The predator disappointment

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

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

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

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.

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?

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

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

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

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

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

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

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?

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

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

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

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?

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

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

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

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.