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.

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.

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.

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.

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.

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!

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)

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.