An eye opener to managerial dilemmas

Dr S.Narayanan, Economic Adviser to the Prime Minister addressed the students of DoMS, IIT-M under the banner of the MIST club. He has nearly four decades of public service in development administration in the state and central governments, starting in 1965. He was responsible for the implementation of economic policies of over 30 ministries including Finance, Commerce and Industry, Petroleum, Agriculture, Shipping, Road Transport and Highways, and Power.

Dr.Narayanan gave an insight into practical situations where managers are at crossroads. These problems are more complex, since the opportunity cost involved is very high. He chose an open ended format, where he cited real life instances and the decisions taken, then. He left it to the audience to take their own stand with respect to the decision.

He started out by giving the example of the recent hit book ‘Zoom’, where the author proves that perspectives change when the window of perception changes. He quoted a few examples:

• How illiteracy was the opportunity cost for having chosen to improve tertiary education. India is a knowledge, service based economy now, thanks to the skill set of the people. But it was achieved at the cost of primary education.
  



• The UTI-64 case, where the government had to intervene and pay compensation for scores of people at the cost of drought measures. But that brought about many positive trends in the economy that included people started to trust mutual funds.
  



• The lack of diesel supplies in the local market even though oil exports are high in our country, due a decision taken long ago – to allow private players to export refined diesel. Now, oil export forms a major part of our GDP.
  

Dr.Narayanan commented that “One will always have to take ethical decisions. And the ethics line keeps getting pushed further in life.” He defined an ethical decision in a very beautiful manner – “One should be able to tell one’s mother, about the decisions taken. Because, she is a person whom we won’t lie to!" He said, "Take decisions in such a way you feel happy when you look at the mirror everyday.”

“Life is full of dilemmas. It confronts you in personal and corporate life. In a corporate setup, you are responsible for what the corporate (or government) represents. And what it achieves by the decision.”

“NRN and Tata are respected for the ethics that the corporation holds. So, choose your stand. ”

He chose to end the session there, for the audience to ponder over what sort of dilemmas responsibilities bring in, and why it is important for one to be ethical.

Learning to Lean - Insights by lean management guru James Womack

IIT Madras had the great privilege of holding a talk by Lean management guru Dr.James P.Womack recently.Dr.James is known for his new principles of management called Lean theory. He is the founder and chairman of the Lean Enterprise Institute, a non-profit education, publishing, conference, and research organization who advance a set of ideas known as lean production and lean thinking, based on the Toyota Production System (TPS) and now being extended to an entire Lean Business System. He said that his greatest qualification was that he did not know anything. He started out with a fresh mind which was ready to be modelled and reformed. During the period 1975-1991, Dr. Womack was a full-time research scientist at MIT directing a series of comparative studies of world manufacturing practices. He visited different countries for a first-hand experience at the auto companies like Toyota, General Motors, Ford, Benz etc. His study of the auto industry resulted in a path-breaking book called “The machine that changed the world’” which looks at Toyota and the way that it transformed the earlier business models used by car companies. This was his third visit to Chennai. He had earlier visited Madras in 1971 as a student and then later again in 2002.

In his lively, anecdotal style,Mr.Womack spoke about why the Dilbert cartoon strips are a great example of employee cynicism towards management re-engineering and what every industry can learn from Toyota-the most perfect process for value creation known to him.

He mentioned about the training program at Toyota. When you’re hired as a university graduate, the company’s assumption is that you know nothing of any use. On your first day on the job you goto your desk and there’s a blank piece of A3 paper and on it your boss has written an issue facing your department in one corner. You have to go out, ask questions, and come back with answers after which you are sent out over and over again. That’s a process called A3.Just imagine your first day of your work is a blank paper. That’s their training system.

Mr. James Womack then spoke about the evolution of management theories and gave us insightful examples on how the management principles have changed over time. He spoke about how the first systematic process thinker Henry Ford transformed the car from a luxury to a product which even the farmers in America could afford. According to him Henry Ford was the first person to integrate an entire production system, under what he termed “flow production”. Ford followed the principle – “Father knows best”. He was very autocratic in his functioning and did not have any organization structure so to speak. He was very much the one-man who knew the solutions to all the problems and would manage the company solely.

American companies were becoming more dominant in the early part of twentieth century and I quote Mr. James “Americans periodically think they can become dominant, and periodically discover they can’t”.

Then Mr. James spoke about Alfred Sloan’s new style of management which was more a decentralized one where in they had offices spread right across the geography and the local management was empowered to make certain decisions. The product became more customized and it came with a tag of personal experience.

The third type of management revolves around the concept of lean management. Perpetual innovation was the key driver in this style of management which was mastered by the Toyota group. Toyota brought in more method into execution and their model was primarily based on delivering quality products.

Today the organizations are trying to work together to create value and it is important for organizations to think on the same dimensions and engage its people for achieving its targets. According to Guru James there are primarily 3 steps which any organization needs to follow – First list out what is important for the organization (list out the goals and objectives).Second, how to engage its people to work towards the goals and third is how you solve the problems.

To put it in a simpler way he suggested the 3P’s of management – Purpose, Process and People each of which are equally important for the success of the organization.

The cornerstone principle of lean is – you always start with the customer and ask what the customer really wants. It sounds like the easiest thing in the world but most companies don’t do it. Lean is about tools that create goods and services that offer precise customer value, but with less human effort, less human space, less capital and less time.

He also alluded to the Indian way of teaching at colleges as climate-controlled artificial learning and said that classroom teaching was only a part of one’s education. The real education lies in going out and observing, asking why certain things are happening and engaging in humble and intelligent dialogue with normal people.

For further information about Dr. James Womack and his Lean style of management you can refer to his website

http://www.lean.org/ and http://www.leaninstitute.in/. It was a great gesture by Dr. Womack to share his invaluable experiences with us and which was appreciated by Prof.LS Ganesh of Department of Management Studies (DoMS).We were also joined by management students from MOP Vaishnav, Guru Nanak, SRM university and senior executives from ICICI, Eicher and HAL. Dr.Womack concluded the talk by emphasising the need to keep working towards lean and keep spreading it.

-Abhishek Mehra

DoMS Interface

Mr. R. Srinivasan, Executive-CMC ITC Ltd. Interacted with students of DoMS, IIT Madras

CEO-Connect forum of Department of Management Studies IIT Madras, recently had the privilege of hosting Mr. R. Srinivasan from ITC Ltd. Mr. Srinivasan is an Electronics & Communication engineer from IIT Kharagpur('74) and has held several responsibilities in several businesses of ITC (including Tobacco) across India, in a career spanning over 34 years. He is currently a member of the Corporate Management Committee (CMC) and looks after 5 of ITC's 13 businesses with 5 of the CEOs reporting to him----Paper & Paperboards, Packaging, Stationery, Matches, and Agarbattis. He is also on the Governing Body of the Indian Institute of Packaging and a member of the CII National Committee besides being a non-executive Director of Asia Tobacco Ltd and Wimco Ltd. He is a member of Bestprax Club, Qimpro Foundation.

Mr. Srinivasan started the session by enlisting the things audience wanted to hear which ranged from leadership issues, supply chain management, role of ITC in rural transformation, difficulties of diversification, surrogate advertisement to competing with HUL and P&G. He assured that he would try to cover as much as possible in the session. Mr. Srinivasan started with the shareholder’s perspective who buys the stock and then wants to be happy forever. Companies like ITC act as trustees who need to multiply the shareholders money so as to ensure returns better then that provided by the banks. The results of such as organization is monitored by many stakeholders like employees, customers, suppliers & business partners, government, society and environment. This is where differences arise between companies like ITC and organizations like Ramakrishna Mission. ITC cannot afford to lose money of its shareholders but they have to fulfil a societal purpose also. Striking the balance is the key here.

Talking about processes, Mr. Srinivasan said nobody becomes basketball player overnight. People select roles very carefully according to their strengths, weaknesses and capabilities. Then processes are put in place to deal, track and make sure that things get delivered. Strategy, Structure, System and Quality Assurance system play important role in processes. Strategy should be continuously evolving unlike Indian Hockey team which failed to reciprocate to the changing nature of the game by sticking to the old strategy. Structure helps in having some restraint and discipline but it should not become a limiting consideration. System is required to deal with individuals and keep them aligned to the organizational needs. Team may have individual stars but if they are not aligned to the team’s requirement, it can be a disaster. Quality assurance is much more just quality of products. It extends all other processes having input and output.

Taking up the topic of leadership, Mr. Srinivasan stressed over the fact that people very often wrongly think that leadership is all about Managing Directors and CEOs. We need leadership at all level to ensure unity, alignment and control. Leadership has many similarities with parental duties which include increasing the number of subroutines so as to make them manageable. He gave examples of how parents teach their kids and these learning can be applied in corporations. Then Mr. Srinivasan went on to explain the life cycle theory of leadership.

Talking about ITC, Mr. Srinivasan stressed on triple bottom line policy of ITC which includes fulfilling the economic purpose, not messing up with the environment (ITC is a zero carbon organization) and fulfilling the social purpose (through e-Chaupal). ITC started with Cigarettes and then moved into printing; later on following a government regulation where no company could control more than 50% market share, ITC started diversifying into other sectors. Company now have 13 businesses. Through e-Chaupal initiative ITC is trying to improve the rural condition if not solving the problem completely. Every year population equivalent to that of Australia is added to our country’s population which presents a huge opportunity for the marketers. Mr. Srinivasan said brand presence of ITC lacks the charisma of TATA and Reliance; that is because ITC sells brands (bingo, wills etc.), not the company.

In the end professor T.T. Narendran thanked the distinguished guest and presented a memento as a token of appreciation from the Department of Management Studies.

Vishal Chourasiya

DoMS Interface

Investment Workshop at DoMS, IIT Madras

The students of the Department of Management Studies (DoMS), IIT Madras have been running Moolyankan, a diversified fund. As future managers and investors the students felt the need to have a platform to apply theory and knowledge to practice, the end result of which has been Moolyankan. The entire focus at Moolyankan is on learning about stock markets as well as on evaluating companies, based on the knowledge gained in the classroom. This also gives the students an opportunity to stay abreast of business happenings and trends across the globe and a chance to invest in the India growth story.

Since its inception on 10th September’07 Moolyankan has posted returns of 24% as compared to 4.5% from the Sensex. With a yearning for more knowledge and insights into the evaluation of firms for investment, DoMS IIT Madras, in conjunction with the Business Line Club organized an Investment Workshop and invited renowned investment advisors Mr. Rajat K. Bose for insights into Technical Analysis and Mr. S.P. Tulsian for imparting wisdom on Fundamental Analysis of stocks.

Mr. Rajat K. Bose is a well known technical analyst in Indian equity markets. He is a member of the online panel of global executives for The McKinsey Quarterly, the quarterly journal of venerable McKinsey & Co. and participates in the surveys conducted by The McKinsey Quarterly. Currently, he appears exclusively on TV18 India Ltd. group channels such as CNBC TV18, CNBC Awaaz and CNN-IBN. He also regularly contributes to http://www.poweryourtrade.com/ with daily calls and writes articles on market outlook on http://www.moneycontrol.com/. Mr. Bose has appeared on several Indian channels like NDTV-24x7, NDTV Profit, Zee Business, Sahara Samay and several other regional language TV channels. He has also written for The Economic Times, Kolkata edition and The Statesman, Kolkata.

Mr. S.P. Tulsian is a name to reckon with in the Indian investors fraternity. Mr. Tulsian was a member of the National Stock Exchange (NSE), right since the time of its inception in 1994. He started a hugely popular and respected weekly tabloid, Premium Investments as its Editor and Publisher and still runs this successful initiative to protect investor interest and give truthful advice. Mr. Tulsian is often seen on prominent business televisions channels like CNBC, CNBC AWAAZ and CNN-IBN. His articles appear in most of the leading financial newspapers in India, like Economic Times, Business Standard and Financial Express.

Mr. Rajat K. Bose helps unravel Technical Analysis

Mr. Rajat K. Bose started the first session by admitting the fact that while student community is getting increasingly fond of technical analysis, it doesn’t guarantee profits even to great technicians. Knowledge of stock markets is the key to success and emphasis should be on managing trading risk while technical analysis can provide controlling handle on the things. Most people assume that mathematics is the technical aspect in technical analysis. Initially when technical analysis started, very elementary school level mathematics was used but later on engineering mathematics also found application. Since 2000 there has been a de-emphasis on mathematics part because at the end of the day people are only concerned about making money and not using fancy mathematical fundamentals.

Talking about the history of technical analysis, Mr. Bose quoted Benjamin Graham and his role in the separation of technical and fundamental analysis in 1960s. Mr. Bose defined technical analysis as study of markets or company performance on price charts. Price and Volume of transactions are the basic raw data required for the analysis. Talking about the philosophies of technical analysis, Mr. Bose said market action discounts everything which is a direct inference from the Dow Theory. Technical analysis is like a chess board where everything is open while Fundamental analysis is like a cards game where many things are hidden. One of the basic assumptions of technical analysis is that history repeats itself. Many people consider it crazy but analysis has proved that it is possible to come up with price projections based on historical price movements. On one hand fundamental analysis stresses on causes of market action while technical analysis on the other hand focuses on the effects of these market action.

Getting deep into technical analysis, Mr. Bose explained three types of market trends i.e. uptrend, downtrend and sideways movement. These trends must be adequately supported by the volume data. The very essence of momentum trading is the fact that a trend is assumed to be in effect until it gives a definite signal that it has reversed. But it has a possible pitfall also because who knows if you are the last bull on the bourses. Another important philosophy of technical analysis is that averages must confirm each other. The averages here generally refer to the Dow Jones industrial average and the Dow Jones transportation average, both should move together. China in 1995 reported a flat transportation average while the GDP was reported very high; at this people suspected the figures.

Mr. Bose explained the fundamental concepts of support and resistance. Support is the level at which demand exceeds the supply and resistance is the level at which supply exceeds the demand. Basic concepts of price gaps and trend lines were then explained with the help of several examples on patterns. Mr. Bose then moved to the topic of managing trading risks. If you put an intelligent guy in a group of fools, he no longer remains intelligent and looses all his intelligence. This is the condition prevalent in the market today, where people do not behave rationally but irrationally as opposed to the efficient market hypo thesis. People generally get trapped in belief that trend will continue forever and in the process make huge losses.

Mr. Bose gave few guidelines that should be followed while trading in the markets. Trade what you see, not what you believe. People need to keep aside their belief and preconceived notions and trade the markets. Selection of counters to trade is based on many parameters like risk averseness of the investor, size of risk capital (money, on loss of which an investor would not lose his sleep), liquidity of the counter in question, volatility of the scrip and the lot size. People should never average a loser. Many investors indulge into buying falling scrip but caution must be exercised on the extent to which one can buy falling scrip. Investors need to decide the stop losses level in advance and it should be strictly followed. Last but not the least, judgmental biases should be avoided. Many investors become adamant at my-current-trade-investment-must-be-a-winner. Such biases should be avoided and the losses should be minimized in this case. In the end Mr. Bose concluded the session by emphasizing on the risk management rather than following any analysis blindly.

At the end of the session, Prof. Rahul Marathe presented a memento to Mr. Rajat K. Bose and thanked him for providing profound knowledge on the topic of Technical Analysis.

Mr. S.P. Tulsian expounds on Fundamental Analysis

The second session at the Investment Workshop was addressed to by renowned investment advisor Mr. S.P. Tulsian. He held forth on Fundamental Analysis and various aspects that can help investors in valuing a company and decide on its investment worthiness.

Mr. Tulsian commenced by saying that he was very happy for Moolyankan and impressed by the fact that the future torch-bearing managers of India were doing a good job of making prudent investment decisions. He said that during the session he would be looking at the objective and subjective factors as well as components that help decide on investments in companies, in addition to 4 case studies of different companies.

Taking up the topic of objective factors that helped in investment decisions and are applied as liked by an investor, Mr. Tulsian enumerated the following important ratios and indicators:
· Enterprise Value (EV)/Earnings before Interest, Depreciation, Taxation and Amortization (EBIDTA)
· Discounted Cash Flow (DCF)
· EV/Sales
· EV/ Profit after Tax (PAT)
· EV/EBIT
· Price to Earnings (PE) Multiple
· Break-up value of Assets
· Dividend Yield
· Book Value
· Replacement Cost

Mr. Tulsian maintained that EV/EBIDTA is a very strong indicator of the core strength and stability of a company. For this purpose, he broke down each component of EBIDTA viz. Interest, Depreciation, Taxation and Amortization and explained that each of them must be discounted for the purpose of zeroing in on the true profitability of the company. Describing further, he said that EBIDTA margins are important benchmarks and companies with high EBIDTA are good investment avenues. However, one might look at firms with lower EBIDTA only if their future prospects and projects seem to be bright and profitable.

Speaking on DCF, he professed it to be an important indicator and said that one needs to discount the profitability of current as well as future projects of a company.
Pointing to the EV/Sales ratio as a valuable indicator of enterprise value, Mr. Tulsian said that in comparison market capitalization was a weaker parameter for measuring the enterprise value. The reason behind this is that market capitalization doesn’t consider the debt component of the company while EV does. However, the EV/Sales ratio is more applicable to industries such as services, technology, and entertainment, where proprietary technologies and innovations will be used in future projects for profitability.

Saying that today EV/PAT was not a very popular ratio today, Mr. Tulsian said that it was so 25-30 years ago. This is so because earlier there was really no difference between a company and the projects it undertook. However, with the entry of MNCs into India, each project that a company now takes is evaluated individually. He still emphasized that EV/PAT was still relevant as it was ultimately concerned with the bottom-line.

Focusing on the EV/EBIT ratio, he said that the ratio indicates how many times the market values the operational result of the company. A low ratio suggests poorly efficient use of a company's resources, even if its profit margin is high.

Mr. Tulsian described the PE multiple as a very important indicator of the health and operations of a company. But valuing the company so would require us to only consider its operations one year forward as the future was really uncertain and looking too forward rosily might attach some risk with our decisions.

Break-up value of assets is the value realised when they dismantle assets or discontinue operations. Valuing companies on this parameter is a good idea as it values a company on the basis of all assets the prices they can fetch, stressed Mr. Tulsian. He revealed that a healthy break-up value of assets permitted many companies to have high stock prices despite a lacklustre performance.

Mr. Tulsian stressed that the Book Value or rather the Price\Book Value ratio as a valuating parameter is important to sectors such as the banking sector as well as the purposes of acquisitions.

The final component of the objective parameters was Replacement cost which is a parameter relevant more to infrastructure projects and companies as the profitability for them is not initially high but increases as the project progresses.

Next, Mr. Tulsian explained the subjective factors which include the following:
Promoter
Sector
Size
Geography
Project Engineering
Growth prospects

Taking up the effect of a powerful and influential promoter on a stock’s value, he said that the Reliance Power Limited’s (RPL) IPO euphoria was fuelled because of the image of Anil Ambani attached so strongly with the ADAG. However, with its fiasco people now don’t have the same faith in RPL. He explained that those companies whose promoters have a clean image, who follow all corporate governance norms have higher valuations.

Mr. Tulsian said that different sectors have different PE multiples. Currently capital goods, retail, infrastructure, power and entertainment sectors enjoy a high PE multiple. This lot keeps on changing depending on the boom an industry is experiencing.

The size of a company does matter in valuation, he said, emphasizing that bigger companies get valued better through their sheer breadth and multiplicity of projects. Here he gave the example of Kingfisher-Deccan merger, comparing them to Jet, as a result of which its valuations are decent considering the fact that the venture has still not posted any profits.

Indicating the importance of geographical location of a company and its operations, Mr. Tulsian said that because of favourable governmental rules and regulations and lower transportation costs from fields, sugar industries in Karnataka and Orissa would be valued much higher than those in Uttar Pradesh.

Similarly, project engineering and related efficiency and capabilities of a company was important, considering the fact that refining companies which can’t process light crude are valued much lesser than those which can. In the same vein, growth prospects of a company play an important role in its valuation.

Mr. Tulsian then went on to describe how components such as fundamentals, liquidity, sentiment at the market and its listed or unlisted status swayed the price of a company’s stock.
Fundamentals were extremely important for a stock. This is the factor, which if strong, should keep the long-term investor invested in a stock, accentuated Mr. Tulsian.

He considered liquidity of a company as important as its fundamentals as that is the factor that drives the market. This was in effect particularly for the period of August 2007 to January 2008, when the Sensex really spiralled ahead.

The fundamentals and liquidity for a company would only change in a period of 1-3 years. However, the sentiment at the market could change within 1-3 days and thus imparted volatility to the market as well as to a stock. He stressed that this was what was happening today at the market when the fundamentals as well as the liquidity of companies were in good shape.

A listed company attracts much more valuation than an unlisted one. On an average, an unlisted company would receive 25-40% less valuation than a listed one and thus a listed status for a firm matters.

After explaining all such factors, Mr. Tulsian took up the case of 4 different companies: TCI Industries, Reliance Industries Ltd., GMK Infrastructure and Parsavanath Developers Ltd. In each case he dug deep to help the audience understand how each factor discussed previously helped the company value better.

Finally at the end of the session, Mr. Tulsian answered questions ranging from how the Sensex was a true indicator of the growing economy, the current volatility in stocks, the case of efficient market hypothesis and how much a retail investor knows really, why Tata Motor’s stock price dropped on buying out Land Rover and Jaguar to the outlook on the banking sector.

Presenting a memento to Mr. S.P. Tulsian the students of DoMS, IIT Madras thanked him for taking time out and his effort to explain the intricacies of fundamental analysis as well for igniting their interest in it.

Vishal Chourasiya
Kunal Lal
DoMS Interface Team

Admissions Process on the way

Process for the admissions for the new MBA batch are on the way. GT/PI process in Chennai and Mumbai was held from 15th to 17th. Delhi process begins from 31st of March to 2nd of April.

The process has been a great experience to the candidates as per the feedback available. The professors have been working really hard to bring the best candidates to DoMS.

Once again, all the best to all candidates..