Sunday, June 19, 2016

DON'T FRET OVER REXIT OR EVEN BREXIT, MARKETS ARE FINE!!



WHY STOCK MARKETS WILL MOVE ON

I was in 2 minds about the conclusion of my thoughts on markets post Rajan till 30 minutes back. That is when I decided to go for a walk and by the time I was back, I was fairly certain about what I was going to write. It rained cats and dogs and it still is while I write this. So makes my job easier.

First things first – The only reason anyone should even fret about Rajan exit was because of its timing. It couldn’t have come at more uncertain time with market already bracing itself for the Brexit vote and some renewed uncertainty over the progress of monsoon.

If this was 2015 second half or first 2 months of 2016 when the stock market went through a cyclical bear phase, I wouldn’t have ben surprised by a 300 point Nifty fall. However, things are different now. This is a market in which smart money is so hungry for bad news (so that it gets an opportunity to buy cheap) that the first major correction (if any) will be lapped up by both hands.

The best example of what I am saying was the market’s reaction to the changes in P notes regulations, which the market forgot in a matter of 45 minutes. Last year, the market was making lower highs and lows on the day of good news. This year, the market is making higher highs and lows on the day bad news hits it. In stock markets, you don’t argue with the tape. It’s telling you something

So what makes me so bullish and comfortable on the state of markets? Let me go back to the opening para – the rains. The monsoon is THE MOST IMPORTANT trigger this year for us and if we get a normal monsoon, then you will find (with benefit of hindsight) that REXIT was a great buying opportunity.

After-all, RBI as an institution is way bigger than any individual. Yes, Rajan has done a good job in RBI's war on bad assets and crony capitalism but there is no reason to believe that his replacement will do any different. On the other hands, if the new governor leads to even slightly easier monetary policy, the market will get one more catalyst for a rally. 

Now, the next important trigger this week would be BREXIT. If Britain decided to stay within Euro zone, all markets are poised for a big rally and India would be part of that. If however, the dreaded BREXIT does take place, then again I will repeat the same point. If the monsoon is good, you will find that BREXIT was once in a lifetime opportunity to accumulate stocks.

For tomorrow, trade with caution – Buy any significantly big dips in good stocks and be prepared for a mark to market of 10-15% and don’t be afraid to buy more if that happens. I don't see this market moving anywhere lower than 7800 in a worst case scenario. The way I see it, if we have a good monsoon, this market is on course to hit a new all-time high at some point in Oct-Dec quarter.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his employers as part of his compensation



Friday, June 3, 2016

SOME LESSONS IN LIFE FROM RAAMDEO AGRAWAL


SOME LESSONS IN LIFE FROM RAAMDEO AGRAWAL

I have started doing a new series – I go out and talk to some of the most successful investors but not necessarily about stocks and markets. I try to present the man (or woman) behind the face you see on CNBC-TV18. The personal traits, the lessons of life, the likes, the dislikes, the achievements, the regrets and everything else and then what lessons

So yesterday I went out and shot at the swanky and large office of Motilal Oswal financial services and spoke to the face of the company – Raamdeo Agrawal, someone who is one of the proponents of value and growth investing. These are some interesting takeaways that came out from this interview

1)      Work on a solid foundation, rewards will come later: When asked what has been his biggest achievement, Raamdeo says completing his CA, even though it took time. He still rates the basic education as the most important stepping stone for his huge success

2)      No excuses: Raamdeo grew up in a village with no electricity and a very humble background. But that didn’t stop him from dreaming big and constantly working towards achieving that dream

3)      Enjoy your riches too and believe in giving: Raamdeo enjoys his life. He is an avid traveler. There are only 28 countries left in his bucket list and he will visit them over the next 5-10 years. He also believes in sharing wealth and does a lot of charity work which satisfies him a lot

4)      Take care of your employees: The facilities for employees at Motilal Oswal rival that of some of the biggest MNCs. And they keep working on improving that. According to Raamdeo, it’s more important to retain talent than finding good talent and they go all out to make sure their employees are happy

5)      Read, read and read: To be a successful investor or to be successful in general, Raamdeo believes it’s very important to read good books and treasure your collection of good books. Till this date, he has all the newsletters of Warren Buffet printed and hard bound and he keeps referring to them

6)      No regrets: If you take a calculated decision and it goes wrong – so be it. There have been instances where he has sold stocks right at the point of a start of multi bagger cycle. But then, if he had taken an educated call to sell the stock, he won’t regret it but won’t mind buying it higher again if his conviction tells him so.

7)      Price is last: For Raamdeo, price comes last. Most important is quality, then growth and finally price. His belief is that if quality and growth is sustained, price will have no option but to keep going up. The best example of this is Eicher Motors per Raamdeo.

You can catch the show all through weekend and once the Youtube edition is available, I will embed it on the blog. It was great learning and fun



Saturday, November 22, 2014

KOTAK-ING DEAL: HINT OF UNPLEASANTNESS



It’s no secret that Kotak Mahindra Bank has walked away with a steal with ING Vysya Bank. The stock behaviour on Thursday and Friday was clearly telling us that the market liked the price at which it managed to get this really great asset. But the deal has left some unanswered questions and I dare say if I am an ING Vysya shareholder, I won’t hesitate to say, this even leaves some stench of not following best corporate governance standards either. I will explain why

First and foremost, it’s well known that ING desperately wanted to cash out of ING Vysya Bank – the parent company’s troubles are well known. So obviously, there is a hint of duress in this sale. But should that matter if the owner wants to sell it? – yes it does and here is the primary reason.

Take a look at the shareholding pattern of ING Vysya Bank: First of all, the promoters hold only 42.73% stake, not even 50%. Secondly, the total promoter shareholding of 42.73% is further subdivided into two entities: ING Mauritius Holdings which holds 33.22% and ING Mauritius Investments which holds 9.51%. Now take a look at what the regulations say regarding the shareholding and voting cap for private banks.

“Bodies Corporate under Category A (2) Foreign consists of two wholly owned subsidiaries of ING Bank N V namely (i) ING Mauritius Investments I (9.51%) and ING Mauritius Holdings (33.22%). The First body Corporate enjoys full voting rights of 9.51% . The voting of second body corporate is governed by section 12(2) of the Banking Regulation Act, 1949 which says that no shareholder holding shares in a banking company shall, in respect of any shares held by him, exercise voting rights (on poll) in excess of ten per cent or such percentage as my be permitted under the prevailing laws as may be amended from time to time of the total voting rights of all the shareholders of the banking company. At present the voting rights of any shareholder of the Bank, irrespective of the number of shares held by him is restricted to 10% . As such voting rights of the second body corporate is restricted to 10% and thus the aggregate voting rights of Foreign bodies corporate stand at 19.51%”

So, there you go - ING may have 42%stake but it has less than 20% voting right. How can it make a decision on it's own?

The second reason is up for debate – normally in bank acquisitions, for a healthy bank – the acquirer values the target at same valuations as itself – case in point being HDFC Bank’s acquisition of Centurion Bank of Punjab at almost 5 times Book Value whereas Kotak is paying only 2 times the trailing book value. In this case, there is a big discount of nearly 30-40% for an asset which is far more complimentary that Centurion was for HDFC Bank. ING Vysya has 553 branches to Kotak’s 661 and has 638 ATMs vs 1156 for Kotak. Even in terms of income and profit parameters, Kotak is no more than 3x ING Vysya Bank.  But the deal has valued Kotak almost 6 times of ING Vysya Bank. But as I said, this is an issue open for debate.

The bottom line – ING has a voting right of 19.51% in ING Vysya Bank. It cannot make a decision for 100% shareholders. This deal should have been put to vote first and I can guarantee you, this deal would have been struck down by shareholders. In fact, I have spoken off the record to some institutions and they are already planning to write to the RBI. The 57.37% shareholders classified as minority shareholders actually control the voting rights and they have every reason to ask for a better deal. This deal will face major hurdles from minority shareholders and for good reasons.

Disclaimer: These are my personal views.



Friday, November 21, 2014

MARKET LOVES KOTAK AND IT SHOWS IN STATS

Quick comment: The merger of Kotak and ING would create the fourth largest private bank behind ICICI Bank, HDFC Bank and Axis Bank. However, the combined market cap of Kotak and ING Vysya Bank now already equates the third largest bank Axis Bank – But on all parameters, Axis Bank is nearly double of the combined entity of Kotak + ING. Is the market justified in this? Well that’s stock market for you…

PARAMETER                KOTAK + ING               AXIS BANK
Market Cap                   Rs 1.11 lakh cr              Rs 1.1 lakh cr
Branches                      1214                             2402
ATMs                            1794                             12,922
Income                          Rs 13,576 cr                  Rs 19,356 cr
PAT                              Rs 3,123 cr                   Rs 6,218 cr
Assets                          2 lakh cr                        3.8 lakh cr        
Advances                      1.2 lakh cr                     2.3 lakh cr
Deposits                       1.1 lakh cr                     2.8 lakh cr
ROE                             12.8%                           18.2%

Profit per employee        Rs 7.8 lakh                    Rs 15.4 lakh

Thursday, November 20, 2014

ADANI LOAN: WHY THE FUSS?


There is a group of people on twitter including some journalists and editors trying to suggest that Adani managed a loan from SBI because of his "alleged" proximity to prime minister Modi. One such editor, recently tweeted an article saying “Adani group, already $10 bn in debt, gets $1 bn loan”…Now, one can only laugh at this kind of statement.

First of all, as clarified to the Bombay Stock Exchange by the Adani group – the loan is not final yet. There is a difference between MOU and final agreement. Here is what Adani has told exchanges.

Adani Enterprises Ltd replied stating "The Company has signed Memorandum of Understanding (''MOU") with State Bank of India ("SBI") wherein SBI has agreed in principle to consider extending financial assistance of an amount upto USD 1 bn for development of Carmichael coal mine. This is, however, subject to SBI's due diligence and internal credit approval and also pursuant to the definitive understanding/agreement to be executed between the parties."

Note the phrase in bold– there will be due diligence by SBI. Raise this issue if they approve the loan without appropriate collateral in place or without being satisfied by the viability of the project. Anyway that’s a technical issue, so we move on.What exactly is this project and how did Adani manage to get this? Let’s take a look at a Reuters story just to put things in perspective

"This project has the potential to be the largest coal mine in Australia and one of the largest in the world," Queensland deputy premier Jeff Seeny said in a statement.
The state's report, which set 190 conditions for Adani to meet, including compensating landholders affected by any harm to water supplies, now goes to Australia's environment minister for a final decision.

Now this is a $15 bn project, won by Adani fair and square after meeting 190 conditions set by Australian government and more importantly, this is not in India. Unless you want to brand the entire Australian decision making body also a Modi agent, you would want to believe that there is nothing wrong in winning a contract in Australia

Now coming back to the loan for a group which has a long-term debt of $10 bn – yes, it has – but the group also has a market capitalization of $20 bn!! Ever heard of a concept called the debt/equity ratio? It has a networth of nearly $5 bn. For a power, infra, port conglomerate – this is a reasonably healthy ratio.

For me, the biggest question is “Has Adani ever defaulted on any loan”? – The answer is no.
This is an absolute non issue. If you want to raise bad loan issues, go chase Mr Vijay Mallya –whose Kingfisher Airlines kept getting loans from PSU banks under the tenure of previous governments.

Oh and one more thing, yes Adani group has debt of $10 bn – but 60% of that, or nearly $6 bn is not even raised in India – it’s overseas debt. Go find out all those Adani agents in these countries.

Disclaimer – These are my personal views.




Tuesday, August 12, 2014

TRADE SETUP - Aug 12,

Aug 12, 2014
Monday was quite a good day for bulls – just for one reason. The market opened with a gap, no that was not the reason I referred to. The fact that the market closed at day’s high was actually the best part about the market. It belied the “Sell on every rally” concern that had arisen after the last 3 days. But frankly, there were some warnings signs as well

For starters, FIIs net sold Rs 163 cr in cash markets albeit on low volumes. The fact that there is reluctance to buy on way down but propensity to sell at highs should be worrying. The other aspect was the nature of rally which looked like complete short covering which can only take market this far. After this, you need strong cash market buying to take markets higher.

This morning, global cues look strictly OK. Yes, the wall street rallied and Europe gained but our markets saw that coming. Asia is relatively muted and that’s the area of concern as is the rally in Dollar index.

So what next for the markets? Well looks like Nifty is still in a broad 7450-7850 range and I would be keenly watching out for which way does the range break. Also, the leadership of the market may have changed from banking and L&T to individual names like Infosys, Tata Motors, HDFC which actually may not be bad news if these stocks can keep the bears at bay.

But, let me reiterate the point I have been making for some time now. Nifty is fine even if it corrects to 7300 or 7000. It’s the high beta space that warrants caution currently.

Stocks to watch:

Tata Motors should rally 7-10% after blockbuster numbers.

IRB Infra: Might see big relief rally on clean chit from CBI on RTI activist murder case

BPCL: Crude has been soft and if currency stabilises this may rally

Ashok Leyland: Any rub off impact due to strong domestic numbers from Tamo as well

GAIL: Possible short covering after yesterday's slam dunk.


Thursday, June 12, 2014

WHAT’S DRIVING TATA MOTORS DVR?

I have been pointing out for last one month about Tata Motors DVR. It’s been outperforming almost on a daily basis. In fact, just take a look at these stunning numbers

This year, the Tata Motors DVR is up 55% while the stock is up a relatively sedate 20%. Even this month, the DVR has rallied nearly 18% vs 8% for the normal stock. Now keep in mind, both these stocks are available in derivatives and hence any pair trade would give you much more outperformance than this 55%:20% due to the leverage factor.

And what’s the result of this outperformance? Well, when the DVR was launched, it had a discount of 10%. Over the period, the discount kept widening and in fact reached 55-60%. Now with this outperformance of DVR, the discount is down to 32%. Can this trim further and what is the reason that DVR has caught market’s fancy?

The trigger perhaps was a bit global in nature. Google’s DVR trades at par with the stock and others like Viacom trade at maximum 5-10% discount. But more importantly, when Google announced a share split and that resulted in Google DVR, the S&P had to do something unprecedented. It had to include both Google (GOOG) and Google DVR (GOOGL) on the benchmark index to fully capture Google’s market cap. So S&P 500 now has 501 stocks but is still called S&P 500.

Now can the same logic be applied in India? Picture this – Tata Motors has free float market cap of Rs 85,000 cr and the DVR has free float market cap of Rs 15,000 cr. Now Rs 15,000 cr is not big enough to make it to the index but what if it reaches over Rs 20,000 cr? That’s a question worth asking. I would still say the chances of Tata Motors DVR being part of index is very low but then you never know in this market.

But let me add a word of caution here: While logic says the discount should narrow further, you must not lose sight of the fact that its vulnerable to any market correction because of its outperformance. But all things being equal, it won’t surprise me if the discount trims further to around 15-20%