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.

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.

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.

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.

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.

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)

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!!

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.

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.

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.