Agency Theory in Action

Airtel recently announced a hike of 20% in its tariff, which was taken quite positively by the investors – Airtel’s stocks reached a 22-month high yesterday. But I am sure the customers won’t be happy by this decision. The investors are thinking that this 20% increase in tariff would translate into better profits, and hence increase the valuation of the company. This in turn would lead to stock price appreciation, and would be kind of an inversion point in the attractiveness of the Telecom sector as a whole, which had taken a beating earlier.

What the analysts and investors have failed to factor in is how this move would be taken by the customers. Their theory is based on the fact that other players would follow suit and increase their respective tariffs. They believe that after all the bloodshed in this sector due to price wars, the players are finally back to their senses - their priority has changed from increasing the customer base to increasing the profit margins.

But why would a customer want to shell out the extra money in the present scenario is one question that the leaders at Airtel have forgotten to factor in. With the inflation never seeming to bow down – and the RBI and the inflationary pressure having resorted to going at war with each other in order to soothe their egos – why would an existing customer of Airtel want to shell out even a paisa more for the existing service? I don’t see any marked improvement in their services – now that they have even started charging for calling the famous customer toll free number -121. , as a customer, don’t see the value proposition of paying 20% more, with the MNP (Mobile Number Portability) in place. Thinking on tangential lines, I see this price rise as a measure to serve the enormous loans that Airtel has taken for acquiring the 3G license. The financial planners at Airtel would have been asked how to break even early -  and the outcome is the rise in the tariff rates. It would have been more justified if Airtel would have passed on these costs to the 3G customers.

Well, what I see from my side is that this is a temporary rise in stock price witnessed by Airtel. As the customers start switching to other players - those who can’t afford to raise their tariff rates and still have their focus on acquiring customer base- this strategy of Airtel is not going to work. Also, one must remember that Vodafone was the biggest beneficiary of the MNP. This makes me conclude that customers see more value proposition in Vodafone than Airtel. Vodafone will take over Airtel as the No 1 player. Just because Airtel is the No 1 player as of now doesn’t mean that the whole industry is going to follow suit. Remember, Tata Docomo was the first player to introduce 1 paise per minute, which compelled the other players, large or small, to follow suit. . I believe Airtel should start counting its days now, as it has dug up its own grave. Is this an example of one of the cases of classical Agency Theory? Only time can tell….

India's White Elephant

Air India has been enjoying the limelight almost on a daily basis with all the leading newspapers in India. But it is getting popularity for all the wrong reasons. According to sources, Air India has a cumulative loss and a massive debt burden collectively totaling upto 67000 crores!! Well, seriously, I don't even want to know how many zeroes are there in this figure. But one thing that I know is that it is roughly 1% of India's 1.3 trillion USD GDP. People do joke that the airline makes less losses on a day it is not functioning (due to strikes etc) than when it is operational!!

Jokes apart, I believe that the culture at Air India is still similar to that of the bygone days babus regime where the employees did not pay any heed to what is going on around them - the typical mentality of a PSU back in those days. There seems to be no accountability at Air India, and absence of skilled employees and/or presence of red tapism could be the reasons why the losses of Air India are always headed North. I believe Lalu Prasad Yadav should be made the Aviation minister, based on the fact that he was the only Railways minister under whose regime Indian Railways posted profits ever.

Why does the Government always have to infuse equity capital into Air India, when it knows that the equity gets eroded as soon as it is infused!! Why not declare Air India a sick company, like it has been doing with many others and divest its stakes. Let the Government hold the majority stake and invite the private players to take a minority stake - which could possibly lead to Air India's turn around. Imagine where would have the Air India been had it not been taken over from J.R.D Tata in 1940s. It would probably have been the most profitable air line by now!!

I strongly believe that the Government should manage the various ministries just like a corporate, with the payout of the minister dependent on the performance of the ministry. It is the only sustainable way going forward to get in more accountability into these portfolios.

Air India should set a target for itself to make it comparable to the Navratnas, where people from all walks of life want to go and be a part of. It should try hiring good people from the corporate world and from good B schools and devise a turn around strategy. Hoping to see Air India in green soon.

Rendezvous with PM's Cabinet

July 12,2011 would be marked as a red letter day in the history of PM Cabinet reshuffle in India. The Govt and our respected PM wanted to undertake this reshuffle to counter the tarred image of the Govt due to numerous scams that have been unearthed recently by the likes of CAG as well as other respected Govt agencies(at least they still have an ethical piece alive in their soul). It was also a day for our PM to prove that he is not a puppet in the hand of the ruling party chief.

After the reshuffle, the only thing that comes to my mind is "What a Waste"! The purpose of this reshuffle was lost perhaps in the various meetings that the NDA Govt had with its allies, threatening to withdraw their support if they weren't given representation in the Cabinet. Well, thankfully the DMK didn't have much muscle power this time to ask the Congress to include some of its highly corrupt party members to be included in the Cabinet, after Karunanidhi suffered from a triple whammy - A. Raja, Dayanidhi Maran and Kanimozhi. The Cabinet seems to be greatly inspired from Einstein's Mass Energy equivalence (E = mc^2) and has adapted it in a different context. The portfolio of a minster can get changed from one form to another, making the total number of ministers almost a constant.

The people of India are dying to see younger people in the cabinet, when today the average age of Cabinet is equal to almost 64 years. The cabinet needs relatively younger people who are dynamic, open to newer ideas and much more flexible. This kind of a change would surely be taken positively by the foreign investors, thereby increasing the confidence of the FII and FDI investors in the Indian economy -  a much needed thing at this point of time when the foreign investors are shying away from investing in India due to the untamed inflation.

Last but not the least, Mr. Jairam Ramesh, who earlier held the Environment Ministry, has now been "promoted" to Rural Development. I really don't know how much of a good news it is for the Indian environment. He is the leader who changed the perception of the environment ministry from a rubber stamp to  something more serious in nature. I believe he did so well because his heart was into the cause of saving the depleting Environment, and he didn't treat it as just another portfolio. But alas! It seems the lobbying of the MNCs and industrialists - whose projects have been stalled due to clearance issues from the Ministry - has finally worked.

Now, it is upto Jayanthi Natarajan, the new MoS for Environment, to either uphold the standards set by his predecessor Mr. Jairam Ramesh or succumb to the pressures of the big MNCs and industrialists.