Books, stocks and more

Who says Elephants can't Dance: Louis V Gerstner, Jr.

2010-02-28T16:37:00.004+05:30

I would have laughed at myself a few quarters back if someone told me to read this book. I have never shown any interest to books on consulting, change management, culture etc etc. So books like Blue Ocean Strategy are a strict "no-no" to me. It is difficult to understand and we complicate these issues so easily with charts and theories (for god sake) and importantly have intellectual discussions surrounding the same. I am not in for it and the testimony to it would be me ranked one of the lowest in my class in HR subjects (not that I was a topper in other subjects).

So when I was sitting in the airport having reached few hours earlier than required and having a book which is interesting but long and time consuming, I saught for a change wondered around the three book-stores (next to each other in this airport having near similar books!) and saw this book. Not particularly keen as I knew this book had great reviews but was a stratrgy kind book. Quite recently, I had laughed at my colleagues who reads such book (including this one specially) but can implement very little in his own work sphere. However, the other choices at this book shop was equally poor so I landed up buying it. Not expensive but definitely worth a try.

Two hours into the flight and one hour at the lounge I completed half of this book, totally hooked: damn impressive writing. The late evening nearly full flight was dark inside as there was probably less than 10 lights switched on: one was mine. As I completed my relieving formalities in my old job, I could not complete this for the next few days though I was yearning to have it completed. I completed today and man, was I not impressed.

Honestly, one cant really believe that a company like IBM could be in such a mess. Having worked in three places, one really understands that negative bueracracy exists: it is painful but it is created across time and coming out it is difficult. However, this is IBM and when I came to understand the true value of this company it was in the early 2000, when everything was all right, everything had changed for the better.

The problems that he had faced, the changes he tried to bring (market share and customer focus, defocus the organisation existing internal issues and bring in a totally new culture, and finally the importance of cash flows) is all the book emphasises. Importantly, there are no HR theories or consultancy jargons/flow charts/ diagrams. The focus has been on simpler issues and he addresses them in even simpler language.

I would want everyone to read this book and I have to definitely read this book again probably in a years time from now. I have not written anything serious in this blog as I am still yet to understand the importance of them in full and would want to give sometime before I throw some more light.

I would end this blog with one of his paragraphs asked in his job placement interview from campus when he was deciding between two companies (McKinsey and P&G).

The following question was from P&G:
"Lou (the author), let's suppose it's Friday night and you are about to leave the office when you get the latest Nelson report (market-share data for consumer packaged-goods companies). It indicates that you have lost two-tenths of a point of share in the last month in Kentucky. Would you cancel all of your activities for the next day, Saturday, and come to the office to work the problem?".

What is your answer?

Indecent Exposure: A True Story of Hollywood and Wall Street

2009-12-28T15:46:00.009+05:30

Well, that is what the heading states and honestly, it is a book that one can skip. Surprisingly, this has a good rating by "amazon.com", something that I truly value. This book is a combination of a board room drama and acts of forgery committed by one person. People who have read 'Barbarians at the Gate' and 'Once in Golconda' should be able to relate the story.

Few comments that I felt making it less inspiring to read that being advertised, my primary reason for purchase.

It has been elaborately written, if anything, much more than required. It was like reading first half of Barbarian at the Gate, which was quite a drag compared to the second. The board room struggle is something that one can really understand. This book, at best differs on one aspect. The management is at the defense unlike most other books where the board is kept in the dark. However, this goes to the other extreme. One does feel that the protagonist deserves some sympathy, after the ordeal he goes through. However, the author painfully reconstructs the scenario, most of which am sure are hard to get, but largely serves little purpose.

The degree of crime involved is hardly anything to speak of: less than 100,000 dollars, largely being petty thefts.

The book finally attempts to tell that it broke a wide spread scandal in Hollywood. However, after having read it, there is nothing substantial that warrants such a claim.

Anyways, my suggestion. Read this book when you are free and you should be able to complete the book in about two days. It is a bit expensive so re-think before buying it.

A Demon of our Design

2009-12-24T00:00:00.004+05:30

My first book after an extended study vacation that probably served no purpose to me. The book essentially tries to answer a simple question: Why is every new crash create larger impacts given that markets attempt to become more complex and strive to become efficient in its attempt to reduce impacts? To answer this, the author discusses many things mentioned below and the role played by hedge funds. He argues that merely blaming these funds as a cause for all disasters do not serve any purpose.

First, He does argue beautifully albeit in an elaborate manner, why added complexity serves no purpose: the possibilities of a mistake, as minor as it can seem, can lead to a big disaster. Adding layers to reduce disasters serves no purpose. The steps that preceded the disaster of Chernobyl and Valujet. I was really wondering why the author was spending such a large amount of time discussing the obvious point. It was an important point anyways.

Second, he argues for simple financial structures given that they have non-linear payoffs, the complexities that gets added due to globalization. He correctly assesses the risks of having MTM instruments, something that we saw in the current crisis.

Third, he advocates low leverage and consequently lower liquidity leading to lesser crash impact

The definition and importance of hedge funds was explained in a fair detail but one can clearly sense a bias on that one. Discussion on reducing inefficiency in the market, playing a vital role of providing liquidity to the market, transferring risk etc.

There is a good discussion on the functioning of a good fund: how much money can be played when information hits the market, importance of understanding how money is moving, continuous flow of information and how they are absorbed in the market, driving factors for investing in a specific stock and more.

There are some discussions for people who are interested in derivatives. However, I found that segment relatively unexciting. Overall I don’t think one really misses too much if one does not read this book. Hence, I would say…read it when you are really short of books on hand.

One of the good lines to take from the book: John Merriweather, “The hurricane is not more or less likely to hit because more insurance has been written. In financial markets, this is not true. The more people write financial insurance, the more likely it is that the disaster will happen because the people who know you have sold the insurance can make it happen.”

2009-10-25T23:09:00.008+05:30

This is a book that has been written by Philip Fischer, the author of the most famous book, "Common Stocks and Uncommon Profits". I did google at Landmark, where I bought the book, to check if it was worthwhile buying. The reviews were not that great compared to his other book. Took it anyways...and agree with the reviews.

His son, Ken Fischer, has written an awesome "foreword" to the book which summarises his views in a very unbiased manner. Yet, I took a chance but I should say I am only half satisified with the decision.

The first section of the book is brilliant and the last was a complete disaster. Lets start with the positives. The book was written in the 60's, a time where depth of research was not that advanced as what it is today. Hence, some of his insights have still withstood the strengths of time. The frst half of the book is all about that while the second half discusses some traditional industries where he sees attractiveness and the reasons to invest in the same. This was probably more for a research report being read and I had to run through some of these sections. Finally, some chapters are probably less relevant and explains the nature of the investment industry at that time.

This section highlights some of the few important things that I found interesting. They are mostly known to all of us but one needs to appreciate the times at which these were written.

Inflation: " Because under the economic system we have established, the seeds of inflation sprout not in times of prosperity but in timesof depression. About 80% of our federal revenue is derived from corporate and indicidual income taxes. The basic source of federal funds is notoriously sensitive to the level of general business. It shrinks sharply on even moderal downturns in the general economy." Government supports through anti-cyclical measures at a time when reveneus are down sharply.

Inflation and interest rates: To curb expected inflation and the subsequent measures taken by various participants in market (businessmen, consumers and speculators) interest rates are hiked. This act prevents the act of overstocking, which inturn stokes inflation further. He explains this pretty well under two conditions : when capacity utilisation is nearing 100% and when below 100%. How it impacts inflation differently and how it postpones investment decision leading to further problems. His solutions are pretty weak (giving low interest loans to reduce strain) and probably, at best , a distant dream.

Stock price movement: What does cause stocks to rise in value are two things that are rather closely interrelated: 1) One is the increase in the a strock's earning power. 2) The other, and usually the more important, is the consensus of investment opinion as to the future course of that earnings power.

In other words "Why does a stock sell at a certain price at a certain time? It is not because of what it is doing, has done or will do. It is because what the mojority of those investors who are actually or potentially interesed in this stock think it will do".

Selling an overpriced longterm stock: Any possibility that the really unusual stock may be temporarily overpriced should not be the least inducement towards causing an invesor to sell that type of security. There are just too many changes that 1) the expected price reaction will not occur 2) if it does, the investor will wait for still lower pricesand will not get back until the stock has again climved to even higher levels 3) by the time the reaction does come the stock will have continued to climb so much that at its coming bottom it willbe still be above current prices.

Psychology and economic forecasts: The author makes an interesting comment on investors who rely heavily on economic forecasts to fall in two buckets. Cautious and eternal optimists. Cautious rarely take advantage of opportunities while eternal optimists who can always find a favorable forecast to satisfy themselves always.

"The are of common-stock investment has changed radically over the past fifty years. However, human nature en masse in relation to its attempt to make profits through buying capital assets does not change at all."

Metgers and acquisitions
The author dwelves in depth on mergers highlighting the following important facts on the same.

Three main sources of dangers for management and shareholders: 1) Struggle for top management 2) Top management getting involved in new problems previously not encountered reducing their efficiency 3) Buyers is less aware of the problems than the seller
Backward integration rarely involves a sizeable risk (cost reduction and efficiency programs) compared to a forward integration as the latter will start competing with its own customers and the loss benefit ratio can be skewed.
Small acquisition may not be value destructive but can be extremely value accretive
Acquisition of similar lines of companies is more attractive and companies should selectively acquire and not be in the business of acquisition

Management: If a poor management has long been in control, the greatest attrition is usually in the junior executive ranks. Younger men of ability will drift away to places where opportunity for promotion is greater and where new ideas and suggestions for doing things better will be welcomed rather than frowned upon.

Overall, the book has its own strengths and weakness. It is lengthy discussing sectors, impact of government decisions, impact of institutional investors, choosing investment managers, most of which were attempts to address the issues of that time.

I would say it is an excellent book with a few disappointments.

Manias, Panics and Crashes

2009-10-19T11:18:00.005+05:30

After two very good books over the last two months, this one came as a disappointment relative to the ones read earlier. Written by Charles Kindleberger and Robert Z Aliber (for the latest edition), this is the fifth edition for the book.

The premise of the book revolves around examining the causes, impact and timing of past manias, panics and crashes. The book gives an exemplary analysis till World War II taking history back to 1700's to produce his point. Having first published in 1970's, the latter editions of the book looks at the Asian and Japanese crisis and to some extent on the tech crisis. Overall, the author gives a commanding and documted explanation to such events and how they tend to repeat themselves across crisis. The author has documented the crisis pretty well and has more importanly linked them impressively: expansion of credit, onset of crisis, burst, international ramifications and policy responses.

If anything, I like this one the best when he explains crisis:
"There was a dramatic increase in the flow of funds from these countries (Asian crisis countries) to the United States that contributed significantly to the increases in the prices of US securities; US residents who sold secutiries to foreign residents then used a very large part of their sales receipts to buy other securities from other US residents. The prices of these US securities increased further; in turn the sellers of these securities used most of their sales receipts to buy other securities from other US residents. The money became like the proverbial 'hot potato', passed from investor to investor at ever-increasing prices."

The book has its flaws too. 1) There is excessive repition in the book which kind of overemphasises the point and kind of gives a feeling that the author is thrusting his opinion upon you, which you have to accept. 2) Since the world has changed a lot, I kind of got lost of the relevance of many things. I do understand that crisis happens every time mostly with the same reasons but in different forms. However, the world has undergone significant change pre and post world war. 3) The book is very slow and is definitely not a page-turner. The layout of the entire book is well done but it could have been shortened much more.

Overall, this book too is Wiley's classic. Has its own merits and flaws. I dont think one would be lost by not reading this book and hence one can definitely skip it.

One should go to Landmark, Chennai. They have a fabulous offer of hardbound books at paperback prices. I picked up two books though was not keen of reading one of it in the first place "The Age of Turbulence" by Alan Greenspan. The other one is a Wiley's classic "Paths to Wealth through Common Stocks" by Phil Fischer. It has not got great reviews but need to see why is it bad.

The Panic of 1907: Lessons learned from the Market's Perfect Storm

2009-10-05T22:48:00.010+05:30

Wow! Back to back awesome books. Just a nice little thing about availability of books. This book and the one that I am just reading was something that I have been searching for over a year. I would have atleast asked three bookshops from where I normally buy my books but all replied last year that were no copies available in India and one had to buy them from abroad. However, two weeks back I see a "heaps" lying all over the place at one of these places. Today publishers have become a lot more intelligent willing to give customers books that they need. I should be lucky to see a crash in stock markets and subsequent references made by many leading analysts comparing these crashes from a historical perspective forcing publishers to publish these outdated books. There are a few drawbacks too. The current book is not the exact reproduction of the earlier book. The publisher has comfortably added one chapter to give a newer perspective to the public, which kind of gives a feeling that you are being cheated of given a tampered book and probably overcharged for no reason.

Being a fast reader has its own advantages and disadvantages. There are so many times when I have wished I could slow down my reading to enjoy the few finer moments that the story is evolving into. Alas, it never happens. The same thing happened to me in this book too. This book restricts itself to only that one year "1907" and I was just coming off from reading "The House of Morgan", where surprising this section was dealt in lot less detail but yet discussed. Given the speed at which I normally read, I could not understand how important certain events played out during the crisis of 1907.

Today, I take a lot of things for granted.

Credit and availablity of capital: Today, being in the 21th century, and having witnessed one of the worst credit and liquidity crisis, I was never too concerned of countries falling into this trap for a long time. But imagine in 1907, there is no central bank to direct (barring Mr. Morgan himself). There are so many fall-back mechanisms that central banks have which was not available and importantly no GOLD standard. Honestly, moving out of these standards bring better flexibility on controlling money supply.

Bank falling like nine pins: Again, look back at reactions which we do today compared to what was happening 100 years back. Imagine seeing your bank going bankrupt and along with it goes your life savings. There are no central bank nor any government body that is insuring your services. That was life then. No guarantee on your money. The run on banks are faster leading to complication of an otherwise economic downward spiral. 1907, was a banking crisis and failure of one bank saw the sharp drop in customer confidence leading to sharp runs on banks. Non regulated entities like trust companies might have created the problem, but a lack of central bank was highlighted in this crisis and finally needed the help of Mr Morgan to unlock this crisis.

Promoter holding and control on lending: When I look at RBI and look at the single investor holding norms, voting rights, lending to group companies and more importantly lending to sensitive sectors, we should take our hats off. These were something that experiences tell us are important and critical things to understand else it can create havoc to depositors.

A perspective of any book is that it helps bring the drawback of another book. I thought the "House of Morgam" gave me a lot of insights into the life of Morgans. However, there was very little that was negative in this book. There are times when I saw a few exchanges made by Morgan and his partners, that they were living in darkness, hoping for things to become allright.

I can go on and on... The authors writing is unique, fast paced with little required to imagine/understand. Issues and implications of certain events are not only unfolded well but emphasised with due respect giving readers an opportunity to weigh the importance of these events. Imagine, there was a time when New York city found it difficult to raise ~USD 30 mn.

The House of Morgan

2009-08-10T22:42:00.019+05:30

I was lucky to have stumbled into this book a couple of months back. The conversation revolved around the new book for "The House of Dimon" and my colleague discussed that the "House of Morgan" is an interesting book that he has heard of. Luckily one of the older and small bookstore near our office had this book. It took me somtime to read this 720 page book that discusses the house of Morgan till 1990. It broadly has been divided into three sections according to time: Baronial, Diplomatic and Casino Age.

Baronial Age:

The life of J P Morgan has always remained a mystery, probably because of very little official records that are online that can be read by all. This book unravels his life remarkably. The origin of the bank, the authority of Junius Morgan (J P Morgan's father) and himself and later, his son has been dwellved in the right depth and detail. The author finally sums up his role in the world of banking very well. His contribution of saving US during the Gold crisis (similar to what happened to India in 1992), his saving of the stock exchange collapse and New York in 1907, and the enormous trusts (Shipping and steel trusts) he created helped him to pretty much rule the world and lend a voice that no country/President could afford not to hear. Here are some interesting titbits / thoughts:

It was interesting that "Titanic" had a very remote role in his life

His life was similar to Ellsworth Toohey. Enormous power and voice that could help him rule the world beyond ones imagination

The introduction of the Federal Reserve Act, though power did not decisively shift from bankers to government; it was nevertheless a move in the right direction

Comparison with "The Partnership", the author has divided the book well making it easier for the reader to know what to expect at every stage. Somehow, I keep coming back to "The Partnership" as I found to be the most absurd way of writing a book splitting the book into sections that are product and people focused forcing readers to get lost in many sections of the book.

I am sure that one should read the book 1907 to get a bit more perspective on what happened exactly during this period.

Diplomatic Age:
The next section is a bit long and the foundation of the story has been slow but yet essential considering that what one has read in the previous section. On the face of it, the first few pages shows nothing great in character of the son. Yet the power to let the decentralize decision making comes through quite well. Having finished the diplomatic age, I probably no longer have the same degree of interest that I carried when I had finished the first part. The book has kept pace but could have been better. As the period symbolizes “Diplomacy”, it can be excruciatingly slow in certain sections which could have been either avoided or probably done in a much more concise manner. This is a period where the role of the bank witnesses a metamorphosis with the gradual decline in the bank’s foothold in the world of finace with events such as New Deal and the Glass-Steagall and the gradual growth in public finance (spending led by government).

What I did like in this book was the additional and probably, the perspective it brought forward which was clearly missing in the other books that I read in this age. When you read books like “Once in Golconda”, “The Great Crash of 1929” and briefly of “The Partnership” it discusses the events unfolding prior to the crisis and the aftermath. However, the view for the reader is restricted to only the common man effect. One really does not get any sense what was happening on the political side which was critical to the crisis. This book, given the role the bank played in government finance across the world beautifully articulates the same.

Most books written on this era maintain one thing. Politics and banking did not go well. Whether its was the impact of Glass Steagall that led to the creation of First Boston (offshoot of Chase National Bank and First Bank of Boston), Morgan Stanley, and Smith Barney or the impact of war there was frequent clash of interest between the two parties.

Casino Age

Honestly, this is the last, longest and probably most extensively covered with little, if any, to takeaway. If anything, this section probably attempts to downplay the steady decline in market share of the bank. Further, this would be my close to fourth book to read on the wonderful 80's after "Predators Ball", "Barbarians at the Gate" and "Den of Thieves" and some through "The Partnership". Fatigue was clearly evident as I was quite desperate to finish this section.

Having completed this section, I was lost on the role of the bank played in this era as the concentration shifted from the bank to Morgan Stanley. There are a few chapters on the bank becoming global (Arab countries and Asia) but this section lacked the pace that kept the book alive in the earlier sections. At sometime, the author could have shortened this section. Industry specific discussion were fewer on the banking side but was somewhat sketchy for the capital market business.

The sad ending of Morgan Grenfell probably moved me a little. Not that their contribution was be deeply missed by the industry but losing history in a very uneventful manner was unfortunate.

Anyways, my closing comments to this book would be simple. I may have sounded a bit negative towards the end of the book. Honestly, given the first two sections I raised my expectations for Ron Chernow, the author beyond reason. My sincere appreciation to the author for the depth of his research and his ability to publish a wonderful history of the company. I think sometime in the future the author should write the next section of the bank living through the 90's, through the fall of Glass-Steagall Act and the bank's ascent to supremacy in 2009, post the world wide economic crisis.

Read it.

The predator disappointment

2009-07-26T18:17:00.006+05:30

Despite a lot of hype surrounding the book, this book fails on all counts. Lets put this in perspective. The two other books I mentioned previously was, which was in the same league as this one was "Barbarians at the Gate" and "Den of Thieves". It discusses the same era but pretty much differentiates the other with the former being a boardroom drama of one specific instance of a LBO while the latter discusses the era of 80's.

Where does this book fit in? NOWHERE should be a good answer.

The book does not have any relation to the title unlike the others where the degree of aptness, if i may use the word, is beyond comparison. Everytime I look at the title of the other two, I only get impressed. Anyways, I was really tempted by the title as it was Michael Milken's era and I hoped that this book would discuss his work life in great detail. The Predators Ball was his annual event. One really wanted to hear more about the event, especially the importance and the drama surrounding the event. This book does nothing. In the entire book, the event is hardly discussed.

Further, this book is more of a collection of LBO's which happened during this era. So, as a reader, you keep wondering why are we discussing them in such detail with a few paragraphs describing Michael Milken's contribution to the deal. Well, everyone did understand that Michael was the best, but, merely accepting in the book by saying "Michael placed the bond in one day" does not give any perspective.

The book is a drag to read. Unlike the earlier two books which becomes fast paced in the last 200-300 pages, this book was a drag even in the last 50 pages. Normally, I like to finish this section in one reading, but this book totally lost me. I really found the last ten pages a bit funny. As the book wanted to complete, the author became a bit philosophical. I thought there was something like an John Galt talking to us. Do not know why. Somehow, it felt like that with a sigh of relief that the book finally completed. It took me a week with atleast ten sittings to finish the final section of the book.

If anyone does want to read this era. Just start with this book. This is like a teaser to what one will experience reading the other two. One may skip it too as one does not become any wiser than before probably with the exception of know the great LBO investors.

Barbarians at the gate

2009-07-08T00:18:00.003+05:30

Honestly, when I had attempted reading this book many times in the past, I never knew this book was as exciting as it has been showered with praises. My interest with this book only picked up pace when I read Den of Thieves. After a series of books which tracked market failures in most decades, I did think that the time had come to give this book one more chance. And boy! it surpassed my expectations by a mile. I had to skip my normal working hours to complete this book as the last 200 pages was too exciting to be left unread. What a title... I think the authors of this book and the Den of Thieves could have never got a better title.

I am not writing anything more as I have started reading the third and probably the last of this series...."the Predators Ball". I shall read that and finally conclude which one should be best.

The Smartest Guys in the Room - Definitely smart by any standards

2009-06-23T21:19:00.004+05:30

This is a definitely up there with the best of books that chronicles corporate disasters. Comparison with "Barbarians at the Gate" and "Den of Thieves" is fully justified. The best thing that you like in these books is that they rarely offer the authors perspective of the issue, preferring the reader to form his own opinion.

The characters, the plot and the unfolding of events has been well thought by the author. Issues regarding the structures of financial misrepresentation has been well reported. It is a well paced book, giving readers little room to reduce focus from the contents. The last few months of the final debacle has been well reproduced making it nearly impossible for any reader to put the book down and concentrate on anything else.

The book does lack in one key aspect. The attention to numbers / financials. It is very difficult to understand the extent of damage unless readers are continuously informed about the magnitude of damage through the book. EPS and market capitalisation was often used but one did not really know how much was the revenues and how much profits did it actually report. Infact, there would have been fewer than 10 times when the actual revenues and earnings were reported in the entire book. It was probably in the last 100 pages did one actually know the revenue, RoE, networth etc etc.

Overall, it is a wonderful book to read...much better than the earlier book on Enron. Read it...

Well..it is over...Liar's Poker

2009-06-16T00:09:00.007+05:30

Well, I should be finally congratulating myself. I finally had the opportunity to finish Liars Poker. In the past five years, I would have at least attempted reading this book over 6-7 times only to finish the first thirty to fifty and dump it for the next time. I have read, albeit one partly, two other books of the same author: Panic, a wonderful book but a jolly evening time read and money culture where I could not understand the head or tail of the book (if there was any sarcasm in that book across chapters which my dear roomate found many, I for sure, did not find any).

Not that Liar's Poker is not interesting. Just that I have a differing opinion of the nature of the job compared to the author and simply cant accept his attempt to trivialize the whole work affair. It was basically this review that prevented me from completing this book.

Having completed this book, I should say that I liked the book. It is simple, good read and should take you less than 4 hours to read the book. If you really want to understand what happened at this time, there are definitely better books around : Den of Thieves, Barbarians at the Gate and the Predators' Ball (have not read this one).

There are a couple of things that should probably come as a few key take-aways from the book: the concept of treasury in a bank and its role, especially investment bank and the skepticism surrounding it. It clearly is difficult to understand when a house would actually keep a security in its book or downsell the same to its clients. If a treasury has the opportunity to make an IRR of 15-18% on its book and would need to compare this with a commission revenue of 1-2 bps on a trade, how would it balance the client and company's interest? Where does the company draw a line between the employee's interest and the shareholder as these banks are inherently employee focussed? How are risks/rewards measured?

A book to read during your travel time only.

2009-06-13T10:16:00.010+05:30

Unfortunately, this book really showed disappointment beyond expectations. Not a good way to start a review either as you guys should ideally skip reading it beyond this line. If you have, then here is the reason. The book seriously lacks depth. Compared to his earlier work on "Once in Golconda", this book pales in comparison. Incidents, reasons and issues are sporadic across the decade and probably under-researched or there was little to say. The book has a lot of pages, so there is a lot of stuff written in it. However, most of these are issues which one can skip and still be a lot wiser. There is a 30-40 page discussion on churches, employee behavior etc which I failed to understand the significance to the story.

Does this book deserve to be a Wiley Classic? Resounding "Yes" because of only the last 60 pages. If one were to read this book perhaps a few years back, one would have thrown this away and said, "Yeah! those were the bad days unlikely to repeated ever". After being threw one of the toughest crisis, I can comfortably say that this crisis partly a combination of the 60s and the 1925-35 era. Here are probably two key reasons:

1. Capital : The last few chapters discuss the crucial element which went haywire in the 60s. The endless leverage at the broker level. In the 1929-35 era, customers were leveraged at an investment level using margin to finance their endless greed. Banks financed the greed and customers readily accepted the same. In the 1960's brokers were leveraged similar to what we have seen in this crisis. The only good part is that it did not affect the banking system. In the current crisis, everyone was leveraged : customers and brokers. What probably was marginally different was the extent corporate leverage. The 60s similar to the 80s seems to have unrelated mergers driving corporate leverage upwards, with the difference being debt was available much more freely than in the 60s.

2. Merger of entities: For a person who has just entered financial markets, the last year should have been a total surprise. The mergers that we have seen at such rapid pace should have thrown his entire theoretical knowledge out of the window. A regulator / group of financial institutions does not call few related parties over a few days/nights and co-ordinate a merger with whomsoever feasible. Yet, it all looks to have happened. This is nothing new in the U.S. In the 1960's as the book highlights, regulators took active interest in ensuring that systemic collapse does not occur. Hence, they were more than willing to help mergers at a rapid pace. Whether it is good or not, I am not sure. It is important for regulators to police the activities of its participants and prevent disruption of functioning. However, should it be actively engaged to this extent? I don't know if our regulator would ever involve themselves to such a degree.

Interesting, this crisis did not bring out any dubious companies like almost any other crisis seems to have.

The extent of crash and the impact is probably less understood in the 60s than in the period of the great depression or the 1987 crisis. We have well documented history for most of the other crisis barring this one, which is what makes the book interesting.

Dow Jones crisis periods

(Source: www.stockcharts.com)

At best, all these crisis keeps repeating the same problem: greed, leverage for investors and growth for corporates. I am almost famished after reading this book and looking at some of the other classics, I doubt I am going to find anything more interesting. However, it is increasingly getting difficult to get the rest of the books. Not one bookshop seems to have any of these classics, which is a definite read for any person in the capital markets.

Mr. Buffett...how did u survive these periods. Reading them is so exciting that living through them should have a world apart!

Capital raising - an exercise for whom?

2009-06-11T14:30:00.011+05:30

I have been tracking stocks for the past few years and should say, through the ups and downs, it has been truly a wonderful experience. As an analyst, reading balance sheets, macro data, quarterly results and corporate actions has always been a delight.

Over the past few months, I have been getting increasingly perturbed with the concept of capital raising. It is a necessary exercise especially for companies that would like to grow beyond their current capacity. Capital is needed for companies for different reasons - funding growth or reduce risk residing in the balance sheet. Few examples

Construction companies need higher networth to bid for bigger projects and fund their working capital.
Banks need capital to fund balance sheet growth when internal accruals does not support them. Further, capital is raised when risk was mispriced leading to substantial erosion of profitability and raising threat of survival
Capex driven industry (infrastructure) need higher networth to reduce risk in the balance sheet.

So, given this simple broad utilisations of networth, we need to understand the valuation behind raising capital and how should investors look at this exercise. We continue to see a capital raising activity to be extremely favourable to investors. Is there a logic to this argument.

To understand this, we assume that investors value companies in two broad valuation metrics: Price/Earnings and Price/Book.

Price/earnings can be dilutive to some extent to investors depending on the extent and price of dilution as investors play for growth more than return on equity (typically RoE in these industries are much higher than the cost of equity). Hence, I have not looked into this that deeply.

Price/Book
We take four specific illustration to understand this argument:
1. Raising at below book value: The book value per share declines depending on the extent of discount. This will be a poor policy, if implemented and can be done only when the possibility of erosion of networth is possible as the existing shareholders are not adequately compensated with the entry of the new investor.

2. Raising at book value: The book value per share remains constant and the new and old shareholders are not compensated with the change in shareholding structure.

3. Raising at fair book value: This is favorable to existing shareholders as there is an improvement in book value per share. The only assumption made here is that the new investors are bringing equity to the business which can impact the return on equity in the medium term. The reason is as follows.

If price were to remain constant at the fair book multiple, the expansion in book value per share will depress the new price/book multiple.This is acceptable sometimes as it would take sometime for the company to sweat the new capital raised.
If the price/book ratio were to remain constant, the price increases. However, this increase impacts both the existing shareholder as well as the new shareholder immediately, which should not be the case, as it gives endless arbitrage opportunity to keep raising capital.

4. Raising at exorbitant book value: This is the most puzzling and the most complex form to understand. Why do investors raise capital beyond fair multiple as the only person benefiting from it are existing investors? There are can be very few reasons for this.

Company like raising money by diluting as little as possible. This is not a valid argument as they are transfering risk to new investors. If this is a reason, then investors should be really wary of playing the game. New and old investors are banking on the ability of the existing company to keep bringing in new investor and artificially keeping their stock prices higher than the fundamentals warrant. Stock prices will be inherently volatile in these stocks as raising capital frequently and consistently will be a challenge.

New investors are not given immediate opportunity to play with the old investors. This is a much reasonable investment argument. The bulk of the risk was taken by the old investors and new investors are coming having seen the performance, which implies that new and old investors have two different cost of equity. The promoter and initial investors have borne the brunt of risk when they had invested while the new investors are just playing the final leg of the game. Hence, they are being punished for not entering early.

Investors understand that sustainable RoE can see further expansion but markets are unwilling to look at these factors. Hence the new investors are playing that risk.

There are arguments of scarcity premium, management premium, country premium etc etc but how much premium and where are these getting factored to the price is always the question.

Having written this, I have become no wiser than ever before. If anything, I seem to be as confused as ever.

The road well travelled

2009-06-04T23:24:00.022+05:30

Here are two interesting books that one should read .... Once in Golconda by John Brooks and The great Crash of 1929 by John Kenneth Galbraith. Both these books are Wileys Classic. There are a few more books worth reading but it is extremely difficult to get these books. In India, barring the easy book of Common stocks and Uncommon Profits, not many books are easily available. I had to borrow these books who could buy it only outside India.

Coming to the two books. Both these books are set stage in the great depression era. Reading these books back to back makes a lot of sense as they fill vital gaps that is present between the two books. Further, read "The Partnership" discussing the Goldman Sachs era in this period.

The interesting part of these two books is that they give a historian...s perspective rather than an analyst/economist perspective. It is advantageous reading it this way as the bias of the author, whatever it may be, is lost and readers get pretty much what happened as it unfolds in time.

"Once in Golconda" spans the period before and after the crisis while "The great crash of 1929" is fairly elaborate till the start of depression. Both these books discusses in detail of the speculative bubble created by excessive leverage available to investors and the failure to understand that stock market at best can only allocate capital and not support an economy. Further, the insider trading, creating pools to move stock prices and the creation of leveraged investment trusts that is similar to mutual funds today is something that is described well.

Once in Golconda discusses the stock market (not economic impact) of the crisis. The endless period of denial by all investors, the subsequent gloom and the final acceptance. The part played by the various banks during the crisis. The two big characters of Albert Wiggin, Chase National Bank and Charles E Mitchell of National City Bank and their contribution towards the crash.

Post the crash, the book moves towards the central character played by Richard Whitney, the head of the exchange, his personal life and his imbalance with professional life and the subsequent "Satyam" like saga. The role played by the regulators/politicians/president has been well documented. The book loses out in the end as it focuses largely on Richard Whitney and less on the exchange. It is entirely silent on what was happening to the economy.

The great crash of 1929 discusses the period just before the crisis and discusses the aftermath in a very brief manner. You like this book as it traces the movement of the index and the mania associated to it. The confidence that investors/ would be investors/ company management / policy makers/ bankers show is an eye opener. It attempts to reduce a few myths associated with the level of participation by Americans, the aftermath suicide rates and the simple stuffs of investing. However, one is trully stunned by the level of participation by banks. I use the word stunned is probably because one always assume bankers to be a pessimitic sort of people who can only look at the negative side as they are the one lending the money. However, the level of participation of banks in lending money to investors to speculate and their peddling of securities through their subsidiaries (leading to Glass Steagall Act- seperation of investment banking and lending activities) makes the book an interesting read. Considering the amount of tight leash the regulator has in India, one has to be trully appreciative of their efforts.

You will definitely like both these books as they are easy to read, and what more exciting. As the famous saying goes..."Those who don...t learn from the mistakes of the past are destined to repeat them". I got the "The smartest Guys in the room" finally from the same person who recommended it and have just started. It surely does not look like a fast read seeing the font size. Lets hope it is as good as the readers recommend it to be.

Enron - the anatomy of greed

2009-05-24T17:05:00.010+05:30

What happens when you happen to read the wrong book of the company despite the reviews of the book being similar. As expected, disaster.

A book was suggested to me sometime back by a good friend of mine, whose review can be taken for granted. The book he told was "The Smartest Guys in the room: The amazing rise and scandalous fall of Enron". I was at Landmark a week back searching for some good books. However, the collection was pretty disappointing as despite such a large bookstore, he did not have any of the books that I wanted. I stumbled on this book "Enron : Anatomy of Greed" and mistook this book for the other one. A couple of quick checks gave not that bad reviews of the book. Amazon.com gave 4.5 for the smartest guy and 3.5 for anatomy of greed. Hence, I mistook this book for the other one.

Now, that I had purchased the book, I had to finish it as it was pretty expensive (INR 500). The book actually turned to be a disaster and a waste of a week for a few reasons. One this book is about a person, who was at Enron in the final stages of the company and how he felt in those few months he stayed there. It is neither insightful nor is it entertaining by any stretch of imagination.

One does feel sorry for the author to be in a dying company but barring this, I dont know what the author expects the reader to make out of this book of him or the company. Being part of a newly formed division, he is not able to add any insights to the functioning of the old company, which probably would have helped the readers with the fall. It talks of greed, but somehow, I dont think it did not show the greed part that well. Greed, was largely restricted to the ESOPs/bonus given.

Frankly, I dont know what to say more of this book. I shall see if I can get the other book. Skip this book...

A view from the outside

2009-04-11T23:37:00.028+05:30

For the first time, I had an opportunity to read a book written by a politician. YES! I could read it and was stunned, stumped and bowled over.

"A view from the outside" is a book written by Mr. P Chidambaram, our very own ex-finance/home minister. I walked into this book on more than a few occasions at Landmark. I read one chapter and was very impressed but was really bothered if the other pages was as good as the one I read. I took the decision to buy considering that the alternatives were poor and the time had come to diversify from business/investments. Partly, I was forced to do because my work takes me a little into politics.

I liked the book for many reasons.

Clarity of thought: While being a minister in various capacity has definetely helped him in writing, it still is difficult to pen one's thought with such openess discussing drawbacks and future aspirations of respective areas. His view that India would soon (next decade or two) see a two party system (coaliation led ofcourse, but essentially on two frame of thoughts led by two important parties with a lot of allies between them) is interesting considering that most of us have a lot of parties to choose but little interest in doing it. His explanation of the problem which the leading parties have is a true eye opener for anyone reading politics for the first time. India is seeing coaliation politics due to the inherent strength of regional politics in West Bengal, Uttar Pradesh, Bihar, and Tamilnadu is simple and straightforward. His discussion on India living in rural India is simply brilliant.It is the same old story of 70% rural population contributing less than 20% of India's output. The only difference is the way it is presented.
Passion that seems to be driving his work immensely. I clearly will not be able to tell this if all MP's and MLA's are of the same cadre but this author has shown a genuine desire to move India into the next growth trajectory, whether in opposition or not. Whether, it is the issue on addressing taxation, creating investment opportunities that can drive growth and stimulate demand, the genuine need of creation of new states to improve governance, the idea of an ideal election manifesto (though it did not show in their recently released party manifesto), the importance of younger minds to enter into politics or the plight of poor people (though exaggerated a bit beyond necessary) his thoughts comes with such passion that it is difficult to accept him as a politican who has represented his constituency, Sivaganga, since 1984.
Consistency: this book is essentially a collection of his writings during the NDA regime. The period of writing is between 2002-04 and by and large, I have not seen too much deviation in his thoughts in these collection of articles. Considering that our regular thought is that a politican knows to praise the side where the butter is, this book atleast shows that he has not deviated much from his earlier ideas/goals.
Honesty: There is a genuine concern to move India to its next growth path. His expertise in Law, economics and management is shown with the way he writes. His discussion on elections in India is a wonderful insight thought not as complete as one would have expected. The problem plaguing Indian politics having nexus with members having questionable past, the discussion on money in politics and candidates.
Unbiased on mostly discussion areas: He is a lot unbiased than I thought he could be. He showers praises and throws brickbats at Congress, BJP, and the left on their various policies. For a person in the opposition, the favorite past time would be to take a pick at the policies of the ruling party. Surprisingly and unlike most other politicians, he is willing to appreciate few policies executed by the BJP/NDA. He appreciated the Left for the way they handled their internal working specificially on organisation structure.
We know that he had the opportunity to pick at Congress as he was part of Tamil Maanila Congress (Moopanar) which later merged with Congress.

I can go on and on on praising this book but there are a few drawbacks in this book.

There are two pieces on International politics or rather India and its neighbours and some general discussions which could not be classified anywhere. These two sections does not seem to be very convincing as the author might have wanted. His discussion on health, girl child, education seems to be a bit hollow.
I was a bit disappointed was that he seemed to be to show too much praise for Rajiv Gandhi. A little study of his life shows that there is a history why he is a big follower of Rajiv Gandhi.
At times, you see a politician side of him. He has picked his oppositiong posting a few numbers where the difference though appears wide seems disappointing small compared to the overall context. For example, he picks up an issue on under utilising the expenditure on various heads (critical ones of course) by the NDA. However, the difference is so small (though appears) compared to the overall expenditure of the government that the topic loses its relevance.
On a lighter vein, I have paid around INR 395 for this book for about 85-90 articles. This would have come at a much lower cost had I bought the papers.

There is a piece written on India Shining where you see the humourous side of him. It is a well written article and he takes the case of everyone in it.

This is the first time I have read any politician from his own words. I do hope that I would be able to read a few more as the years progress. I was tempted to buy a book by Arun Shourie, who Mr Chidambaram sincerely appreciates (except when he was in office as a minister), but wanted to wait to see if I am able to complete this one. This book has given me confidence that India has politicians that we can trust however: scattered and few they may be.

And yes...read this book ...it is a simple yet a powerful one.

Unemployment benefits

2009-03-22T22:33:00.006+05:30

What more, this seems to be the right time to look at unemployment benefits.

I have made some simplistic analysis of the entire thing and looked at unemployed and those who are married or where the best information was available and converted them to US dollars to make comparison easier.

Ireland - USD 1100 / month (increases with dependents)
Sweden - USD 1220 / month (after taxes)
England - USD 540 / month
New Zealand - USD 400 /month
Australia - USD 577 / month

US seemed to be pretty complicated, so have not included in this.

Most of these benefits range for atleast 6 months.

Though they are strictly not comparable, the basic idea is to give an idea on how developed countries have established social security net for individuals. In India, while there is Rural employment guarantee scheme, the rest are pretty much left in the lurch.

Wonder when we can have such a benefit. It is going to raise the cost of salary (more taxes) and also will result in more delay in employing anyone as unemployed will not mind waiting for more time to get a better job and this disconnect will raise the cost for the employer as hiring is going to take time and employers will have to raise salary to attract employees.

Surely, it is not going to be easy. First, we need more employees in the tax net to ensure that we can have the scheme going. Almost most of these schemes are driven from employers who charge the insurance cost from the employees salary (~6% in the US). A sizeable employee benefit will ensure that success is attained.

It is only a dream from my side that India can ever have one even in the next decade.

Fiction, at last - Jeffrey Archer

2009-03-22T12:56:00.004+05:30

Fiction, at last...and a good one. The latest book of Jeffrey Archer : Paths of Glory. Having not read that many fiction books in the past year, this book comes as a welcome change.

It is not a typical book of Jeffrey Archer. There are no two people fighting to become the best in their chosen careers but one person fighting with a mountain. However, the desire to be the best, the success etc etc is something that we regularly see from any of his books. There is no suspense in the book which was disappointing. The prologue makes it quite clear that the author is not interested in laying down any suspense.

Normally, I do not read any reviews of a fiction book as I normally follow few authors and would read it despite it being a bad book. A bad review can slow my pace of reading a book, which is something I do not like. This time, I did read the review of the book as the book did not look like fiction by any chance. It turned out to be true. This is a true story of the protagonist reaching Mt. Everest first. The book has raised a few brows atleast as it looks like the author is hell bent in proving that the first to reach Everest was an Englishman. However, during the course of the book, the author clearly mentions a few facts like success of any mountain climbing is not only reaching the top but also to come down.

Anyways, there was a few interesting comments in the book. There was a question asked, "Why do you want to climb the Everest". The reply to it..."Because it is there"... One of the best replies I have heard. Sometimes I find it hard when people ask the question, "what makes a person tick?". Maybe this is a good answer to give. There was an interesting comment which was made by the wife of deceased Captain Scott (lost his life reaching South Pole)... I would rather spend two years with one of the most exciting men on Earth, than forty with someone who thought I had prevented him from fulfilling his dream" These may sound like typical bollywood / hollywood statements, but is definetely good in the backdrop under which they were made.

Read the book, one should be able to complete in about one full Sunday.

Definite books to read in 2009

2009-02-25T21:11:00.013+05:30

Having read a few market related economic books of the likes of Tim Harford and Joseph Stiglitz, I longed to read some really good investment books. Here are my new definite reads for anyone in 2009

1. Snowball -

It is surely a bible by any measuring scale. Extremely well documented and so well written, that it hardly takes time to complete the book.If anything, one is just disappointed to have completed the book early. I liked the approach of the author to be as unbiased as possible and critical wherever possible. I was quite surprised to read so many new facts in some of his investments which was starkingly different from Warren Buffett says in his annual meetings. Anyways, this is my current best pick. Buy the book: one would never regret this purchase.

2. The Partnership : The Making of Goldman Sachs As a reader, there is every chance of getting irritated with the author for his approach of explaining the history. Ideally, the easiest way to explain would be through dates or periods but the author chose to explain through a mix of periods, people, products and geographies making it difficult to be with the author.

I disliked the way he is trying to set right a few facts straight. He picks up Den of Thieves, (which b.t.w. has been mentioned below as a good read), and tries to prove the point of Goldman Sachs facts being horribly misrepresented. I believe that this part was unnecessarily long, uninteresting and most importantly makes me feel that the author is a bit biased to Goldman Sachs. Anyways, read the book as it offers an amazing insights into the company.

3. Den of Thieves One of the best books of all time. Read this with a few others to offer a much better insight into what happened in the 80s and 90s. Snowball, Den of Thieves, Barbarians at the Gate (somehow could not complete this book despite trying to read it many times), The Partnership, When Genius Failed offer multiple dimensions to the same topic. It is a gripping book, much like a movie. I simply loved the book so much that I would add this as a collectors item.

4. A few other books that I am reading and including as it looks very good from what I have read so far.

Panic: Though not a big fan of Michael Lewis, this is just a collection of articles published in various journals. Considering that so much has been written on every crisis, Michael Lewis has taken a few crisis in the past and looked at how people look at things before, just after and after a crisis. Here, he looks at published journals, which includes a few reputed authors for his reference. Good book, though I don't know why I paid so much to buy this book.

I have just bought this book. Bailouts and Bail-Ins written by Nouriel Roubini, an economist who is credited to have understood the current sub-prime crisis and Brad Setser. I dont know much about this book but hope it is a good one.

Are we going back to the past?

2008-11-30T01:01:00.004+05:30

I was reading through some of the events that happened in the US during the period of great depression. Somehow given the apparent resemblance of what we are witnessing over the past year, the tendency to compare with the past is very compelling. As analysts, we like to look into the past as often as possible. We see a goldmine of information which we tend to under-utilize during the best and the worst of times. It is only during the phase of transition that this is used extensively as we are slowly but decisively testing our hypothesis on grounds that was otherwise never ever thought of.

There are two fold uses of looking into the past. 1) Are we heading for the same actions which probably will give the same set of results or different ones 2) Are we venturing into new areas and if yes, what does that mean.

I came across this interesting piece of what was happening in US during the period of great depression.

http://law.jrank.org/pages/13455/Home-Building-Loan-Association-v-Blaisdell.html

In 1933, in the midst of the Great Depression, Minnesota passed the Mortgage Moratorium Law. The law was modeled on President Franklin D. Roosevelt's NewDeal program for national economic relief and attempted to provide protectionto farmers and other property owners against mortgage foreclosure "during the continuance of the emergency and in no event beyond 1 May 1935." It authorized the Minnesota state courts to consider exempting troubled mortgagors fromforeclosure if the mortgagors requested such judicial consideration.

This law was passed till 1942...

Someone did an analysis stating that the debt to GDP in the US currently is over 3.5x times this time compared to over 2.5x times during the depression.

Are we going to see this happening again.

Interesting book - interesting macro themes

2008-06-17T16:02:00.003+05:30

Three of the best books I have read in the past one year.

Confessions of an Economic Hit Man by John Perkins
Globalization and its discontents by Joseph Stiglitz
Making Globalization Work by Joseph Stiglitz

Not that they are any kind of outright best sellers, but these are some books which caught my eye when I was browsing books at Landmark.

I think it is worth reading all these books continuously though the order is not going to make much of a difference. Confessions of an Economic Hit Man is more a James Bond kind of book, but most importantly the book reveals some interesting insights to the functioning of a few countries. This book specially corroborates the story of the brilliant movie, "Syriana".

After reading this book, one really wonders if our understanding of the world is actually in the right direction. We are all, atleast in class rooms, taught that Capitalism is far more efficient form than communism and that companies would eventually be ruling the world more than politics. The books written by Joseph Stiglitz gives an amazing insight, through his eyes, into the functioning of leading finance institutions like the World Bank and IMF. It gives the broad philosophies that these institutions have towards lending. A true eye opener.

I shall reserve my inferences to myself but would urge readers to look at these books quite seriously. I shall end this section of the blog by saying that the book is clearly one sided and hence suffers serious setbacks to create an unbiased opinion. From critics of these books, I see them lacking the same degree of conviction that I saw with what these authors have written. Anyways... there are a few more books available which could help create an opinion. Raghuram Rajan is one who follows the IMF doctrine. Hopefully his books should help create a better opinion.

Analyising the life

2007-08-03T19:59:00.000+05:30

It has been quite a while since I have had an opportunity to write anything. After a busy result season that finally seems to have got over this week, I wondered where exactly is this life heading. It seems like a different world when you enter into work life, a life so distinct that it almost does not connect at any point- a life that is forgotten and is left in history just to get dust settled to it.

I have been living such a life that I have not had the time to chat much with my close friends and considering that my best friends are planning / having intention of joining the same place, I seem to have some touch with them. With the rest, orkut proved to be of some value and gtalk is allowed. So I tend to catch up once in a while with all of them. I have a friend who is in the next building where I work and we have been working together for the same committee for two years in college, where interaction was almost two hours a day, but I have met him only a few time after joining work. Stunning what life gives you with minor adjustments to your life.

To say that you work here is clearly an understatement. There is this movie where I have watched only the ending... One of my corridor mates fav one.. a drug addict and he leaves it after going through hell. The ending is a beautiful one where he comes out of this and walks down the road with his head held high- facing a new life that is exciting and wonderful. That is how I see life today...You get up everyday for the work that you love most. Enjoy the work and try to remember a few of the good and bad things in life.

I dont know if there could ever be a follow up to this mail and this will remain hopefully one of the few personal ones I would ever write.

I dont intend to re-read what is written. With the results season just going out, life is back with an even better exciting prospectus.

Entertainment Industry Update

2007-03-30T02:56:00.000+05:30

This note is a combination of some technical and fundamental side of the entertainment industry, which like the rest of the industries has had a strong correction in the recent slide. This is a continuation of my earlier article (http://mbmahesh.blogspot.com/2006/10/under-pressure-movie-theatres.html )

What is interesting is the selective discount that I see in this sector. It looks like I am missing some important point here. The correction for PVR and Inox is relatively the same, wheras the correction for Adlabs has been insignificant. The listing of Cinemas is quite new and though it has seen some correction, I am not able to distinguish the reason as it could be a factor of IPO get repriced in the market or it could be a normal correction as witnessed by the rest of the stocks. However, the point to be looked at is in Inox. I have been to all these cine theaters and am personally unbiased to all of them. The movie experience remains the same for all these and my friends and myself do not see any reason to have any loyalty to any one theater. Given this, why is there such a discount to Inox. The P/BV is on the lower side inspite of showing better ROE simply amazes me.

While there seems to be some reason, I am not committing that Inox is undervalued as the rest could be over valued and poised for a correction. The reason is because of something that I read in a recent analyst report, think it was Motilal Oswal. The case was in the Cement Industry and it focussed on the second rung cement companies and their expansion and EV/EBITDA and EV/Per Bag being on the lower side when compared to their larger peers and hence there should be a revaluation in this sector despite customs reduced to zero and on and on. What ultimately happened is something that we all are seeing today. The large cap cement stocks seem to have been at the receiving end more than the small caps cement stocks, something that can happen in the entertainment industry too. Hence the small disclaimer.

Is it really worth spoiling the party?

2007-03-24T12:29:00.000+05:30

There was a recent ban in a college from all drinking.

Someone had to find the real loser in this recent directive. On the face of it, it did look like the students had the raw deal and the institution was probably effective in its order. Could this be true? After all, stopping people to drink does not look a good way to stop people from drinking.

Given the restriction, there was not a single person drinking near the party. The students did follow the rules there. However, the real drinkers were nowhere near and that is all. Instead, they started using the driveway, the lawns near the buildings, and the rooms that overlooked the party. The music was available with the booze and probably in a even more cozier environment. What else do they want? What it did do was the occasional drinker who spent most of his time dancing on the floor started to drink more as he had nothing else to do except watch the others dance (which did not happen either. The party proved effective only where there is booze around. Else, the number of people dancing on the floor dropped exponentially). As the directive was issued to prevent drinking and the serious drinkers are not going to be bothered with such rules who could be the cause of trouble in the first place, the directive hence was useless.

Given this, we need to find who lost in this: The social cause of entertainment to all of the students, dancers and drunkards inclusive and the economic benefit to the canteen department. We can check if the social cause is going to cause any harm to the studies cause an important stress reliever is being curbed and the second one is something that we can calculate.

While the margins are on the conservative side, I still see that there is a huge loss for the canteen department. The department, in the first place, employs more people during these days giving more employment -> more salary -> higher benefits -> better standards of living due to better consumption -> higher distribution of wealth from the 'have' to the 'have not'*. Is it right for the institute to do such a sinful act where such transfer of wealth is being curbed?

*Though the students do not have money either, they still earn much more to compensate for today's' expenditure.

ICRA Limited - Go Ahead

2007-03-21T14:29:00.000+05:30

Issue Details

No. of Shares : 25.811 Lakhs Shares
Price Band : Rs.275 to Rs.330
Issue Dates: March 20th to March 23th
Issue Size : Rs. 71 crores to Rs.85 crores
Market Capitalisation : 274 crores to 329 crores
Sellers : IFCI,SBI and UTI
Post Issue dilution : 74.19%
Book Running Lead Managers: SBI Capital Markets and Kotak Mahindra Capital Markets

The company will have a preferential allotment of 2.889 lakh shares to Moodys and 9.06 Lakh shares as ESOPs to its employees.

Objectives of the IPO

IFCI, their principal promoter is selling its stake in the company and exiting through this IPO completely.
SBI is reducing its stake to below 10% as per regulations and SU UTI is also selling its complete stake in the company.
Brand building through the listing as the company is not making any fresh issue for raising money in this offer.
ESOPs to its existing employees and thus an exit route for them in case they would divest their holding.

Company Analysis

The company was established in 1991 for providing credit rating with a tie-up with most of the major financial institutions in India. It has a tie-up with Moody's, a subsidiary of Dun and Bradstreet, who also advice on the Technical part too.

ICRA subsidiaries provide consulting, technology support, outsourcing facilities and information based services. The services mentioned is largely done with its subsidiaries: IMaCS, ICTEAS and ICRA online.

The company does other types of innovative ratings too like corporate goverance, project finance, mutual funds etc.

Some observations of the business model:

The rating business derives more than 50% of the total income for the company and this is a strong segment as the company has a good brand name to generate business
It has a solutions business segment that is deriving revenues of more than 15-20%. However, the target segment is still looks a bit hazy for a Credit Research Agency (CRA)
Its CAD services is still a puzzle to me and the website drives too small income in the current stage.
The information services segment is currently too small in its revenue mix. However, the company must understand that this is one of core work of a CRA. Its ability to derive strong brand name will depend on the reports that it comes out regularly. It must also understand the segments where there is income to be made. I am not too clear in a maritime institution rating, segments where the growth seems to be limited.
There royalty payments are also on the lower side to Moody's, something I actually feared in this IPO. There are hardly any significant payments to Moody's apart from the dividend payment to them.

Industry Analysis
This is a regulated industry with only 4 players. Crisil, ICRA, CARE and Fitch being the largest.

Strengths

This is a regulated industry and hence there are huge entry barriers. However, this industry also requires huge investment in knowledge and hence investment in industry research is a constant requirement. CRISIL has been a leader in this segment with its well respected industry reports.
Most of these agencies in India have a foreign partner who can bring in the much needed expertise to build a strong reputation in India.

Weakness

The industry revenue model is different as the average realization looks to exceed 365 days
Attrition levels at more than 22% for a company like ICRA. It is surprising for such a company with such high levels of attrition. The only plausible reason could be the pay being just not competitive to its competitors.
The industry has not been witnessing any major growth in the number of debt issuance over a 3 year basis. The cAGR on a 2 year basis is just above 7% though the average issuance has grown by 23%.

Opportunities

The Industry is extremely dependent on a strong debt market. Given the nature of bank's role in Indian Debt Market, issuance of securities is far lower in number leading to an inefficient market. However, with growing funds available in the longer term in the form of Insurance and Pension funds we could see an improved market in the near future.
The government is playing an active role in ensuring that the debt market is improved. It has, over the period, issued guidelines on compulsory rating and has gone a step further with the necessity of dual rating.
Barring Korea and Malayasia (>50% of GDP) which have debt markets controlling credit, India is still at an abysimal 5% of GDP.

Threats

Bank plays an important role in mobilizing the savings of the country. Hence, it role in controlling the growth of Credit Rating Agencies(CRA) is significant. With the introduction of Basel Norms, we could see an increase in the role of CRA.

Financials

The company generates over 85% of its total revenues from 3 business units. Rating services:55%, Consulting:17-20%, IT Based Services: 14-15% and the rest is from research and outsourcing. The company has a good revenue mix in ratings revenues. An average of 30% comes from corporate and infrastructure ratings, 50% from financial companies and the rest from structured finance and project financing.
The biggest cost is in personnel cost at about 40-44% of the total revenues followed by administrative expenses at 10%.
Quality of Debtors is still a question as the company has close to 25% of debtors who have do not pay for more than 6 months.
There are tax suits against the company. Service Tax of around Rs. 22 Lakhs and IT of 2.44 Lakhs
The company has significant investments in Mutual Funds, Debentures etc as this currently contributes close to 7.5% of the total revenues for the company.
Book Value for the company: Rs 118
Annualised (Expected) EPS: Rs.17.5 (Given a discount of Rs. 0.25 ) and Diluted EPS (Annualised and Expected) :Rs. 15.6
RoE: This has been consistent at approximately 13% barring one year at 9%.
The Net Profit Margin for the company has been increasing and is currently above 35%, indicating a strong pricing model.The companys' ability to use its reserves is very impressive given its ability to increase profits over the cost of maintaining in the form of reserves over the years (Barring 2005 which saw a decline in profit growth due to an abnormal increase in personnel due to revision of salary and administrative expense).
The capital infusion of the company is unlike the other IPOs that I have seen in the recent past. The fresh infusion for the company has been done at reasonable prices. There was an infusion of equity in 1997 and 1999. The prices has been at Rs.60. The price growth is similar to the business growth at 21% on the issue in 1999 and 16% in 1997
The company is a regular dividend paying company. The dividend rate exceeds 20% for the past four years. The company is able to make full utilisation of its reserves barring one year in 2003 when the incremental profit generated was less than the RoE for the previous year.
The cash from operations generated has been not been that strong over the years. The CAGR over the past five years in Cash from Operations is 12% and this could be a result of the revenue mix for the company.
As the subsidiary companies are less than a couple of years, no individual valuation of these companies has been done (consolidated statements have been taken into valuation)

IPO Details

The comparison is done only with CRISIL, as it is the only competitor listed in this segment.

The P/E is in the range of 21.33 to 23.41 with a Dividend Payout approximately 20% when compared to CRISIL P/E at 40 and Dividend Payout at 40%.
The P/BV is in the range of 3.4 to 3.73 with a RoE approximately 17% when compared to CRISIL P/E at 9.15 and RoE at 19.5%.
The P/Sales is in the range of 5.7 to 6.22 with a Net Profit Margin approximately 37% when compared to CRISIL P/Sales at 11.21 and Net Profit Margin at 21.12%.

Summary and Points to Ponder

Here is a credit rating company and they have recently started a new initiative of rating Equity IPOs. As a company that is providing that service, would one not expect to rate their own company given that the concept is new and not too many companies are willing to rate their IPOs in the first place? I would have liked to see this company actually do a credit rating of their IPO and state if the offer price was good or not! Though they could have not done it by themselves, they could have atleast asked the other credit rating agencies to do this.

The IRR for Moodys in its investment at ICRA is at 27%. Looks good for an investment across 7 years.

The report on the industry is extremely poor,vague and largely irrelevant to the nature of business that the company is involved in. Consider IT/ITES as a segment in which the company has some exposure to. The prospectus touches the entire industry and the growth as a whole rather than looking at the area in which the company is concentrating its revenues or the growth of that segment in the total IT/ITES arena.

One of the critical requirements of the company that its boasts is its personnel. Surprisingly, this is also mentioned as a biggest risk that it is facing given the attrition levels of more than 22%.

When I saw the directors salary, it was pretty unimpressive and thought the directors were equally in a bad footing with this company. The main directors were getting an annual salary approximately 13-18 Lakhs.However, if one goes to the total take home, it is a whopping Rs.50 Lakhs. The perks (exceeding 30% of the total take home) for being in this company too attractive for the top management to leave this company.

It is a norm from most companies to have a mid year dividend declared to its existing shareholders so that the new shareholders do not enjoy the benefit of the company's existing profits. Surprisingly, this company has not done nothing of that sort. Also, given that the principal promoter, IFCI, was leaving them, thought it would be good to have a dividend declared, a nice parting gift :)

Given all this, I still like the company as it trades at a discount to CRISIL on almost all counts. However, CRISIL has a different business model (with its recent acquisition of Irevna and Crisil Newswire-I think it is still not sold, though not sure). If the company is able to establish a strong business model and generate a good brand through its consultancy/research reports, able to reduce its attrition, this company looks good to me.

Despite this, I would give a go-ahead to invest in the company though one may not see significant institutional investment as the size of the IPO is too small for them to make an investment!

Sakthi Sugars - Promoter Buying

2007-02-12T19:56:00.000+05:30

The Vice Chairman and Managing director has bought close to 0.1% his total outstanding shares, an announcement in todays NSE Website section. He looks like a person who is positive in this segment that has only seen a downside over the past two-three months.

Power Finance Corporation - Raising money for Branding

2007-02-04T01:14:00.000+05:30

Well, an IPO for no reason. The GOI feels that the publicity that the company is getting till date is not sufficient and the stock exchange would provide this solution. That is the objective for the IPO, raise money but no definite use from the funds raised. It also says that the funds will augment its capital base.

Issue Details

Issue Size : Rs. 856 crores to 997 crores
Issue Date :January 31 to February 6
Price : Rs.73 to Rs.85
Post Issue Equity Dilution: 10.22%
Book Running Lead Managers: Enam, ICICI Sec, Kotak

Company Background

The company's primary activity is to channel savings into power generation. It was started in 1988 and have most of the clients in this sector under their fold.The company's financial products and services include financing in the form of rupee term loans, foreign currency loans, bridge loans, short term loans, transitional loans, bill discounting, equipment leasing, buyers’ line of credit, loans to equipment manufacturers, line of credit for the import of coal, debt refinancing, asset acquisition schemes, study assistance and non-fund based products such as guarantees, letter of comfort and management advisory and consultancy services. The company is involved in AG&SP program as well as the UMPP program. The company has been awarded a "Mini Ratna" status giving freedom to run its operations. The company has assets exceeding 40,000 crores.

Objective of the Issue

The company intends to use this capital for raising its equity base. Also, the company believes in using the stock exchange to increase its publicity and could also serve to liquidate GOI share at a latter date.

Strengths

There is extensive knowledge that has been gained by the company in this sector. The company share in this business is more than 10-20%.
The business is regulated by RBI and if the company has to follow the guidelines from RBI as a part of NBFC, this can reduce their exposure limits to certain entities.
The current gross NPA is 0.23%, extremely low. However, we need to look at the debt books to see how much is actually given provision for.
It is trying to diversify its client and product portfolio (in power)
It is de-risking its lending portfolio by co-lending with various institutions.

Weakness

Single product portfolio and is extremely dependant on state electricity boards for its revenue.
There is a client concentration risk. The top 10 clients and groups accounts to 45% and 67% of the borrowing. Also, some of them are loss making entities.
The nature of loans has been clearly mentioned. However, certain risks include in the lending books. The nature/value of the collateral, ability of the state to back the loan in case of guarantee (currently 45% of the loan book).
There is a negative cash flow in business.
The NIM is reducing and is currently at 3.37%.
The company receives subsidy from the govt. under the Accelerated Generation and Supply Program in advance on a NPV formula. This can create losses incase there is some change in the factors.
Some of the projects such as Sasan, UMPP, has been awarded to Lanco at extremely low price. The viability of such a low price is still questionable. If they fail to get the financial commitment for their project, this can delay the implementation of the project. This can delay the execution of the project.

Opportunity

The opportunity mainly is in the largely unment demand that currently exists in the system. On an average, we have a unmet demand of around 8% and 12% in peak demand.
The company is starting a venture capital fund for investing in power generating companies.
The current Electricity Act gives much more freedom for regulators to fix tariffs.
Most of the funding from World Bank and ADB is going towards restructuring the SEBs. Once we significant reduction in T&D losses, we can expect this industry to invest in generation.

Threat

Removal of SLR Bond status, tax free bonds can affect their borrowing program.
The government has largely failed in keeping its commitments in implementation of its program.

Financial Analysis

The company has a strong disbursal growth at over 21% CAGR in the past five years.
Book Value : Rs. 66.68
RONW: 13.06%
AG&SP forms 24% of the loan portfolio.
The company's subsidy from the government has remained at similar levels inspite of growing disbursements. This could indicate efficiency in its collection.
The current assets is at 0.95.
The reserves are currently growing at 14% and the total equity employed is increasing by 11%. This is quite healthy considering the income growth of the company.
The company is currently maintaining less than 1.5% in reserves for bad debts. That is quite aggressive.
The interest cost is increasing by about 12% CAGR basis. Again, the company has done well here. Only 10% of the loans are short term in nature. This implies that the company may not have an duration mismanagement as much as a bank that borrows short to lend on long term.
The net profit growth is approximately 8% CARG in the past four years. However, this has been extremely erratic with the 2003 being one of their best years. Post this, the operating profit has been declining.
The cash from operations has also been affected for the same as mentioned in the previous point.
The company primarily raises money from banks/financial instutions and open market (~75-80%).
The company has lowered its foreign currency risk by lending and borrowing in a similar currency.
Its dividend policy is quite insistent though it is a regular dividend player
The per share of PTC for PFC holder is approximately Rs. 0.75 . If this is discounted from the current share price, the EPS will fall further

IPO Pricing
P/E - 7.7 to 8.97.
P/BV - 1.15 to 1.34

I have not made any comparison due to lack of a proper alternative comparable company in this industry.

Interesting Thought and Summary

The company's outstanding loan book is at Rs.38,562 crores. The IPO will raise only 1000 crores in the higher end. What is the company going to do with such a paltry amount? A company that has a very strong credit rating can raise funds at one of the cheapest rates and there is no requirement for the company to come out with this IPO.
One of the directors of this company is my institute head too!
Though there is nothing to lose for the company in this IPO, I would still invest considering the sector attractiveness only.

Cinemax Private Limited- Disappointment

2007-01-20T00:23:00.000+05:30

Having read the industry recently, I started with a hope that this would be a good one. It definetely is, but couple of transactions that the company has undertaken last year make me feel uncomfortable on the nature of the company policies. Anyways, here is a brief of the IPO

Issue Details

Issue Size: Rs. 120.42 to 138 crores
Fresh Issue: 94.5 crores to 108.5 crores
Existing Shareholders: 25.92 to 29.5
Price: Rs.135 to Rs.155
Post Issue Dilution : 31.86% of the paid-up capital
Book Running Lead Managers : Enam Financial Services, Eidelweiss Capital, JM Morgan Stanley and Ambit Corporate Finance
Issue Period : January 18, 2007 to January 24, 2007

Company Analysis

The company has revenues coming from diverse streams. Theatres or Movie screening, construction (commercial and retail) and also in gaming.The income from construction is not regular. The company has a history in construction with more than 5 million square feet constructed space till date. In movie screening they have more than 9000 seats across 10 theatres. They have a very significant presence in Mumbai with 9 theatres and 21 screens. The company has two important subsidiaries that is involved in constructing and the other in maintaining multiplexes.

Objects of the Issue:

The company is raising the money for funding its expansion and also an exit option to its existing shareholders. The total cost of expansion of new theatres is expected to be Rs. 110 crores with close to 140 screens in the next two years. There is hardly any investment made from existing capital. Probably, since most of the reserves have been converted to bonus shares, they found it difficult to raise cheap money!

The company technically could raise more money if it gets subscription at the higher end of the price band. Now, it is quite disappointing as most of the expansion is happening from new shareholders. The company will utilize all the funds by 2008.

SWOT Analysis

Strengths

The company is focussed in increasing multiplexes across the country with close to 100 screens in the next couple of years from the current 33 screens. This will increase the seat size by 3 times.
The biggest strong point for the company is the current location of its theatres. They are mostly centrally located. Also, unlike its competitors, they have 8 properties with 7 in Mumbai giving free rental cost (only opportunity cost involved).
The company has a strong experince in building and construction. Also, there is a brand of 'Cinemax' to be considered. I do not know if can be translated into revenues. They have a premium theatre too. The utilisation of this could probably indicate the pricing power for the company.
The companys's average ticket size is still above Rs. 100 but with the introduction of cheaper tickets, this is bound to reduce.

Weakness

High dependance on distributor for showing films in every theatre and for every film. This gives a very unstable business model when one compares with Adlabs which are in the other end of the value chain.
The biggest weakness for any investor, which is mentioned rightly in the risk factors is the capital structure. It is so unfair for the retail investor. The bonus issue last year has diluted the earnings in a very big game.Further, there is also an issue of a preference share issue at no cost. This has diluted the earnings even further.
The promoters have been investing in multiple business' streams. This is an area of concern as it looks like the promoters' are willing to enter into many areas with a motive of profit. The promoters have more than 25 different companies, partnerships etc and only 4 are operational. There are too many construction/building companies. I do not understand the existance of such companies.
Alternate mediums like DTH, DVD or VCDs can become popular making the business unattractive.
Existing competition is with Adlabs, Inox, PVR cinemas and Shringar. Adlabs is expected to be the largest player with a strong backward integration. Given this level of competition, efficiency or utilization rate is one of the key parameters for success. There is no strong pricing power with any of these competitors. Given, that they can't reduce the price to a 'non multiplex' rate, the downside pricing to increase volumes is lost too. Also, the competitors are expanding very aggressively. Incase, they are represented in most areas, specially in prime areas, that Cinemax is operating, this can lead to loss of business.
Currently, the projection medium is traditional. Newer digital forms can force the company to incur substantial capital expenditure.
The issue size exceeds the current networth by 5 times. That is a lot of funding under the present capital structure.

Opportunity

There is a big demand for theatres across the country given the poor quality currently in existance across places. Also, most theatres are willing to open in Sec B and C cities and move into small towns too.
They are willing to work on different model for pricing tickets depending on time/day
The contribution of Multiplexes has been increasing constantly and is close to 20%

Threat

Success of theatres are movie specific and this can tilt towards failure with poor movie scripts.
Alternate sources of entertainment such as DTH, DVD can lead to lower sales.
Removal of entertainment tax benefits can risk profitabilty if lower pricing power is not passed to the customer.

Financial Structure

On the capital structure : The capital contribution by the promoters has been for 70 Lakh shares. The rest 1.5 crore shares has been in the form of bonus shares. This has been issued quite recently-July and August 2006. With the current issue of 89 lakh shares, 70 lakh shares represents a fresh issue. This will be 25% of the post issue of the share capital.The preference share issue to the promoters and persons acting in concert is a source of concern as this was issued at no cost to the promoters.
There is a small taxshield available in the form of goodwill in the balace sheet created out of amalgamation of group companies. This is to the extent of approximately 5 crores across years.
D/E of the company is on the higher side : 2.2 ( Tax provisions benefits taken as a part of equity)
The working capital requirements for the company is increasing at more than 55% CAGR. Given the nature of business (cash from tickets) the company's has a huge growth in working capital requirements.
As with any other multiplex, there are primarily three sources of income: Ticket Sales (60-70%),Food and Beverage(15-20%), Advertisement. In the case of Cinemax, this works to 80% (on the higher side), and the rest is with food and beverage. Advertisement revenues is very marginal(~5% but contribution is increasing). The sales from tickets has been growing at 30% p.a.
Project income is something erratic for the company and hence difficult to estimate revenues from this business. It contributed to 55% of the revenues last year. However, this year it is less than 20%. Gaming income is still insignificant for the company (~1%)
However, on the cost structure of the company, the distributor cost contribution is about 25% and this has reduced from last year at 40%. Entertainment tax has reduced for the company mainly due to tax benefits enjoyed by multiplex.Employee costs have risen in the last six months (~8% of the cost)
The company has not declared any dividend till date. However, it has compensated with a huge bonus issue.
The ROCE is about 40% significantly higher than its peers. This will fall down to 28% after the issue.
The current EPS is at Rs. 2.02(annualised). This has dropped from 3.57 last year. The only reason for it being the huge dilution of equity in the month of August. If one removes project income and depreciation written back, the current EPS is at 1.56 wherars it was 4.07 last year.
Given the erratic nature of the project income, the Cash from operations is highly irregular. However, the current business is generating strong cash for the business.

IPO Pricing

Relative Valuation : (Taken Post Issue Capital and on the lower price band)

Price/Sales :6.46 and Net Profit Margin : 20%. Inox is trading at 6.34,Adlabs is at 12.5 and PVR cinemas is at 19.01

Price/Book Value : 10.58 and ROE:28% Inox is trading at 4.2, Adlabs is at 5.23 and PVR cinemas is at 2.95

Price/Equity : 66 times. This can go as high as 89 times if the benefits from the new theatres do not accrue to the shareholder in the next year.
Inbox is trading at 39, Adlabs is at 37 and PVR cinemas is at 61.86.

Managment

The management of the company is headed by the Kanakia family. A family held business from 1984. The other members are quite impressive. They have a CA who is also a key director in other companies including Ashok Leyland, Gulf Oil Corporation, Ennore Foundaries etc. Another director is an independent director at L&T, Hindustan Motors, India Infoline etc.

Interesting Facts

It is interesting to note that the issue of 1.5 crore shares through a 'bonus issue' to the promoters. The lead managers have rated this as a risk factor, possibly on the basis of concern on management. Apart from this, the directors have a monthly salary of Rs. 2.5 Lakhs per month as salary and perks.

Each principal promoter will have a networth of close to Rs. 130 crores on the lower side. These promoters have increased their networth by 3 times from approximately 40 crores to 130 crores merely by issuance of bonus shares.

The company is pretty expensively valued when compared to its peers. I have not valued two of its important subsidiary because of the nature of disclosure. However, this could impact the pricing in a significant way. A big let down was on the pricing and also on the bonus issue by the company. I would not buy this stock inspite of the business being attractive.

Autoline Industries IPO - Go Ahead

2007-01-06T04:29:00.000+05:30

After more than a week IPO is back in action. The first for the year is Autoline Industries Limited. For once, reading the IPO was very refreshing. A good insight into the automobile industry.

Some of the key issues for the IPO
Issue Size : 75 Crores
Period : January 8 to January 12, 2007
Price Band : Rs. 200 to Rs.225
Lead Runner: BoB Capital Markets
The company has been extended loans by BoB, a prime reason for being the lead managers for the issue.

Objective of the Issue

The company is planning to upgrade, expand and modernise its existing facilities and desgn centre in Pune.
The company is planning to enter into new products such as door assembly and contract manufacturing for heavy vehicles
Building a new corporate office
'Long Term' working capital requirements

Sourcing of Funds

The company is looking at an investment of Rs. 104 crores. The funding has been done as follows.
75% of the funding is done from this IPO. 8% through private placement. 17% from raising debt.

Utilisation of Funds

Expenses on Construction / Upgradation / Modernisation : 72%
Joint Ventures and Acquisition : 11%
Working Capital : 11%
Others: 6%

Strengths and Weakness for the Industry

The industry is moving up in the value chain and also there is some element of scaling of business by existing players. This would help in driving the cost of manufacturing down.
The after market is mostly held with unorganised players, with more than 65% share. This is a good opportunity for companies with scaling business to take advantage of price. However, increase in scale can lead to differential taxation nulling such benefits.
Cost and quality advantage, esp in the export market, where India's contribution is increasing every year (CAGR >25% in the past 5 years).
The industry is moving towards e-auction. This is a big danger for companies that are in contract manufacturing.
There is a huge demand for cost reduction from suppliers. Also suppliers are engaged in active designing and the risk of performance is falling on automotive component suppliers.
Consolidation in the industry leading to fewer players in the market. The same should start occurring in the component supplier in which scale is giving key benefits.

Strengths and Weakness for the Company

The company is committed with this IPO fund deployment. The funding which is to be raised from debt has already been raised or commitment received from BoB and Kotak Mahindra Bank.
25% of the cost of the plan requirements has already been implemented with existing source of funds. The promoters have contributed to this significantly. This might be reduced with the money raised. However, I like the promoters commitment to the venture.
The company has made some really strong predictions on its sales figures. 95% (almost on track 54% of the target sales figure reached in 7 months) for the current year. 140% for the next year and 20% the following year.
The company is also looking at mass production as a method to reduce its cost. This will make them competitive and can increase volume in the long run. This would increase the dependence of its customers on the company.
The company is moving up the value chain from being a mere manufacturer to be a part of the design team. The downside risk is the inherent problem with quality manpower. Its subsidiary company is involved in this venture and it is a reseller of a software and does CAD/CAM. The subsidiary company is planning to increase manpower. However, for a company which does not have a clear focus in this area, I still am not sure of the success of this venture. The company has a tie up with Detroit Engineered Products. This MOU seems to be a more successful idea than having a separate venture of its own.
The company is also setting a state of art control tool room that provides testing facilities. The customers are unclear and though this contributes only 5% of the cost of funds required, utilisation is under doubt.
The project expansion has taken the customer requirement in mind. The company has entered into some kind of contract manufacturing with the Indian subsidiary of Stokota, Belgium.
The biggest weakness for the company would be client segmentation. With more than 80% of the business coming from a single client Tata Motors, the company is running a big risk.Though the company has a small benefit being a sole supplier to Tata Motors, this however is product dependant.
The company's owners were more than willing to have the entire IPO handled by BoB, given that they have had very few issues last year. Merely being the bankers to the company, BoB was able to influence them quite easily for a complete issue.
The company has been given a covenant of not declaring a dividend till it has an adequate current ratio of 1.33:1 and also the bank's permission.

Financial Aspects of the company

Networth of the company before the issue : Rs. 298 million
Net worth of the company before the issue : Rs. 373 million
Book Value : 42.49
EPS (Latest) : 15.95 (Annualised)
RoE : 25%
RoC : 8.4%

The company has a employee manpower of 1588 and this is expected to increase by another 72. The incremental sales per employee is expected to increase by more than 75%
The company has just started declaring dividends over the past two years (18% last year).
The inventory is close to 15% of the sales, on the higher side.
Significant cost include: Raw Material and Manufacturing Expenses: 90%
In spite of huge investment in machinery to create scale benefits the depreciation cost contributes <2%>
The interest coverage ratio is now close to 6 times and this can go down further with increased sales.
The current CEPS for the company is around Rs. 14

The future financial projections can give the following EPS and the forward P/E for the company:

Relative Valuation

Price/Earnings: 14 times on the higher side and 12.5 times on the lower side. Rasandik is at 12, Jay Bharat Maruti is at 12 and Automotive Stampings is at 20
Price/Book Value : 5.29 times on the higher side and 4.7 times on the lower side Jay Bharat Maruti is trading at 2.5 times(RoE : >20%) and Automotive Stampings is trading at 2.7 Times (RoE : 9%) and Rasandik Engineering is at just 0.49 times (RoE : >20%)
Price/Sales: 1.19 one the lower side and 1.33 on the higher side Net Profit Margin of the company is 6.3% while that of competitors are Rasandik is at 6%, Jay Bharat Maruti is at 2% and Automotive Stampings is at 1.5%

Others

The company has been receiving some funding from different entities in the past. The most recent one in August was at Rs. 130, a steep discount of 30% (lock in period is 20% 3 years and 80% 1 year)at the lower end of the issue for a company that is doing really well for the year and with clear plans for an IPO in place giving sight of exit options to the investor. Yet such a discount to the issue.
Mr.Vikram Bhat, the chairman of the company has strong credential with the Monitor Group, Mahindra British Telecom and other entities of the Mahindra Group. Also the board is largely filled with non technical people and also a marketing professor from IIM A.
The promoters networth would be close to 11 crores (on the lower side) with this IPO listing.One of the promoters of the company is a sitting MLA and also a former mayor of Pune. Surprisingly, the company does not look bureaucratic as a government institution The group has not ventured beyond this company. No company is sick though two companies of the two promoters are not doing any more business.
The company is not facing any major litigation and also the contingent liability is on the lower side and more on export obligation commitment.

Pricing of the IPO

The company has priced its IPO between Rs. 200 and Rs. 225. On a relative basis and given sales projection the forward P/E looks very attractive for an investment in this company. However, the profits are dependant on two key factors: ability to meet its sales projection and its pricing power. With the product it has and the success of Tata Ace and Indica, the volume looks plausible. However, pricing and profit margins is still under threat. I have made some downward correction to the future margins. Given the strong RoE the Price/Book Value is attractive comparatively attractive to its peers. I would give a 'go ahead' to this IPO and a good investment for the future. There is a possibility of listing gains in this scheme. However, I would look at this stock for a long term rather than a short term story.

Index!!

2006-12-12T09:37:00.000+05:30

Have you wondered why inspite of the index performing so well, your portfolio of stocks has never done as good as it should have been?

While the answer is quite obvious, the question largely remains whether it can be addressed. So, what was the obvious part! Just take a look at the weights of different stocks in the Nifty and the Sensex. In the top 10% of the weights - ONGC, Reliance, Bharti and TCS dominate the Nifty and Infosys, Reliance and ICICI Bank dominate the Sensex. Barring Reliance, we saw some phenominal returns in the rest of the stocks. Add the next 10%, and with just 6 stocks in the Sensex and 10 Stocks in the Nifty, you have covered 50% of the index. You do not have to invest in the rest 80% of the portfolio!! to replicate half the index.

Next is to look at the performance of these stocks. I have taken a period from 24 July to December 8, 2006. This is when we started seeing the amazing rally in the Index. The stocks that has contributed has been none other that the ones that represent just 20% of the index.The rest 80% of the companies just gave a return of approximately 16%. So the question arises as to whether having such a skewed sensex or nifty actually makes sense in the first place.If one has to compare his portfolio, this is surely not the best benchmark. I just have to add these stocks in my portfolio and make merry and if I do not then there it is end of the road for any fund manager. It is for this reason we see a similar portfolio. No fund manager wants to be left out from this race of out-performing the index.

I tried to build another Index - a Price Based Index as followed in NYSE. Simple to calculate but has certain deficiencies. The stock with the highest price will tend to play heavily on the movement of the index. However, it is good our index does not follow that method as the returns would have exceeded 40% (under certain assumptions). Well, the weighted price does look a lot better that this method.However, if one follows a value line price index of an equal amount of investment in every stock in the portfolio, the return falls substantially to 23%. This looks a lot better than 35% that we saw earlier.

But is this what we need to expect from an index? I firmly believe that this should not be so. With more and more money coming into the country, the fight will always be with this set of stocks which is going to drive the price even further leaving fundamentals out of the window. What I expect of an index would be to represent the overall movement of most stocks in the market. What do we do then? I believe the focus should start moving from BSE 50 or Nifty Fifty to a probably broader index. A BSE 100 or BSE 200 or Nifty Junior should be an ideal one to start with. As we see more liquidity and transparency in the other set of companies, we can start having a BSE 500 or Nifty 500 as an ideal benchmark. Surprisingly in fall that has happened over the past few days, my portfolio was rather safe than the way the index fell. Now, that is not smart investing but just that my portfolio has stocks that do not represent the top half of the index. Hence, I tend to perform when the index corrects!! Now that is what is called contrarion investing.

Capital Safety Fund - Surely !!

2006-11-02T21:42:00.000+05:30

Mutual Fund industry is a 'funny' industry. The best part is the near cartel formation in the products delivered by most of these fund houses. Not that they are not coming with the right products. It is just that most of these funds raise money on schemes that are too similar to one another and launched within a span of few months each and then forgotten forever. How many of us talk of dividend yield or fund of funds anymore? We are still comfortable with Reliance Growth, Franklin India Prima etc etc, the ones that have withstood time and have held themselves high!

Capital 'Safety' looks to be the new buzzword in Mutual Funds. Interestingly I looked at the offers coming from one of the Mutual Funds. Below is one of the schemes that is currently in offer. The scheme allows investor an option to invest in a 3 year or a 5 year scheme. I have just taken the 3 year for discussion. The investment in equity is a maximum of 20%. I have taken a conservative estimate on the debt side at 7%. At a minimum exposure in the debt side at 80%, the profit earned in the form of interest for the investor is Rs. 18000 or it covers most of the equity exposure that the investor is taking on the equity side of a maximum of Rs. 20,000. If the investor has to lose money on the scheme, then the equity market has to lose 90% of its value or the sensex value. Whoa! that is one pessimistic view of the markets.

I do not understand having such a scheme in the first place. Even if debt funds give 12% in the three years of investment, that gives about Rs. 9600 in profits. Unless the equity markets fall about 50%, this fund will not lose money.

Even in 2001 crash of equity markets, it took 3 years for the equity markets to fall. No fund manager would be that foolish to keep his money in the equity markets. If a change happens from equity markets to debt markets, he is bound to earn more, with fall in interest rates, giving capital appreciation on his debt portfolio, and reducing his chances of losing money.

I would have liked funds that sticks its neck out and is willing to take the risk on behalf of the investor. These funds will not lose money unless he makes something drastic on both the markets that he has to lose money to his unit-holders. A serious let-down to me! I guess SEBI is not willing to experiment as these are fund houses with awesome track records.

Under Pressure - Movie Theatres

2006-10-21T06:35:00.000+05:30

Last time I was in a theatre, I was impressed by the infrastructure or rather the movie experience trying to be offered by FAME Adlabs. While there is much to be desired in-terms of service levels as I found it difficult to get my choice of food to take it inside the show yet I was happy considering that it was close to a private show with no one in the theatre except my gang of friends!

I am currently in Indore and it was really difficult to watch a movie as they were hardly any good theatres to talk of. Well enter the consumer age and things have rapidly changed over the past year. Three big multiplexes has reached this place. FAME Adlabs, PVR Cinemas and Inox. With an average of 4-6 screens, these corporate theater companies can house close to 1200 people at any given point in time.

Given the nature of this business, where people do not want to watch movies in theatres twice or thrice as it was earlier, most of these theatres need to reach to the audience really fast. Enter the idea of more than the standard number of shows per day with odd hour shows. Even if this were not enough, multiple screens are being used to show the same movie. Something that was close to a taboo in earlier days.

A good friend of mine was looking at the availability of tickets for DON, a new movie of Shah Rukh Khan in Indore. The results that came out was astonishing. I have attached two clippets on the same below from two of the four important theaters in Indore that follow a similar business model. The number of shows/day that was shown by these theatres in the next few days exceed 30! At an average 250 seats/screen, this translates to 7500 a day and for a week this will be 90000. At a 85% utilization rate and a cost of Rs. 125/ ticket, Indore citizens are going to spend a crore on movie watching this week for DON ! Phew that is a lot for a movie. What are the plans for the second and third week or the next month? Who is there to watch this movie in such a big theater? If I were to add the cost of the eatables, parking for this movie, another Rs. 100-125 is going to go off most of them. Movies are getting expensive!

Movies has taken a new turn today. It is no more the number of days that makes a difference to the director. No more do you see movies harping on running for 100 days, 200 days etc. It is how much money do you make during the first week, how much did you lose over the previous week, marginal loss in ticket sales!

It is important that we look at new-age theatres in a new light because the business model for most of these companies has changed.

Most of them are looking at first week sales quite closely. Quite evident from the number of shows shown.
Movies are getting extremely short-lived. The theater companies can be blamed for this. In their primary interest of capturing most of the movie-goers to their screens, they are showing more shows leading to lesser number of days for a movie. For people like me who like watching after the initial euphoria dies down, I end up missing most of them as they are never there on screens at a later date.
New initiatives like SMS Booking and Internet booking makes sense to most of us. While I do not know the risks faced by these companies, I see this model making some change as there is no need to stand in a line, the ticket is confirmed and no anxiety is associated with getting tickets.
Companies are also looking at the food counter closely. I know Satyam in Chennai did outsource this section thus making it profitable for them. Today, we tend to take something during the first section of the movie too rather than having something during and after intermission.
Pricing has changed for the tickets. They are getting extremely expensive. The reason primarily arises from the huge infrastructure and maintenance costs for these theatres.
With most of them running empty during the week and the non-availability of good movies at all times, good movies is getting expensive and so does huge variation in movies during the weekends and weekdays.

Understanding the Industry for any valuation

It is nice to see the business model changing, it is even better to see an active corporatisation in theater distribution. Corporatisation is making distribution system. Earlier we had theater owners with less than 3-4 screens. Now companies like Inox, PVR Cinemas and Adlabs are consolidating the screens around the country. Directors can start actively looking at negotiating with the screen owners rather than the old model of having the middlemen. The old system can't die this early with the penetration still low in the Tier 2-Tier 3 cities but there is a step towards this direction. Also, this increases the bargaining power for these companies for better revenue sharing.
Business revenues has changed drastically. What was earlier a function of days with a standard set of shows for a movie has now changed to more than 5 shows a day/screen to multiple screens for the same movie. This makes modelling more difficult as a bad movie can just see audience vanish creating huge unutilized seat for a screen and this will lead to huge unrecoverable variable costs.
Also, weekdays and weekend pricing will start seeing some changes. With unutilizated capacity, price cutting will get into the place between theatres making it even more difficult. As most of these companies are still expanding, revenues from existing theaters has still not stabilized.
This business is getting a bit murkier for an investor because there is hardly much to distinguish between the theatres. I am yet to see loyalty to any of these theaters by the audience.
Business revenues are coming not only from ticket sales but also from the food counter. On a average every customer spends on a coke and a popcorn for two people. This is a revenue of close to Rs. 50 and a margin of around 60%. This is a strong stream and one that should not be overlooked.

Valuation of such business is extremely difficult and unless we see some clarity, of which 'time' is the best master, any approach would lead to extremely diverse pricing models for these companies. Once we see most of these companies stop expanding, one can start valuing these companies with better clarity!

Glenmark - PR activities

2006-10-06T11:43:00.000+05:30

Hi,
This is something interesting that I am seeing as a good PR initiative for a company that is looking to come out of the woods when in trouble. There was a recent news on the company being alleged with anti-asthmatic drug that is choking people. The clarification of the drug effects is available at the company website or you can click on the link below

Glenmark Investor Relations

This was in the NSE website yesterday in corporate communication:

The shares of this company has fallen by more than 15% with this news. The stock movement is available at knowcharts.blogspot.com

The director has now come now to buy the shares of his company to possibly indicate that he is happy with the performance of the drug and is willing to increase stake in his own stock. While this idea is sincerely appreciable I would have preferred if they increased their purchases some more. This purchase by both the directors is less than 0.05% of their existing portfolio, Rs. 4.5 lakhs each. The directors have also taken sometime to respond with this initiative. But yet, I like this initiative better than investing heavily in an advertising campaign which is expensive and may result in similar results on a cost-effectiveness basis.

His indian market would not affected much as the patients hardly ever look at the manufacturer of a drug and his extensive sales network will ensure that the news of their version of the 'correct information' reaches all doctors instantly, thus reducing his downside.

Overall, good idea!!

DCB - Aggressively Priced

2006-09-28T13:50:00.000+05:30

Well, an issue that throws more surprises than ever!

A company that has

a criminal case pending on fraudulent deposits
an increasing losses in its income statement and negative cash flows for the past three years
huge write offs because of its poor portfolio
to now give existing shareholders fresh equity at a lower cost, a discount of 63% over its previous issue which happened in February this year
been bordering on Capital Adequacy Ratio (CAR) at 9% and is compulsory lending lower amounts to maintain this margin
currently wants to create a niche in banking by being in selected cities only!! What is the use of it is beyond comprehension!

Issue Details

No of share : 7.15 crore shares
Issue Size : 157.3 crores on the lower side and 185.9 crores on the higher side.
Date of the IPO : September 29, 2006 - October 6, 2006
Price : Rs. 22- 26
Post Equity Issue Dilution : 48.43% will be the free float for this bank
Lead Runners : JM Morgan Stanley and ENAM Financial
Net NPA Details : Currently down from 4.5% to 4.05% in three months
Gross NPA : around 14% of advances

Objectives of the Issue and the mission of the bank

To raise capital for funding and meeting their Capital Adequacy Ratio
To focus on improving low cost funds through acquisition of CASA accounts
To grow fee based income
Build a based call center and enhance retail presence
Focus on a few states and build a strong sales team

Company Overview

It was setup as a new private sector bank. The company has 72 branches. Of which 26 are located in Mumbai. It has presence in Maharashtra, Gujarat and Andhra Pradesh. AKFED are its in-principal promoters and not from India. They established this bank after two consolidation in the banking history of theirs. They have a significant stake of approximately 60% which they intend to reduce it to 30% by the end of this issue. The bank is predominantly an SME bank. They focus on customers with less than 10 crores of business. They have a fairly large aggressive retail division that is contributing to their bottomline.The management is something to cheer about. It is headed by some strong people today. Mr Vijay Kelkar is in their board too. Most of them are non-executive directors.

Positives

While the company is saddled with NPA's, since 2003 the company has done well wrt to NPA's as it has reduced to .75% net. It has burdened itself with current net NPA's at 4.05% or 78 crores.
A professional board with immense experience of Dr. Vijay Kelkar, Anuroop Singh from ANZ etc which will help the bank in strong regulatory mechanisms.
Setting up a call center will enhance the delivery model for the bank as it will be cheaper to solve a customers problem and creates an alternate sales channel.
Customers are in the mid segment and the possibility of charging higher prices is probable. Hence, given the focus on low cost deposits, this can translate to higher net spreads from the current 3%.
The bank in view of poor performance has taken amends to reduce its losses. It has reduced salary, stationary, postage charges, directors and auditors fees.
The bank has a strong tax-shield with its accumulated losses. It has around Rs.50 of losses currently. Profits on this can be adjusted for the same. At 30% tax rate, this will give the shareholder of Rs.16 as a tax protection. Assuming this comes in the next ten years in an incremental basis there is still about Rs.6 on NPV basis.

Negatives

The branch network of the bank is extremely weak. Of the 72 branches that the bank has 26 are located in Mumbai. 51 branches are located in three states constituting risk in raising money. Also, these three states, Maharashtra, Andhra Pradesh and Gujarat has strong network of banks.
The banks internal controls on group exposure is at risk. One group has an exposure to 38% of its total capital!
The gross NPA that the bank has shown does not give much information. 3 of the five sectors are growing well. I do not have much information on the chemicals, dyes and for the engineering segment. While there is much potential in this segment, however, considering the fact that one does not know the financial of these companies, it would be unfair to comment on the same.
Foreign Investors in this bank have an exposure upto 68% before this issue.
Cost of funds is 5.73%. SBI is currently at 4.73%. Most of the banks are at these levels.
The focus is only building branches, focusing on key areas for business banking.
The SME segment has a lot of focus with ICICI, HDFC and all MNCs giving a lot of importance. Nationalised banks and others were always there in this segment.

Financials of the company
The banks networth is near collapsing with around 170-200 crores erosion year after year.
The bank has really a very poor performance and unless they have their plans in place, this bank is headed for disaster. Their P/L shows increasing losses from 2003. Before this, they had an average profits mainly because of their revaluation of their assets. Their core income has been constantly reducing (30% in 6 years) and income from investments has reduced by 50% in the same time. Most of the other income barring lease rentals has remained or marginally increased in the past 6 years. Its interest outgo has also seen a corresponding decrease. But the employee cost and lease rentals has shot up the roof by more than 50%-60% in the same time.
There is an increase in the other expenses to the tune of 200 crores on a year to year basis with little explanation.

Capital Structure
This is probably the first time that I am seeing that the cost of the promoters capital is more than the issue price. The promoters are locking their shares for a period of one year. Also, AKFED, which has a share of 58% will have to dilute to less than 10%. There was a RBI circulation on foreign holding on a bank in India till 2009. The promoteres holding after this IPO will fall to 30%.ESOPs have been provided but its largely ineffective till the price reaches Rs. 40 and not in the next two years.

Interesting Facts

The bank has strong exposure with some select few companies. 5 industries, according to their classification has exposure of more than 30% of their funded exposure. Its top borrower has control of more than 19% of the capital. If I am to understand the banking laws, unless this is in infrastructure this just cant happen.
The bank has a customer base of only 6 Lakhs of which 5.95 Lakhs are in the retail segment.
There has been a sticker sent to all existing shareholders stating that the promoters will have their shares locked-in for a period of one year!
The bank has gross NPA at 14%, no wonder it is loss making.
The promoters company are not profit making and though it should not impact the bank, but such request for dividend declaration would be hard to resist.
Changing auditors rarely happen in a company, but this bank has changed its auditors thrice in five years. How come?
One can read the litigation section to have some pass-time in the entire section of the prospectus.

The pricing of this issue:

Comparing it on earnings would be unfair as the bank is loss making and only one quarter of profits is available. So I have taken the book value for comparison and have assumed the following. I have used a two stage relative valuation based on the book value for the company. The following are the key assumptions made

ROE: 14% for the future considering that it is a bank and the leverage is high
Cost of Equity at 12% (CAPM method : Risk Free at 7%, Beta: 1.1 Risk Premium : 5% will give 12.5% as cost of Equity)
Growth during the first 5 years will be 20% and the rest will be at 4%
Payout Ratio : 10% for the first five years and 40% from then onwards.
Based on the above assumptions the price to book value can be 1.02 times.

At the current bookprice of Rs.18, this will work out to Rs. 18.36, making it expensive by about 25%. However, if one adds the loss in the books and the benefits that it would derive out of it, this will translate to another Rs.6. giving a total of Rs.24 to the shareholder.

Summary:

I like the management as it is impressive. The bank may be a loss making company but they seem to be committed in improving it. The portfolio is straddled with poor assets which they seem to be determined to improve. The incremental NPA this year has been only 0.5% which is heartening to hear. I would be suspect of the profit that they are making today as they were clear on the coming IPO. The bank has a strong focus on a segment where the revenue generation is higher. Though the competition is heating up in this segment, I am still happy with the margins that can be charged. Given that the cost of borrowing is on the higher side, this is offset with a higher cost of lending. The bank has not lost on non-fee based income and has done well on that front. Given that these are non-funded incomes, the capital requirements would be lesser.

The issue has been fairly priced and if it does get subscribed to less than Rs. 22-23 it would be a good one. It is a good IPO and can be applied for the banks possible future performance.

Gayatri Projects Limited - Hands Down

2006-09-24T12:41:00.000+05:30

IPO is back and it is a nice sight to see the number of companies rushing in to cash this opportunity before the stock market crashes. FIEM is currently running and Minar, GPL (this one), JHS and Hanung on the pipeline. So what is nice of this IPO. I saw the others and thought something on projects to be an interesting one as there could be something on infrastructure.

There are times when you wonder how some companies, that have done all the negative things can still raise money. This is one company that falls in that category.

Issue Details

No of Equity Shares : 29 Lakhs
Objective of the Issue : Videocon Aplliances and Videocon Industries are diluting their stake and there is a fresh issue of 10 Lakh shares
Employee Quota : Just 1 Lakh compared to the others that I have seen in percentage terms
Post Issue Dilution : 29% will be for public
Price : Rs. 275 -Rs. 295
Issue Size : Rs 79.75 crores to Rs. 85 crores
Dates : September 26-29, 2006
P/E : As of last years earnings it stands at 13-15 times

Overview of the Company

The company has been around for 16 years and has an experience in constucting over 600 kms of highways and 1113 kms of irrigation canals. It has a minor interest in building ports, airports, industrial works etc. It has experience in building dams (7 in total). It has a current book order of more than 1000 crores of which 40% constitute building of roads and irrigation completes the rest. Its joint ventures have a book size of Rs. 1350 crores with approximately 50% in road segment.

Objectives of the offer

The first objective of the company is to get a listing in BSE and it wants to giva an exit-option to its existing shareholders. The first part of the objective is something that is unique. This company is not in IT sector where the requirement for publicity is high. It is into key infrastructure projects and the financials, experience plays a higher degree of role than a brand name.The company is borrowing in excess of 28 crores of which 20 crores would go to fund an SPV and the rest is to retire its debt. It currently has debt in excess of 250 crores and I do not know how this small change of 8 crores will make any impact.

Understanding the Financials

The company has close to 60% of its balance sheet in working capital. Of its current assets, 85% is locked in inventories, loans and advances and sundry debtors.
The current D/E is close to 2.75
Work Expenditure which contributes close to 80% of the cost has been reducing over the years, indicating some pricing power
The company has had a strong cash flow from its operations last year. This is highly fluctuating for the company with negative CFO in 2003-04. The company has too much debt in its portfolio that is carrying with a higher cost.

Positives

The company has recently got a working capital loan from a bank for Rs. 165 crores. As a bank has allowed this, the company's financial might be getting better with good projects on hand.
Work Expenditure which contributes close to 80% of the cost has been reducing over the years, indicating some pricing power

Capital Structure

Well, this issue will make the promoter richer by 62 times on the lower side. Apart from it, the company has been issuing shares to its promoters at face value. There has been no infusion of capital since 1994. However, the company has capitalized its reserves by giving bonuses to its existing shareholders. The plan for the IPO has been in place for the past year as the company gave a bonus last year.
With this issue, Videocon will completely come out of the venture. 16% of the equity capital is held by IL&FS and 2i. This part of the equity capital is not sticky and they can sell their issue at any time of their choice.
D/E is close to 2.75, an average running with its peers

Negatives

Management is extremely poor and the details have been given on the risk section.
Dividend policy of the company for one of its group companies is at a big doubt. The company was incurring losses from the start but the company declared dividend. I do not know from where did the money came from to declare the dividend.
The company's debt book is simply stunning with average age of 10 years. The company does not look to be in a position to recover this money and it exceeds 100 crores.
The company does not believe in maintaining its assets. No AMC has been taken on its assets and it has written that its assets in construction equipment etc as one of its key strengths!
The company has given guarantees amounting to Rs.233 crores to its group companies.
Interest Coverage Ratio is only 1.75 times, this is extremely low for a company that is heavily leveraged. Small changes in revenue can wipe out its profits.
As its loans are secured, this can create a bottleneck in its operations. This ratio has been improving over the years, but still in a dangerous territory.
The company is using the exit as a route to raise money too. The SPV has a cost of Rs. 20 crores and this issue is expected to give Rs. 27.5 crores for the company and the remaining money is used to retire its debt.

Risks

Management

One of its groups companies has a criminal complaint for non-payment of a lease rental. Though it is for a small sum, it still raises some concern on the quality of management.
Two of its companies have been suspended from trading for non-payment. The company paid the fees for re-listing last year. It looks like the company wanted to have a clean sheet before this IPO. Unfortunately, BSE is yet to give a clearance as these companies is yet to start commercial production.
The litigation against the company is quite high at 80. Civil, Debt recovery tribunal and sales tax being the key ones. The total exposure in these cases is close to 90 crores. Group companies and the promoters have not been spared either.
11 of the 17 companies have negative networth.
The company has been doing a lot of inter-firm transfers. A total of 250 crores have been reported in this section but then most of them are acceptable transactions

Interesting Facts

I do not know if this true. This security is for listing only in BSE and not in NSE. However, I got the prospectus from NSE. Videocon must not have been too happy with this venture. The investment has generated close to 16% p.a. since its investment in 1994 excluding dividends. With 16% of the capital held by FIs with no lock-in, this stock can open with some profit booking. However, the management has been so poor that I would not regret having missed this issue.The company has priced on relative earnings and the company has priced it on the lower side. However, consider the D/E of the company with its peers, it is still on the higher side and its RoNW is at best - average.

This stock is a pure exit strategy for Videocon and borrowing for the SPV. The company's financials are by no means strong. There are too many litigations indicating poor management. FIs can pull the price down at the open of this issue and as investor apart from the sector it is playing in, nothing else is close to being attractive.

Gayatri Projects - Hands down for this IPO

Research Reports - The Fun of reading it

2006-09-23T13:20:00.000+05:30

I enjoy reading research reports. There have been instances in the past when research analysts post reviews that are opposite in nature for the same event. An example of this was with SBI when the results were posted for the third quarter. Two research agencies, extremely reputed gave exactly the same reasons, but had a final outcome that was diametrically opposite.

Here is another instance of another research company. As an amateur analyst myself, I know how difficult it is to estimate the cash flows for a company. The company in this case is OMAX Auto. There was a recent 'buy' order from this reputed research agency. I went on reading it and I found the section of financials interesting. The company had given an expectation of the following in the previous year.

Consider the same the next year in the following. The research predicted that the company would have a sales figure of Rs 662 crores while the actual sales for the company was only Rs 578 crores. This increase is only 9% when the projected rate was approximately 25%.
The reasons that were cited were as follows.

Employee cost : This amounts to close to 5 crores
Power cost : This contributes to 5% of the cost. It was about 17 crores last year and this year it is at 24 crores. Of this 10% was the natural growth of sales. Hence it was already incorporated in the financials. The increase was only 5 crores.
Interest cost : This is a reason that is unacceptable as the capex plans was already given in the previous year and their model should have incorporated this high cost.
The company has saved 2% of sales which amounts to 11.76 crores

If one adds all these that the company has mentioned, they should have still got the profit that they had predicted as the cost of savings from raw materials has been offset with the increased cost in salary and power. Yet, they missed the mark by a big margin. Why cheat the investor for something that the company is not able to deliver? The research report completely ignored the poor sales forecast that it did and blamed the entire game onto the management for ineffective performance. Now, this is unfair. How is the company at fault when your forecast was way off-mark.

The answer lies somewhere in an article that I read recently by Paragh Parekh. He was in our institute to give a guest lecture and I truly enjoyed the subject on "behavioral Finance" that he taught that day. However, coming to this issue, he mentioned that the research agencies have targets on the number of reports that they need to generate in a year! I was stumped to see it and now after reading this, I find it believable. I have no solutions to this issue. But then, I think the research house should

show the research agency's previous call on this company
give reasons for a downgrade for this company
the number of times it has downgraded on the whole for all companies that it normally researches
the frequency of such changes and the timing of such changes

Now, as a research agency, I can still escape by giving a reason of higher interest rates or higher risks or high beta that will be built in the CAPM to confuse the common reader. True, it can happen but atleast I do know that the company has some reasons for the change in such forecasts.

Speculation Rocks

2006-09-22T11:34:00.000+05:30

I was surprised when I was reading this document from NSE on a derivative update. Read the section on stock futures. We simply beat the nearest exchange 'hands down'. We enjoy taking risks and especially in the futures segment and not in the options segment. 15th in stock options and 9th in index options. We rank 1st in stock futures and 3rd in index futures.

Index options where it is probably easier to speculate as the only risk that one takes is a systemic risk. NSE stands 9th in this section. We are probably more risk takers than the rest of the world or probably too much 'inside information' at play. If one reads the entire document, one sees that the retail participation is extremely high (more than 50%).

God! This is scary

DFIs Shrinking Spreads or Rising NPAs

2006-09-19T04:34:00.000+05:30

Typewriters saw its end with the introduction of computers and so did the bicycles after motor vehicles. Is it time to see the slow death of financial mammoths called Development Financial Institutions (DFIs) and the rise of capital market and banks to replace them?

Post World War II, several countries nearly depleted with capital resources, struggling to develop their financial and labour capital, infrastructure. Banks with its limited expertise charged high premium for projects with large gestation periods could never meet the demands of these projects. This gave birth to special institutions called Development Financial Institutions (DFI) to act as a ‘gap-filler’ with the following mandate

Providing medium and long-term assistance to business undertakings in the form of loans, underwriting and investment and fill the gap created by banks who confined to short term financing and selective investing and a poorly developed financial market
Assisting new project ideas, undertaking feasibility studies, providing technical, financial and managerial assistance for the implementation of projects

Different countries have followed different objectives such as financing, promotion, building technical expertise for the functioning of DFI. Countries like Germany, Korea and Japan have transformed or devolved their DFIs after having attained the objective and with the better access to capital markets. India today is straddled with DFI under huge NPAs. This paper aims to establish that it is not only shrinking spreads and NPAs but more than that and the future of
DFI.

Looking back into its past

RBI was entrusted with the responsibility of building the success story of the DFI in our country. The Industrial Finance Corporation (IFCI) was the first special financial institution established in 1948 by an Act of the Parliament. This was followed with establishing State Financial Corporations (SFC) in 1951; currently there are 18 SFCs, ICICI in 1955, LIC in 1956, Agricultural Refinance Corporation (ARC), UTI and IDBI in 1964, RECL and HUDCO in 1969-70, 70, Industrial Reconstruction Corporation of India Ltd. (precursor of IIBI Ltd.) in 1971 and GIC in 1972. There are currently 52 institutions in this category.

Financial Health

The classification to understand the financial health for the DFI has been done in two broad areas: FIs are regulated and supervised by RBI and FIs that are not under the direct purview of the RBI. IFCI and IIBI which have been operating as providers of direct assistance are all in poor financial health while refinancing institutions such as NABARD, SIDBI, NHB, EXIM Bank, IDFC have done really well in maintaining strong financials year on year.

The most inefficient among DFIs are State established SFCs. In states like Orissa, Bihar, TN, W Bengal, Maharashtra, Haryana and Gujarat, these institutions have eroded their entire networth and have neither been able to raise fresh funds nor service their debt requirements. The causes for the same have been explained in detail below.

The causes of decline in the 90s

IDBI, ICICI and IFCI formed the triumvirate on which the country's project finance edifice rested. Of these, ICICI rapidly changed to face the challenges of the new competition while IDBI was forced to change when faced with huge losses. However, IFCI’s future is still undecided. A look into what caused their decline in the 90s will show the following reasons

Evolution of the Indian Banking System
The Indian Banking system is today well diversified with public, private and foreign banks competing for similar businesses. The expertise they have acquired to manage risks in extending finance to long term projects has reduced the need of DFI. The credit given by banks and DFIs as a percentage of GDP has increased from 3.9% in 1971-1992 to 4.3% in 1992-2000 .

Competition – A driving force for effective performance
UTI mutual fund today faces competition from more than 30 other mutual fund companies. LIC competes with Prudential ICICI, Tata AIG, Bajaj Allianz etc. In the long term financing, there has hardly been competition. Being monoliths, IFCI, IIBI and erstwhile IDBI had poor loan appraisal mechanisms, ineffective regulation leading to mismanagement.

Riding the Low Cost Advantage of banks
Banks enjoy the natural advantage of having easy access to lost cost funds, a primary contention for DFIs. With RBI removing the LTO option for raising funds, DFIs were forced to raise funds from the market. DFIs are forced to lend to projects at rates that could make the loan unfeasible for them to service its cost of borrowing. The average cost of borrowing for SBI in 1997 was 6.3%, whereas the cost of borrowing for IFCI was above 10%. While the cost has reduced to 4.5% for the current year, it still remains the same for IFCI.

Poor asset distribution leading to NPA’s
DFI had the following issues: High sector exposure , cyclical nature of business, limited checks with group and company, long term loans led to disproportionate asset distribution. SFCs, on the other hand had been extending term-loans to SSIs. They were burdened with high operational cost, poor assessing skills, and were extremely bureaucratic. It is estimated that they would require around 3600 crores of capital infusion to clean their balance sheet.

Indiscriminate disbursement of loans
IDBI disbursement was growing at a rate of 14 per cent, ICICI at 27%, and IFCI at 20% since 1992-93 when the industrial growth in the country has stagnated around 3.5 per cent to 4 per cent indicating poor appraisal mechanisms.

Development of the Indian Capital market
One of the primary objectives of DFI was to act as a ‘gap-filler’ in the capital market and help lending medium to long term loans. The resource mobilized in the capital market in the form of debt and equity as a percentage of GDP has increased from 0.6% in 1971-1992 to 1.7% in 1992-2000 .

Others
The Public Undertakings Committee found SFCs

Not following stipulated guidelines while sanctioning loans
Lack of constant monitoring leading to misuse of funds
Poor collection mechanisms
Corruption and heavy sectoral exposure
Political Interference

International Outlook on DFI

Internationally, DFIs have had significant changes in their functioning over a period of time. There have been two distinct models followed:

Anglo American: Market based which competed for resources
Continental Europe and South East Asian Economies: Financial savings was diverted to these FIs for investment.

Of the four DFIs in Japan, one was restructured and the objectives realigned to meet social challenges and the rest went bankrupt and sold to private banks. Korea’s DFI has constant shifted to focus the requirements of its government. Singapore’s Development Bank of Singapore (DBS) now functions as a full fledged commercial bank.

Recommendations on the future of DFI

Given the importance of DFIs role in as a ‘gap-filler’, the following are the key recommendations and shall be discussed on the basis of classification

Refinancing Institutions
NHB, SIDBI and NABARD can continue their status as a DFI till the existence of DFIs. However, they need to act as regulators for the section they are re-financing.

Sector Specific/Specialized Institutions
No changes are required to specialized institutions such as LIC, UTI, and EXIM bank etc. as they are competitive players and strong regulators. TFCI, National Co-operative Development Corporation and National Dairy Development Board should be converted to a NBFC and will be easier as they are profitable too .

Medium to Long Term Lending Institutions

Barring IDFC, IFCI, IDFC have shown heavy losses. The following are the options that are available for a turn-around.

Create an SPV or transfer them to IFCIs ARC Having completed this, the DFIs can be converted to a bank or an NBFC for the following reasons

DFIs need to be given access to markets to raise low cost loans
DFIs can cause systemic failures by not servicing their debt to insurance companies, pension funds. Hence, active regulation and portfolio monitoring will be needed from RBI.
By deepening our debt market the dependency for DFIs will reduce

Devolving the system of DFI:

Converting them to banks or partnering with an existing bank
The success of ICICI’s conversion to bank and the recent make-over of IDBI to a bank but with a DFI status, gives a strong case for converting the existing DFIs to a bank. However, converting to a bank is not fraught without risks.

Partnering or Converting to a bank: A discussion
Establishing a bank will require

Replicating an existing bank with no assurance of access to low cost deposits
Longer Time requirement
Heavy investment in technology
Statutory requirements to be met with your current portfolio

Given these conditions, it is advisable for institutions such as IFCI or IIBI to merge itself to another bank than converting to a bank . RBI should allow these banks to raise long term loans through issue of ‘Development Bonds’ to fund the projects the DFIs have expertise in.

Converting into an NBFC
It would be ideal to see most of these institutions as NBFCs than DFIs as they can be regulated by RBI.

Regulations can be relaxed on CRAR for profit making NBFCs of DFI nature .
Active securitization of loans to help deepen the market.
Compulsory investment from pension funds, postal savings in the lines of Korea.
Diversification into wholesale banking including term finance, working capital finance, cash management services, equity to projects. Others include exposure to sector, group and individual companies.

State Financial Institutions - A stronger dose

In spite of commendable performance from Delhi SFC, APSFC (NPA’s currently at 16%) significant restructuring is imperative. The following are some of the key recommendations for SFCs.

Short Term Solution
Consolidate the bad portfolios of all SFCs and transfer to an SPV that works like in IFCI

IDBI and SIDBI can restructure their loan exposure or convert them to equity. There would be a requirement of infusing close to 3600 crores from most states.
An effective VRS , requiring close to 230 crores will be needed to reduce employee overheads that contribute 15-50% to less than 1-3% .
Appoint a professional non-executive chairman with banking and finance experience and boards with experienced professionals, implement managementinformation system, adopt standard accounting practices and the EDIFAR should be updated with the defaulters list.
Cross-sell other products and increase fee businesses.
Prudent norms on exposure limits, in lines of banks, to specific industries must be established. Diversification of portfolio will ensure reductionof risk during adverse times.

Long Term solution

Banks have gained expertise in analyzing risk and have slowly started to increase their presence with in all segments including micro-finance . Given this current scenario SFCs have outlived their utility and should be phased out within a definite time frame. However, changing to a bank in the long run would be difficult. The opportunity should be constantly monitored and converted to a bank or an NBFC that can absorb the SFCs without affecting its statutory requirements.

Conclusion

DFIs had been the cutting edge of the Indian financial system and enjoyed high credibility as a more than being a ‘gap-filler’ .Recent losses with IFCI, IIBI, SFCs has changed the scenario. However, barring these few DFIs, others such as NABARD, SIDBI, NHB, and IRFC have done exceedingly well. However, the need has come to address these losses and look at the future of these institutions.

The government of India cannot escape from its obligation to bail out the sick DFIs. As long as the present legal structure makes it difficult to force delinquent borrowers to pay up, DFIs may have no option but to look up to the government. It can be argued that the current problem of NPAs of DFIs is itself partly the result of the acts of omission and commission of the government. It goes without saying that the long term remedy to the DFIs’ problem lies in the
development of the debt market. Converting them to a bank, that have gained the expertise of strong loan appraisal mechanisms, cheaper source of credit, better collection systems and active monitoring of disbursals and regulatory check would be more appropriate for the future of DFIs. However, it should be at the discretion of the DFIs. Active securitization, allowing long term development bonds, diversification, sectoral caps will further benefit by removing systemic shocks. It is much more than a combination of shrinking spreads or rising NPA’s that gets addressed.

Fines and the sham of it

2006-09-13T04:35:00.000+05:30

Here are some interesting articles and something that I always thought was unfair. Read them at your leisure time and it has very little relevance to what I am planning to discuss today-

For some of us, clicking and reading is even more difficult than reading it here. I just sent the link to show that they exist and it is no fabrication from my side. Hence, I shall give a brief on most of them. Merrill Lynch was asked to justify their trades that they advertise as there was a 'big' mismatch between them and NYSE. Canara Bank was imposed with a 5 lakh fine for not maintaining the statutory requirements and the IPO scam is well known to most of us.

I shall just take the case of Canara Bank as it is easy for me to put my point across. Its fine was not maintaining the fortnightly balances on its CRR and SLR requirements as 'somehow' some balances from its branches was unnoticed by the head office. Not that it is impossible considering the number of branches it has, but then I always amazed at the power of modern technology in tracking everything, including me. Yet, it happened. Was this intentional, don't know. There was no 'show-cause' notice given to the public. If I was to look at it differently, things show a really different picture.

What if I did it intentionally. Look at Canara Bank's balance sheet. This incident happened sometime this year. The closing balance sheet deposits was close to 116000 crores. The company has to maintain CRR and SLR requirements on this-5% and 25%. The bank was fined 5 Lakhs for this. A small math calculation reveals this - Assuming that the company had invested the money in AAA rated 10 year paper instead of holding it in cash and G-Secs. So the bank should have maintained 34800 in CRR and SLR. Had the bank invested in AAA rated paper and the differential was 3%, this will boil to 2.86 crores for a day. Assuming it takes 2 months for the decision to take place and the fine to be given to RBI and as a good company invest the same in call market that is earning 5% returns. The bank shall now get approximately 7 lakhs as further interest. Have not gone scot free in this transaction. What has the company lost in this? A little bit on the brand value. Well, this is a financial transaction and will get reported mostly in business papers in a small section of a relatively irrelevant side or page where there is nothing else to fill. The bank can explain different reasons and accept that it was a mistake beyond its control. But was it?

The point was never to give a bad picture. I have been with Canara Bank and in all probability this could have just been an accidental error from their side and never intentional. However, if I were to create such a scenario in front of you, is it right? RBI should have actually estimated the profit on this transaction and levied charges proportionate to it. Yet it levied a standard fine. Is the regulator right in his decision or just plain lazy to take note of it? Look at the Merrill Lynch and the IPO scam. The profit has already been taken and the goodwill for Merrill Lynch in terms of being the best broker has already been decided. The incremental business has been created. Will the fine that the regulator imposes reverse these transactions? I do not know. If I were to be unethical, I would happily do so albeit not regularly that I kill this cash cow opportunity.

But then, I can do it, can't I.

The point to be noted is that I am using these companies as an example to explain my thoughts. This is purely a thought process.

HOV Services - Skip it

2006-09-07T06:22:00.000+05:30

HOV Services - Exceeds Expectations?

HOV Services is a holding company and offers its services in the Finance and Accounting segment with its 6 key subsidiaries. They being in three different segments - Accounts Receivable Management, Enterprise Management Tools and Services and the third Insurance and Tax Services.

Investment Objectives

Investment for this IPO is between 81 to 97 crores depending on the pricing of the IPO, constituting to 32.3% of public shareholding.
The key objectives include planned capital expenditure (approx 25%), redeeming the units issued by its subsidiary (approx 70%), and further acquisitions

Investment Positives

The company is floated by promoters who have extremely strong background. While they are not paid any compensation for their work, they get excellent sitting fees of a lakh/month. Having read the entire prospectus, I could only find one positive aspect of investing in thi

Investment Negatives

The revenue stream for the company is extremely risky, with most of its revenues coming from its top 10 clients and this figure has been increasing over the past three years. The revenues are contract based hence their pricing becomes an issue everytime the contract is up for renewal.
The companys key revenues is from outsourcing and hence there will always be pricing pressure unless there is significant value addition
The company has acquired other companies without having an independent valuation. This is dangerous as the company could end up buying companies at higher prices.
Damages in terms of litigation exceeds 35 Lakhs.
It is natural for most companies to give promoters shares at substantial discount. This company is no exception. The promoters enjoyed a fresh equity investment at the face value in January 2006. Surprisingly the same is now being offered at atleast 20 times the cost of this issue.
The company is increasingly moving into the sphere of merely a pure BPO, whereing its clients save on cost when compared to their country. The reason is found in the sales mix of the company's 3 distinct subsidiaries. The share of it branded product division, EMTS, has reduced from 99% in 2003 to 12% in 2006.
Also the company is increasingly looking at business in the two segments where there will be a price war with little differentiation to offer.
The company has been buying out comapanies to generate its growth strategy. However, these companies have been coming at a premium now being reflected in the goodwill at which they are purchased.
Two of its subsidiaries are under losses.
The company's cash flow is a extremely volatile for similar incomes too. Given the nature of income that one would see in any other company, the same is just not true for this.

Strange ones

The company's capital structure, as usual, remains a mystery inside an enigma. Consider this-32 transactions in the last 6 months. A lot of internal transfers between companies, promoters, promoters' floated companies. The company forms companies for a specific period and transfers the stocks back to the promoters at the end of the period. The company has largely grown inorganically. There is so much confusion on the holding companies and internal transfers that after sometime, you wonder where this is all ending. This issue is anything but pure confusion on share holding. The maze of transactions can lead to false understanding of the company's promoters.
The company has floated options worth 5lacs to its employees creating further dilution to the capital structure.
The issue, inspite of being on the lower side, has solved the company to exit one of its promoters, if not undertake limited work of capital expenditure.

Conclusion

At a networth of just over 11 crores and a book value approximately Rs. 13, the issue price is at 15 times its book value, extreme price for a stock in the BPO segment.At EPs of 5.96, the P/E works out to 33 times wheras its peers like Allsec are on the upper tens.
One of the primary usage of the funds is to give the existing investors an exit route more than funding the business operations that will help the company to grow further.
To me, the entire reading was like more of understanding who is the final owner of the company, rather than the business and the future of the company.

Such complex IPO's is worth a skip and that would be my choice.

ACE Constructions - Go on

2006-09-06T16:56:00.000+05:30

ACE-Action Construction Equipment Limited

It is quite interesting to note that the company has changed its name thrice in the past ten years. Though most of it have been more of a regulatory requirement than merely to change it for namesake. The last time it changed, I could not reason the need to change to singular (equipements to equipment)

Moving to the most important part,

This issue is for 50-59 crores depending on the cut-off price of the offer
The company is issuing 25% of its capital to the public. Post this issue the promoters control on the company is expected to reduce from 87% to 65%.
Lead runners for the issue is Karvy and they are back after a long time

Reasons for the IPO

Setting up a new unit
ACE is plannning to use a part of this IPO in a joint venture with Tigieffe SRL, Italy, though nothing has materialized in-terms of confirmation of the venture. The prospectus says that Rs. 6.6 crores earmarked for this. Considering the nature of the amount, this looks like it is in the final stages.
Acquisition/Investments which is unclear
Working capital requirements
Brand building
Building a corporate office

The total cost for all the above is about 78 crores and will be funded with this offer by about 50-59 crores and the rest with internal accruals and debt.

Negatives for the Company

The company looks to have taken a few loans with severe restrictions for the shareholder. The covenants on its loan, though is normal, looks severe on the management to take decisions on undertaking new businesses or expand its set-up using debt.
Sales of the company has increased by approximately CAGR 95% however the expenditure has tagged along pretty well. Margins for the company was extremely thin except for the last two years, where the company had the ability to price it higher.
The company has increased its balance sheet size by about 13 times in the past two years,wheras the business has increased only by about 100% annually in the same time. The company has given 25% of its balance sheet in the form of loans and advances. This loan is largely unclear.
The company has declared dividend last year and it was the first in the last five years.

Interesting Issues

The company's promoters are extremely clear on their allotment of capital. They have constantly issued shares at face value barring the last few issues. The company conveniently capitalised its reserves into bonus shares in the year 2005. It is quite interesting for the company to have done it, as this will give the promoters access to the premium money it charged to outside shareholders from its previous arrangements. The effect was that the company pocketed a 25% CAGR return on their investment on that day. However, it was not the company's profits only that was capitalised but premium money. One of their promoters is Benett, Coleman & Co. They have bought the shares at 100 and it looks like there is a wait for this investor to encash his investment. The company is lenient to the directors, friends, relatives as to have given it at a lower price than the outsiders. The company has been extremely lenient with insiders and quite harsh on its outsiders.

The company's EPS is approximately 11.08. At 110, this has a P/E of about 10, which is on the lower side. The company's networth is 43 crores and the current IPO is for 50-59 crores.The book value of the share is Rs. 29 and this works at 3 times at current issue price.

The company has made strong cash from operations. The cash EPS from operations was approximately Rs. 15.

I like the company for the industry which is in and I would go for it if I had surplus funds. The investment will be needed for the long term. However, if there is any downturn in the industry, this should be the first stock to sell as it does not pricing power.

Shirdi Industries Ltd : Braving the sentiments with an IPO

2006-06-27T12:00:00.000+05:30

After a long time am I seeing a company braving the current slide in the market with an IPO. The past few IPOs have been quite a disaster for companies. Air Deccan's take-off in this market has been quite unsuccessful as is the same when it launched its first flight. Hope it has a better flight journey in the days to come. The others like Vigneshwara Exports tried to lower the price like Air Deccan in the hope of increasing some buying interest. Well, it had to return its money at the end. Prime focus and Allcargo all have seen some erosion in prices. However, given these conditions, Shirdi Industries defying the market comes with an IPO.

These are my thoughts on this company....They are personal views and I do hope it is able to raise its money successfully.

Size of the IPO 44-50 crores
The issue will be open from the 29th of June to the 05th of July.
The company was incorporated in 1993 and the company is planning the current issue for manufacturing MDF and particle boards, flooring, door skins, laminates and door and furniture components

About the Company
The company was incorporated in 93 and primarily dealt with trading of forward sell options. Later, the company started to import raw materials from south east Asia and sold it under the ASIS brand. The current issue deals with this segment to increase its capacity in the manufacturing segment.

The company is in B2B and mainly uses its dealership to induce sales. Discount may hamper margins and also cash flow. The details on the cash flows has been dealt in the later section.
Sales is limited to a few states. The IPO does not talk of strengthening the distribution set-up, which I think is crucial to develop business in the long run.
Internal competition is mainly from local, un-organised sector. The plywood industry has seen a few closures due to unhygenic practices.
China is the largest producer of this company's product of MDF. The growth of this segment by China is around 40% while India's production increased by 2%. In the hard board, India manufactures 10% of Chinese production. Hence, any entrants of Chinese products will lead to a price war. India manufactures 0.4% of Chinese production.

Balance Sheet and Profit and Loss

A look into the manufacturing division of the company is revealing some startling results. The company seems to have done well in this divison. The company sales has increased from 80 crores to around 1300 crores last year. If you see the improvement in bottom-line, this comes to around 30% net margins (the assumption is that trading sales has a margin of 10%, other incomes and consultancy at 100%)

The ROE is around 11% as of last year. However, a significant portion of this ROE is from the manufacturing division. The ROE has improved from 2% to the current level
The ROCE, a better indicator of the business is also at similar levels of approximately 10%. This margin has moved from 8.5% last year

Depreciation seems to have been understated. The company has added 52 crores of assets last year, a 5 time increase in assets. However, the depreciation provision has increased only 35%. This can be possible only if the company has made substantial acquisition in land.

The cash flows of the company has been varied and strictly nothing conclusive is coming out of it. While the company has achieved a strong cash flow for the current year, the cash flows was negative on three of the five years. Also, the increase for the current year has been mainly on account of increase in creditors and the company has consistently increased its debtors over the years.

Capital Structure

Again, yet another disappointing capital structure for the company. The promoters have acquired the shares at around Rs.11. The company has made an allotment to a foreign company at around Rs. 53.84. With the euro currently at around Rs. 58, and the issue price at around Rs. 69-78, this company has got an exit option with about 18% profit in a year. Infact, the lock in period on this investment by this foreign company has just come to an end for 85% of its investment. Anyway, given that the promoters have made an excellent deal in this company, at buying it extremely cheap, its now time for the public to understand if this pricing is correctly valued.

The current issue has some interesting facts:
The company needs Rs.127 crores for its funding requirements. Of the 127 the company has already tied in funds of approximately Rs.87 crores. The remaining 40 crores is coming from this IPO. At current issue price of Rs. 69 the company is expected to raise 44 crores, giving it a margin of Rs. 4 crores. Well, that is around 10% higher than the company requirements. Will we see a reduction of price due to poor market conditions?

Investment Positives
The only positive that I saw in this company was the strength of the new business. The new business seems to have strong earnings potential given the sector of housing is seeing strong growth. The company has a strong pricing power given the margins on the business.

Investment Negatives

The company has not paid any dividends since 1998.
Company has entered into various businesses such as in finance companies, reality, and biotech. The group companies, especially one of them Poona Pearl Biotek has shown a 16 times increase in losses last year
Current networth is 38 crores and the company is raising close to 44-50 crores in this issue
The issue is two and a half times the current book value of the share and the promoters have acquired the shares at half this price
Legal Proceedings against the company's directors are a bit hazy. The promoters are being sued for acting on personal interests. Though the claims are on the lower side, it still raises doubt on the management.
The current earnings is at Rs.2.4 and even at the lower end the pricing of the issue will be at 28 times its current earnings. As a relatively unknown brand for the public, I personally believe this to be on the higher side.

Others:

Though the lead managers has fallen to Allianz Securities, Edelweiss Securities seems to have taken the onus of selling the issue to the market. 50% of the issue is being underwritten by this company.
The MOA has a whole paragraph of more than 15 lines on IT and the scope of operations it can undertake. This comes as a surprise, as it is the first time that you will hear IT from the company. The sales figures, does not indicate any revenues from this stream
The promoters group companies are a big question on sustainability. A host of companies, pretty closely held. Most of them are showing high variability in sales across years. While this is does not impact the company directly, however, a company that has not paid dividend in the past five years, and the promoters having a clutch of companies with high volatility in sales, does not ring the right bell.
The salary earned by directors are unnecessarily confusing. The perks are close to 2.5 times the salary being earned. At first glance, it looks like the company is paying only Rs. 35000 for the promoters every month. However, once you add all the perks it increases to around 1.15 lakhs on the lower side.
The company seems to be quite sure that the price change could be possible as it has marked this sentence in bold that the change shall by duly intimated to the exchanges.

Given the above information, I personally believe that this IPO can be passed and the investor rather have his money invested in the direct market. However, these are only my personal observations.

India - Arcelor and Mittal

2006-06-26T06:29:00.000+05:30

Business Standard was covering an opinion poll today and the question was whether Arcelor Mittal combine will help India. He had given a yes/no as his options. Now, this was interesting and I was trying what it could be. Arcelor has no known presence in India. Mittal, atleast has given his word to invest in a 12 mln plant. However, his presence in India, considering he is an Indian, is pretty disappointing as he waited till last year to invest in India.

India currently produces around 1/3rd of the combine capacity of this merger. Around 35 odd million. The entire country! Arcelor produces more money than Mittal but the latter produces more steel. So what am I being an Indian going to get any benefit? The big guns of India with Tata, Sail, Jindal all produce steel and their exports aren't that great, compared to this giant combine. Tata produces one of the lowest cost steel in the world and Sail and Jindal seem to have done some decent work, inspite of being one being a PSU and the other was almost a sick company.

I am just not able to understand how this deal is going to affect India.

Are we going to get better deal on prices?
Is he going to manufacture something else that is on the higher end of the value chain in India, post this merger?
Will he stop his plans in India, now that he is got some incremental capacity in his kitty (close to 10% of the world production) and also considering that we have a government that is unclear on its policies?

I would not be surprised if the third happens as the government enjoys giving a decision and taking it back. The airport contracts, the SEZ issues on land requirements etc...

None of the above questions gets me a conclusive answer, but yet the results from the other readers was overwhelming 'yes'. I wanted an answer that had the option like - 'I am ignorant and hence inconclusive'. One thing that hit me immediately is that we like Indians to perform well and we back them for no apparent reason. Sania Mirza, Indian cricket, Arun Jain, Bobby Jindal, Vinod Khosla, the many known in US and the even more unknowns who are successful in other countries. W e support them as if they are here to help us move out of this rut with their achievements, but rarely we see that happen. We just sit back and applaud and have an empty happiness. Again, its a feeling that they will come and help us, because they have achieved. We, as Indians, must support, after all, he is an Indian.

Am I missing something that the others seem to have seen and possibly in plain sight?

Should the RBI hike Interest Rates

2006-06-15T03:24:00.000+05:30

For the past few days, I have been tormented with this problem if it makes sense for the RBI to raise interest rates. Here, I am not talking of repo or reverse repo rather the CRR. I was quite surprised to see the rates hiked without notice to anyone. It caught everyone off-guard. It's sometime nice to see the power of RBI. Completely, neutral to government pressures. Even surprised to see the markets to have rallied the next day as I thought it was not a positive information for the markets to discount. Well, the markets have not been always rational.

The Fed has been hiking its interest rates over the past few years and its now reaching a level where the markets are increasingly jittery. At 5.25% we are at a all time high. It is increasingly removing money from Asian markets, which was largely leveraged from these countries. Also I don't know if he will be able to control inflation with this hike. The brunt of the fuel hike will cause further damage to inflation. However this is supply driven and demand driven. Our consumption of amount of fuel has remained more or less constant across two years. This could be important as one will not be able to change his consumption pattern too much because of this hike. He may reduce it, but the extent will be relatively small. Given this scenario, should India hike its interest rates. I have some thoughts on it.

Capital is increasingly required in most of the industrial sectors. Most companies have announced their plans to expand or currently in expansion. As we have a largely under-leveraged companies, they have been borrowing quite extensively from the markets or banks. So, it is going to affect their profitability. I however, doubt if these companies will curtail their investment decisions or defer them for sometime till they have some clarity. It is obvious that the world over interest rates are hardening, and hence makes sense for them to have their expansion plans at these rates, than later.
To a certain extent, we are handicapped to world interest rates. I don't deny that. I feel this rate hike has taken the speculative money and will increasing pressurize good money that can be spent as FDI to move out and Reddy wanted to prevent that by giving hints in the air. As I do not know our ECB completely, apart from what keeps popping in ET, my guess is that we still are not in the area of concern.
Being a capital hungry economy and the projects lined up in infrastructure being huge till 2012, the governor should be more interested in the areas of lending rather than the rate at which it is being lent. RBI forced banks to increase the provisioning for house loans, which in my sense was a good move as it changed plans for the banks to shift priorities
Directive lending should be bought back in place to ensure money is sent to the right sector. Now, here I do not want them to invest in agriculture, coz this sector is hardly growing and increasingly the money does not seem to reach the end consumer. However, with the kind of efforts that is being put in by ITC, Reliance, Bharti, HLL, Godrej, I personally believe money can be used elsewhere.

Money can be specifically spent on building effective roads, airports, sea-ports and railways.
Money can be spent on power. Somehow, the pace can be improved. With lending made aggressive, this can be done
Money needs to be spent in having clean water, education etc. as these will help the country in the long run

Given this picture, I don't think interest rate hike will affect us immediately but I hope he does not hike the core interest rates as it start creating the fear of building expectation of hiking interest rates, which an even more danger to the system.

SREI Infrastructure - A must buy

2006-06-14T02:31:00.000+05:30

The reason for my posting some companies in my blogs is just to re-inforce myself if I was right in making a purchase of shares. After this crash, it makes sense for an investor to be a critic and understand if staying with the company makes sense. The recent fall in the share market has given tremendous opportunities for investors to look at his portfolio and make adjustments to them. Surely, the crash would have left most of us wounded with huge losses, but I believe this crash giving an ideal entry to companies that one missed in the previous rally. The rally gave hints of companies that have the potential to be better than the others, but have fallen as there no buyers and speculators have left them in the lurch. Ideal long term investors need to grab them and have the next round of gains.

I enjoy infrastructure based companies as it is not heavily dependent on outside economies. Most of these companies undertake projects for the development of our country. The only risk being whether such investments will yield the desired returns. Peter Lynch did well in the 80s investing in companies that focused on infrastructure. If I recall correctly, he did a 5 bagger in most of these companies. His reason was extremely simple. These companies do a big service to give the country the next level of growth. However, these companies will stop showing growth after the country has become a developed one simply because consumption can be easily monitored. You are not going to spend more on electricity just because you have more money. You probably will travel more-but the facilities that you need from the road, ports or in airports will become predictable and further investments into these areas would only enhance comfort marginally. Well, we are a long way off. We hardly have continuous power, decent roads to travel, excessively used airports created by the low fare airlines. So creating the opportunity for all companies in this sector to grow and grow much faster. I do not know if they would grow at a pace greater than the other sectors, but I am atleast confident on the government's commitment to improve basic necessities that is much needed for us. Hence this post and possibly more on these type of companies.

The main problem that I encountered in this sector is the investment that one needs to make. Companies that are in IT, Entertainment etc rely heavily on manpower. Unlike infrastructure, where companies consume massive capital, these sectors hardly have such requirement. Any deal with proper pricing can ensure reasonable amount of safety for the return of capital. Infrastructure based companies run a risk on this. They consume capital and you do not know if they will make money. The projects have a huge gestation period and have leveraged balance sheets. Small changes in interest rates is sufficient to make the project infeasible after a few years. I am bullish on the country and hence I believe that I am making the right sense of investing in these companies.

I shall be posting my views on a series of infrastructure based companies in the next few posts of mine, if I have sufficient time at my disposal. My objective is to try and make sense in the policies of these companies.

SREI Infrastructure could probably be one such company that falls in this segment. The company gave up its highs of around Rs. 80 from around a month back to the lows of Rs. 30 today. That is one mammoth fall for a company that is doing pretty well. A company with a slightly different objective. They are into lending and only to infrastructure based companies. I read their annual report, and a truly interesting one. Very colorful (the company is in a purple patch), loads of explanation of the core activities of the company, extensive information on the industry (it probably took half of the report, which is a good one). Currently trading at a PE of 7. Imagine. Why are people not investing then? The company at its peak was trading at about PE of 18. Capital and infrastructure based companies were literally murdered in this crash. Probably that is why it is trading at such levels.

Company is primarily involved in these segments

Equipment financing
Equipment leasing
Infrastructure Project financing
Projects that are based on renewable resources (extremely small but amplified in the report)

Company has some diversification, of which some looks unnecessary in

Capital Markets-generated marginal revenues, not making operating profits mainly due to increase in debtors
Forex Services-generated about 2 lakhs of profits, not generating operating profits
Insurance-loss making division and again not making operating profits and is moving into securitisation and asset reconstruction. Has created a new company that has a general license to market all insurance in one window. Company seems to have made some heavy initial investment not in assets, as the only asset they have is a computer. Sustainability in this seems to have some attractiveness as there is some synergies in business, especially in the non-life insurance sector.
Venture capital-looks promising but details of this company is a bit sketchy. The company is investing in infrastructure based companies in the SME segment. The profitability that the company has shown is impressive. The salary in the P/L gives an indication that there are not more than a few individuals, and that too in the lower rungs of the company
Retail Financial Services-made some huge investments in infrastructure, but the segment is highly competitive with banks being the market leaders. It is difficult for the company to position itself unless some clear differentiation can be created by the company.

Investment Positives

Paison Ki Nilami-reverse Auction - a concept of reverse auctioning on determining interest rates.
Direct bulk purchase of equipments from companies like Tata, Ingresoll Rand and ensuring their availability to its clients at cheaper prices. This fends off competition especially from the banking sector as their cost of borrowing is significantly lower. However, they would not purchase assets for lending them as leases. This activity has to be done by these companies.
Listed on the LSE-can be more transparent in its accounts
Its presence across the finance vertical, its expertise in consultancy, its reach
Good dividend yield at current levels. At 15% dividend declared last year, the yield is about 4-4.5%. We have seen the upside on this stock a few weeks back.
The company has done well in terms of customising its receipts with the cash flows of its client and has done well on the NPA front. Its capital adequacy ratio is well above the prescribed limit of 12%.
The company uses securitisation of its assets, buys from ARC's (can get at a decent price) to ensure lower costs are maintained.
The sales growth in its key areas are well above 30% and with more infrastructure based projects in pipeline and a capital starved country, the company should be able to maintain these growth levels for a certain period of time.

Investment Negatives

Heavily dependent on the condition of the economy and the pace at which government will announce its projects
Road projects are sometimes not viable investments. Any hardening of the interest rates can affect the project
Raising money for projects- Rating of the company is not attractive. It is at AA-, which is a comfortable 200 bps from a bank. This benefit will affect the company as competition from banks is bound to get fierce.
The other segments that the company is concentrating will give poor returns
The company has a corpus of only 2200 crores
There is a constant hint in the annual report that the company is not able to deliver its equipments on time due to non-availability. It seems to have mitigated thru bulk purchases.
Interest Coverage ratio of less than 2 is a big risk in a rising interest rate scenario. The company's debt equity ratio is frightening given the fact that the company seems to borrow quite extensively (close to 6) and the borrowing mix is heavily tilted towards term loans from banks and financial institutions

Overall, the company has shown promise and the report that I spent reading for more than 3 hours was well spent. I truly believe the price of this stock to bounce back and show better appreciation in the years to come. More updates shall be posted when required.

Transfering Assets-Yet again is it fair?

2006-06-12T17:23:00.000+05:30

Company	PRITISH NANDY COMMUNICATIONS LTD.
NSE Symbol	PNC
Announcement	Pritish Nandy Communications Ltd. has informed the Exchange that the Company has received a letter from Reliance Capital Asset Management Limited, a body corporate that pursuant to an inter-scheme transfer on June 05, 2006 from Reliance Growth Fund holding 9,00,000 Shares of the Company constituting 8.5985% of the paid up capital of the Company to Reliance Media & Entertainment Fund, there has been a change in shareholder, but the percentage holding by Reliance Mutual Fund i.e. 8.5985% remains unchanged.

The above mentioned was in the communications sections today. I found this piece interesting. It is a normal practice for mutual funds to shift assets from one scheme to another, so ideally this should not have created any panic to the investor. However, some interesting facts :-

Sales of this company is extremely volatile. It was down from around 40 crores to 30 crores to back to 34-35 crores in the past three years.
The share is trading at close to a year low. Has participated in the downside quite well
Reliance Growth Fund is a flagship fund of the company and there is always pressure to perform constantly. The Media fund is less focussed than the hugely acclaimed Growth fund, creating pressure to perform.
The Growth fund is completely transferring all its assets to the media fund. Total assets of the scheme : 2800 crores. Transferred money of this company : 3 crores. Not much to show any impact.
Volumes are low in the market and this company is facing resistance at higher levels with huge 'sell' orders. Hence any share sold is further going to dampen sentiments on the stock

Yet the fund is doing it. Now what could be the reason? I just was thinking if this is the way wherein the fund is revamping its portfolio by transferring assets to other funds that are not that noticeable and can always be blaimed on markets of these companies specifically (one can say media companies, in general, have not performed) Just a wild guess.... but then I do not know. If it is so, then it is a disappointment from the fund house as the company is passing the buck of losers to these funds wherein the investors are forced to take the loss. Though the existing shareholders have not gained anything from this transaction, it gives the fund, the much needed liquidity to invest in stocks that have better potential to grow. It is similar to accepting the losses and taking fresh positions, but only this time it is at the cost of the other fund, infact their own fund.

All this could just be an imagination from my side, cynical of such a transfer. As mentioned previously, this happens most of the time in mutual funds. I just took this case to mention how this is applicable to save one's face in the worst of times.

Report on Annual Reports

2006-06-12T11:07:00.000+05:30

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.

Declare Dividends by borrowing-Unfair

2006-06-09T19:55:00.000+05:30

Something struck quite unique to me in the recent bonds raised by these oil companies. All of them cited losses if not for these bonds. They showed the receipts of bonds as normal sales. Borrowing of this money by the government as SALES. How can you do it. To top this, they have shown profits in their books and to further aggravate this they have DECLARED DIVIDENDS and the government has coolly taken this money what it gave to them in the first place. The government has borrowed money and distributed this money as dividends, when in reality they have been running losses and have asked ONGC, the scapegoat to bear the losses, as how much can the govt. bear. I have, for long, invested in ONGC as it was one decent company heading somewhere. Today, because of the government, I am forced to share my profits to not only these refining companies but to the entire nation. Just look at it this way. The government raises money from the public, thus raising its deficit. This is a long term borrowing to fund annual shortfall. First mistake funding short term losses with long term funds. Second, receiving dividends from these companies. Why are we borrowing more and receiving dividends and thus showing income in your GDP. This is wrong as you saying that raising capital is SALES. Though most of the dividends it received from this decalaratin by companies is small compared to the overall GDP, I still feel that the entry for this transaction must not be recorded in the books as dividends. There ought to be an alternative such as a book entry for the bonds received for the year and the excess or defecits charged to it rather than to the profit and loss account, where the government gets unfair benefits, (in taxation of profits and dividends received post taxation).

Well, my interest in this government seems to be falling apart for the past few months. There seems to be a lack of proper forecasting like its predecessor-the BJP. Inspite of their current shortcomings, BJP still has a few sound people which I am not seeing in this governemnt. Critical issues being held at gun point by the LEFT and failure to take the RIGHT choices, is keeping this government heading nowhere. We are lucky that this party is spending on infrastructure, else we might be in doldrums.

Vigneshwara Exports Limited - Another IPO

2006-06-06T16:29:00.000+05:30

Well it looks like the stock markets just loves to see an IPO every week. So next in line is this company. The company is based out of Mumbai and the office is in Parel, a place where I was staying for two months. However, the place has seen tremendous appreciation of land value, but as this place is only the registered address and also since I have not seen the place I shall not comment on it. Anyways, coming to the IPO, the issue has been priced between Rs.121 and Rs.140. The IPO looks to gather around 50-60 crores from the market. Compared to the previous issues from ICICI, ONGC and possibly the DLF issue, this looks like it will hardly have any impact on the market and will comfortably sale through even the company does not advertise in the market.

This issue is not fraught without risks.

First, that comes to my mind is the promoters stake. The promoters are diluting their stake in the company to below 50%. I do not understand the reason for such a drastic step for the company.

Second, the company was into diamond trading for the past five years. Post this issue the company is planning to exit from this business. Now, that is something that needs attention. The company has entered into a field where the competition is already on the higher side creating heavy pricing issues. This should have been forecasted before entering. However, the company seems to have taken the poison pill and have decided to move from it.

Third, VEL is getting regular business from existing customers. Its top 5 clients have account for more than 75% of the business. Though this has been reducing over the past few years, this is one factor that I would be keen to looking at during the coming few quarters of the company. The company is a regular in a show in Germany for the past 15 years but it has not been able to increase its customer base for these many years. One should give this some thought.

Fourth, the company's pricing policy without using LC. As far as the customer is a regular for the company, this strategy works fine, else one would consider the risk for non-payment.

Fifth, the company's capital structure-post 2003, the company has changed the capital structure 7 times by bringing in fresh capital. However, the company has always issued the capital at extremely low cost to the promoters. Till 2005, the company issued at Rs.60 to the promoters. This was increased to Rs.100 in a month. I have no reason why things changed dramatically in a span of couple of months. The promoter will actually double his returns on his investment made last year. However, if one looks at the issue, the company has issued to the promoters at about 6-8 times earnings. Sometimes, I do wonder, if it right for the promoters to have issued the shares at such low prices when he knows that he has the option to dilute his stake when he brings his company to the public. Finally, a small irrelevant issue, the company's prospectus was mostly referring to the opportunity in US when it hardly has operations in that country. The company only has plans to enter into this market after the issue.

Positives

While we have spent our time on the negatives of the company, here's the brighter side. The company has been growing aggressively. Assets have grown by more than 14%. Inventories though has been a problem with certain years of poor forecasting, but the company has increased its sales by more than 150% in the past five years. The company has a CAPEX of 200 crores in the next few years and have lined up their capital. The company is making use of the Technology Upgradation Fund provided by the government. The rest is being funded by the IPO which is expected to raised about 55-63 crores. However, the company has sales of around 1200 crores for the past couple of years. I like the industries' prospectus with immense potential to grow.

Neutral

The company's capacity utilization has been below expectation and the bottlenecks seems to have created the problem which is being addressed with the cash inflows from the IPO. The company is increasing reliant on external supplies for its raw materials. Though this will be reduced by the IPO, this still is a concern that should be addressed by the company. The company's will be investing in heavy machinery. Hence the company should see a higher tax benefit and some security to the cash flows. The company has faced problems in dispatching within deadlines. With no cover from LC, one needs to know if there could be some risk. Power will be a concern for the company but the company seems to have addressed this issue-by hoping the government will provide with the necessary fuel.

I still am not quite clear if this company will provide the necessary appreciation that one is looking at. The cash flows which still hits me constantly is the main source of concern. However, I do hope the company will be able to manage the cash flows better. Also, the company's pricing policy at Rs.121 - Rs.140 will make it expensive today when compared to its peers. But Invest thinking of the future of the industry.

Allcargo Global IPO

2006-05-30T15:59:00.000+05:30

Allcargo, a company that I spoke of in my previous blog. A prospectus that will make you sleep quite comfortably. To the point, I think this is yet another company that is promising more than average returns though it looks like the company has the prospects to do so.

The company is involved in logistics and has quite a history in this field. However, you will see that the company has used a few paragraphs repeatedly throughout the prospectus. In the first instance it was unnecessary as any person who is reading the first section will remember what he read and even if he does forget, a simple remark of the page would have done so. However the company insists on repeating forcing the reader to re-read. Anyways, writing a prospectus seems to be an art which ENAM is yet to master and I shall hopoefully not delve on this issue any longer.

What I liked of the company was the prospects of the industry. Again the company's will be extremely dependent on the infrastructure that the government needs to invest in. However, given the fact that considerable investment is being done by the government atleast in the improvement of ports, this company is promising to deliver something that is achievable.

The pricing is also comfortable. It recently had placed a part of the equity to outsiders at similar prices hence making the company slightly more reliable. However, the company's promoters loved to juggle their shareholding at extremely cheap prices. A share that the company's promoters should have sold for atleast Rs.350 was sold for Rs.10. Also the company has given stock options at Rs. 10 which can be exercised in the near future. However, this will not dilute the stake as it marginal in nature and would not affect the profitability when charged to the income statement.

The investment proceeds will be used for building infrastructure for the company in certain regions such as Chennai. Also, the money will be used to pre-pay debt. This is something I was not comfortable as the cost of the loan is only 11%. The company has strong cash flows and could have used that to re-pay the loan. However, this is the company's decision.

Anyways, the company has fairly valued its stock and do not know if it provides reasonable appreciation. However, when one compares to its peers, it looks there is some. Time would be the judge for this. Investing would be ideal for a period of 3 years, is my best estimate. Why 3 and not 5? Coz I am a long term investor, and prefer 3 over 5.

Reading a Prospectus

2006-05-30T11:44:00.000+05:30

Over the past few weeks, I have taken some fascination reading IPO prospectus'. It takes a long time as an average IPO prospectus for an equity investment has about 150-300 pages. Given the abundance free time that I seem to possess at my place, this does not seem to be a problem.

Obviously not everything is interesting and you can comfortably skip about 50-75 pages. However, the rest of the pages are interesting as they always give a wonderful picture of the company and the industry. It always tries to give you a feel that this is the company that will give you a 'ten bagger' or atleast a 'five bagger' (A 'ten bagger' is a term used for companies whose share price moves by 10 times, a term borrowed from one my gurus, Peter Lynch).

Most prospectus follow similar pattern of reading. This is extremely useful as one knows when to skip pages. I do not have any interest reading the general risk factors, endless repition of financial statements (which I shall comment upon later), statutory disclosures etc. We all understand that cigarettes are injurious to health yet it still does not prevent the smoker from enjoying his five minutes of absolute freedom.

Anyways, I enjoy reading certain specific sections of the prospectus. First, the industry - gives a wonderful picture, as always, the growth prospectus, how India is always in deficit of these basic requirements, commitments from the government (which I do not know if it will be implemented) to improve them which will be repeated from infinite number of times, outsourcing that will always happen to India and nowhere else. While it sounds pessimistic, I enjoy these statements because it tells me there is so much scope to improve in the country. Developed countries would face this biggest concern-the reason for government to spend hufe amounts of taxpayers money. India, being deficit in almost every area, has no problems. Outsourcing is a reality and cost savings are huge for companies. So, every prospectus reinforces the same issues.

The second part I enjoy reading is the company's prospects to grow in the near future. Most of them tend to be leaders in their category and almost all of them are planning to grow more than industry average. I do not know how everyone is growing at above industry average. However, this statement is something that one sees and cant help laugh at it.

The final part is the capital structure and what it intends to do with the money. This part is significant and it helps me to understand if the company is interested in building wealth to the shareholders. I like companies that repay its debt, however as far as it is above the cost of equity. As interest rates are low and most companies are 'leaders' in their industry this can't possibly happen. However, most companies seem to be expanding their capacities. Scalability will be important as companies can play with their cost structures effectively and hence gain advantage on pricing. What is most concerning is the kind of allotments the company has made in the past to its shareholders. Focus IPO for instance alloted at a steep discount to its preferential holders a year back but where charging the new investors thrice the comaparable cost. A comfortable exit option to the existing shareholders. I like reading the section that deals on civil and criminal suits against the company. Deccan Aviation tops this list. The suits against the company ran to three - four pages and it was fun reading the reports. This section is important as it shows light on the quality of management. However, the number of complaints is related to the industry, as a company that is in the end of the value chain is bound to face more. Directors of the company and their profiles is another good area of reading. Again Deccan Aviation tops in this. One of their directors is a director of 52 other companies too. If every company keeps atleast 5 board meetings a year, he will spend most of his official days just from one board room to the other. Something has to be done on this issue. You can't have directors, who are meant to safeguard shareholders interest being a director in so many companies. However this is India and as I said earlier, huge scope for improvement exists.

Finally and most importantly the current balance sheet, profit and loss and cash flow statements. This is something you will see frequently in the prospectus. Comany's projection seems to be there on every page of the prospectus, ( exaggerated but cant help myself). Yet reading this gives me an idea on whether to invest or not. Well, what I do like about these IPOs are that they do meet their projections in the near future once they are listed. As I do not track most of these companies post their issue, I do not know what has happened to their projections. My guess is that they should have met them as the stock markets seems to be quite embarrassed to list IPOs at par and most of them have done well even past a few quarters after their listing.

Currently I am reading a prospectus on Allcargo. Lemme see what fun this prospectus beholds to the reader.

2006-05-29T16:55:00.000+05:30

Prime Focus an IPO - Focus on IPO

Prime Focus has come out with an IPO from May 25th -May 31, 2006. An interesting IPO coming from a sector that seems to be doing well-the entertainment sector. The company's performance has been stunning. The sales has grown by 60%-80% CAGR across three years. The PAT has shown even better performance. The company decided to price the issue at trailing PE of close to 50 on the lower side and updwards 70 on the higher side. Considering the performance and the future plans of the compny, it looks like the share price is fairly or slightly over-valued. My problem is not on the price of the issue but on this table that was in the offer document.

I do not know if the above image is clear or not. It shows three transactions, preferential in nature, made by the company to Rakesh and Rekha Jhunjunwala, and one company Sonata Investments. Rakesh and Rekha got the shares of the company at close to Rs.66 in June, 2004 and Sonata got the same shares at Rs.166. I have no problems on the pricing of these issues, though I am disappointed that the former two got the company at really attractive prices - a P/E of less than 17. Sonata Investments got the same shares at slightly above 17. While these two investments is reaping them enormous returns, the poor shareholder of the current issue, will be forced to wait for a long time to get the returns that these three investors are enjoying. If this is what one calls "Angel Investing" or Venture Capital Investments, then it surely looks like they robbed the company blind.

The fresh investors do not have to worry too much either. The company has a wonderful option for them. The IPO has the stablisation scheme for a period exceeding not more than 30 days. A simple scheme wherein the director has 'loaned', if I could use that word, to the book runners. They shall 'ensure' that the price does not fall below the issue for this period. So, the investor is atleast 'reasonably' assured of downside protection.

Yet, for a company that seems to have done well, atleast on paper, with strong cashflows, it seems to be a letdown on pricing. However, we are on a bull market and we have funds that invests in IPOs. Hopefully, they shall bring some upside to the stock.

2006-05-24T15:55:00.000+05:30

And the crash....

I have always enjoyed crashes in the past. I enjoyed the stock markets around 2000 when everyone was excited seing sensex touching 6000. Balloons were flying around BSE to mark the fresh high. I loved seeing this crazy act by brokers, who are otherwise meant to be silent and unknown to the rest of the world. And then it happened, the inevitable or the truth prevailed as the Sensex crashed and it was the start of a long period of consolidation. I started investing at 3800 levels. What more exciting would it be to see the Sensex fall further to 2900 before the reversal actually start. Each time it fell, each time I would 'buy'. As a small investor, I feared that the stock markets would actually reach an all time high before I could invest my surplus money completely. This was my learning during the times it fell.

Things took a totally different turn this time around. Today I do not have surplus money to invest, I took money out of my treasure chest, close to 10% of my portfolio, which I always keep it liquid money, waiting for an excellent occasion to invest. I thought that day was last week and so I started investing in a stock that fell by 10%. It fell the next day by another 10%, I thought this was an amazing bargain and I invested further. Atleast, one thing I learnt was to always build a portfolio of stocks slowly. There is always time in this market to make money. But to my utter dismay, the crash occured on monday, and god it was one hell of a crash. I saw this stock fall by an amazing 20% in about two hours. Well, to compound this, the stock fell again the next day when most stocks were moving up. One of the "Blue-chip" ones that is beating me black and blue. But then that is life.

I tried to analyse if I made a mistake in my buying process. Not too many mistakes, but yes there were a few. The stock was pretty expensive but comparitavely cheaper than its peers. A leader in its field with business in India and outside. Well lets see what the future holds for this stock.

2006-03-07T22:50:00.000+05:30

Credit Ratings : Impact on Equity Markets

Crisil, ICRA, CARE etc all perform some activities that I never knew could help in understanding equity markets. Infact little is known of the help that they do to understand the pricing model for any company. So what is it that these credit agencies do that I found out recently :). While I do not know if this idea makes sense, but yet I shall publish what I think should be right.

Credit Rating Agency - A brief understanding

Assume an unknown company wants to expand its operations but it does not have the funds to do so. The company has a few options. Raise funds in the form of equity or debt. Equity is expensive but debt can help in saving taxes and can ensure that the company performs well as it is forced to service the interest and principal. Further assume that the company decides to raise debt. It faces a new problem. How can the company attract the investor who can be sitting anywhere in the country. Here is where the credit rating agency comes to rescue the company and the investor. A credit agency is a registered entity from SEBI and they help in rating companies to help investors compare companies before investing in their debt securities. Ratings are assigned on different parameters, such as type of industry, growth prospects for the industry, level of competition and most importantly the strength of the balance sheet, profit and loss and cash flow statements. Credit rating agencies assign a Sovereign rating for Government securities as there is no risk of default. The only risk will be on liquidity and this is also on the lower side. However, companies are given different ratings and they range from AAA, AA, A, BBB, BB, B, C and D. There are further + and - ratings within each category. The main aim is to clearly identify the type of risk involved with respect to each security. The investment grade restricts to a B. Anything further is purely risky for the investor. Now all of these are for debt securities, how is it going to impact the equity pricing for the company.

Little more history...

One of the popular methods used for identifying the share prices is by DCF method. A simple method of discounting future cash flows by an appropriate rate, which is normally the WACC, Weighted Average Cost of Capital. Now from where do we get the WACC. Cost of equity can be found using the CAPM.

Eq= Risk free Rate + Beta of the security * Risk Premium

All are freely interpretable and the individual who is optimistic will use lower values for most of the variables and the pessimist will tend to use higher values. The optimist wins when it is a bull market and the pessimist wins in a bear market. Anyways, this handles the equity portion.

Debt is a little easier. You just go to a credit rating agency and he can rate it for you. Normally the objective of a company is to achieve higher ratings as the cost of debt reduces. Each company strives to attain a AAA as it is the cheapest. Rating for a ten year paper can be benchmarked similar to equity.

Debt = Risk free Rate + Risk Premium (Increases for each lower grade)

Voila! you have got the company's WACC. Now we need to identify the cash flows. Again a little searching of the companies record and you will get to know the cash flows for the company. So now we have the cash flows and WACC. Divide the annual cash flows with the WACC and you have the company's price. So, how has the company pricing increase by a credit agency?

Lets take company Z. It is currently trading at Rs. 100 and there are 100 shares outstanding, market capitalisation of Rs. 10,000. Assume that the company has a debt of Rs.3000 and is in 'AA' rating paying 7% risk free rate and a risk premium of 3%. It pays an annual interest payment of Rs. 300 and gets a tax shield of 35%, Rs. 105. If there is a change of rating from AA to AAA, and the rating changes to 7% + 2% risk premium, the company will now pay Rs 270 and gets a tax shield of 94.5. The net savings is Rs. 19.5. Now our assumption is that the company shall maintain the same debt equity ratio. Assuming that it does, and you discount this 19.5/.09 we get a net savings of Rs. 216. This net savings is for the equity investor. Hence the share should appreciate by Rs.2.16 to 102.16. Ah! isn't this simple. How a credit agency can affect the price of the stock.

2006-01-26T10:32:00.000+05:30

Recommendations...We always want quick money

A small, secret tip from the broker who has just found a gem and he wants you to invest today and that too immediately. This is as if the secret is being let out in the market and he wants you to capture the opprtunity now. We are always in a rush when it comes to investing in stock market. This is something which Warren Buffet too mentions time and again whenever he is asked for the reason behind his success. When I look at my mother when she goes and buys groceries in the market, I am surprised by her bargaining power. She fights tooth and nail to get the best price and not get cheated. What more, the shop-keeper knows that my mother keeps a close track on the price movements of her products. Only thing is that she does not stock too much to taken advantage of price movements:)

When it comes to decision making in the stock market, this talent is missing. She totally depends on the broker/father. She does not even bother to see if the company exists or not. It puzzles me too. I am no different, but probably I fare slightly better than my mother. It is nice to see her decision making process. In the first stage, she is not interested in investing in the stock market as she has no knowledge in it. A wonderful stage, where we see most of the housewives. It is better being this way than investing blindly. It takes a lot of convincing to make her first investment. A little bit of opportunity(or greed, depends on the timing), and some confidence showing the limited downside can lead to the next stage of her first investment. In this stage, she makes the investment after consulting a lot of people. You will have to give a lot of reasons, some she may understand and some she may not. She likes to hear the good things, and when the person who is advicing throws a lot of jargons, economic fundamentals (and most importantly uses words like "look at people spending money, your recent purchases etc) she becomes confident to make the investment. In this stage, she is extremely active and looks at her decision making very closely and will keep calling the broker to get the comfort of her investment. The broker is not that concerned as his work is completed.

The next stage is where we all make the mistake. If the first investment was a successful one, which the broker is ready to point out, we start thinking of the next move. We are ready to make the next investment, which the broker has been secretly telling you. This time the stake gets bigger as you have the profits of the previous investment to fall back on. It is interesting to note that, most 'un-educated investors' assume that they can beat the market, by just getting out of the market before the others do. Rarely has one seen this happen. If this investment and few subsequent ones turns out to be good, one sees the control shifted from my mother to the broker completely and this is where the RECOMMENDATIONS starts kicking in. The recommendations which was just a guiding tool, becomes the most important decision making criteria to buy or sell and the broker, the WARREN BUFFET. The biggest feature of this recommendation is that it highlights the BUY more than the SELL. This again can be attributed to our decision making process. Once a decision is done, we do not want to be proved wrong or we believe there is unlimited growth to that stock. We just want to look at newer opportunuties to capture before anyone can. It suddenly becomes a RAT RACE. We are so involved that the previous macro economic factors of the country and the industry, profitablity, ROI, ROE, P/E's, promoter holding all is thrown out of the window. All that is important now is that call from the broker and hopefully CNBC, NDTV Profit, Dalal Street covering an attractive article of your stock. The funny aspect of this is the emotional aspect. Every new high of your investment makes us even greedier and every fall is just an abberation as the lesser mortals have yet to understand your reasoning. Your broker's reassurances will make things comfortable. How helpless we all become...

My mother who was leading a simple life suddenly is in the midst of a big confusion. Having invested her savings, she sees a life with too much activity, which she never wanted in the first place and that frequent recommendations made her life so miserable that she will never lead the life she always wanted. She probably will only know when the market starts to fall....

Note: I used my mother only to make things simpler. My mother has never invested in the market and she leads a simple life that I sometimes desire. She is totally against this market, as she believes it is speculative. She is right at times....

2006-01-04T05:38:00.000+05:30

Expense Ratio... Who is looking when investing

When advising people on Mutual Funds, I always saw people looking at few parameters for investing. The first was always 'Returns'. To me this is extremely important, however I found this an extremely narrow minded approach to investing. When advicing we had to specify reason for investing in a scheme. So, in my first few months, one parameter I explained was the 'Expense Ratio'. This is the ratio a fund is being charged for the services offered by the fund house to manage the fund and this does not refer to the normal 'entry or exit load' which most investors are aware of. My customers were quick to shoot this down and look at the return and which area was it investing. If they were comfortable with the idea, the investment was completed and I return happy. Over a period, I too stopped explaining and preferred to explain only if the demand needed. The sad part was after a two years, I stopped looking at it. Only after I shifted my jobs, did I start looking at it closely and I was surprised to see what was happening.

To understand this ratio you need to understand where is the money being made by a fund house. Though mutual fund is formed as a trust, the underlying objective for any mutual fund company is 'Profit'. Fund houses make money on the expense that is charged to their schemes. So, in effect the more the company has assets, the more it makes money. In India, fund houses are regulated with the amount of expenses that it can charge. It differs based on two factors:

Type of Product being offered
Size of the Scheme

Deploying money is more time consuming in equity schemes than in debt schemes, considering the risks associated with the market. Infact, for debt schemes, there is hardly any incremental cost in deploying higher amounts of money. Hence the equity schemes are allowed to charge 0.25% higher than a debt based scheme.

As it is easier for higher amounts of money to be deployed with no huge additioanl costs, fund houses are given ceilings for the expense that it can charge based on the assets that it has in the scheme. The charges are

first 100 crores-2.5%
the next 300 crores - 2.25%
the next 300 crores - 2%
the rest - 1.75%

Now that you know the charge, lets see the current practise. It ranges from 0.75% for a liquid scheme to 2% for long term products. Unlike banks, mutual funds are forced to match the duration of its investments with its clients investment horizon. That is investors with a shorter time frame invest in cash schemes that has very short maturity periods. Since investors, mostly institutional investors, invest for less than a month, they do not want to see any negative returns on investment. So, investments are made in products with a similar time-scale and these products normally give lesser returns. As the investor, has the option to invest the same in a bank fixed deposit, the only way to provide similar returns is by reducing expense. The second reason for charging this low fees fund houses have similar bond portfolios. As this will only generate similar returns, they differentiate with expense ratio, as this will directly boost the returns. The underlying assumption is that charging a slightly lower expense ratio will generate more assets to manage.

However, this situation is completely reversed in equity schemes. Fund houses can differentiate themselves with better stock picks. So here we see most fund houses charging the maximum possible expense on the fund. This is where I find it unfair to the investor. The investor pays a load for entering the fund. Over this amount, he is charged with another 2.5% charge. This makes the investor to lose 4.75% on every investment that he makes. Also, this is under the assumption that the investor is for a year. Also, the current practise to churn the portfolio for better returns by moving to different schemes further worsens the matter. Though the expense is not a one time charge, a customer who shifts his portfolio twice a year ends up losing 6.5% p.a. This is a phenomenal charge, considering the returns that he makes.

The investor is least bothered of this issue today. With equity markets flaring, he is making a lot of money. Agreed that this returns is better than most asset classes but is the customer making the most of his investment. The investor has taken a risk by entering this product and the fund houses charge a load as 'fees' to give to the broker who brokered this transaction. The broker ensures that the fund being sold is always a load fund. Sometimes, fund houses remove this load for higher amounts. On most occasions, this would never be revealed to the customer. After this the customer is not aware of the expense charged on the fund. He assumes that the poor returns is always because of the poor stock picks. For this, I shall not blame the broker. I have tried to teach this to my customers and they are rarely interested in it. Hence, we see this practise by fund houses to charge as much as possible.

In the U.S. fund houses such as Vanguard, thrive on reducing the costs for a product and pass the benefits to the customers. The bonus for the employees are based on the costs that it has saved. We hardly find such a practise in India. Even if it followed like in cash funds, it is more with a reason to accumualate more assets than anything else.

I believe that this situation can be changed. Though it would take a long time. Firstly, fund houses have to change their way of operations. Mutual funds have gathered a good momentum this time in gathering assets in the current market. However, this is comparitively low when we look at its participation in the equity market. To improve this funds have to make the fund attractive, a reduction of expense is necessary as this automatically improves the customers returns. Also, the load factor. The fund have to start lowering their load as this prevents most customers to enter a fund. NFOs with 'no load' have been successful in the past. Though the fund houses had to burn their money to pay the broker, it showed the success of such ventures.
It is difficult to implement considering the nature of the distribution. If one was to look at the long term prospects of this industry, I believe this practise has to be established.

Secondly, Fund houses regularly interacts with its customers. The mailers it sends on its products can show the expense it charges. Sadly, today except Franklin Templeton, I do not see this practise elsewhere. Repititive information on expense is bound to create some interest. Agents may not like the direction this might lead, however I believe this will be good for the industry in the long run.

However small this issue maybe for the industry, I am concerned. As an optimist, I strongly believe this product to have the potential of being the most important channel for investing our savings and I do not want to see a bad landing as it has happened a few year back.

2005-12-31T17:32:00.000+05:30

Equity or Debt Instruments

Before we decide which instrument to invest in, lets understand the various instruments on hand. The well known Fixed Deposit is what comes to all our minds. So, is 'the product' to invest in. Sadly, if one were to ask me, I would rate this to be the worst product. Before I explain, lets see the other products.

What is it that I look at when choosing a product.

Safety: This is something that comes to my mind instantly when I invest. While safety can be interpreted differently, to me it refers to the cushion the product gives for the risk that I am willing to take.
Risk: This is probably the worst word to define. Risk is interpreted differently by everyone and everyone. To me it means that there is a probability of loss and I expect a compensation for it. Now different product come with different levels of risk. There are different types of risk. One when the product has a risk and one when external factors act on it to change the price of the product. For example, when BJP lost the election, the stock prices crashed across the board. This is an external risk. When prices of Infosys crashed when it came out with a disappointing earnings guidlines in 2003, it was an internal factor. Apart from this you have other types of risk like liquidity risk, default risk, credit risk etc. The point here is that there needs to be a clear quantitative value attached to these types of risk. I shall write something more on risk a little later....
Returns: This is the residual that you get when you have clearly defined the above mentioned factors. If you are a person who looks at investment conservatively, then the risks that you take are on the lower side, hence the degree of safety is higher making expected returns to appreciate to be smaller.

Now lets look at the products that I fancy...

There are tax savers such as PPF, an excellent product considering that the interest rate is guarenteed by the government and the government is always pro-citizen. But then this product is least liquid. I will always invest in this product apart from my employers contribution in this fund. This will be a long term investment for me and it shall be a small part of my portfolio.

Post Office Savings Scheme is another product that one could invest. Though it is not guarenteed, the government would force the post office to provide higher rates of interest to promote savings. Again, there are problems with liquidity.

Reserve Bank of India Bonds: This is my another favorite instrument incase I do not want to have any risk and I want something better than Fixed Deposits. Though this investment is taxable, it still gives something better than FD's. This is a completely risk free product as it is backed by RBI and the possibility of it defaulting either interest or principal is infinitesimally small. An investment which is completely illiquid and you can not pledge this instrument. Extremely useful incase you are on higher income bracket and have completed all other safe products like house(s), precious jewellerly.

Money Market/Debt Mutual Funds: The final product and I do not prefer investing in anyother form of safe instrument for short periods of time. Here, time period is anywhere from one day to probably three years. The broad ranges of products that you get in this is simply amazing and this is probably the least understood of all products. Money can be invested in a liquid fund, incase your time horizon is less than a month and short term debt funds for less than a year and long term instruments for more than a year. It works the same way of a Fixed Deposit, except that this is not guarenteed. There is however a catch in this product and that is only for the long term debt products. As investments is made in securities the ideal time to invest in this is when economy is in recession and when it is just coming out of it. A poor product to invest when economy is in full swing.

Equity: The safe haven for investing when your time horizon is less than five years. A wonderful place and a little active participation has made me understand that this product can be invested for years and the longer that I stay the better returns that I make. To me, it is a nice feeling of owning a company and even better if I can see my wealth accumulate better than other debt products. I prefer taking risks that I can bear with and though I do not set goals when I invest in equity, I like to follow a Warren Buffet style of investing. To invest in a stock like owning and working for the company.

Equity Mutual Funds: This is another place where most of my investments will be if I am not in a position to devote a lot of my time on stocks. Also, this product is useful as the fund managers' access to information is better than as an individual. There is a problem with this though. Fund managers are tracked very closely and they tend to take calls on companies that are safer. However, I believe that this will be better than not investing in equities at all.

I shall explain my investment philosophy with every product in more detail later....

2005-11-26T01:30:00.000+05:30

For the Illilterates...

There is a problem of blogging for the illiterates. A prime example would be me. After having taken pains on thinking of three articles, I see my 'edit posts' and see all my previous articles written. So, I thought this should be a waste of resources having copies in multiple places and do the wonderful thing of deleting it. Only when I come back later that I see that I have deleted all my articles. There comes the small but a useful and painful learning that 'never delete your posts that are still in comments'

I shall re-write the articles in the near future hopefully if I have the inspiration. In the meantime there is a lot more to discuss :)