Markets have been very quick to punish companies alleged to have made unethical gains. As an increasing number of companies are finding themselves in the dock, Raamdeo Agrawal, joint MD, Motilal Oswal Financial Services has said in an interview with Sandeep Singh that the valuation gap between well-run companies and those seen to be tainted on account of unethical practices will go up. Excerpts:
How do you currently see the environment where companies are openly being targeted for unethical practices?
Companies involved in the infrastructure sectors, including power, telecom, port, mining etc. that have to deal with government, are the ones that are affected the most. These businesses are the backbone of any country and there is a nexus between bureaucracy and business. Earlier, the bureaucrats and businessmen could get away with irregularities and could prosper at the cost of the consumer. While this has always existed, it has reached unsustainable levels now and is getting exposed. As a country we have come quite far and it is time to reset. Politicians and businessmen have to come together and find new rules of game. We are becoming a soft state and the psychology is that you can get away with anything. Unless you punish them, no one will be scared and it will not be preventive.
How has all this been taken by the markets?
Market is the most democratic place and people started withdrawing from such companies. Stock prices are not determined by big guys but the small guys, today’s stock price is just today’s opinion and the moment my opinion turns negative, even if I am a small guy I will set the price lower. All these people are getting hit. People do not forget and will not forget till the next generation. Building reputation takes 20-25 years and you can lose it in just half an hour.
Will this reflect in valuations?
This is the first time people will know the meaning of good conduct. Corporate ethics was always at the forefront of giving valuation to companies but now since the companies are getting exposed, people will classify them into low PE category. The premium to goodness will go higher and so will the discount for badness, thereby increasing the valuation gap.
What do the companies need to do?
The way to change is to change from within — you will have to take tough decisions, have to forego some greedy benefits, pay more taxes, take care of minority shareholders and have to come out clean. Some will reform while other will just go down.
How do you see markets now?
The earnings season is better and has been a mixed bag. I think rupee will play an important role, if the government does not act, the rupee will slip. It is the invisible headmaster as we are now much more globally connected, even the government cannot act. Government currently is in such a situation where they are not able to honour their own words —the laws are not firm, things are changing midstream and so you cannot project anything with certainty. I know that the economy is headed high and we will move up and do well but probably we can do better.
What do you think the government should do?
Any country is built on how it handles its savings. They need to see methodically how to use savings and look to use it to build businesses and infrastructure. If we don’t use it properly we will flounder somewhere. Also there is a growing gap between private and public sector banks. An ownership change of these public sector banks will not only provide ample money to the government but these fantastic institutions will start conducting well and a lot of what we see — a bad airline or a newspaper getting money — those things will not be possible. Reform in the banking system is very important. The government can still own stakes in banks and will still have the power as it will be the regulator.