Saturday, November 22, 2014


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


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


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


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


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%

Wednesday, January 15, 2014


Coal India futures are outperforming the stock by 4% and today is not even ex-date. So what really happened here?

The essence of the situation lies in the special situation rule that exchanges have in treating futures and options contract. Normally the stock is adjusted for dividend in cash market but the same adjustment is not carried out in futures and hence, in earnings season, some of the index stocks tend to go into discount as they factor in the dividend impact. However, if the dividend is more than 10% of the market price, this falls into special category and even the futures prices are adjusted to reflect that.

What this means in simple terms is that come the ex-date, Coal India future price will also be deducted by 29 Rupees to arrive at previous day’s price. If you shorted Coal India and hence on ex-date you see the price lower by 29 Rupees, don’t cheer it – you are not getting this money.

The case of Coal India was curious. By late afternoon the gap between spot and futures was over 20 points but by the time the trade wound up the discount had narrowed to 12 points. So clearly, there was some big buying in Coal India futures before the markets closed yesterday. Were some of these market participants sure of an over 10% dividend? And if you had bought the future yesterday, you would be sitting on a gain of nearly 40-50% on your margin money given the big move in future.

What makes it even more interesting is the dividend component. A dividend of Rs 29 is 10.03% of the market price of Coal India. Even 10 paise lower and the dividend would have been less than 10% and miraculously, the discount would have widened again today to nearly 28 Rupees instead of converging with future price.

So really, should a 10% move on future price be dependent on a differential of 10-50 paise in dividend? And what would have been the reaction if this was a private company? These are some important questions. May be time has come for the exchange to do away with this special situation rule being applied only if the dividend exceeds a certain percentage. Let them do it for all dividends. It will take away some fun on stock futures trading but it will make the process a lot more transparent.