INVESTING IN NEW REALITIES: GCC CHALLENGES

This Article was published in Arab Times, Akhbar Al Khaleej, Gulf News, Alqabas

The year 2014 will count to be a momentous year for the GCC region. The year witnessed both a strong rally in the stock markets during the first five months followed by bloodbath during Q4 2014, thanks to oil price swings and its pass through effect. As we enter 2015, there is lot of panic, trepidation and uncertainty. What this means for investing?

In panic, it is always possible to miss the big picture. And the big picture is quite strong. Years of strong oil price has enabled GCC economies to increase spending and build reserves. Saudi Arabia, being the largest, can serve as a proxy to study. Contextually, it may be relevant to compare three time periods to appreciate the big picture i.e., 1998, 2008 and 2014. During the last 15 years, the region witnessed three inflection points where it has braced the lowest oil price (1998), suffered collateral damage inflicted by the global financial crisis (2008) and experienced steep oil price decline (2014).

KSA	1998	2008	2014
Oil Price (Brent, $/bbl, average)	13.04	98.3	106.1
BEP ($/bbl)	20.4	57.6	94.8
Fiscal Balance as a % of GDP	25.90%	29.80%	5.60%
CAB as % of GDP	-9.00%	25.60%	15.30%
Govt Spending- Current Exp (USD bn)	45.7	103.8	179.0
Govt Spending - Capital Exp (USD bn)	5.0	35.1	80.4
Index Level (Tadawul)	1,413	4,803	7,905
Stock Market Cap (USD bn)	42.7	247	422
GDP (USD bn)	146	520.5	764.1
M.Cap/GDP	29.2%	47.5%	55.2%
Turnover velocity (tot value traded/avg. m.cap)	26.9%	137.8%	119.9%
Population (in million)	19.51	25.79	30.67
GDP / Capita (USD)	7,483	20,182	24,914
Foreign Reserves (USD bn)	46.9	442.2	793.2
Source: IIF, World Bank

However, compared to 1998, the GCC region is today well poised to weather any storm given the large surpluses that it has built during this period. Saudi Arabia’s foreign reserves at close to $800 billion is nearly 17 times larger than what it was in 1998. The period marked an increase in the overall economy (GDP) and the attendant increase in stock market capitalization and liquidity. During this period, the population has also increased. However, the GDP growth outpaced population growth resulting in higher per capita. It may be interesting to focus on spending for Saudi Arabia. From a modest $50 billion in 1998, overall spending increased fivefold to $260 billion. In this, the current expenditure increased by a factor of 4x while that of capital expenditure increased by 16x. This probably explains the lower fiscal balance today compared to earlier inflection periods.  The stock market soared from an index level of 1400 to 7900 though in the interim it reached 20,000! Measured in GDP terms, the market cap/GDP ratio is still a modest 55% providing room for significant market cap expansion.

The growing demographics punctuated by young population is triggering demand boom for several goods and services including banking, telecom, housing, retail products and capital goods. Increase in current expenditure has unleashed a consumption boom while increase in capital expenditure has resulted in infrastructure spending focused on power, roads, aviation, water, ICT, education and healthcare.

The period also marked significant developments on the regulatory aspects with several countries including Saudi Arabia launching independent capital market regulators to modernize the capital markets and attract new players. Several other sectors like telecom, insurance, etc also witnessed launch of independent regulators.

However, the economic and investment expansion is not accompanied by improvement in business environment as reflected by the WEF ranking on various parameters. While performance on issues like starting business, infrastructure and access to loans were better, critical parameters like ease of doing business, health and primary education, labor market efficiency and capacity to retain talent deteriorated from 2008 to 2014.

Saudi Arabia - Ranking on a Global Level	2008	2014
Ease of Doing Business	23	49
Number of Days to Start Business	30	20.5
Number of Procedures to Start Business	34	9
Health & Primary Education	51	50
Infrastructure	41	30
Labor Market Efficiency	63	64
Ease of Access to Loans	39	27
Country Capacity to Retain Talent	16	22
Source: World Economic Forum –Global Competitiveness Report 2008-09 & 2014-15 Note: 2008 ranking is based on 134 countries, 2014 ranking is based on 144 countries

The GCC economies must therefore prepare themselves for oil price swings and should use their enormous reserves to rapidly diversify their economies by improving the business environment. While the big picture is very strong thanks to years of strong oil price, GCC needs qualitative change in the global rankings to tap the vast potential in several key sectors including banking, telecom, infrastructure and services. Improvements in these indicators call for a variety of reforms at various levels and their successful implementation. They should form the Key Performance Indicators (KPI’s) for the relevant ministries. The need to accelerate reforms and diversify the economy is acute given the ever increasing break even oil price required to balance the budgets of GCC economies. This then  is the new reality!

The Power of Net working

This article can also be read at Linkedin

It’s not just for marketing people to be well networked. It applies to every profession, in every community. Networking implies enabling active interaction among people that you can connect in order to receive and provide knowledge. It is important because it can make a huge difference to your career, will enable you to come in contact with people that you can appreciate, can build very crucial bridges in your life and it can make a world of difference when things challenge you on many fronts. However, there are many road blocks to effective networking. The question is how to overcome them and effectively network?

The first rule is ‘Overcome hesitation’ – Many a times, we are very hesitant to really make an acquaintance with a stranger, saying Hello!! or writing a small memo introducing yourself. There is the hesitancy in us to really make that first phone call or write that first email. But if you overcome that hesitancy you can feel that you are much more comfortable in terms of how you start building your network. This is the first and most important step that one should take by overcoming hesitation.

The second important thing is ‘Don’t hesitate to ask for advice or opinion’. People really respect being asked for opinion. We always have a very high level of tendency to talk more and listen less. Just reverse the process, make your contacts talk more and provide yourself the opportunity to listen.

The third aspect to Networking is ‘Perseverance’. Don’t be afraid of dead ends. They happen all the time. Not every step that you make towards building your contacts and networking can result in a success. It doesn’t mean that you should give up your networking efforts. We should just put behind those things that doesn’t work and keep moving with the single objective of building effective networking.

The fourth important aspect is when you network, try to follow very basic etiquettes. Thanking a network that just got connected with you is a basic requirement. If you have approached a particular person for a particular aspect, keep him posted about subsequent steps that you take. This will really help them appreciating you in the long run. People do remember small things.

The fifth important aspect is, ‘Don’t restrict your networking group to your professional job colleagues’. It’s a huge temptation to really reach out and build your network only among your job colleagues. It is important to expand your network to your ex colleagues, to your friends, to your educational acquaintances and to a host of other people that can really widen your perspective.

And finally, use social media for building your networks. Among the most popular social Media today, LinkedIn counts as the most important tool for building professional network. You can be very effective by being an active LinkedIn member. You can browse people of repute and request them to connect with you and keep actively engaged in the LinkedIn by contributing to occasional articles, share updates and appreciate people when they move on to something very important. This is the most effective method of networking and it is freely available and people should make full use of this powerful engine.

Happy Networking!

Don’t be that Leader!

This article was published in Marketexpress.com

Who is a good leader?

You must have asked this question to yourself countless times. How to become a good leader, how to spot a good leader, how to engage with a leader, how to learn from a leader, how to change our leader,….In our professional and personal lives, we must have dealt with at least one of the questions listed above.

Hence, leadership is an issue even if you are not the leader. In our day lives, we have to encounter situations of either having to lead or being lead. Leadership lessons can come from anywhere. Here are three scenarios that I would want to analyse but with no guarantee of any conclusion:

1.       Be that Elephant

2.       Be that Dhoni &

3.       Be that Ravikumar

Be that Elephant

From Harvard to Mckinsey, many have analysed leadership lessons from elephant herd. Much against the conventional wisdom in the animal world that the mightiest and fiercest makes it to the leadership throne, the largest of all animals (elephant) place age and wisdom as priorities for becoming the leader of the herd. The elephant herd usually is a large family with several members. However It is usually the oldest matriarch that is crowned as the leader clearly showing emphasis on experience, wisdom and knowledge. Unlike the lion kingdom where it is the strongest male lion that adorne the leadership mantle, why is the emphasis in the elephant herd more on age and wisdom ?

Elephants have become good case studies for leadership primarily because the matriarch leader is known for the following: can enable survival of the herd through intelligent decision making, is compassionate, provides inspiration, excellent in cooperation, highly effective communicators, and possess knowledge and wisdom assimilated over years of observation. For want of space, let me expand on one trait i.e survival. The key to survival for elephants is to remember water holes during drought. In search of water, the herd walks thousands of miles and here is where the key is. One wrong estimate and the entire herd would be walking the wrong path where the result is normally nothing but death. It is for this reason experience, memory and wisdom is given more priority than other attributes to select a leader. Normally the matriarch is 60+ when she takes over the leadership role. The buzz words highlighted exclude terms like aggressive, authoritative, and innovative; normally used otherwise to describe a leader.

Be that “Dhoni”

 "A Leader Should Know How to Manage Failures” This is what Dr. APJ Abdul Kalam once said about leadership and Mahendra Singh Dhoni is a great example of that. He ruled Indian test cricket for a long period of time (2005-2014) in spite of having the worst overseas track record (only 20% win).

  

“Dhoni” The Captain
	Matches	Won	Lost	Drawn	% of Win
Home	30	21	3	6	70%
Away	30	6	15	9	20%
Total	60	27	18	15	45%

He is the third highest in the number of international matches played (Kumar Sanghakara being the highest), fifth in terms of all-time dismissals (Mark Boucher being the first), 11^th highest run scorer in test match (Sachin Tendulkar being the number one), third highest run scorer among “wicket keeper captains” (Adam Gilchrist being the top). No firsts anywhere, but still ruled Indian test cricket for 10 long years and retired on his own terms. How was that possible?

Firstly, he showed tremendous composure under extreme pressure, a trait much needed in what has turned out to be an extremely competitive game. No wonder he was described as “Kaptain cool”. Secondly, in a game where traditional stalwarts held on to their positions more on their past track records than on current performance, he reposed faith in young talents much against conventional wisdom. Thirdly, he takes the blame in failures, and credits his colleagues in successes. And like how Abdul Kalam said, he learns from his failures.

Be that “Ravikumar”

Who the hell is he? For those not familiar with Tamil film industry, this should be a natural reaction! However, K.S. Ravi Kumar, is arguably one of the most successful, highly sought after film maker of the Tamil film fraternity. He has directed more than 40 films, worked with all leading names (Rajnikanth, Kamal Hasan, etc.), and has been an iconic film maker for the last 25 years. While most of his films are major hits, the notable among them is the Rajikanth starrer Muthu, which became popular even in Japan. Film making (director) is arguably the most intensive profession where your leadership skills are put to extreme scrutiny. While a typical corporate CEO has at least 3-4 years to prove his leadership mettle, here the name of the game is success and success alone all tested in a few months span. Hence, to rule such an intensely competitive industry for 25 long years is not a joke. What sets K.S. Ravikumar apart?

    •        All his movies are produced with a commercial format in a masala genre with the typical themes of action, comedy, sentiment etc (stick to your core competency)

    •        His team of writers and assistants are the same (be loyal to your team)

    •        Renowned for his quick schedules and prompt completion of his projects (efficiency)

    •        Stays within his budget allotments (efficiency)

    •        Always works with established actors than new comers (don’t take risk with others money!)

    •        Rescripts the plot to suit the lead actor (be adaptive)

    •        Highly temperamental (show authority where required)

Does this not read like a corporate scorecard for the most successful managers? In a recent interview, when queried about the secret of his success, he said none of the above. Rather he quipped “concentration” as the mantra.  He opined that once you concentrate completely on the task on hand, everything else follows!

Leadership is not a science for us to derive exact rules that can work. We have seen here three very different situations where different lessons can be learnt. Examples of good leadership can come from unexpected places, but the lessons are precious.

Wishing you a great 2015!

Having the cake and eating it too!

Is it possible that a stock investment makes sense both from a capital gain point of view as well as dividend point of view. Unlikely, since it is like pulling a rope from two different directions. As company’s share price increases (resulting in capital gains), its dividend yield (defined as dividends/stock price) falls for the simple reason that as the denominator in the equation (stock price) increases, the yield decreases. A perusal of top stocks (in the table) clearly shows that if they are high on capital gains, they are definitely low on dividend yield.

Having said that, we can identify companies that have done well not only from a capital appreciation point of view but also from a dividend yield point of view.

The table lays out this dilemma by looking at the past five years average on both dividend yield and price performance. Among the large caps, if the stock tops the list on dividend yield, it lags in price returns and vice-versa. For eg. NTPC has a healthy dividend yield of 2.6% while it has a negative price performance of 5%. Where the price performance is very healthy (for eg., Tata Motors at 64%), then the dividend yield is 1.4%[1]. There may be minor exceptions to this but in general if the dividend yield is healthy, then price performance is poor. Large caps generally suffer from this tension where if it scores well on capital appreciation, it tends to lag on dividend yield. A good example would be Kotak Mahindra Bank, whose capital appreciation was a healthy 32% annualized for the last 5 years, while its dividend yield average is a paltry 0.1%.

So, if we chase dividend yields, then we may risk incurring capital loss and if we chase capital appreciation, then we have to settle down for paltry dividend yields. However, if we can find companies that not only produce good capital appreciation but also pays handsome dividends, then that is a list worth looking at. After quantitative research, here is such a list.

Stellar Stocks	Years since inception	Mcap (USD mn)	5Yrs CAGR*	5yrs avg DY
Hexaware Technologies Ltd	17	726	66%	5%
Supreme Industries Ltd	20	1,247	79%	3%
Finolex Industries Ltd	20	588	41%	6%
SRF Ltd	20	619	25%	5%
VST Industries Ltd	20	391	51%	5%
Aarti Drugs Ltd	18	137	43%	5%

Source: Reuters

*Compounded Average Growth Rate

As we can see, the list not only combines strong price performance, they also enjoy high dividend yields. Let us look at them a bit closely.

Hexaware Technologies is the erstwhile Aptech which is now renamed as Hexaware. The company’s share price increased at the rate of 66% p.a. thanks to robust annual growth in top line (22%) and bottom-line (30%) with the price to earnings ratio holding in tact at 10. However, what is surprising is the equal performance on the dividend yield where the D/Y increased from a modest 1.5% in 2009 to 8.4% in 2013 thanks to dividend pay-out increasing from 16% in 2009 to 88% in 2013.

Supreme Industries, is a Mumbai based company that belongs to Thaparia group. The company is into plastics and plastic products. Over the years, the share price improved from Rs.76 in 2009 to Rs. 425 at the end of 2013, yielding an annualized return of close to 80%. The stock is currently trading at Rs. 588. Over this period, the company enjoyed a top line annualized growth of 19% and a bottom-line growth of 16%p.a. However, the capital gain was achieved more due to a p/e rerating that improved from 6.25 to 19. The dividend pay-out ratio has also increased from 29% to 36% though not dramatic. The average dividend yield during the 5 year period was 3%, which though not very high is not bad at all.

Finolex Industries, is a Pune based Petrochem company belonging to the Finolex group. The share price improved from Rs. 56 in 2009 to Rs.167 at the end of 2013 implying an annualized return of 41%. The current share price is even better at Rs. 327 as of 12/11/2014. Being in a commodity industry, where the margins are low, the top line and bottom-line growth was a modest 14% and 6% p.a. However the robust capital gains was made possible by a p/e rerating from 5.2 in 2009 to 12.2 in 2013. During this period, the dividend pay-out also increased from 28% to 51% causing the dividend yield to increase as well. The 5-year average dividend yield was an impressive 6%.

SRF Ltd, is a Delhi based Bharat Ram group company mainly into textiles. This is a strange entry into the list. Its share price performed at 25% annualized during the last five years though its recent profitability has shown a decline from Rs.253 crores in 2013 to Rs. 162 crores in 2014. The company’s top line has been growing at a rate of 13% p.a. during the last five years. The declining profits is more than compensated by the rerating of the p/e that increased from 3.68 in 2009 to 12.7 at the end of March 2014. The company has a generous pay-out of 35% leading to impressive dividend yield of 5% during the last five years.

VST Industries, is a Hyderabad based multinational company selling tobacco products. The company’s share price increased at the rate of 51% p.a. during the last five years aided by a 25% annualized growth in the top line and an impressive 73% annualized growth in the bottom-line. The performance has also been helped by a growing p/e ratio that improved from 13 to 17. Being cash rich, the company has always adopted a generous dividend pay-out stance with the pay-out ratio averaging close to 75% of profits. The average dividend yield during the last five years stands at 5%.

Aarti Drugs, is a Alchemie group company that is into pharmaceuticals. It enjoys an annualized 

price appreciation of 43% and an average dividend yield of 5%. The company’s top line (19%) and bottom-line (22%) improved at a healthy clip leading to higher profitability. The p/e ratio has been stagnant at 4 over the years. The company adopts a conservative pay-out policy.

Concluding Theme:

The list given here is only partial and it is possible to successfully isolate companies that have shown impressive capital gains as well as dividend yield. The running theme among such companies is healthy top line and bottom-line growth, p/e rerating and generous dividend pay-out ratios. However, they all belong mostly to small cap segment whose fortunes can change overnight!

The author thanks Rajesh Dheenathayalan for his assistance

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[1] Price performance refers to annaulized performance in past 5 years (2009-2013); Dividend Yield computed as average yield over the same time period.