Rakesh Jhunjhunwala: A long-term Bull Run!

A column written by the Ace Investor in Business Today dated 28th June’09.

Click here to read the article.

Quality Stocks: Companies with ROE & ROCE of over 30%

I have compiled a list of quality stocks which one can look at based on earnings growth and return ratios (FY09) . I have excluded FMCG and Banking from the list.

Amara Raja Batteries (CMP: 92)

Ahluwalia Contracts (CMP: 87)

Bajaj Electricals (CMP: 400)

Blue Star (CMP: 342)

Crisil (CMP: 3412)

Divis Labs (CMP: 1117)

Mphasis (CMP: 370)

Opto Circuits (CMP: 160)

Page Industries (CMP: 545)

Sesa Goa (CMP: 185)

Thermax (CMP: 408)

Titan Industries (CMP: 1180)

TRF (CMP: 825)

Voltas (CMP: 123)

Voltamp Transformers (CMP: 842)

Stocks with a little lower ROCE but over 30% ROE are Crompton Greaves and Tulip Telecom (both have ROCE of around 25%).

If you can pick 5 stocks from the above list whose earnings are expected to grow over 20% over the next few years and available at FY11 PE of less than 12, then I believe you can easily outperform the Index over the longer term.

Sensex @ 21000 in 2010?

Madhu Kela of Reliance MF, Nilesh Shah of ICICI Pru AMC and Ajit Dayal of Quantum AMC believes Sensex will hit new high in 2010. I tend to agree with them. I had mentioned in my earlier post of Indian economy growing by atleast 8% in FY11 which I see as one of the reason for the index hitting new high as GST, Oil & Gas Discoveries and Global recovery boost the earnings of the Sensex companies. The added trigger could be the de-control of oil prices since the election is now over. Even if oil prices are not decontrolled completely but raised around the market prices, subsidy burden of ONGC will ease considerably and boost its earnings. ICICI Bank business should have undergone a significant change with focus on CASA,NIMs and ROE while bank’s lending should pick up after the consolidation. HDFC and HDFC Bank will continue with their 20%+ and 30%+ earnings growth. With the capital inflows coming back into the country, Real-estate players will start raising money through equities and pay back the debt to the Indian banks. This will ensure that the restructured assets have not turned bad. SBI & ICICI Bank will be the biggest beneficiaries. L&T might demerge some of its subsidiaries while its infrastructure business continues to deliver 25% earnings growth. BHEL too should continue to deliver 20-25% growth. US economy is expected to recover by the end of 2009 which should lead to increased spending by the US companies. Infy,TCS and Wipro will benefit from the same but the rupee appreciation will take off some sheen. Defensives like Telecom and FMCG should as usual deliver 15%+ growth . Metals will rebound as global economy recovers. Autos could be under stress as interest rates rise and commodities shoot up so growth could be around 10% in this sector.

If the global recovery happens by the end of 2009, Sensex FY11 EPS and FY12 EPS should be around Rs 1090 and Rs 1250 respectively which markets will start discounting by the end of 2010. At the one-year forward PE of around 17, Sensex does have a high probability of hitting new high. Inflation and Commodities prices remain a risk on the downside.

India’s Best Managed Companies

FinanceAsia’s annual poll of Asia’s top companies have been voted by 238 investors and analysts across the region (including yours truly).

Infosys topped across the board by bagging the best managed company, best corporate governance, best investor relations, best corporate social responsibility and most committed to a strong dividend policy. Not surprised!

Bharti Airtel was voted the second best managed company and investor relations.

HDFC Bank stands third on the best managed company and investor relations.

Tech Mahindra and Opto Circuits were voted the best midcaps while Sanghvi Movers and Bharat Bijlee voted as the best small-caps.

Check out the complete list here

George Soros exiting Indian markets ?

Billionaire investor George Soros’ Fund Quantum M has been selling its holdings in different companies. As per the filing of shareholding patterns on BSE, Quantum M has sold its holdings in Reliance Capital, Future Capital, GVK Power & Infrastructure, Orissa Sponge Iron & Steel, Indiabulls Real-Estate and Indiabulls Financial Services. In April, his fund has been selling shares of Rel Infrastructure (595895 shares sold in March quarter and 1304191 shares on 6th April) and JSW Holdings (311232 shares of 965991 shares held by his fund as on 31st March’09) according to the bulk deals on BSE. Quantum’s holdings in Dish TV is awaited.

His fund still holds 1.5% stake in Anant Raj Industries, 5.63% in Gujarat Ambuja Exports Ltd, 3.17% in Karuturi Global as on 31st March’09. So he has not completely exited the Indian markets.

One can make out clearly that there are higher number of stocks his fund sold in the March quarter than the stocks his fund holds. Soros is known for his currency bets. He has fared poorly in equities.

George Soros mentioned in his 28th Jan article in FT,

Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and the developing worlds. Indian and Chinese were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before.

Infact, his fund was on a buying spree in February and July last year!

Rakesh Jhunjhunwala’s holdings as on 31st March’09

This is just a small brief on the shares Ace investor Rakesh Jhunjhunwala bought/sold in the March quarter.

He bought 6,50,000 shares of Geometric Ltd, 1,75,000 shares of Karur Vysya Bank, 1,34,000 shares of Lupin

He sold 1,21,000 shares of Titan Industries, 7,00,000 shares of Pantaloon Retail and 11,00,000 shares of Nagarjuna Constructions.

No change in holdings in Rallis India, Praj Industries, Punj Llyod, Crisil and Mid-Day Multimedia.

I will keep on updating the changes in shareholdings in other stocks. For a detail check on his holdings, visit The Equity Desk. If I have missed any stock, do let me know!

Barclays’ Economist got it all Wrong

Barclays Capital’s Economist Sailesh Jha has been consistently getting all his forecast wrong since August last year. His forecast started with Inflation touching 17% in 2008 and we know that inflation never went above 13%. In the current year, he predicted rupee will tumble to 56 to the dollar by June. Rupee has appreciated in the past few weeks and is now trading around 50 to the dollar. Dollar-Rupee movement is highly correlated to Sensex movement. So Rupee will hit 56 only if Sensex tumbles to 7000.  Since anything can happen in the next two months, we will see how the prediction pans out. Jha predicts that bonds yields will fall to 5.1 by the end of Q2CY09. Yields are currently trading at 7.01%. With the huge government borrowing in the coming quarter, I am sure his prediction will fail. According to the Barclays economist, Indian economy is likely to grow by 4% in FY10. If our economy can grow by 5.3% in a tight liquidity scenario, we will probably grow above 5% in an easy liquidity condition. Infact, we have seen signs of recovering in Q4FY09 in major industries except textiles and gems and jewellery. I believe the effect of low interest rates have been underestimated by economists and analysts.

I hope Barclays is not acting on his forecast. But then for what is he paid for ? Unfortunately, Economists don’t get fired too easily. As someone rightly said,” When your neighbour loses a job, its a recession and When an economist loses a job, its a depression“.

Banking Simplified!

Banking is considered to be the pillars of any economy. It is essential to understand this sector to get a sense of the various industries, consumer sentiment,etc. I am in the process of understanding the minute things operating in this sector. Let me share whatever I have learned till now. What are the factors which affect CASA, NIMs, NPAs,etc..

CASA impact on NIMs

Banks pay 3.5% interest on savings account. In reality, the actual cost of savings account is less than this as banks pay interest on the minimum balance kept between 10th and the last day of the month. The average cost of savings account is less than 3% and overall the cost of demand deposits could be even less than 2%, depending on the combination of savings and current accounts (CASA) of a particular bank.

Treasury/Government Bonds

Prices and yields of bonds have an inverse relationship and firm yields could saddle banks with mark-to market losses on their government bonds portfolio. Most banks do mark-to market accounting, making provisions for losses or profits at the end of each quarter, based on the difference between bonds prices and purchase prices. In case of 10 year bonds, prices fall by 7 paise for every basis point rise in yields. For example, if yields rise 100bps above last quarter then banks will have to provide for a loss of Rs 7 for every Rs 100 invested. Currently, banks investments of upto 25% of deposits in govt. bonds are protected from booking depreciation in bond yields if the bonds are kept in the HTM portfolio. The other two portfolios of banks bond investment are “Available for sale” and “Held for trading”. Banks are allowed to shift their bonds to HTM category once a year.

Impact of Ratings on Capital Requirements

Under the current standardised methodology of risk weighting, Triple “AAA” to “AA-” rated assets need to be risk weighted at 20%. However, if the credit rating sink to “A”, the risk weighting increases to 50%.

Bulk/Wholesale deposits

Bulk deposits are deposits by the corporates of the amount of Rs 1cr or more. Banks usually issue Certificate of Deposits (CDs) to corporates for a period between 3-12 months. In a tight liquidity scenario or higher interest rates regime, bulk rates might be higher than retail deposit rates. Rates fall equally fast in a surplus liquidity scenario. It might be slightly above Govt. bonds yields.

Interest Cost to the bank

The cost of funds of most banks is between 6-6.5% (mix of term and demand deposits rates). The cost of funds goes up by 2.5% due to the establishment costs and maintenance of CRR and SLR costs. Thus, the total cost to the bank is between 8.5-9%. To maintain Net interest margin of 2.5-4%, banks have to lend at 11-13% to the borrowers.

NPA’s Management

Banks protect their assets from becoming a non-performing loan (NPL) by going through the Corporate Debt Restructuring (CDR) exercise. Restructuring typically involves rescheduling the principal repayment date or even reducing the interest rates to help revive the borrowers cash flows. Banks recover non-performing loans through one-time settlement and compromise schemes, Lok Adalats, Debt Recovery Tribunals (DRT) and SARFAESI Act in addition to their own internal recovery process. A bank is allowed to write-off gross NPAs to the tune of mark-to market gains in govt. securities.

Loan Asset Classification

Banks classify loans as standard assets, sub-standard assets, doubtful assets and loss assets. Except for the standard assets, banks have to make provisions for the rest as they are treated as NPAs. According to RBI, an NPA is defined as a loan or advance where interest or installments of principal amount remain overdue for a period of 90 days in respect of a term loan.

Buy Cairn India at 17% discount to CMP!

Cairn Energy holds 65% stake in Cairn India. Cairn India has a market capitalisation of Rs 30,836 crs as on 9th March closing whereas its parent Cairn Energy is trading at a market cap of 2.35bn pounds at the London Stock Exchange which equals to Rs 16,607.45 crs if one goes by the exchange rate of GBP = Rs 70.67. Cairn Energy’s 65% stake valuation comes to Rs  20043.4 crs which is 17% discount to the market cap on the NSE. I wonder is the 17% discount given to the holding company. The risk here is that one cannot bet with certainty that the discount price between the FTSE and NSE will narrow going forward. I am not sure about the holding company discount in the European markets but in India it can vary widely between 5-75%.

I am not advising to buy or recommend anything. Its just that if you wanna buy Cairn India then buying through Cairn Energy makes sense. I think this is the reason for the biggest hedge fund HSBC India Fund to buy Cairn Energy rather than Cairn India. Another benefit could be no risk of currency fluctuation as the fund is based in UK.

Top Ten US Financials v/s SBI’s Market Cap

Lets take a look at the market cap of the top ten US Banks v/s  State Bank of India at yesterday’s closing prices.

JP Morgan Chase -$79bn

Wells Fargo- $45.94bn

Goldman Sachs – $39.84bn

Bank of New York Mellon – $24.57bn

Bank of America – $23.20bn

U.S. Bancorp – $22.99bn

Travelers Cos – $20.89bn

Morgan Stanley – $19.29bn

Metlife – $13.10bn

American Express – $12.83bn

If we compare the top bank in India in terms of market cap, State Bank of India (SBI) which closed at a market cap of $12.5bn, it seems like after topping Citigroup,Royal Bank of Scotland, Lloyds and Barclays (except first, rest are not based in US) , SBI is all set to overtake Metlife and American Express this year. Isn’t it amazing that two financials having operations all over the world being overtaken  by a bank with major presence in just one country. SBI is now close to Deutsche Bank. In two-three years, SBI could vault into the list of top 25 banks globally. I am not sure what is the ranking of SBI currently. If you have any idea then let me know!

Rs 65000 crs Domestic liquidity in H2FY09

I did an estimate of the potential money which can be invested in the markets over the next six months by the domestic investors.

Rs 6817 crs which investors will receive from the open offer from Daichi to Ranbaxy shareholders. Hopefully, greater portion of the amount should come back in the market.

Rs 15,000 crs cash lying with the Mutual Funds

Rs 40,000 crs can be invested by the Life Insurance companies. Note that Q3 and Q4 are normally the best time for the industry.

Rs 3,000 crs can be invested by the Banks and Financial institutions.

Then there is funds which might be invested by the retail investors directly, Venture capitalist/PE players buying through secondary markets, pension fund money and Promoters increasing their holdings through open market puchases. All this should ensure that the downside is limited with FII’s continuing their selling spree. My sense is that FII inflows should resume by the end of Q4FY09 as global situation improves and risk appetite returns towards equities.

Impact of Oil/Gas finds on India’s GDP

Updated on 31st March’09: The KG Basin is thought to be one of the largest gas finds for the country and is expected to almost double India’s domestic gas production.

Reliance is likely to ramp up its gas production to a peak capacity of 80MMcm/d by the end of FY 2010, while the MA crude discovery is likely to lead to peak capacity of 40Mbbl/d by FY 2010. For the FY 2010-12 period, the overall refining capacity of Reliance Petroleum Limited (RPL) is thought likely to be 580kbpd. On the other hand, Cairn’s MBA (Mangla Bhagyam Aishwarya) project for crude production is expected to reach peak output of 175Mbbl/d by FY 2011/12.

In FY10, India’s GDP will be up by more than 1.5% from the commissioning of RIL Gas production from KG basin, Cairn India’s Oil production from Rajasthan fields and Rel Petroleum refinery at Jamnagar according to ICICI Pru AMC.

According to HSBC, the net benefits accruing to the current account balance are expected to be in the range of $8.3bn to 12bn in FY 2010 (0.6% to 0.9% of GDP) assuming Brent Crude at $71 and 50% & 100% substitution. $11-25bn in FY 2011(0.8% to 1.7% pf GDP). For FY 2012, the estimated benefits are even higher, ranging from $12.4bn to $27bn. Addition to GDP would be 40bp in FY10 and 50bp in FY11.

I-Sec estimates savings of $70bn through FY10-14E. Overall, benefits to various sectors through reduced petro-products consumption, lower urea imports, higher LPG production, surplus naphtha and FO availability will be Rs171bn (US$4.3bn), Rs451bn (US$11.3bn), Rs628bn (US$15.7bn), Rs736bn (US$18.4bn) and Rs810bn (US$ 20.2bn) in FY10E, FY11E, FY12E, FY13E and FY14E respectively. Additional benefits are reduced cost of power generation, urea and LPG production, and higher GRMs of refineries (by switching to cheaper gas from Fuel Oil.

Deutsche Bank projects addition of $103bn to India’s GDP over the next four to five years.

According to Goldman Sachs, gas production will lead to reduction in the oil import bill by $8-$13bn, add $2.5-$4.5bn annually to the exchequer, lead to cost savings of $2-4.8bn across various industries between 2010-11 and 2013-14.

GSPC’s gas find in KG-8, KG-15 and KG-28 has been certified at upwards of $6bn. So far, the GSPC has drilled 12 wells and is going ahead with drilling four more in the Deen Dayal block, which is spread over 100 sq kms. Most of the action is happening on the south-west of the block in an area of 15 sq kms. GSPC had claimed a commercial potential of 5.6 TCF before the DGH, but the DGH has certified a minimum discovery of 1.26 TCF, which is subject to upward revision on a more detailed appraisal. If GSPC’s claimed figure of 5.6 TCF is finally confirmed, KG-8, 15 and 28 together would be worth $ 28 billion (Rs 1.40 lakh crores). Plans are afoot that GSPC’s gas from KG basin would land in Gujarat by Christmas of 2011 to meet the energy needs of a state.

According to Cairn India CEO, its field may cut India’s oil import bill by as much as 7%. The explorer may generate more than $1bn in 2010 based on current oil prices ($50) and $2bn annually starting 2011, once it reaches the peak output rate.

In short, depending on the Crude price, gas price, exchange rate and refining margins, impact on economy growth and current account balance will be significant.

Related link: Macquarie’s take on RIL gas  http://www.livemint.com/2009/01/07223819/RIL-sitting-on-8216promisin.html

Focus on Profitability and Transparency as stock price falls

As stocks get hammered, Anil Ambani’s Reliance Capital has shifted focus from boosting topline to growing bottomline and increasing transparency. Rel General Insurance which was incurring heavy losses till last quarter (Q1FY09) turned profitable in Q2. Rel Consumer Finance whose loan book grew significantly Q after Q till FY08 has slowed down disbursements subsequently. What’s more, it has put a brake on fresh lending signalling a move towards containing NPL’s in this liquidity crunch environment. In addition to profitability, the transparency level has increased a bit by organising Concall for the first time ever in Q2, consolidating Rel Money accounts with the parent though life insurance business is excluded from consolidation as it continues to bleed. It would have been better had Anil Ambani focussed on profitability and transparency before the market crash so that the extent of fall in the company’s stock price would not have been so severe. No wonder then Institutional holding is less than 4% while retail investors share is around 18% of the total outstanding shares.

Brokerage Forecasts for 2009

ENAM Securities:

Q1 of CY 09 insurance purchases of $5 bn, saw a marketvertigo as it moved from severe undervaluation to a stress-case valuation level (8 to 12K). As we entered mid-CY 09, an invigorating new Govt & global macro realignments brought the “West to East” theme into
sharper focus. Markets entered a scattered-buying “return to Sanity” period. And by Diwali 09, we have entered a whole new World-view. Hence, the Price-Nadir was Nov 2008!

Forecasts Sensex at 15109 by Nov’09.

BNP Paribas:

Our bottom-up estimates indicate 8-9% EPS growth for Sensex in FY09 and FY10 (despite Reliance’s new businesses kicking in), followed by 13-14% growth in FY11. Our growth estimates are one of the lowest on the Street.

Our bottom-up target for Sensex is 10,000 – 11,500 by end of 2009. Current valuations (P/E of 10.5x 12-month forward, P/BV of 1.9x) appear reasonable, though there are cheaper markets in the region.

In 2009 investors should focus on rate-sensitive, free-cash generators and commodity users. Pharmaceuticals and consumers should do well owing to inelasticity of demand in these sectors to domestic economic conditions.

Avoid sectors where global slowdown is dragging down demand growth, or those needing large external financing.

Kotak Institutional:

“We find the valuations of Indian market (BSE-30 Index) inexpensive at 10.1xFY09E and 8.8xFY10E. Adjusted for valuation of “embedded” assets, we find valuations attractive at 8.3xFY09E and 7.3xFY10E. Our band for BSE-30 for CY09 is 11500-14500 based on a bottom-up aggregation of the fair value of individual stocks.

Merrill Lynch:

Expects Sensex to fall to 7000 in Q1CY09. Late 2009 can see better markets.Sector strategy – Barbell portfolio. We continue with a barbell sector strategy that is largely defensive. We expect to get less defensive in the later part of 2009.

Our favored sectors are telecom (Bharti), pharma (Glenmark), auto (Hero Honda), banks (SBI, ICICI) and industrials (BHEL)

Morgan Stanley:

We think that Indian equities are hurting because of impending earnings risk, a liquidity and BOP problem, a relatively sizeable NPL cycle, political uncertainty and rich relative valuations. This is best summarized in our top-down EPS forecast for the Sensex EPS, which calls for an 8% decline over the next two years versus a 21% rise as per consensus. Our view is that the market is biased for flat to downside rather than upside. Our probability weighted Sensex outcome for Dec’09 is 8559.

We are cautious on cyclicals and rate sensitives and positive on defensives with a 12-month view. Our biggest overweight positions are consumer staples and healthcare whereas our biggest underweight positions are industrials, financials and materials. We are removing Arvind Ltd from our portfolio and adding Cipla. Our favourite stock is HUL.

UBS:

We factor in 5%/0% EPS growth for FY09/10E and assume a trailing 12 month recovery PE of 15x to arrive at our Sensex target of 13500. Our most preferred stocks are Infosys, Bharti, Hero Honda, ICICI Bank, PNB and Idea. Our least preferred stocks are HCL Tech, HDFC Bank, SBI, Rel Power and Tata Motors.

Additions & Deletions to Long term ideas

I had recommended some stocks from a long term perspective on 23rd May here I am removing Technology companies Tanla Solutions and 3i Infotech from the list and adding Educomp Solutions and Titan Industries to the list. 3i Infotech faces the risk of non-conversion of its FCCB by March’2010. Here’s a brief on both the companies:

Educomp Solutions:

Business Oppurtunities: 220mn kids,1mn schools (50k private schools)

Smart-class: <2% penetration. Present addressable market at approx.15k schools. Targetting 1700 schools by FY09.

ICT: Orderbook of Rs9.8bn to be executed over 3-5 years.

EPS should continue to grow over 80% for the next few years with ROE at 40% and ROCE at 28% for FY09.

Titan Industries:

Titan is a specialised retail play on watches, jewellery and precision engineering. The company wants to capture a share of the unorganised jewellery retailing. Jewellery is a Rs 70,000 crs opportunity. EBIDTA margin increased by 108bps in H1FY09 as operating leverage kicks in and also due to higher charges for making jewellery. Titan could end FY10 with an EPS of around Rs.80 with an ROE and ROCE of over 35% and 30% respectively.

Situation in India

Positives
Jobs (More recruitments than layoffs)
Consumption remains robust (retail sales up around 20%)
Infy says no change in dollar guidance. Depreciating rupee positive for IT.
Subsidy burden reduced substantially with Crude price correction thus budget balances turns favourable
Spend on Entertainment remains the same (DTH subscription and 80-85% bookings at the box-office)
Inflation down to near 9%. Bet on rate cut before end-2008.
Commodity prices cool down

Negatives:
Real Estate in trouble (due to liquidity crunch)
Auto sales down for the same reason
Airlines continues to bleed
Infrastructure spending slowdown
Life Insurance premium growth dropped to single digit
Exports down 15% in Oct, Excise collection contract by 8.7%
Expansion plans of India Inc hit due to funding problems

With interest rates easing inevitable in the near future, many of the negatives can be rubbed off to a certain extent from FY10 onwards

Quotations from “Buffett:The Making of an American Capitalist”

I have been reading Roger Lowenstein’s “Buffett: The Making of an American Capitalist” and once again he did a remarkable job (after When Genius Failed). I am posting some of my favorite quotation from the book.

When Warren said that he would be a millionaire by age thirty, Mary Falk asked why this drive to make so much money? He replied,

“Its not that I want money. Its the fun of making money and watching it grow.”

Buffett on “Joys of Compounding”,

I have it from unreliable sources that the cost of the voyage Isabella originally underwrote for Columbus was approx. $30,000. This has been considered at least a moderately successful utilization of venture capital. Without attempting to evaluate the psychic income derived from finding a new hemisphere, it must be pointed out that….the whole deal was not exactly another IBM. Figured very roughly, the $30,000 invested at 4% compounded annually would have amounted to something like $2 trillion…

His serious point was that even trifling sums should be invested with the utmost care. To Buffett, blowing $30,000 represented the loss not of $30,000 but of the potential for $2 trillion.

On avoiding taxes in financial planning,

What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound.

On Fund Managers owning hundreds of different stocks,

Anyone owning such number of securities….is following what I call the Noah School of Investing -two of everything. Such investors should be piloting arks.

On Momentum investing,

‘Fashion’ investing does not completely satisfy my intellect (or perhaps my prejudices), and most definitely does not fit my temperament. I will not invest my own money based upon such an approach – hence, I will most certainly not do so with your money.

On Public opinion, Buffett illustrated this with an allegory

An Oil prospector who arrived at heaven’s gate only to hear the distressing news that the “compound” reserved for oilmen was full. Given permission by Saint Peter to say a few words, the prospector shouted,” Oil discovered in hell!” – whereupon every oilmen in heaven departed for the nether reaches. Impressed, Saint Peter told him there was now plenty of room. The prospector said, “No. I think I”go along with the rest of the boys. There might be some truth to that rumor after all.”

Ken Chace on Buffett’s questions,

Buffett asked questions like crazy. About the marketing, the machinery, about what I thought should be done, where I thought the company was going, the technical end of it, what kind of products were we selling, who we were selling to. He wanted to know everything.

Buffett on Stock Options,

He opposed it for the reason that most CEOs were enamored of them. Options conferred potential -sometimes vast-rewards, but spared the recipients any risk, thus giving executives a free ride on the shareholders’ capital.

Ben Graham on Investing,

Investing don’t require a genius. What it needs is, first, reasonably good intelligence; second, sound principles of operation; and third and most important, firmness of character.

When Forbes asked Buffett about his take on markets,

“Like an oversexed guy in a whorehouse. This is the time to start investing”.

I call investing the greatest business in the world because you never have to swing. You stand at a plate, the pitcher throws you GM at 47! US Steel at 39! and nobody calls a strike on you. There’s no penalty except oppurtunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.

On Market direction,

The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values.

On takeovers at hefty premiums,

Many managements apparently were overexposed in impressionable childhood years to the story in which the imprisoned handsome prince is released from a toad’s body by a kiss from a beautiful princess. Consequently, they are certain their managerial kiss will do wonders for the profitability of Company Target…We’ve observed many kisses but very few miracles.

On managements dressing up accounts,

In the long run, managements stressing accounting appearence over economic substance usually acieve little of either.

GDP Projections

These are some of the projections by foreign brokerages on GDP growth going forward. All the economists of these brokerages were proved wrong when they said “Inflation will remain in double-digits till the year-end”.

JP Morgan: 6.7% for FY09 and 6.2% for FY10.
Citi: 6.8% and 5.5%
Goldman Sachs: 6.7% and 5.8%
Merrill Lynch: 7.5% and 5.8%
Morgan Stanley: 7% and 5.7%

Since all the economists do nothing but guess-estimate, my sense is that growth will be 7%+ in FY09 and 6%+ in FY10 (In no way, I would believe growth will slip below 6%). Remember, at 6% GDP growth, the contraction will be by one-third or 33% from FY08 which I guess should price in all doom and gloom. Who knows growth in Agriculture (neglected by Economists) surprises with better than projected growth. Just as when the index was 21k+, people were shouting 25k and when the tide turned markets went way below “bear case value” which was 9.5k. In short, these so-called experts go with the trend and nothing else. Anyway only time will prove whether these guys were right or wrong.

Q2FY09 GDP growth@ 7.6%

As I mentioned in my last post, Indian economy will grow higher than the projected by Economists. India’s GDP grew 7.6% in Q2, though lower than 7.9% in Q1 of this financial year, has come at higher than expected 7.2%  median forecast of 16 economists in a Bloomberg News survey . What’s more, Agriculture and Services have surprised with better than projected growth. With this H1FY09 GDP growth is 7.8% and the situation has to be much grimmer in H2 for growth to dip below 7% which I dont feel is going to happen under the given circumstances.

My heartfelt sympathies to those who have lost their loved ones in the terror attacks.

 

 

Fund Managers Investment Strategies

S Naganath,CIO, DSP Blackrock

For stock-picking, we do pretty much the same thing that everybody else does – a combination of fundamental analysis, liquidity analysis and macro analysis. I don’t believe that bottom-up stock-picking alone works. The future price of a stock is influenced by a variety of factors. To focus only on the stock’s fundamentals would be to take a very narrow view. So, we have a mix of top-down and bottom-up approaches. If I had to look at one parameter, I would focus more on return on equity (RoE).

Tushar Pradhan, CIO, AIG

I simply look at growth at a price. India is in- herently a growth market. If you are looking for value here, you are likely to underperform for many years. Look at Procter & Gamble. It’s a wonderful business and it doesn’t require any capital. It makes sanitary napkins and it makes Vicks Vaporub. Both are perennial businesses in India. But the stock price just doesn’t move. None of the open-ended mutual funds has the patience to buy this company’s shares. On the other hand, growth can be very dramatic when the cycle is rising. For instance, look at the kind of growth the capital goods sector enjoyed in the past five years. When the cycle turns down, it doesn’t mean that the rate turns negative. The rate of growth goes down for a while before turning up again. So that is my focus – growth at a price, which will give you good returns.

Anoop Bhaskar, CIO (Equity), UTI Mutual Fund

If you are buying a company for growth and you expect it to double in size in three years, it cannot have free cash flow. My only criterion is that its cash from operations should be free. I think, the other thing is experience. You have to keep on meeting companies every week and in their offices and plants so that you know how their offices are and can observe other small things which tell you a lot about how they are managed – whether the guy serving the tea has a stained uniform; whether he greets you properly. Usually, in good companies, the lowest-level guys are very keen to work and keen to help. They are very proud to be in that company. If you didn’t like the tea and didn’t have it, they would notice and ask if they should make it again. All this tells you how the company is managed. This information is not there in the balance sheet.

Meeting companies management gives you a lead. You tend to understand what exactly is happening structurally in the industry. The key is not to have a meeting to discuss the next quarter numbers. The key is to spend time with the promoter and the management team. So I have meetings where I don’t discuss any numbers with them; some of my colleagues are very amazed – how could one have a meeting and come back without asking anything about the numbers? I say, we can call the right brokers and we will get the numbers but the point is we have just 45 minutes and let’s find out from him where he sees we could be three years from now. Is it really going to be different from what it is today? That is the key.

There is one rule (of investing) which is that, if the intensity of the working capital is lower than the sales intensity, then the company is a fraud.

Nilesh Shah, Deputy MD, ICICI Prudential MF

Selecting the right business is taking a call that, if the economy moves in a particular direction, then sector X would do well. Then you have to select the right company. The definition of a right company for us is a company which has a vision, which has an execution plan to back that vision and where promoters will not take the minority shareholders for a ride. The third important factor is to see if the price is right. Here again you try to analyse past trends, global benchmarking, some emerging market experiences and do some future analysis, to figure out if the price is right or not.

Source: Moneylife

Related link: http://deveshkayal.wordpress.com/2007/12/03/fund-managers-investment-strategy/

EXCLUSIVE: Life Insurers premium growth turns negative in Oct’08

According to the figures released by the IRDA for the month of Oct’08, life insurance industry premium growth has turned negative for the first time in the current financial year. The industry growth for the month of October’08 was a negative 6.73% compared with the corresponding figures of last year. Clearly, the life insurers have started to feel the pinch of the slowing economy and sharp fall in equity markets. On the year-to date basis (April-Oct’08), the life insurance industry grew just a marginal 2.77% YoY.

While LIC growth was a negative 15.54% on a year-to date period, private players Kotak premium growth was 100.17%, Reliance 99.78%, SBI 85.57% and Birla Sun Life grew 78.3 %.

Life insurers are the biggest players in the domestic institutional investors. Infact, in FY08, they even topped FII’s by investing close to Rs 55,000 crs in the equity markets.

What I learned from Bear Markets

Lot of you, like me, were uncomfortable with the valuations when the Sensex soared to 21k levels. But still you didn’t had the courage to sell as greed took over fear and held up with the stocks. Result: One is down 50-95% from the highs. Its time to look back and learn from our mistakes.

If you see most of the stocks at crazy and unjustifiable valuations (e.g RNRL @ 250, Adlabs @ 1900…) then that is the sign that market is most likely to peak out soon. Though its not easy to sell at the peak (you are just lucky if you did), its better to lose 10-20% on the upside than 50-90% on the downside.

Since timing the market is very difficult, what one can do is get into defensive stocks like FMCG and pharma with the highest ROE’s, if one is not able to stay in cash for some or the other reason. Though defensive stocks will also fall along with the market,  stocks with highest ROE’s and earnings visibililty are likely to outperform the Index by a huge margin. (For example Divis Labs is down 36%, Nestle is down 10% year-to date whereas Sensex is down by 58%)

Since it was my first bear market experience in my life (and I am happy it came much earlier in my investing career), my argument was that if the economy keep on growing at 8%+ then the markets will not fall much and recover quickly. But I am proved wrong. Markets start discounting events earlier than the actual event. People are now expecting growth at 6.5-7% for FY09 and lower in FY10. Still we are better placed than all the countries except China but dependent on FII’s for capital flows.

Avoid businesses related directly to capital markets if you believe the expected earnings does not justify prevailing prices. These are the businesses which will be badly hit in the market crash.

As fear takes over greed or in other words there is extreme pessimism, stocks trade at very attractive valuation, then its the time to move on to aggresive bets. At this juncture, avoid taking calls based on macro, its time to look at micro. Remember this is a once in a lifetime oppurtunity as earnings will be back to normal, economy growth at 8% and the charging bull takes the market to new highs. But for that to happen, markets will first consolidate for the next six months (maybe between 9k-12k)

My prediction for 2009!

My 10 predictions for the year 2009:

 

ICICI Bank will be the best performing stock from the Index stocks as CASA improves and interest rates fall.

RIL will go for a big ticket acquisition thanks to its substantial cash flow generation from gas sale.
3i Infotech or Firstsource or both will be put on the block but dont expect high premiums as both are heavy debt companies.  
Sensex range will be between 10k-14k as markets start discounting positive news earlier than expected.
Rupee will around 45 to the dollar as FII/FDI flows resume slowly.
Crude between $40-60

Gap between India & China’s GDP growth will narrow to 1%.
PE players will be most active in India amongst all the markets in the world.  
Overweight: Banking, Oil&Gas, Capital Goods, Pharma
Neutral/Underweight: Metals,Cement, Telecom, IT, Real-estate

 

I must admit I have been wrong in 2008. I will consider myself lucky if I get my call right in 2009!

How India dedicated funds fared in 2008

There are about 120 or so India dedicated hedge funds. Assets under management of India dedicated funds is down from $31bn in Jan’08 to around $10bn in Nov’08. Here are performance of 41 dedicated funds year-to date with their AUMs. Figures in brackets are “As of”

HSBC GIF Indian Equity Fund AUM of $2263.82mn (31/10/08 ) compared to $8.5bn as on 30/11/07. Down 61.52% (15/12/08 ). So one can sense heavy redemptions in this fund. The fund is managed by Sanjiv Duggal who has an uncanny ability to be bearish before the market does. This was justified in April 2004, April 2006 and Dec 2007.

Top holdings: Cairn Energy,Jindal Steel & Power, HCL Tech. Fully invested.

Helios Strategic Fund, a hedge fund managed by Samir Arora, is down 66.83% (30/11/08 )

Blackstone India Fund AUM of $638.5mn as on 30/11/08 (Marginal cash holdings of 2.6%). Down 64.5% YTD. Close ended fund so there is no redemption pressures here.

Arisaig India Fund AUM is $285mn (Marginal Cash holding of 3.3%) as on 30/11/08 . Down 67.3% YTD. On Redemptions: US Endowment and Foundation accounts for 60% of their invested capital, are more inclined to add to their holdings in emerging markets which have, due to market action, fallen well below target levels.

AIG India Equity Fund AUM of $123.12mn (30/11/08 ) down 58.8% (30/11/08 ). Top holdings: Bharti, Sun Pharma and Infy. 

CAAM Funds India AUM of $533.62mn is down 64.45% (18.12.08 ). Top holdings: RIL, Infy and HDFC. Cash: 2.64 (30.11.08)

CAAM Funds India Infrastructure AUM of $21.54mn is down 65.16% (18.12.08). Cash: 5% (30.11.08)

DWS India Equity Fund (Deutsche Bank Group) AUM of SGD 697.49mn (02/01/09) is down 65.34% (02.01.09).

DWS Invest Indian Equities AUM of 15.9mn Euro (30.11.08) is down 60.8%. Cash: 6.5%

DWS India Fund AUM of 190.5mn Euro (30.11.08) is down 60.5%. Cash: 10%

Mirae Asset India Discovery AUM of $375.45mn is down 47.16%. Cash: 10.28% (15.11.08)

Mirae Asset India Infra Sector AUM of $89.12mn is down 58.41%

Mirae Asset India Solomon AUM of $356.89mn is down 50.53%. Cash: 12.4% (15.11.08)

Atlantis India Oppurtunities Fund AUM of $7.8mn as on 30/10/08. Down 71.3% YTD.

Aberdeen’s New India Investment Trust AUM of  61mn pounds as on 31/10/08. Down 36% YTD

Aberdeen Global Indian Equity Fund AUM of SGD $2.3bn is down 47.4% (31/10/08)

India Value Investments Ltd AUM of $20mn as on 31/10/08 is down 58.22% YTD (12/12/08). Divis Labs is their largest holding.

Shanti Asset Management AUM of $392mn is down 72.5% YTD (11/12/08)

Excel India Fund AUM of $180.53mn Canadian dollar (30/11/08) is down 53.58% YTD

Matthews India Fund AUM of $316.6mn (30/11/08) is down 65.14% YTD

Charlemagne Capital’s Magna India Fund AUM of Euro 4.6mn (31/10/08) is down 70% YTD

Fidelity’s India Focus Fund GBP AUM of 822mn Sterlings (31/10/08) is down 60% YTD

Blackrock’s BGF India Fund AUM of $438mn (31/10/08) is down 63.2%. Top holdings: RIL, Infy, HUL

BCV’s AMC Indiac Fund AUM of CHF 31.1mn (11/12/08) is down 63.16%. Top holdings RIL, Infy, HDFC Bank

Lyxor ETF MSCI India AUM of $78.35mn (31/10/08) is down 55.24%.

JP Morgan’s JF India Fund AUM of $1458.4mn (12/12/08) is down 64.33% (30/11/08). Top holdings: Infy, HDFC, HDFC Bank (31/10/08)

BNP Paribas Parvest India AUM of $187.72mn (30/09/08) is down 52%. RIL, ONGC, HUL

Pictet’s Indian Equities AUM of $222mn (12/12/08) is down 63.8%. Cash holdings: 6.1% as on 28/11/08.

Schroder ISF Indian Equities AUM of $31.8mn (12/12/08) down 62.35% (31/10/08)

Morgan Stanley Indian Equity Fund AUM of $18.6mn is down 68.53% (30/11/08)

Morgan Stanley India Investment Fund AUM of $286mn is down 67.68% (30/11/08) . Cash holdings: 8% (31/10/08). Its a closed-end fund so no redemptions here .

WisdomTree India Earnings Fund AUM of $160mn (12/12/08) is down 54.49% (31/10/08)

JP Mogan India Fund AUM of $9.49mn (12/12/08) is down 63%.

Nomura India Equity Fund AUM of Rs 345.60crs ($70mn) is down 59.86% (30/11/08)

Franklin India Growth Fund AUM of $32mn is down 54% (30/11/08)

Eaton Vance Greater India Fund AUM of $673.65mn (30/09/08) is down 65.86% (11/12/08). Cash 4.24% (30/09/08)

Melchior Selected Trust: Indian Oppurtunities Fund AUM of $16.2mn (30/11/08) is down 81.1%. Cash holdings is very high at 34.55%. The Fund is managed by U.R Bhat of Dalton Capital Advisors.

Fidelity India Fund AUM of Australian $80mn (12/12/08) is down 50% (31/10/08)

DPF India Oppurtunities Fund, a closed-ended investment fund AUM of Canadian $129mn (30/9/08) is down 71.34% (30/11/08)

Jupiter India Fund launched on 29.02.08 with an AUM of $60mn is down just 11.1%. Cash holdings: 14.26%. Top holdings: Godfrey Phillips, Opto Circuits and Bharti Airtel (31/10/08)

There are funds like Antara India Evergreen Fund which was liquidated in Nov’08,  Boyer Allan India Fund in Dec’08 and there was some which launched new fund like Brevan Howard India Opportunities Fund with some $75mn capital during the year.

Will Satyam go for a buy-back?

Markets reacted strongly to the Satyam-Maytas deal. ADR down 55% while it closed down 30% on NSE/BSE. Satyam’s reputation built over 21 years has been destroyed overnight. So what will the management do to restore some confidence of the investors back into the company. Satyam holds Rs 5300 crs in Cash and Cash Equivalents. To quote from Ramalinga Raju’s interview to CNBC,

“Now that we are not going ahead with this transaction and it goes without saying that we will evaluate other options closely and take a decision that in our opinion is best for the investors”.

 Though increasing dividend is an option, my sense is that the company will go for a buy-back few months down the line which will help promoters increase their stake in the company from the present 8.61%. Satyam market cap is Rs 10,586crs at today’s closing price of 157. Assuming company utilises Rs 3500crs from its cash chest for the buy-back at a price of Rs 225 (closing price before the deal was announced), it can buy-back 15.55 crs from the market. There are 67.34 outstanding shares which means the company can buy-back 23% of its total stock. Promoters stake subsequently will be 11.19%. All this would lead to marginal relief to the investors as only 1 share out of 4 shares held will be accepted by the company. Corporate governance issue will make sure that Satyam joins the league of mid-tier IT companies when it comes to PE.

HDFC Bank v/s Axis Bank

HDFC Bank and Axis Bank both have shown consistency in their earnings for the past several years. HDFC Bank has grown at a CAGR of 38% from FY98-FY08. Axis Bank has grown at a CAGR of over 30% from FY99-FY08. So the question is which one should the investor bet on.

 

Market Cap (Rs):

HDFC Bank- 41,645crs

Axis Bank- 17,930crs

 

Lets compare both the banks on the basis of H1FY09 financial performance. Since the numbers are not comparable year-on year for HDFC Bank as they merged CBoP, its better to compare them on performance parameters rather than profit/income growth.

 

Return on Equity (Annualized) (%)

HDFC Bank- 16

Axis Bank-  17

 

Return on Assets (Annualized) (%)

HDFC Bank- 1.2

Axis Bank- 1.26

 

CASA Deposits (%)

HDFC Bank- 44

Axis Bank- 40.3

 

Net NPA (One of the parameters for evaluating Quality of Assets) (%)

HDFC Bank- 0.6

Axis Bank- 0.45

 

Fee Income to Total Income: (%)

HDFC Bank- 23

Axis Bank- 35

 

Capital Adequacy Ratio (CAR): (%)

HDFC Bank- 11.4 (Should not be an issue as HDFC will invest $900mn by Dec’09)

Axis Bank- 12.2 (Around Rs 1500crs will be raised through subordinated debt)

 

Cost to Income Ratio: (Parameter for evaluating productivity and efficiency)(%)

HDFC Bank- 55.45

Axis Bank- 45

 

Net Interest Margins (NIMs) (%):

HDFC Bank- 4.2

Axis Bank- 3.43

Cost of Funds (%):

HDFC Bank- 6.2

Axis Bank- 6.17

 

Branches:

HDFC Bank- 1412

Axis Bank- 729

Book Value (Rs):

HDFC Bank- 326.3

Axis Bank- 253.1

 

It can be observed from above, except for NIMs and CASA deposits, Axis Bank scores above HDFC Bank on most parameters. Still Axis trades at a historical P/BV of 2 whereas HDFC Bank trades at a P/ABV of 3. So is the price premium of HDFC Bank over Axis due to better NIMs and higher CASA deposits. I believe the premium valuations will narrow going forward. My bet is on Axis Bank! No wonder, Axis has outperformed HDFC Bank with a CAGR of 53% over 1998-2008 whereas HDFC returned 39% during the same period.

Does high dividend yield stocks create Wealth?

I was very surprised after reading a piece on Wealth Creators by Moneylife given the returns generated by high dividend yield stocks over 1998-2008. Here is the list of companies whose payout is high with the returns (including dividends earned).

Castrol India : 31%

Abbott India : 26%

P&G Hygiene & Healthcare : 21%

GlaxoSmithKline Consumer : 13%

Wyeth : (-7%)

Merck: (-22%)

Ingersoll-Rand (India) : (-22%)

Gillette India : (-27%)

Novartis India : (-30%)

Clearly, from above, one get a sense that high dividend yield stocks have turned out to be wealth destroyers rather than wealth creators. One would have been better off with bank FDs. According to ace investor Rakesh Jhunjhunwala, Multinationals have the worst corporate goverance standards in India. That might be one of the reasons for such pathetic returns.

But on the other hand, we have stocks like Phoenix Mills, Orient Abrasives, Motherson Sumi and Sesa Goa, where dividends have created wealth for the shareholders. If one goes by the top 20 wealth creators of 1998-2008, only 6  stocks have earned more dividend than the  capital gains. That’s a mere 30% success. So, it would be fair to say that high dividend yield stocks should be avoided from a longer term perspective.

Satyam Saga: A 26/11 with a Corporate angle

I see lots of similarities between the Satyam Saga and the 26/11 Mumbai terror attacks.

 

- Those responsible for the Governance quit: Home Minister of the country, CM and Dy CM resigned. Independent directors of the Satyam did the same.

 

- Activism: Shareholders made sure the deal is cancelled whereas the Indian citizens is making sure that Govt. took some concrete steps/actions.

 

- Damage done: Shareholders lost money, Company’s reputation at risk. People lost lives. Tourism Industry suffered in the peak season.

 

- Measures : Restoring the faith of the people/shareholders in both the cases.

Life Insurers premium declines for Second straight month

Life Insurance industry continues to see de-growth in their premium income for second straight month with November figures seeing a decline of 7.05% in First Year Premium after a 6.73% fall in October’08. The total premium collected has dived from Rs 6081.16 crs in Nov’07 to Rs 5652.39 crs in Nov’08.

Individual Single premium down from 1980crs in Nov’07 to 1310crs in Nov’08.

Individual Non-Single premium down from 3503crs to 3074crs

Group Single premium is up from 535crs in Nov’07 to 927crs in Nov’08

Group Non-Single premium is up from 63crs to 342crs

For the period upto Nov’08, Life Insurance industries premium has grown by a marginal 1.43%.  Shikha Sharma, CEO, ICICI Pru Life expects a flat growth in fiscal 2009. One can only conclude that flows into equity markets will be equal to or less than last year’s figures.

Six Midcaps worth Investing

Midcaps have been battered down in the last one year which gives investors an oppurtunities to buy stocks at attractive valuations. Below are the stocks with good management, strong earnings growth, superior return on equity and adequately funded for the growth available at reasonable valuations.

Everest Kanto Cylinder (CMP: 171)

EKC is the largest domestic manufacturer of high pressure gas cylinders used for the storage of industrial gases and CNG. The company currently has four manufacturing plants (Aurangabad, Gandhidham, Tarapur and Dubai) that have a total production capacity of 806000 cylinders per year. An aggressive expansion plan, including a greenfield plant in China and new plant in SEZ would increase EKC’s capacity to 2.3mn cylinders over the next four-five years. EKC should grow at a EPS CAGR of 45%+ over the next two years with EBITDA margin of 28-30% and ROE of around 35%.

Risks: Crude price @ $40/bbl which could impact CNG’s strong economics and consequently slow CNG penetration.

Future Capital (CMP: 156)

FCH is a focused alternate investment advisor with $1.5bn AUM in consumption related sectors and plans to grow its AUM to $5bn by FY11. It has exclusive rights to offer financial products (loans, third party distribution of insurance, credit cards and mutual funds) at Future Group outlets. FCH benefits from a declining interest rates scenario. FCH has one of the best management. Its a niche business model.

Risks: Might face some problem in raising capital this year but things should be better next year. Also, no exit option till capital markets improve.

Jain Irrigation (CMP: 346)

Jain Irrigation makes irrigation and piping products, plastic sheets, tissue culture planting material and processed food and vegetables. The firm has a 40% market share in total exports of dehydrated onions from India. The company had an order book of more than Rs 600crs as on Sept’08. Only 3mn hectares of irrigated area is under micro irrigation compared to a total irrigated area of 69mn hectares. The govt. emphasis on increasing micro irrigation bodes well for the company. The company has expansion plans of Rs 600crs spread over next three years. MIS business order flow to strenghten further with central govt. approving disbursals even in absence of disbursals by the state govt. Growth in international business will slow down.

Debt of Rs.16bn on the books. Margins would expand by 5-7% with favorable business mix and raisin prices. EPS is expected to grow over 35% in the next two years with ROE of around 25%. Its shareholders includes the likes of George Soros, Matthews India Fund, Rel MF and Arisaig Partners.

Risks: 7.5mn warrants issued to promoters are due for conversion in May’09 at Rs 478/share. Possibility of conversion is 50:50.

Shriram Transport Finance (CMP: 195)

STFC is the largest asset financing NBFC with AUM of over Rs 225.5bn. The company is a leader in organized financing of pre-owned trucks with strategic presence in 5-12 years old truck and a market share of 20-25%. It has a pan-India presence with 462 branches and employs 12619 employees. The company has built a strong customer base of over 0.6mn. Over the past 29 years, it has developed strong competencies in the areas of loan origination, valuation of preowned trucks and collection. It has a vertically integrated business model and offers a number of products which include: Pre-owned CV financing, New CV financing and other loans like accidental repair loans, tyre loans and working capital finance, etc. The company is supported by strong institutional investors like TPG New Bridge, Chrys Capital, Tiger Global, Blue Ridge, Citicorp and Axis Bank providing it growth capital support.

STFC helps private and foreign banks meet their priority sector lending by selling down the loans originated by it. Every year the company sells around Rs 2500crs of its loans to these banks. Basically, securitization of loans.

AUM is expected to grow to Rs 30,000crs by 2010.

Net NPAs – 0.91% in Q2FY09 from 0.88% in Q1. Could increase to 1.2% by the end of FY09 and 1.4% by FY10 as economy growth picks up in H2FY10.

Book Value – Rs 104.67 (Rs 150 expected by FY10)

Net Interest Margin – 7.71% in Q2 v/s 7.38% in Q1

ROE – 32.38% (Q2) v/s 30.41% (Q1)

ROA – 3.36% (Q2) v/s 3.16 (Q1)

 

Risks: Promoters not exercising conversion of warrants into equity shares by May’09 since conversion price is 300 which is 50% above CMP. This will result in company non infusion of Rs 216crs. I personally feel it would be exercised. GDP contraction more than anticipated.

Opto Circuits (CMP: 90)

OCIL is a leading manufacturer & supplier of electronic medical equipments. OCIL is a manufacturer and exporter of invasive and non-invasive medical equipment & supplies wide range of electronic devices and patient monitoring products in the healthcare segment. OCIL’s topline is contributed by 75% non-invasive products and 25% by invasive products. OCIL’s product portfolio includes digital thermometers, sensors, probes, pulse oxymeters, patient monitoring systems. OCIL derives 95% of its revenues from overseas markets, of which 70% comes from OEM’s. Invasive segment is expected to grow at 100% over the next few years. The global stent market is estimated at $12bn and growing at around 12% annually. Non-invasive segment will grow by new product launches. With the acquisition of EuroCor in Germany and Criticare in US, OCIL has got tremendous advantage to cater to new geographies with its diversified product basket and penetrate the existing markets, which leave enough scope for growth amid global slowdown.

EPS is expected to grow at over 45% for the next two years with EBIDTA margin over 30% and ROE of around 43%. Debt is Rs 2bn. OCIL has a track record 7 consecutive yearly bonuses.

Sintex Industries (CMP: Rs 145)

Sintex is India’s largest manufacturer of a range of plastic applications. With a well diversified portfolio and very limited competition in place, it stands a market leader in the Indian plastics processing industry as well as its expertise in the niche segment of corduroy fabrics and men’s structured shirting for premium brands add to its sheen. It manufactures a range of plastics at its 9 manufacturing plants across the country which includes prefabricated structures, industrial custom moulding products, monolitic construction, FRP products and water storage tanks. It has a market share of about 70% in overhead water tanks, 80% in specialized industrial tanks, and more than 60% of pre-fabricated structures.

Over 75% of revenues comes from plastics while the remaining comes from construction and textiles. Exports share will rise to 40% in FY10 compared to 27% in FY08. Sintex has an order book of Rs 15bn to be executed by end of FY10 in its monolithic business. The company is sitting on Rs 1700crs cash to be used for capex and acquisitions. EPS is expected to grow at a CAGR of 40% over the next two years (assuming no FCCB conversion) with ROE of 20% and EBITDA margin of around 18%.

Axis Bank might replace Satyam in Sensex/Nifty

Its a Black Day for Corporate India with serious damage to the Corporate Governance standards in India. I would not get into the implications of the Satyam fraud since everyone right now is focussed on the same. But one thing which I want to guess is who is going to be the contender for being included in the elite club, I mean, BSE Sensex and Nifty since Satyam’s market cap has been hammered down to Rs 2700crs which is more like a midcap company than a large cap company and the prospects of being merged with another higher. My guess is that Axis Bank and Reliance Capital are the likely replacement for Satyam which has a weightage of 0.62% in Nifty and 1.57% in Sensex. The chances of Axis being included in the Index stocks is more since it has a higher market cap than Rel Cap. But Rel Cap is one of the top traded counter in both the exchanges so on that parameter it scores over Axis. I dont think market cap is one of the parameter in selecting Index stocks as Jaiprakash Associates (Sensex stock) has a market cap of Rs 8400crs which is lower than both Axis and RelCap. Neither earnings (Rel Power).

My only wish is that if there is indeed a replacement for Satyam, I would prefer a stable Axis over wild swinging Rel Cap.

Plz note that these are just plain guesses and what actually turn out might be different from what I say.

Sun Pharma replaces Satyam: What does it mean?

BSE has announced that Satyam will be replaced by Sun Pharma in the BSE Index Sensex. What does it mean for the market as a whole ? EPS estimates changes significantly. Consensus EPS estimates for Sensex for FY10 is forecasted at Rs 970. Satyam EPS for FY10 was estimated at Rs 35. Consensus EPS for Sun Pharma is estimated at Rs 85 for FY10. Which means that EPS for the Sensex will get boosted by Rs 50 to Rs 1020 in FY10. This in turn reduces the forward price/earnings ratio. Market cap of Sensex will be up by Rs 10,000crs or $2bn. But the negative part is that EPS will de-grow by 6-7% YoY for Sun Pharma. Plus point is that it will serve as a defensive in case of market crash, excellent promoter (Dilip Sanghavi was awarded as the “Entrepreneur of the Year” by Economic Times in 2008 ) , ROE of around 25% and forward P/E ratio of 12-13x compared to 6x for Satyam (before Maytas deal) . All in all a positive for the investors !!

Rakesh Jhunjhunwala’s holdings as on 31st Dec’08

This is just a small brief on the shares Ace investor Rakesh Jhunjhunwala bought/sold in the December quarter.

He bought 1,64,000 shares of Titan Industries (0.38%) , 6,80,000 shares of Geometric Ltd, 61,944 shares of Rallis India, 982 shares in Praj Industries

He sold 24,00,023 shares of Hindustan Oil Exploration Company Ltd, 820000 shares of Bhushan Steel (complete exit), 7,00,000 shares of Nagarjuna Constructions and 14500 shares of Lupin.

No change in Pantaloon Retail, Punj Llyod, Bilcare, Crisil, Geojit Financial, Prime Focus and Mid-day Multimedia shareholdings.

I will keep on updating the changes in shareholdings in other stocks. For a detail check on his holdings, visit The Equity Desk.

Satyam and Corporate Governance in India

First some facts on Corporate Governance:

2007 ranking on Corporate Governance by Asian Corporate Governance Association (ACGA) placed India 3rd out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of China, in 9th place.

Govt. of India has introduced a New Companies Bill which would allow shareholders to pursue class-action lawsuits against the company.

Directors can sit on as many as 15 boards. Independent directors should make up atleast half of the board strength in a publicly held company.

Now some views by Management professors from Wharton (courtesy: Knowledge @ Wharton)

Mauro Guillen,

Indian business has an advantage in arguing that the problem is limited to Satyam and is not systemic. India is not perceived like Russia – it is neither everyone’s darling nor the plague. This works to the country’s advantage because it deflects the blame of such occurrences to the way governance works in emerging economies rather than to India.

Michael Useem

Draws a parallel between what occurred at Satyam with the scandals at WorldCom and Tyco rather than at Enron,” At WorldCom, the CFO and the CEO were knowingly mistating the accounting and financials of the firm; at Tyco, the CEO and CFO were knowingly taking money from the company for personal purposes. Satyam’s disaster has a parallel to these acts of malfeasance. If it survives, Satyam maybe able to redeem itself with new management and governance codes. He recalls working as a consultant a couple of years ago with Tyco where the company’s new CEO Ed Breen systematically went about cleaning up after the departure of disgraced CEO Dennis Kozlowski, instituting strong corporate governance practices. Tyco is one of the best examples of corporate governance turnaround.

Jitendra Singh on governance practice at Infosys,

He drew a “level of confidence” from the accounting rigor and governance mechanisms at Infosys, where he was an independent director from 2000 to 2003. He recalls how T.V. Mohandas Pai, the company’s then CFO, “would take so much time going into accounting details. “

How effective independent directors can be is mainly a factor of the “dynamics inside the board room once the doors are closed”. There is an attitude in some Indian companies that the board members actually work for people who have brought them onto the board. This is a completely misguided attitude. It looks like this may have been the problem at Satyam. The real strength of a healthy board is when a consensus gets overturned by a dissenting view.

Saikat Chaudhari on Enron v/s Satyam

At Enron, the CEO stonewalled, while whistle-blowers came out with the truth. At Satyam, there were no whistle-blowers. The CEO blew the whistle on himself.

Why India will continue to trade at a premium to EMs

Five reasons why India will continue to trade at a premium to Emerging Markets.

- Better Corporate Governance though there are some companies where corporate governance standards are doubted, like JP Associates, Sterlite Industries, ADAG companies, DLF (Sensex) and Unitech (Nifty). But the weightage of these companies in Sensex is around 10% in aggregate which is not so high compared to other Emerging markets. Satyam was an isolated case. In Korea, there is an issue of corruption.

- High ROE’s: In FY10, Sensex ROE is expected to be around 17% which is higher compared to 14-15% for Emerging markets. 

- Diversified across sectors: Sensex constituents are diversified across various sectors with cyclicals and non-cyclicals. Going ahead RIL’s share from cyclicals business will be less than half the total revenues. Brazil and Russia are basically commodity exporters which means they will continue to trade at low PEs. 50% of Taiwanese Index is Tech.

- Domestically demand driven economy: India’s demographics and low exports share to GDP make it less vulnerable to external threats. On the other side, India is dependent on capital inflows.

- Healthy Corporate balance sheets with relatively low debt to equity, reasonable cash balances and freshly added stock.

Oil below $50/bbl: Companies at risks

There are many companies whose earnings are at risks with crude oil trading below $50/bbl (right now below $40/bbl). Indian upstream companies like ONGC, RIL, Cairn India and GAIL , Indian Capital Goods companies like L&T and Punj Llyod. Offshore companies like Aban Offshore. Refining companies like RPL.

Cairn India is highly leveraged to Oil price. Every $1/bbl decrease in WTI reduces Cairn’s EPS by 5.2% in FY09E, 2.3% in FY10E. ONGC’s EPS will be impacted by 3-5%  for every dollar decrease in oil price. If ONGC share 33% of under-recoveries on cooking fuels, assuming no under-recoveries in retail fuel, then at $52/bbl, its under-recoveries would be Rs 53bn which would reduce its net realisations by 16% to $44/bbl.

RIL is also impacted by the direction of gross refining margins. Every dollar movement impacts its EPS by Rs 10. RIL is least impacted as its share from production of gas will increase going forward.

GAIL’s petrochemicals business could be impacted negatively with EPS declining 0.6% for every $1/bbl decrease in crude price.

Approx. one-third of L&T’s business comes from hydrocarbon business. With oil prices below $50/bbl, clients might start re-evaluating the feasibility of the projects which will lead to either cancellation of orders or re-negotiation of price. Some respite for L&T could be ONGC’s plan to invest $5.3bn in gas finds by 2013. But L&T can only bid for shallow water projects as it lacks deep sea projects capabilities.

66% of order book of Punj Llyod comes from Oil & Gas and petrochemicals sector and more than 70% of order book comes from overseas. Punj Llyod has a history of contractual disputes (IOC-PIL, GAIL, Petronet, SABIC).

Aban Offshore is impacted due to higher supply of rigs coming into the market with a declining demand for rigs as E&P projects is not viable with crude below $50/bbl.

I would avoid all the above stocks (except RIL) till crude price recovers to $50/bbl on a sustainable basis. I think crude price are not going to rebound to $50/bbl in the next six months (maybe a year). As for Oil Marketing companies (OMCs), it is more of a trading play than a long term bet as it is dependent on govt. policies.

CRAMS players like Divis and Dishman Pharma might be one of the beneficiaries as their raw materials constitute of oil derivatives.

Sunil Singhania’s expectation in 2009

Sunil Singhania is an Ex.VP -Equities of Reliance MF. He has been managing some of the top funds like Rel Growth Fund, Rel Diversified Power Fund among others.

What are the key concerns of the Indian market in the medium term ?

In the medium term, it will mostly be fundamental concerns. We have seen a big slowdown in a number of sectors. There is the old inventory of raw material lying around and there is a lot of marked-to market loss in that. Because of the demand slowdown a number of companies are operating at sub-optimal capacities. These two factors are going to put a lot of pressure on profitability. And there is also higher interest cost because of higher interest rates putting further pressure on profits. The results will be disappointing in the next two quarter. But the market already expects it and has already discounted it. It is not going to be an unexpected shock.

When the markets pick up, which sector will be the one to move first ?

Right now the call is that interest rates are falling and the economy is reviving. So the sectors to get impacted first will be the interest rate sensitives like construction, capital goods and to some extent auto companies. These stocks have fallen a lot and they would be the direct beneficiaries of a falling interest rates. But I would be more cautious and not get euphoric too early.

From a valuation perspective, pharma looks good with its significant entry barriers. They are big beneficiaries of rupee depreciation since they are export oriented and raw material costs have dropped significantly. This sector will grow by 15-20% over the next few years. (My note: I guess he is talking about Divis Labs ).

IT will not command the valuations it used to earlier. We dont see the problems in the US disappearing over the next one year. The IT exposure to financial services is quite high. The near term earnings may not be at risk due to rupee depreciation but the kind of growth which IT companies enjoyed a few years ago will no longer happen.

Source: Value Research Online

AUM’s of Life insurers as on Dec’08

Currently in India, 21 life insurers are operating of which 20 are private. Every month, it is mandatory for Mutual Funds to disclose their AUM but not for players operating in the life insurance industry. One can only know about this when quarterly results are declared. So here it is (Only top 10 players). I wish life insurers had given the break-up of assets managed between debt and equity. Thanks to corporate governance issues with ADAG companies, Reliance has for the first time disclosed the information I never expected!

LIC, the BIG boy of Indian equities, manages assets worth Rs 8,06,000 crs

ICICI Pru Life AUM of Rs 28,445.2 crs, of which Rs 14863.3crs in Equity and Rs 13581.8crs in Debt)

SBI Life AUM grew by 80% to Rs 13,272 crs.

Max New York AUM of Rs 4827 crs, up 45% YoY

Reliance Life AUM of Rs 4495 crs, up 57% YoY (of which Rs 2524.4crs in Equity and Rs 1970.6crs in Debt)

Bajaj Allianz AUM stands at around Rs 13,152.6 crs

Birla Sun Life AUM is Rs 7958.5 crs, up 21% YoY

HDFC Standard Life AUM stands at around Rs 9,500 crs

(The company has not declared any official figures for Dec quarter. But they did announce an AUM of 10k crs in Sept’08 with 55% of assets under equity. Since then, Index have fallen 33% by the end of Dec’08. So my sense is that AUM would be around that figure considering new premium inflows and gains in debt investments)

Kotak Life manages assets worth Rs 3374 crs.

Tata AIG AUM stands at over Rs 4000 crs

Just to compare with Life insurance industry, Indian Mutual Funds managed assets worth Rs 4,18,336crs as on 31st Dec’08 whereas life insurers manages almost 9,00,000 crs worth of assets!!

On the liquidity side, my calculations show that private life insurers are sitting on Rs 5000-5500crs (over $1bn) cash as on 31st Dec’08 waiting to be invested in the equity markets.

Reality check on Corporate Governance in India

ET’s supplementary Corporate Dossier carries a reality check on Corporate Governance in India. Its an excellent piece. Click here to read.

Also read how Kris Gopalakrishnan was selected as Infy’s CEO.

Stay Hungry, Stay Foolish

I found out some interesting things from “Stay Hungry, Stay Foolish” by Rashmi Bansal which is about 25 young entrepreneurs who graduated from IIM-A.

Shantanu Prakash, Educomp Solutions:

Market penetration levels are less than 2%. And Educomp can keep growing 100% over the next ten years without reaching a saturation point.

We are now five times larger than our nearest competitor in India.

Educomp today has atleast 25 employees who are dollar millionaires.

Educomp is valued at about $1.5bn (as of May’08). I think we can be a $10bn company in the next three years.

Vinayak Chatterjee, Feedback Ventures

Money is a by-product. Business growth, turnover, bottomline is a by-product of what your heart and head wants you to do. So if you follow that money will follow. Woh Gandhi waali baat hai ,”Find purpose and the means will follow”.

Feedback is one of the top 10 engineering companies in India with 5000 kms of roads, bridges and industrial parks to its credit.

Somewhere in ‘98-99, we built up overheads far higher than our order book. We had negative cash flows. It was the second last day of the month and there was no money to pay salaries. Vinayak met Deepak Parekh and he immediately handed over the cheque.

Deepak Parekh, a “bailout man” ? First UTI, then Feedback and now Satyam.

R Subramanian, Subhiksha

RS started Viswapriya Financial Services & Securities Ltd, an IPO financing company in 1991. In 1996, he exited the business as the markets were very weak but he had money unsure of how to utilise it.

Current situation is completely the opposite. He needs money immediately. I remember, at one point, he mentioned that he will takeover the big players in Retail (read Reliance, Bharti).

Rashesh Shah, Edelweiss Capital

In ‘94, the index was at 4500. In 2003, it was at 3000. Adjusted against the inflation, the market had lost 80% of its value.

Educomp Solutions: A steal at CMP!

I have mentioned about Educomp in my previous posts here and here

A look at some of the brokerages target on Educomp will give a sense that the stock is a bargain at CMP of Rs 1410 (Feb futures closed at Rs 1341 on Friday). Lets start from aggressive ones to conservative.

CLSA – 4400  (Analyst Bhavtosh Vajpayee & his team was voted No.2 Technology/IT Services & Software Analysts by Institutional Investor in 2008. Bhavtosh Vajpayee was also voted as one of India’s best analyst by Business Today. They also helped Nandan Nilekani in his book “Imagining India” to get an investment analyst perspective)

Merrill Lynch – 3400

SSKI-IDFC – 2800

Credit Suisse – 2700

Kotak – 2550

First Global report criticize that the company does not generate free cash flows at the operating level. Someone should tell them that Bharti turned FCF positive this year and has been a multibagger if one had invested in 2003.

I would highly recommend to read a report on Indian Education sector by CLSA analysts to understand the business,  Clarifications and Letter to shareholders and then take a call on investing in the stock.It always pays to do one’s own homework!

If I had to summarise, Recession-proof business, Scalable business model, well funded for growth, available at decent valuations, company taking measures to be among top 10 in India in Corporate Governance and No payment issues as they bag most orders from Govt. (though debtor days are high)

My advice to Educomp management is to get their Corporate Governance standards rated by Crisil and Appoint one of the Big 4 audit firms as their Statutory Auditors. Appointing GT as their internal auditors wouldn’t give much confidence as they ultimately report to the company management even though its a good move.

8% Economy growth in FY11?

I know I am thinking too far since we have not even completed FY09 which is expected to grow between 6.5-7% and FY10 between 5-6%. Now what is the trigger that will push the economy to grow from 5-6% to 8% ? (Many of you might be thinking I am too optimistic). According to me, there are three factors which will lead to 8% GDP growth.

1) Production of Oil & Gas by RIL and Cairn, RPL refinery will boost India’s GDP by atleast 1% in FY11.

2) Implementation of GST from April 2010 will contribute an additional 1.4% (atleast) to GDP according to Vijay Kelkar, Chairman, 13th Finance Commission.

This is what Nandan Nilekani mentions in his book “Imagining India”
about Mr.Vijay Kelkar,

I have been a long time admirer of his, especially after I saw a remarkable presentation he gave in 2002, titled ‘India: On the Growth Turnpike’, which predicted -with what would turn out to be unusual accuracy -India’s growth trends over the next few years.

3) Recovery in the world economy will also help in accelerating the Indian economy  (Assuming 5.5% growth in FY10)

All in all, bulls will be back by the end of 2009 or early 2010!!

Top holdings of Top Indian Hedge Funds

Four largest Indian hedge funds manage cumulatively $6.55bn. So where is the ’smart money’ betting on in the Indian stock market.

HSBC GIF Indian Equity Fund (AUM of $2.3bn) top 10 holdings include Cairn Energy, Jindal Steel & Power, Wipro, HCL Tech, TCS, Maruti Udyog, Idea Cellular, Aditya Birla Nuvo, DLF, Glenmark. Cash: 2.39%  (Seems to be betting on out-of favour stocks)

Aberdeen Global Indian Equity Fund (AUM of $1.5bn) top 10 holdings are HDFC, Infosys, Satyam, Hero Honda, ICICI, GSK Pharma, Grasim, HUL, ITC, Bharti Airtel. Cash: 2.4% (Ofcourse the fund exited Satyam after 31st Dec’08 )

JP Morgan India Fund (AUM of $1.42bn) top 10 holdings include Infosys, HDFC Bank, HDFC, RIL, ICICI, Bharti Airtel, BHEL, ITC, NTPC and L&T. Cash: 10.5% as on 31st Jan’09. (Quality names should do better this year)

Fidelity India Focus Fund (AUM of $1.33bn) top holdings include ICICI, United Spirits, MCX, Suzlon, Tata Motors, Financial Technologies, Pantaloon, SBI, Piramal Healthcare, HDFC Bank. Fully invested. (Investing in stocks where funding is the key issue)

Seth Klarman in “Security Analysis”

I am currently reading what is considered as the “bible of value investing”, Security Analysis by Ben Graham and David Dodd. Seth Klarman has written the preface to the Sixth Edition of the book. Though the whole piece is worth reading, I have taken out some key things which I believe should be kept in mind by every investor.

Investing in bargain-priced securities provides a “margin of safety” – room for error, imprecision, bad luck, or the vicissitudes of the economy and stock market.

As Graham has instructed, those who view the market as a weighing machine – a precise and efficient assessor of value – are part of the emotionally driven herd. Those who regard the market as a voting machine – a sentiment-driven popularity contest – will be well positioned to take proper advantage of the extremes of market sentiment.

Essential characteristics of a value investor are patience, discipline and risk aversion.

As Warren Buffett said in his famous article, “The Superinvestors of Graham and Doddsville”, “It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn’t take at all. Its like an inoculation. If it doesn’t grab a person right away, I find you can talk to him for years and show him records, and it doesn’t make any difference.”

While formulas such as the classic “net working capital” test are necessary to support an investment analysis, value investing is not a paint-by numbers exercise. Skepticism and judgement are always required. For one thing, not all elements affecting value are captured in a company’s financial statements – inventories can grow obsolete and receivables uncollectible; liabilities are sometimes unrecorded and property values over or understated. Second, valuation is an art, not a science. Because the value of a business depends on numerous variables, it can typically be assessed only within a range. Third, the outcomes of all investments depend to some extent on the future, which cannot be predicted with certainty; for this reason, even some carefully analysed investments fail to achieve profitable outcomes. Sometimes a stock becomes cheap for a good reason: a broken business model, hidden liabilities, protracted litigation or incompetent or corrupt management. Investors must always act with caution and humility, relentlessly searching for additional information while realizing that they will never know everything about a company. In the end, the most successful value investors combine detailed business research and valuation work with endless discipline and patience, a well-considered sensitivity analysis, intellectual honesty, and years of analytical and investment experience.

Another important change in focus over time is that while Graham looked at corporate earnings and dividend payments as barometers of a company’s health, most value investors today analyze free cash flow.

Good businesses are generally considered those with strong barriers to entry, limited capital requirements, reliable customers, low risk of technological obsolescence, abundant growth possibilities, and thus significant and growing free cash flow.

There is a significant downside to paying up for growth or worse, to obsessing over it. Graham and Dodd astutuely observed that “analysis is concerned primarily with values which are supported by the facts and not with those which depend largely upon expectations.” Strongly preferring the actual to the possible, they regarded the “future as a hazard which his (analyst’s) conclusions must encounter rather than as the source of his vindication”. Investors should be especially vigilant against focusing on growth to the exclusion of all else, including the risk of overpaying. Again, Graham and Dodd were spot on, warning that “carried to its logical extreme, ….(there is no price) too high for a good stock, and that such an issue was equally ’safe’ after it had advanced to 200 as it had been at 25.

Dish TV compared to EchoStar Corp. of USA

This is what Bruce Berkowitz, founder, Fairholme Capital Management writes in his introduction to Part IV (basically on the importance of free cash flow) in “Security Analysis“. He gives an example of EchoStar Corp., parent of the DISH satellite TV business. I thought it could be compared to Dish TV in India.

That company went public in June 1995, on the premise that there was room for another pay-TV provider. By 2000, at the peak of Wall Street’s infatuation with all things tech, EchoStar had 3.4mn subscribers, an enterprise value (market value of equity, plus net debt) of approx. $30bn, and a reported annual loss of nearly $800mn. Worse yet, the company was consuming cash like crazy as it sought to build its infrastructure and customer base – and that alone would take it off many value investors radar.

Fast forward five years, and the subscriber topped 12mn. With many of the start-up costs behind it, free cash was flowing and growing -monthly subscriber fees are a pretty reliable income stream. Yet at that time, in 2005, EchoStar’s enterprise value was just $17bn. Clearly, the market was not giving the company much credit for its cash generating abilities. That allowed Fairholme to purchase shares in an excellent franchise business with a double-digit free cash flow yield while risk-free investments were paying 5%.

At the peak of 2008, Dish TV’s market cap was Rs 4282crs and its debt was around Rs 450 crs resulting in an enterprise value of Rs 4732 crs and a reported annual loss of Rs 414crs. Currently, its market cap is around Rs 2000 crs thanks to rights issue and the company continue to report losses.

How will Media fare in an Economic slowdown

Media & Entertainment is generally considered as a recession-proof industry. So what will be the impact on advertisement in a slowing economy. Industry experts outlook remains cautious for India. KPMG-Group M forecasts a 8% advertising growth in FY10 while Media Partners Asia (MPA) forecasts a growth of 7.2% in 2009 and 9.3% in 2010 compared to 14.4% in 2008. Pitch- Madison forecasts a marked slowdown to 2% YoY growth in advertising. Advertisement revenues account for 70-80% of the total revenues of the Media and Entertainment industry. High single-digit growth is better than a negative growth seen in other developing countries. Saving grace for the media industry could be higher penetration of DTH but still it would not be significant to offset the softening ad spends.

Interestingly, Star Group, the biggest TV network in India, gets less than 8% of the total broadcasting revenue pie. The Times of India Group, gets less than 10% of the total revenues in print.

LIC cannot increase stake in 18 Nifty companies

According to Insurance regulator IRDA, any life insurance company cannot hold more than 10% stake in a particular company. Its implications is that the big boy of Indian stock market LIC (equity investments of over Rs 2 lakh crs) will not be able to increase its stake in 18 out of the 50 Nifty companies. LIC’s stake in these 18 companies are as follows:

ABB – 12.86%

ACC – 17.48%

Ambuja Cement – 11.25%

Axis Bank – 10.36%

BPCL – 9.88% (which is pretty much close to 10%)

Cipla – 13.49%

GAIL – 9.98%

Grasim – 12.75%

Hindalco – 10%

ITC – 13.98%

L&T – 17.38%

Mah & Mah – 17.61%

Maruti Suzuki – 14.64%

Reliance Infra – 13%

Siemens – 13.26%

Tata Motors – 10.27%

Tata Power – 11.44%

Tata Steel – 11.56%

LIC have little room to increase its stake in ICICI (9.38%) and Tata Communications (9.21%). The life insurance major has NIL exposure to DLF, NTPC, Reliance Power, Sun Pharma and Suzlon Energy. In the first three stocks, promoter’s holding is 85% or more as on 31st Dec’08. Fresh money could be deployed in Bharti Airtel, BHEL, Cairn, HDFC twins, Idea Cellular, PNB, RIL, SBI and Sun Pharma.

GMR Infra/Jindal Steel might replace RPL in Nifty

Last time after the Satyam saga, I had mentioned that Axis Bank or Rel Cap might replace Satyam in Sensex and Nifty stock constituents. Rel Cap replaced Satyam. Though Axis has joined the Nifty club by replacing Zee Enterprise from Feb’27. Now I expect GMR Infra or Jindal Steel & Power to replace RPL if the merger between RIL-RPL go through simply because both are heavily traded counter and their market caps are around Rs 15,000crs.