interest and minimise the damage as much as I could, given the mess I had got into.

 

In simple terms I want to explain the mess to you. Actually, Satyam was doing quite well. We were making decent profits. We had good clients also. But, it was a little too staid and boring. So, I kept reducing my stake in Satyam progressively from 30 odd percent to 8 percent.

 

You know I am not really a computer guy. I can barely manage to read and write emails. Also, I can open and scroll down powerpoint presentations made by my juniors. I was not really the software pro, I was made out to be.

 

At this point, one man I really hate is Babu (Chandrababu Naidu). He wanted  Hyderabad to compete with Bangalore on IT. So he wanted some homegrown entrepreneur from AP to take on Bangalore . In his mind, Satyam was the competitor to Infosys. Although heart of heart  I knew, I was no match for Narayana Murthy. I enjoyed all the attention and favours I got from Babu. You remember, how happy you were when I made a presentation for 45 minutes in front of Bill Clinton.  

 

Then our boys joined business. I advised them that rather than wasting their time in Satyam , they were much better of getting into more exciting businesses. I thought real estate and infrastructure was where the action was. So I asked them to inject life into Maytas, which was passive for a long time. I can leverage my connections in the political parties and the government to get them good contracts and land deals.

 

Couple of years back, I even began to believe that what I did in 20 years in Satyam , our sons have achieved it in two years in Maytas. So that is where the future of our family lies. The real estate boom in and around Hyderabad gave me hope that we can multiply money much faster in real estate than in software.

 

However, I was identified very strongly with Satyam. I realised that in public mind Satyam was me and I was Satyam, even though my heart lay elsewhere. With a meagre stake of 8 %, I wanted to control Satyam. It gave me access to ready cash whenever I needed it. I had put a team of yes-men (all are from our place) who were running it without much hassles. I had put that clerk, Vadlamani as the CFO,as he was ever ready to do whatever I asked him to. 

 

The plan started to unravel in 2008. I did not realise that the correction in the stockmarkets in January was unlike the previous years. I had in the past pledged Satyam shares and taken loans and invested in land and stockmarkets. Even when the shares used to go down , they used to recover soon. In 2008 it did not. I wanted to do an IPO of Maytas Properties and get some money by fooling the public, but I could not. Simultaneously, the real estate market also collapsed.

 

When the real estate and the stock market collapsed simultaneously, I realized I was in serious trouble. I had pledged a lot of our family holding and also taken a lot of cash out of Satyam to buy a lot of land. On top of that the Satyam results also were poor.

 

In September 2008, if I had reported poor results, the stockprice of Satyam would have gone down, which means I would have margin calls from the debtors for my pledged shares. So I decided to doctor the results big time. Honestly, earlier I had cooked the results once a while, to meet the guidance or to just look that we are nearly as good as Infosys, but nothing like what I did in September 2008.

 

 

The real estate and the stock market refused to look up and the December results were round the corner. So my only hope of retaining control of Satyam and Maytas was to merge them. Whereas, all our Telugu-vadu board members accepted it without any murmurs, I did not realize the investor and media reactions would be so sharp. Actually, I and Satyam were too high profile for pulling of such a thing. Many others manage it beautifully, but they maintain low profile.

 

After that event, the investigations started and I knew that time was running out. I consulted a lot of our Raju community people and even told them that there is a problem. They assured me that they will help me out. They even told me you resign, but do not confess. I thought, quite a bit, should I confess or not. Should I confess about siphoning Satyam money or cooking results ? My lawyer told me that confessing about cooking results would get you a maximum of 10 years in jail. Knowing the judicial system in India and our political connections, I thought I would confess it in India .

 

By taking the entire blame on me and Rama (MD), I wanted to shield you and our sons. I decided to dump that clerk Vadlamani by not even mentioning his name. Anyway, he might have made more money than he had ever dreamt.

 

The real estate market is down now, but it will recover sometime soon. Then it will all be fine. The next half of our life we will have to live fighting cases and in ignominy. It is OK.

 

I took a little too much risk. I counted too much on our political connections and community support. It did not work out. My kshatriya pride also came in my way. Otherwise, I could have clearly focused on money and pulled off this, just like many other Indian businessmen.

 

Please do not get too sentimental about the 50,000 odd Satyam employees. The good ones will find job elsewhere. The majority of the others are half-baked engineers from third-grade colleges. They should be grateful to us for enjoying the high salary and the foreign tours for all these years. If they believe that they are software pros, it is their problem. They cannot speak a few lines of correct English and cannot write proper software code. I will not be surprised if they go back to tobacco cultivation and chilli trading in Guntur and other places where they came from.  

 

I know still there are a lot of unanswered questions. I have sneaked in my Blackberry, I will write to you from wherever they keep me in custody. We are still in our 50s only. Even if they put me in for 10 years, I still look forward to our retired life together in Bhimavaram on the banks of Godavari .

 

Take care.

Disclaimer – This is an imaginary letter and any resemblance to persons living or dead is purely coincidental.

Why Shahrukh is Missing in the Airtel DTH Launch Ad?

After a week of teaser campaign, where the most visible prop was a red-colored sofa, Airtel launched its DTH service, Airtel Digital TV today. The advertisement has virtually all the celebrities who have endorsed for Airtel coming together in a single advertisement, TVC as well as the press advertisement. Saif Ali Khan, Kareena Kapoor, AR Rahman, Madhavan, Vidya Balan and cricketers Gautam Gambhir and Zaheer Khan.

 

One celebrity who has been endorsing Airtel for a longtime is conspicuous by his absence. No prizes for guessing that, it is Shahrukh Khan. He is not endorsing Airtel DTH because he has been endorsing Dish TV, a competitor to Airtel.

 

It appears that when Airtel signed up Shahrukh for Airtel mobile services, they had no idea they would one day be in DTH service. In these days of convergence, even when signing up celebrities it is important to keep in mind the future product launches.

 

Even Videocon, a brand which Shahrukh Khan endorses, which is next in line to launch its DTH service, will not be able to use SRK for the same reason.

 

- G. Mohan

 

Should ICICI Bank Dump K V Kamath Before His Retirement?

The last few months have been particularly terrible for the CEO of ICICI Bank – K V Kamath. For someone who has been the toast of the business press for his successful transformation of a staid financial institution into the second largest Indian commercial bank, this has must have been a humbling experience.

Three days back, there were wild rumors in Andhra Pradesh and Karnataka that ICICI Bank was going down. Customers queued up in front of the ATMs and branches. Some ATMs ran out of cash, leading to the mob getting unruly.

Mr. Kamath made a press release the day before yesterday and even got the RBI to assure the public that the bank is healthy. The anger and the frustration of Mr. Kamath in his interview to The Economic Times yesterday were palpable.

Prima facie, it appears that there is nothing seriously wrong with ICICI so as to precipitate a collapse of the sorts we are seeing in US. The bank is well capitalized, having a capital adequacy ratio of 13.4 %, as against less than 3 % for Lehman brothers. It has a net worth of Rs 470 billion, higher than any other Indian bank.

Yet, ICICI Bank suffers from a serious perception problem. In spite of being big and successful, it does not command the trust and security of smaller lesser known Public Sector Banks. Four-five years ago, a similar scare was seen in ICICI Bank in the Gujarat region. It needed some deft crisis management and reassuring words from the RBI to assuage the fear of public.

The share price has been beaten down close to Rs 500, as against its peak price of over Rs. 1450 in January 2008. In fact, Mr. Kamath is crying wolf that there has been a bear cartel which has been manipulating the bank’s shares.

The perception of risk that the public is now associating with ICICI Bank probably stems from the aggressive growth of the bank and the alleged laxity in processes on the part of the bank to achieve this growth.

Mr Kamath himself admits to some of the real problems faced by the bank. It had exposure to sub-prime related securities in the US and the UK. As a strategy, the bank is reducing its global book considerably. He admits that the bank is going slow on retail lending, because of higher than estimated delinquencies. It is no longer aggressive on unsecured loans.

His erstwhile close lieutenants like Lalita Gupte,  Nachiket Mor and  Kalpana Morparia  not being there by his side during this crisis is not making the situation any better for Mr. Kamath.

Looks like it is time for ICICI Bank to return to conservative banking, which probably is not Mr. Kamath’s style. Although he has hinted at continuing beyond April 2009, if his board approves, I feel there is a need for change of guard at ICICI Bank. Perhaps an outsider can wield the broom better.

- G. Mohan

The Changing Industrial Landscape of Hyderabad

 

 

Hyderabad, the city of Nizam, is a historical city. It is home to various businesses and business-houses. Unfortunately, the city does not have a single business-house or company that has been a blue-chip for an extended period of time.

 

 

In the last 25-30 years, the industrial and business landscape has changed a great deal in the city. In the 1970s and ’80s, Hyderabad was home to a number of Public Sector Units (PSU), some state and several central PSUs.

 

Hyderabad Allwyn was a large state PSU. Allwyn refrigerators and furniture were quite popular all over the country. Allwyn, also had a watch unit in collaboration with Seiko. Later, Allwyn got into LCVs in collaboration with Nissan. Hyderabad Allwyn became sick and it no longer exists. The LCV unit has been sold to Mahindras.

 

Andhra Pradesh Government had set up a scooter unit in collaboration with Piaggio. They came up with Vespa PL170, when Bajaj Auto used to have long waiting lists. Once, Bajaj Auto increased its capacity, AP Scooters failed to survive.

 

HMT and its subsidiary Praga tools was another large PSU. Although, HMT still exists, it is a pale shadow of its former self. BHEL and HAL existed then, they exist even today. They may not be hot, but they are steady companies. IDPL was a PSU with a large bulk drug unit in Hyderabad. IDPL is often credited with the pioneer status and the nursery of all the pharma units in Hyderabad.

 

In the private sector, VST with its Charminar brand of cigarettes was a prominent company. VST’s brands no longer have the market shares they used to command in the past and has now become virtually a small unit of ITC/BAT. There are several ITC group companies and divisions which operate from Secunderabad. ITC Agrotech was a hot company in the 1990s, with its Sundrop brand of edible oils. ITC sold this division to ConAgra. Other ITC Group companies in Hyderabad include ITC Bhadrachalam Paperboards and ITC Agri-business division.

 

In the 1980s, the Nagarjuna Group created waves. It set up quite a few companies in diverse industries. Nagarjuna Steels was the most high-profile among them. Nagarjuna Fertilizers, Nagarjuna Finance, Nagarjuna Construction and Nagarjuna Signode being the other companies in the group. Nagarjuna Steels has folded up. Nagarjuna Signode has since become ITW Signode. Nagarjuna Finance became insolvent resulting in lakhs of depositors losing their savings, giving Nagarjuna a bad name. Nagarjuna Fertilizers and Nagarjuna Construction (NCC) have survived. NCC has availed the infrastructure boom and its stock is now considered a good one. The Pennar Group, came up alongside the Nagarjuna Group, copying their strategies and business plans. Most of their businesses are defunct today.

 

Bakelite Hylam and IDL (now Gulf Oil) were the other big industries of the 80s, which exist even today. Bakelite Hylam, a pioneer in laminates, became sick in 2004 and is slowly recovering under a BIFR package. Gulf Oil is a fringe player in the lubricants and explosives market.  

 

 

In the 80s, the pharmaceutical industry grew rapidly in Hyderabad. Cynics often attribute its rise to the theft of intellectual properties and processes from IDPL. Standard Organics and Dr. Reddys Laboratories were the big pharma companies that were set at that time. Standard Organics and its sister company SOL Pharmaceuticals, no longer exist. But Dr Reddy’s has become a large company through acquisitions. It was considered a blue-chip until recently. However, Dr Reddy’s stock was removed from the Nifty index  recently.

 

Aurobindo Pharma, Matrix Laboratories, Divi’s Laboratories are some of the other large public listed pharma companies from Hyderabad. Aurobindo Pharma, a widely tracked company among equity analysts, is losing favor among investors and was recently removed from the Nifty Junior index.

 

Hyderabadi entrepreneurs suffer from a dangerous herd mentality. Businesses like aquaculture, mini-cement plants, granite, ceramic tiles, financial services etc. have either folded up or on the verge of closure. Most of these companies raised money through IPOs and large number of small investors have lost their savings in these companies. This has caused a great deal of harm to the image of Hyderabadi entrepreneurs.

 

If there is one big blotch in recent industrial history of Hyderabad, it is the collapse of Global Trust Bank (GTB). Although, the bank got eventually taken over by Oriental Bank of Commerce, its miserable failure still rankles in the mind of many a  Hyderabadis.

 

Hyderabad experienced a major shift under the leadership of the then Chief Minister – Chandrababu Naidu. His efforts in making Hyderabad a center of IT industry and knowledge economy resulted in the city being known as Cyberabad.

 

Satyam Computers is the biggest name in the Hyderabad IT industry. The company has grown from strength to strength and is the biggest employer in the city. In keeping with the Hyderabadi herd-mentality several software companies came up, particularly during the dot-com, Y2K era. Most of these companies were body-shoppers, sending half-trained programmers with doctored CVs, seducing them dollar-dreams of USA. Most of them have shut their shops.

 

Unlike other industries, in IT, Hyderabad has a large number of MNCs operating here. Microsoft and Oracle with their large development centers are big employers. There are several MNC BPOs in the city such as Dell, Genpact, HSBC, Deloitte etc.

 

Hyderabad is home to two reasonably big media companies viz. Deccan Chronicle and Eenadu.

 

As IT industry’s gloss started fading, the Hyderabad entrepreneurs entered the booming power and infrastructure sector. Notable among the big players in power and infrastructure sector include Lanco Group, GVK, GMR Group, IVRCL and several smaller companies.

 

Real estate, an offshoot of the construction business, is also fairly big in the city. Post-2003, Hyderabad like the rest of India, saw a huge construction boom. Maytas ( a company belonging to the Rajus of Satyam), IVR Prime, NCC, Prajay and several small builders have built a sizeable business constructing  in and around the city. Several of the construction companies have also entered construction and operation of retail malls.

 

Cut to 2008, the industrial landscape of Hyderabad is now dotted by companies belonging to the service sector. IT and ITES sectors are the largest employers and the drivers of the city’s growth. For pharmaceutical industry, Hyderabad continues to be an important hub, but with the industry itself facing pressures, the outlook is not bright. A number of mid-size companies in a variety of industries are showing good promise. Some of these companies, in no particular order, include Bartronics, Alpha Geo, ICSA India, Rain Commodities and DQ Entertainment. Time will tell whether they can emerge as blue-chip companies.

 

Unarguably, Hyderabad is a big market and therefore a big trading centre. It has been unable to become a big industrial centre. Among the capitals of southern Indian states, Hyderabad lags behind Bengaluru and Chennai in this respect; it is only ahead of Thiruvananthapuram. The stunted vision and the get-rich-quick philosophy of the Hyderabadi businessmen are largely to be blamed for this state of affairs of Hyderabad.

 

- G. Mohan.

New International Airports in Bengaluru and Hyderabad – Which One is Better?

 

 

Last month, I had the opportunity to experience the new international airports in Bengaluru and Hyderabad.

 

What follows is a quick comparison.

 

Both these airports commenced operations within a span of few months. Both these projects are based on the Public-Private-Partnership model. Interestingly, both the airports have been constructed at a cost of approximately Rs. 2500 crore (USD 600 million).

 

Both are larger and swankier than the old AAI airports they have replaced. Also, these airports are built on huge tracts of land away from the city. Devanahalli where the Bengaluru International Airport is located is 40 km from the city center. Hyderabad Airport (RGIA) is at Shamshabad , almost 25 km from the city center

 

BIAL looks much smaller than RGIA. You can’t fail to get impressed with the huge ceilings and the large expanse of space RGIA indulges you with.  BIAL with its lounges already full most of the time looks more like a cute glass box, in comparison.

 

If one does look at numbers closely, the difference leaps at your face.

 

Air- passenger traffic in Bengaluru is almost 50 % higher than Hyderabad. Hyderabad had air-passenger traffic of 7 million in 2007-08, whereas Bengaluru had nearly 12 million passengers. Both the new airports claim that they have a capacity of handling 12 million passengers annually.

 

Hyderabad airport has a terminal area of 107,000 square meter; BIAL is much smaller at 71,000 square meter.  Hyderabad can handle 3200 passengers per hour, whereas BIAL can handle only 2733 passengers per hour. 

 

Clearly, BIAL has been designed to barely meet its current full load while RGIA has been designed for the future.

 

The architecture of BIAL has been fashioned after the minimalist Zurich airport look. RGIA on the other hand, has been influenced by the Kuala Lumpur airport.

 

As a passenger, I would certainly rate the Hyderabad airport far superior to the Bengaluru airport

 

- G. Mohan.

 

First Families of Indian Auto Industry and the Economy of Scope

 

Till a few years ago, large Indian business houses active in the automobile sector were ensconced in their clearly demarcated turfs. Tata Motors (TM) has been a clear leader in the commercial vehicle market; Mahindra & Mahindra (M&M) has been a dominant player in both utility vehicle and tractor markets while Bajaj Auto (BA) has been a reigning colossus in two-wheelers and auto rickshaw markets. 

 

The business houses of the Tatas, Mahindras and Bajajs did avoid any direct competition In industry meets, they were seen as friends and usually expressed similar views from the same platform. Anand Mahindra and Rahul Bajaj, often came together to speak on issues related to manufacturing sector in general and automobile industry in particular. Keshub Mahindra, Chairman of Mahindra and Mahindra, has been on the board of Tata Steel for a long time.

 

This cosy arrangement was laid to rest when the opportunities started reaching global scale along with the opening up of the domestic market to foreign behemoths.

 

Years ago, TM launched utility vehicles Sumo, Sierra and Safari in direct competition to M&M. Now, Mahindra Scorpio and Safari are slugging out in the same segment of the SUV market.

 

M&M entered the BA turf by launching three-wheeler carrier vehicles.

 

TM launched Tata Ace (four-wheeler carrier vehicles) a category killer which cause considerable headache to both M&M and BA.

 

M&M with the purchase of Kinetic Motors (KM) this week has now stepped into BA’s two-wheeler market.

 

But the mother of all battles will now be waged in the passenger car segments.  TM’s soon-to-be launched Nano will have to lock horns with BA’s ( in collaboration with Renault) sub – $ 3000 car expected to be launched next  financial year.

 

M&M’s Logan (manufactured by a JV between M&M and Renault) is already busy battling with TM’s Indigo.

 

Clearly, while seeking competitive advantage, the first families of the Indian auto sector have decided to go beyond the economy of scale in their respective territorial confines.The economy of scope seems to be the new frontier in balancing production efficiencies, range of products, dstribution clout, consumer preferences and price points. 

 

 

That day may not be far off when tractors from BA, motorcycles from TM and buses from M&M will grace Indian roads. 

 

- G. Mohan.

 

Malvinder Singh Writes to the Late Dr. Parvinder Singh on Ranbaxy Sellout

June 12, 2008 

Tokyo 

Dear Papaji, 

Sat Sri Akal!

It is with a heavy heart I wish to inform you that I have just sold our family’s stake in Ranbaxy to a Japanese company, Daiichi Sankyo (DS). You may remember Sankyo, now it is Daiichi Sankyo.

 

The decision was not easy. I was constantly remembering you and thinking, what you would have done if you were faced with a similar situation. I had no plans of selling out. In fact, I had come to Japan looking for a partner for our R & D venture. One thing led to another and I found DS willing to partner us, only if they had a controlling stake in Ranbaxy.

 

I came back to Delhi and discussed with the family members. I told them that they are giving us a good offer, only if we sell them our entire stake. Honestly, it was not the money alone that was tempting. You have left enough money for us. But it was the entire set of circumstances.

 

Increasingly, business has become very difficult. In our generics business, which you built to a global scale, we are having serious margins pressure. Our success in litigations on patents in US is going down. We haven’t made much headway with our R & D after you left us. In fact, ever since Rashmi ( Dr Barbhaiya) left us, our R & D is directionless. The stockmarkets have also got wind of all these problems and during the bull-run in Indian markets after you died, Ranbaxy stock is just languishing.

 

You will accept that, along with the global pharmaceutical company, that we inherited from you, we also inherited the family disputes. The disputes you had with your father and brothers are still unresolved. Chacha Analjit has not forgiven you to this day and never leaves a chance to get back at us. These disputes take a lot of my and Shivi*’s time.

 

Shivi is doing pretty well with the Fortis Hospitals business, which you had started in a small way. He wants to make it a national chain. Religare ( which was known as Fortis Financial in your time) is also showing good promise. Both these businesses will do much better, if we infuse capital. 

 

Thinking all of the above, I thought that this was a once-in-a-lifetime opportunity. So I decided to accept the offer. I know you had a  dream of making Ranbaxy an Indian MNC. Now it will be a subsidiary of a Japanese MNC. You will be happy to know that they have agreed to retain the Ranbaxy name.

 

I have also negotiated a good deal for myself. They have retained me as the MD and CEO for five years. I know it is not going to be easy, reporting to the Japanese managers. I am used to being an owner-manager. Their slow consensual decision making is surely going to get on my nerves. I am sure, they will appoint a number of Japanese managers all around me. Sooner, rather than later, I will be a puppet in their hands. I have seen this in Maruti. But atleast I will be the public face of Ranbaxy. I can retain the family honour this way. If things get diffcult for me, I will not stay on for the full-term. By then the spotlight will be out of Ranbaxy and I can go on to do something else.

 

I think, the Indian media and the CII-types are not going to like this deal. They will feel let-down.Ranbaxy is often taken as an example of  Indian pharma’s success story. I have learnt from you, that ultimately, the company, our family and our shareholders matter. This deal is good for all of them. Let the chatterati keep talking.

 

Emotionally, it was very difficult to let go. Ranbaxy and our family identity is so intertwined. But logically, I found that it was in the best interest of all of us to let go. I hope you approve of this.

 

By writing this letter, I feel a great sense of relief. Please forgive me, if I have disappointed you. Seeking your blessings for my future endeavours.

 

Yours affectionately, 

Malvinder.

 - G. Mohan.

Disclaimer: If at all a disclaimer is needed, the letter above is a pure piece of fiction.