Tuesday, February 22, 2011

Has RIL lost its mojo?

Reliance has announced what is being described as a game changing deal with BP worth billions of dollars and possibly India’s biggest FDI deal. But is it game changing for the stock market? Is Reliance still the axis around which the market revolves? My research throws up an unequivocal no as the answer.

Let’s turn the clock back to June 2009. That was the time RIL used to contribute a massive 16.3% to the Sensex. Since then the weight has gradually come down quarter after quarter and it has now fallen to 11.9%. Still largest, but clearly quite a dilution from almost 2 years back. Here is the data

RIL weight in SensexWeight (%)
June 200916.3
Dec 200914.8
March 201014.5
June 201014.3
Sep 201011.5
Dec 201012.1

The contenders on the other hand have been fast in climbing up the ladder. While HUL has fallen by the wayside, ITC and Infosys are giving RIL a strong run for its money. Here is the data

RIL, ITC differenceDifference(%)
June 20099.2
Dec 20097.1
March 20106.5
June 20105.2
Sep 20102.1
Dec 20103.0

Not just that, the combined weight of ITC and Infosys now is much higher than RIL. Not long back, RIL used to have higher weight than the other 2 combined. Here is the data

RIL Vs ITC+InfosysRIL WeightWeight of ITC+Infosys
June 200916.313.8
Dec 200914.815.6
March 201014.516
June 201014.317.3
Sep 201011.517.4
Dec 201012.117.9

And now, lets talk about the single most important factor for that change, the stock price performance. And just look at the following data, its startling. RIL has been a massive underperformer.

Stock returnRIL StockITC StockInfosys Stock
Since June 2009-5%+66%+78%
Since Dec 2009-12%+26%+21%
Since Mar 2010-11%+20%+21%
Since June 2010-12%+4%+13%
Since Sep 2010-3%-11%+4%
Since Dec 2010-9.6%-9.3%-8.2%

Conclusion: Has RIL lost its mojo? Well, it remains a very important stock for the market, but it does not make or break the market any more. Its similar to what Sachin Tendulkar is to the Indian cricket team. 10 years back, he was a one man team. Today, he remains the most important member but the team does not depend on just him.

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 of TV18 and Network18 given to him by his company as part of his compensation

Monday, February 21, 2011

Have the banks bottomed out?

Have the banks bottomed out?

Over the last 10 days, there have been 5 reports suggesting the worst is over for banking stocks and it’s time to buy. The main points being spoken are: The worst of inflation pressure is over, interest rates have peaked and valuations have reached value zone and in some cases are at historic low. While prima facie, all of them look valid arguments, one fact that worries me is that banks are easily the most over-owned stocks in India and there is bound to be some vested interest from these brokerages to see the bottom of these stocks. In this piece, I am wondering if there is a possibility of double dip in banking stocks. Just to illustrate this over-ownership, I am presenting some of my research.

The Bankex is a composition of 18 leading banking stocks in the country. The combined FII holding at 2009-end for these 18 banks was 166 cr shares. By the end of September quarter of 2010, this had gone up to 198 cr shares, an increase of 32 crore shares. If I take the average share price of all these stocks individually during this period, this would have led to buying worth Rs 23,293 cr. This was led by Rs 4,715 cr in case of ICICI Bank and Rs 4,308 cr in case of SBI.

Despite the recovery in markets, it’s still down 13% from November levels and during the same period, the Bank index is down 17%. The big boy SBI is down 22% and some stocks like IDBI and Dena Bank are down as much as 31%. So there has been more punishment for banking stocks than for markets overall. And considering the starting point for the market correction was inflation worry, this underperformance is justified.

First up, let’s look at the valuations of banking stocks. Let’s begin with the PSU banks. SBI is trading at 1.5x adjusted FY12e book value. Here are the valuations of other PSU banks:

PSU BankPrice/FY12e Adj BV
Bank Of India1.3
Canara Bank1.2
Corporation Bank1.0

Now SBI has fallen from recent peak of Rs 3515 to the current price of 2750 odd. The valuation has fallen from 1.90x to 1.50x. But is it attractive enough?

The only reason I am uncomfortable with this cheap valuation argument is the fact that the current scenario is looking a bit like early 2008, when we had the big inflation scare led by Crude’s surge towards $140/bbl. It’s worth noticing that from Jan 2008 to April 2008, the SBI stock fell from 2463 to 1605. From FY09 book value perspective, the P/BV fell from2.3x to 1.5x. It then had a brief rally towards 1795 and it looked like bottom was in place, and then we had that big fall to 1078, taking its P/BV to 1x. Under current circumstances, a 1x P/BV would be if stock hits 1850. I am not saying this will happen, just saying it can happen.

Now, let’s talk about this inflation bit. The only component that has come down is the vegetable prices. But we need to see one to two months of stable prices before concluding that the worst is over on that aspect. On the other hand, we have seen milk prices going up twice this month and milk forms a large part of consumption basket in India. Sugar prices too have started showing signs of firming up and the non food inflation remains quite high.

And finally the interest rate situation. Evidence suggests rates are yet to peak. We have seen a retail bond issue from SBI which is giving as high as 9.75% interest. Now I find it hard to fathom that SBI would come out with such a large issue if this is the peak. Clearly they expect some more hardening of rates and there is a chance that the NIMs of banks will take a hit and that will have an impact on profitability as well.

In India, the banking sector has a massive advantage in terms of the regulated savings rate of 3.5%, which is almost criminally cheap. However, there is a likelihood of significant shift in deposits from savings to fixed deposits. There is also competition from the fixed maturity plans (FMPs) being launched by the mutual funds. And as banks become for aggressive in lending, there is a risk of that impacting the asset quality and the NPA ratios.

Conclusion: While the valuations may look attractive, there is no rule which says they can’t become more attractive especially if the headwinds are pretty strong.

Monday, February 14, 2011

Nifty change: The good, the bad and the ugly

I have been pleading for long that it was high time Suzlon went out of the Nifty. It had absolutely no business to be in the index for so long, after being a serial underperformer and actually eating away some of the Nifty’s earnings. Finally, this stock is getting out and it will be replaced by Grasim. So let’s look at the good, the bad and the ugly aspect of this change.

First the good part, it’s a good riddance. For all the promise Suzlon had, you could only give the company this much time. After all, even Yuvraj Singh has shown lot of promise over last 11 years, but somehow has never translated that at the highest level of test cricket. Suzlon was taken into the Nifty as long as 4 and a half years back, in June 2006. It all looked hunky dory then of course. In FY07, Suzlon posted net profit of 864 cr and went on to better that in FY08 with 1030 cr. In FY09 though, the profit came down to 236 cr and by FY10 it had become a loss making company, posting a loss of 983 cr. By all indications, FY11 net loss is likely to go up to over 1100 cr.

From the time Suzlon went into the Nifty, it’s down 75%; during same period, the Nifty is up 82%. That’s some statement.

Grasim on the other hand is likely to post a significant profit number and with its free float weight being much higher than that of Suzlon, my initial calculations show that it will add around 3 to the Nifty EPS. So if the Nifty was to trade 15x, it goes up nearly 50 points without any effort. So that’s the good part about this change.

Now, let’s come to the bad part – of all the companies available to the NSE, they could find only Grasim to replace Suzlon? As much as I was relieved to see Suzlon go out of the index, I was aghast to see Grasim going back there. It went out of the index in April 2010 and to my mind has done nothing to warrant a selection back to the index in a span of 9 months. In fact, it’s going through a demerger and via which, the cement business will go out to UltraTech cement. There will be a holding company discount that Grasim will have to contend with and cement in any case is well represented by ACC, Ambuja and even JP Associates. Or may be, the exchange believes that Grasim needs to represent the VSF industry of the country, which I think is a bit far fetched. The other factor could be due to the fact that the choice of stocks was restricted as the NSE has a criterion of an incoming stock having at least twice the free float market cap of outgoing stock and has an impact cost of 0.5% or lesser.

And now let’s come to the ugly part, which is that the exchanges are really behind the curve in terms of selecting the companies to represent the index and also selecting the criterions for the same. While Suzlon is out, it does not absolve the committee for keeping it there for far too long and I am going to give some examples of companies that deserve representation in the index and are not there and also companies which should not be in the Nifty but somehow are still there.

My research shows that Reliance Capital, Reliance Power and Ranbaxy have absolutely no merit in being in the Nifty anymore. In fact Reliance Power had no business getting into the Nifty in the first place. On the other hand, there are companies like Lupin, Nestle, Asian Paints, Mundra Port and even REC which should be the part of the index.

The combined weight of all pharma and FMCG stocks in the index is 12.5%, which is low, especially at times when you need defensive stocks in the basket to counter some negative sentiment. On the other hand, financials have a massive 24% weight on the index and as we have learnt from the last global crisis led by sub prime issue, this is not exactly the most stable sector.

Take the case of Ranbaxy. Its free float market cap has come down to as low as Rs 7,300 cr and if you replace it with let’s say a Lupin, it will increase the weight of pharma by about 30 basis points without changing the overall composition of the index. Also, Ranbaxy is now technically a Japanese company where disclosures going forward may not be as strong as they used to be and as we have seen in the past with companies like ABB and Siements, most of these MNCs see a dip in financial performance, followed by a delisting/open offer. Lupin on the other hand has been a consistent performer, a wealth creator and even in terms of financial performance, Lupin has been far more consistent. Stock market wise, Lupin has gone up 310% over last 2 years while Ranbaxy is up 34%.

To my mind replacing Ranbaxy with Lupin would solve 2 purposes. It would make the index less vulnerable to the swings of Ranbaxy’s financial performance and at the same time, it will increase pharma’s weight in the index, thus providing some stability at bad times.

Second, let’s take the case of Asian Paints and Nestle. Both these companies have respected their equity. Asian Paints has never diluted its equity and Nestle hasn’t done it since April 1993. Both these companies have high free float, high market cap and in fact in both cases, a free float adjusted market cap of Rs 11,500 cr is higher than that of Reliance Capital, DLF or even a SAIL. Financially also, both these companies have been proven outperformers. The only problem with these stocks is that they are not very liquid and at times the impact cost would be an issue, which is one of the criterions of the stock selection.

So even if we have to leave out both these stocks, Mundra Port and REC to my mind would be far better than Reliance Power and Reliance Capital. The financial performance of both these stocks and the volatility of stock prices would corroborate that. I am comparing the financial performance of Mundra Port & SEZ with Reliance Power and Power Finance with Reliance Capital.

Company 9-mth FY11 sales 9-mth FY11 profit Free Float m Cap
Rel Power 559 NA 6,608
Mundra Port 1233 651 7,147
Reliance Capital 3,798 285 5,411
REC 5,950 1,869 8,529
* All data in cr

Stock 1-year change 2-year change
Rel Power -17% +8%
Mundra Port +12% +95%
Reliance Capital -42% +2%
REC +11% +194%

To be fair to Reliance Power, it’s best is yet to come. It may have good numbers when all the projects get operational. But then, that’s promise and not delivery. When there are proven contenders, why do you need to punt with sheer promise?

Conclusion: The exchanges need to change some of the parameters to include stocks in the Nifty. This should be a dynamic process and should keep changing as the scenario evolves.

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 of TV18 and Network18 given to him by his company as part of his compensation

Saturday, February 12, 2011

New feature - Poll on the blog


I am adding a poll on my blog. You can see it on the right hand pane of the blog. Please take part in the same. I would be updating the poll every third day


Friday, February 11, 2011

Trading strategy

Today’s trading strategy

I maintain my bearish stance on the markets. And this market can still be played with Puts. The 5200 Put closed at 78 Rupees and the indications are that at some point in the morning at least, the Nifty would show a green tick. So may be the best time to buy the 5200 Put would be in a region of 50-60 Rupees. If the slide comes in the second half itself, it would be a good idea to book profits ahead of the weekend and start from a clean slate Monday morning.

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 of TV18 and Network18 given to him by his company as part of his compensation. Also, please consider your financial advisor before acting on any strategy given on this page.

Thursday, February 10, 2011

Feels like a bear market?

I have been writing this blog since Feb 1 but those of you following me on CNBC-TV18 would know that I have been bearish about the Indian market since the beginning of January. I have received a lot of mails and messages on linked In, asking me if this is a bear market. Those mails have led me to do some research on the same. So I would express my sincere thanks to those who wrote to me.

First up, let’s define a bear market – everyone has their own definition of a bear market and to me, any asset class, any stock, any index is in a bear market if it falls over 30% from its bull market peak. Till then, it’s a bull market correction. And that’s the number I have arrived at after looking at the past data of Indian markets. Now I believe one should not be a slave of the history but at the same time, one ignores history at his/her own peril.

The Nifty made an intermediate high of 6338.50 on November 5th. Taking this 30% parameter, the number that I arrive at would be 4437. So let’s say a ballpark of 4400-4500. We are currently at 5200 and change, so still some way to go before that bear market trigger is hit. For the record, Nifty is down only 18% from its recent peak.

What is more interesting is that only 8 of the Nifty 50 stocks have fallen 30% or more. So these 8 stocks are in a bear market of their own. This list is headed by the ADAG group. In fact the top 3 losers are Reliance Capital, Reliance Infra, Reliance Communications and throw in a Reliance Power at number 8. And couple of others like DLF and JP Associates never really participated in the bull market, so them being in a bear market is of little or no significance. It leaves L&T as the only bluechip stock which has entered a bear market with a 31% fall.

However, do keep any eye on stocks which are down 20-25% as some of them are pretty influential. SBI is down 26%, ICICI Bank is down 25%, ONGC is down 20% and all these stocks are in serious danger of falling in a bear market. Reliance Industries too is approaching a 20% fall mark. Not a great sign for the bulls.

Keep in mind, in the last bear market, the Nifty fell 58%, and that does not mean it fell 28% more after falling 30%. It fell 40% MORE after already falling 30%. Yes, do the math, that’s the beauty of a lower denominator. So keep in mind that a bear market can completely wipe you away. And if the markets do approach the bear market triggers, it’s not a great idea to take the plunge as the fall after that can be equally devastating.

And one fact is clear. The broader market is clearly in a bear market of its own. 50% of the listed stocks on the NSE are down more than 30% of their recent peak, that’s serious. What’s worse, 11% of the stocks have halved and innumerable stocks are trading at their 52-week lows. And this list hurts as this is the space around which a lot of retail investors’ portfolios are centred.

Conclusion: Just one final word before I end this piece. Don’t make the mistake of buying stocks only because some of them have fallen 40-60%. The best example I have for such investors is Unitech in the last bear market. I remember when Unitech fell 50% from it’s peak, a lot of analysts/wise men/brokers started recommending the stock as a great value Buy. It fell 50% more from that level (Overall fall of 75%) and again few investors took the plunge. Then it fell another 60% (overall fall of 90%) and that’s where the consensus emerged that the stock has finally bottomed out. Too bad for the consensus view, it halved from there as well to complete a 95% slaughter. On the other hand, Hero Honda was the only stock that came out of the bear market unscathed and doubled the following year. This time around, the only index stocks that have gained even during this painful period are HCL Tech, Infosys and TCS. One can never say that these stocks will continue to outperform, but my gut feeling is they will.

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 of TV18 and Network18 given to him by his company as part of his compensation

Wednesday, February 9, 2011

Number crunching time

Statistics are like mini skirts. What they reveal is interesting but what they conceal is vital. A funny one liner but so true when we talk about market statistics. I have done some number crunching. Presented this on CNBC-TV18 today and as promised, here is the blog entry.

First up, the Nifty is down 822 points or 13.3% since December 31. Now why is that date important? That's because the FII (foreign institutional investors) data is released at the end of every quarter and we have absolute numbers to talk about.

During this period, FIIs have net sold Rs 10,131 cr in Indian equity markets, which is $2.25 bn and change. Now, the question that has pained a lot of people is that are the Indian markets so shallow that $2.25 bn pullout leads to 15% correction? What would happen if the FIIs withdraw another $2.25 bn? Would we fall another 15-20%?

Well, the answer lies in some internals. Let's put this 822 point fall in perspective. Nifty 50 as the name suggests is a basket of 50 stocks and 8 of these 52 stocks have led to 56% contribution to the decline. In fact 71% of decline can be attributed to 15 stocks. Presenting the list below.


Stock Contribution

L&T -94

RIL -83

HDFC -69

ICICI Bank -56

ITC -48

Infosys -46

HDFC Bank -32

ONGC -32

Now comes the second internal. In one of my previous posts, I had pointed out at the importance of GROSS numbers from FIIs and not just the net number. And here are those numbers. Gross buy worth Rs 74,343 cr and gross sell worth Rs 84,475 cr. Now this gross sell number is in excess of $19 bn. So clearly the selling has been intensive in individual stocks. Its getting masked by gross buying, which could be in non-index stocks or may be under-owned Index stocks.

And the final piece in puzzle now - take a look at the FII holding and the value of that holding in the top 11 Nifty stocks. Any guess how much it's worth? It's Rs 3.65 lakh crore or $81 bn. Staggering isn't it? Presenting the data below.


Stock FII Holding (Rs cr)

Infosys 64,908

RIL 53,573

HDFC 51,222

ICICI Bank 44,278

TCS 28,331

HDFC Bank 27,811

SBI 22,596

Bharti 21,939

Axis Bank 18416

ITC 17042

L&T 15566

As you would see, there is an overlap of many stocks in both these lists. My sense is that while there has been FII selling in some of the large cap stocks, the buying has happened in stocks which don't matter, or at least can't push up the Nifty. For example, an HCL Tech which has just 0.6% weight in Nifty but a stock which has actually risen in this carnage. Or even Power Grid for that matter.

Conclusion: I really wish we had the FII data on a monthly/fortnightly basis. That would surely solve this puzzle thoroughly. Now we have to wait for March end numbers and this quarter is not half way through yet.

Coming up in some time: A similar analysis on some of the midcap stocks which have seen big fall and their FII holdings.

Playing the markets via Put spread

Hi folks,

Its funny to hear the opinions again. Everyone wants to believe the market is oversold. Well, it may be oversold but then for the entire 2010, this market was overbought, why can't it remain oversold for 3-6 months, if not longer?

Now, if you have been watching Markets Mid Day on CNBC-TV18, I have been talking about the options data in great details. It's a folly to just take massive build up at a 5300 Put as some support level or a 5400 Call build-up as massive call writing. The fact is that options are presenting a beautiful trading instrument and believe me, you would have made more money in this market by playing with Puts, then you would have made on your stocks in a bull market.

What essentially is a Put spread? The Put spread is buying a higher strike Put and selling a lower strike Put. The premium for the higher strike price is always higher than the lower strike Put. So while you buy the higher strike Put, to compensate for the premium you pay, you also sell a lower strike one. This limits your losses if your directional call goes wrong, though it also limits your profit. But the risk-reward has been just too strong.

Last week, the spread that was giving the highest juice was buying the 5500 Put and selling the 5300 Put. It swiftly moved to the combination of 5400-5200 and yesterday it was 5300-5100 combination.

Let me explain this in numbers. The 5300 Put is available at Rs 87 and 5100 Put at Rs 29. If you buy the 5300 Put and sell the 5100 Put, your total premium outgo will be Rs 58. So that's your maximum loss, in case the markets were to go up from here. Your profit potential on the other hand is Rs 142. That's a very favourable risk reward in a market which is inherently weak.

Conclusion: The market remains a Sell on rally market. The bigger the rally, the higher the opportunity. But the time for going whole hog has gone, play the market via Puts in smaller lots.

Monday, February 7, 2011

It remains a sell on rally markets. Occasional bounce backs notwithstanding

First a word of thanks to all those who have messaged me and called me after Thursday's post and what followed up on Friday.

This morning, I heard some views regarding FII selling getting over and markets falling on Friday only on account of rumour mongering. Well, I have slightly different view.

As I mentioned on Thursday, I won't give too much credence to what took place on Thursday and Friday and in fact, even if you take a look at the GROSS volumes and not just the net number, you would notice that the FII volumes were 20-30% lower on Thursday and Friday.

And secondly, with regard to FIIs being net buyers - just consider this. Suppose an FII sells 500 crores of HDFC and buys 100 crores of Jain Irrigation, 100 crores of IDBI, another 100 crores of NHPC and say 300 crores of Sun Pharma. What's the net impact? An inflow of Rs 100 crore but how would that reflect on the Nifty? It will show Nifty down 20-25 points. Yes, we need to check the profile of stocks being bought and sold and not just the net number.

What amazes me most is that there is no panic yet on the street. Everyone seems to think it's a healthy bull market correction and the Nifty is in no danger of going to the levels of 4000-4400. And what corroborates my fear is the F&O data. Presenting some data here.

On November 4, when the Nifty was trading at 6282, the India VIX was 21.53. On Friday, with Nifty coming down to 5396, the India VIX has gone up to 22.69. So basically, a market fall of 14% is accompanied by an increase of just 5% in VIX. This is really bizarre. Under normal circumstances, you should have seen the VIX go up at least 20-25% if not more. The investors are still complacent.

Let's go back to the last bull market correction of June 2007 (not taking the big 2008 fall as that actually was a bear market). During that May-June, 2007 phase, Nifty fell 15% and the Open Int Put Call Ratio fell to 0.87 with the implied volatilities hitting 35-40%. This time, even with a 15% fall, the Put Call Ratio is at 1.12 and the IVs still stubbornly at 19-22%. You need these IVs to approach at least 30% mark before a bottom is formed.

Also, let's take a look at the options pricing. As I write this piece, the 5400 Put is priced at Rs 103 and 5200 Put is priced at Rs 40. Suppose you were to buy 5400 Put and write a 5200 Put, you would need to pay Rs 63 as premium. Now if the Nifty was to move towards 5200 or below, you would make a profit of Rs 137 and if the Nifty was to rally, you would make a loss of Rs 63. What you need for this market to bottom out is if this 5400 Put premium moved up to Rs 200 or above and that would happen if the IVs move.

Conclusion: This is still a sell on rally markets. The occasional bounce backs will come but the chances are that they will be shallow. What you don't need is another Thursday kind of session where Sensex goes up 350 points and creates a false illusion of a bottom. You need to see 5-6 trading sessions with the Sensex consolidating in a 300-400 point range with positive bias

Thursday, February 3, 2011

Curious trading action today

This one is going to be a short one....

Its 1:30 pm and the Sensex is up 280 points, Nifty is up 71 and the screen is looking far more green than red. Worst over? Forget it, in fact far from it. Just take a look at the internals

The advance/decline ratio is not even 2:1, but the most telling stat is the volume picture. cash market volumes at 9,000 cr and F&O volumes at 80,000 crores. That's 9x in terms of F&O-Cash ratio, which is obscene

The sane ratio is 4-5x, on boring days it comes down to 3x and during expiry it surges to around 7-8x. But hello, early in a series, we are at 9x!!!

The fact is that Asia is closed. There are no volumes from Hong Kong and Singapore desk. So while the cats are away, mice are at play. Just take a look at the profile of stocks rallying and you will get the gist

Conclusion: Don't fall in this trap. This is a sucker's rally. Wait till Monday, wait for markets to stabilise before taking the plunge

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives

Stock focus: IVRCL

There is something horribly wrong with IVRCL. The stock is down 60% from its July peak and is clearly in a strong bear market. Now while this stock is not alone is the infrastructure mayhem, the following stats make you wonder if there is something specifically wrong with this Hyderabad based company, once among the bluest of blue chips in mid cap space

Consider this - Since July, the stock is down 60% in a period when it's peers are down anywhere between 25-35%. JP Associates is down 38%, GMR Infra is down 26%, IRB Infra is down 28%. So while the whole infra pack is under severe selling pressure, IVRCL in particular has been singled out for punishment

Let's talk about valuations in terms of Price to book. IRB Infra trades at 1.83x FY11 book value (even after the 28% fall), JP Associates trades at 1.74x and GVK at 1.32x. IVRCL on the other hand trades at 0.6x. Yes, half time books. Cheap no? Well even cheaper one would say if you look at the following stats

It holds 75% stake in the real estate company IVRCL Assets & Holdings (erstwhile IVR Prime). Now you give a discount of 80% in a bull market and 20% in a bear market. Let's assume we are somewhere in between. So I am giving 50% discount and this translates into per share value of Rs 15. It further holds 55% stake in another listed subsidiary Hind Dorr Oliver. Again, giving 50% discount, you get a per share value of Rs 8.

This leaves the core business being valued at Rs 50/sh. From all the brokerage reports that I could lay my hand on, this business has been valued at Rs 130-150/share. Then what really is the problem?

A cursory look at the balance sheet will give you the answers. The company has a market cap of Rs 2,050 crore and net debt of Rs 2,120 cr. Yes, the debt exceeds market cap of the company. In Q2 alone, it added debt of Rs 730 crores. It has just sought shareholder approval to hike borrowing limit by a further Rs 1000 crores. This is scary.

You wonder why the company is taking so much debt? Well, that's because it's not able to raise equity, either at parent level or at subsidiary level. It's been trying to do a QIP for IVRCL Assets with no success and has been looking for suitors for Hind Dorr, again with no success. The only silver line was the fact that it raises Rs 150 cr from a PE investor in IVRCL Assets in November at Rs 119/sh (The price now is Rs 55/sh, so my sympathies with this PE player).

But what else is bothering the investors. Couple of things - this whole quantum of debt is mainly due to higher loans to subsidiaries. Now the promoters may have great vision of value in their real estate business, but the investors don't share that view. Blue chip real estate stocks like DLF, HDIL, DB realty, HDIL are biting the dust. Who wants to invest in a real estate company based in Hyderabad?

And here is the scariest part for the promoters. They own less than 10% in this listed company with the public holding over 90%. Is the promoter in trouble? Well there are some rumours on the street, but I would not get into that

Conclusion: Promoters should respect shareholders, especially if the minority shareholders are actually holding majority stake. At some point, IVRCL will become a takeover candidate due to its solid underlying business and very low promoter stake. The stock may be oversold, but remember, a stock can remain oversold for months just like it can remain overbought for months

Disclaimer: The author of this article does not invest/trade in Stock markets including derivative markets

Tuesday, February 1, 2011

MNC delistings - lessons from history

This was coming. The stock price movement of Siemens clearly was suggestive of some corporate action. And now we know, it's the delisting offer by the German parent which follows almost similar offer by ABB. Now the big question is - Should the retail shareholders tender?

Over last 2 days, you would have seen a lot of analysis on TV and print telling you how great this offer is compared to the fundamentals shown by Siemens over last 1 year. Well, I am not a great follower of any such analysis and I just know one thing - you must pay top dollar to de-list a company, especially if the shareholders have been patient.

To present my case, I am giving an example of AstraZeneca (there are so many examples, I just picked one). I am giving bullet points which are easy to understand


-In March 2002, announced delisting offer at Rs 375/sh

-Managed to increase stake from 56.5% to 87.2%

-In Sep 2002, announced another offer for the balance 12.8% stake

-Open offer was again made at Rs 375/sh

-Managed to take stake to 91.6%

-In 2004, announced delisting offer for residual 8.4% stake

-This time, the floor price of Rs 875 fixed for residual stake

-Discovered price was around Rs 3000/sh

-Exit price was rejected promptly

-In 2006, face value was split from Rs 10 to Rs 2

-In 2010, announced another delisting offer with floor price of Rs 576/sh

-Pre-split, this floor price worked to Rs 2,880/sh

-Co indicated exit price of Rs 1152/sh

-Pre-split, this exit price worked to Rs 5,760/sh

-CMP at 1237, adjusted for split at 6,185

-Stock up 1550% since first offer in 2002

Now lets assume you were holding AstraZeneca shares in 2002 and tendered it because the offer looked lucrative at that price. Now what did you do with that money?

Whatever you did, you must have done something really special to beat the 1550% returns that AstraZeneca gave over this 8 year period

Now, I know stock price is not just a factor of fundamentals. With the float down to less than 9%, the selling pressure on the stock is limited. But the point is you could have been one of those representing this 9%.

Now, the other argument is regarding the financial performance of Siemens which has been rank bad over last 1 year. My apologies for being a fan of history, but lets take another example here


Year Profit Growth

2002 20.4 185%

2003 32 57%

2004 57 78%

2005 64 12%

2006 102 66%

2007 161 58%

Now, why I have put the 2005 numbers in bold? See what follows


-Board approved delisting offer in Feb 2005

-Price in Feb 2005 was around Rs 150

-In March 2005, announced floor price of Rs 153

-In March 2005, stock price was around Rs 200

-Discovered price of Rs 295 was rejected

-Promoters found Rs 295 too high

-Stock went on to make a high of Rs 500 in 2007

-Investors would have made 233% by staying invested

-Stock had already rallied 94% in 2 years preceding delisting offer

Only in 2005, the company came out with bad numbers. As coincidence would have it, that did lead to a lot of investors getting frustrated and some of them actually tendered the stock in offer

Conclusion: My point is simple. Why do you invest in stock markets? To create wealth, right. Else you go and trade, do jobbing, arbitrage or whatever. But if you want to create wealth, think long-term. Just imagine, in 10 years, Siemens may be generating 20% of its profits from India. Do you want this company to take all this profit and distribute it as dividend to its German shareholders? Think again before you tender the shares

Disclaimer: The author of this article does not invest/trade in stock markets.