June 12, 2006

Report on Annual Reports

The recent crash in the market has led to fewer IPO's reducing my workload. That was bound to happen. How long can we keep funding an unreasonable growth in the stock market. Someone's got to lose. Well, if not for anyone, I surely did. However, when I did ask a few of my friends if they lost money, I surely heard two reasons. I am there for the long term and this is a temporary correction long awaited and secondly, the long term story of the country is still intact. For the stock to move upwards, there should be a buyer who can find value once we reach back previous highs. I do not know who is that going to be. and as usual time will surely tell.

So what is exciting in these markets. My holidays gave me a huge list of annual reports to catch up on. I enjoy reading annual reports. It is like reading a prospectus. A lot of repitition making it complex and boring to read. If there is some regulation that requires repetition, then its high time the law some change. Endless repitition of the best performance and silently ignoring the important signs. As a shareholder, even if it means a single share, I get to read the important stuff of the company. It is true that the company incurs more cost to maintain a single shareholder, but then every shareholder has the right to be informed. This time around, till I see an IPO in the pipeline, I shall comment on the shareholders report and my observation on them.

I think it is important for every shareholder to read the annual reports. It probably gives insights to the company that one would have never thought of. For example on the recent budget proposal on ultra power projects. We get information that India is building 4-5 ultra power projects. One sees the shortfall in generation at about 75000 MVA. Now what do I understand by this. Can Reliance actually bid for this...does it have the competency to bid...no idea. Reading the reports, esp annual reports gives indication if the company has the capability to implement. Btw, for information the company only generated around 1000 MVA for the last financial year. The total generated in the country was 125 times his generation. Surprised, yeah so was I as Reliance always advertised as though it was the largest producer. It still is, but the scale is just not comparable. Public utility companies are far ahead in power generation. The annual report from the company was equally disappointing. There was no symbol of the newly formed ADAG symbol. Though I am not a big admirer of the symbol, yet it is a signature of the company and this was missing.

The report from Anil Ambani is always good to read. Somehow, though I do not know him personally, I like what he says. Comes out as a person who is truthfully and likes doing things within the constraints of the law, wherever applicable. The company actually has not done that well this year. The sales has been on the lower side. The company has reached its limits in capacity and incremental sales has to come from expansion. The company's foray in wind is disappointing and natural gas has had no buyers. No wonder he has not advertised this in his report. The company has revalued its assets. This could have been due to the de-merger between the two brothers. I hope this was the reason as I do not like companies revaluing assets upwards, esp. during boom markets, as they are not going to devalue once the market is down. The company has not charged the depreciation due to this upward revaluation on the profit and loss directly. They have used their reserves to make up the higher cost. This again is something unacceptable, revaluation is similar to having bought the asset that year. They should have charged it to the income statement directly without using the reserves. I understand the company has not done anything wrong, just that it is unfair to the shareholder. Next, on the company's general, distribution, administration expenses- the investment to the gratuity fund dropped dramatically. Could find no reason as the company had a slightly higher salary expenditure. The company should be completing its merger with Reliance Energy Ventures this year. Should this create an impact to the company? I do not have an answer as I am not clear of the shareholding pattern of the company. My ideal guess is that it would not have an impact but to be certain I need to know the shareholding pattern of the company and the extent of impact of this shell company.

Finally, I am definitely interested in this company for the following reasons. I am bullish on infrastructure based companies. Reliance energy has got approvals to build over 12500 MVA over the next few years. The investment should roughly be in the range of about 50000 crores. The company has reserves less than 10%. So, the company will be borrowing and given its credit rating, this should be easy. However, I will be concerned if dilution occurs due to FCCB, as they can demand steep discounts. I like the aggressiveness of the management. There is a definite hunger for success. The company has got Anil Ambani, and he too is like his brother in thinking big projects. The best of this team is that this is in a sector with huge opportunity of success. Growth will taper off in a decade but utility companies are as the name suggest- a requirement that can't be reduced.

The next one that I read was on Gail. I have been investing in this stock for a long while and I finally took the pains to read their annual report. Unlike the report by Reliance Energy, this was comparatively attractive to look at. This can be both negative or positive. Negative as the company is spending on something that is hardly read and positive as the company is proud. My take on this is that, the company ought to make it attractive as this is a PR material for the company and it is important for the company's management to be proud of its results. It does not have to be lavish yet a little bit of shades should do no harm. Coming to GAIL, the company is an ideal company with immense potential to grow. It is in the oil sector, yet the company makes investment on communication lines, which is irrelevant. You will see this getting disinvested or floated into a separate company soon. I am not happy with their investment. I do not see the synergies of business apart from the gosling that they are using for building them. It reminds me of a famous quote by Mark Twain- There are two times when a man must not speculate: One when he has money and the other when he does not. This looks like speculation with money to me. The company otherwise is making some good moves in investing in local bodies for distribution of CNG and LNG. The company still generates 70% of its revenues from its core sector of selling gas. Here is something funny. The company's vision is to ensure value is created to all stakeholders yet it takes pain to reiterate by giving importance again to environment and customers. My guess is that they do not believe these two as a part of their stakeholders. Its part time directors is a total disappointment. Two directors have attended just one of the 15, the best being 10 attended by another director. Wonder what value they add in that one meeting that they attend.

About 23 giving an PE of about 10. Ideal for a company with ROIC of over 27%. The company is suffering from the subsidy burden. It had to pick up a tab of about 1100 crores translating to about Rs. 13 per share. Well, one is helpless of the atrocities of government policies even if they are going to get something back in the form of Oil Bonds. Anyways, the company is in the right sector and the supplies that it is making to the power sector and for local consumption gives this company an ideal candidate for investment. It is still a govt defined pricing sector, and my faith of the current government is losing over the past few months. Yet I would like to invest in this company.

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