Value Investing to Investing Values

Nesco Ltd

2012-01-07T20:11:00.000-08:00

We value investors are a funny breed. I have over the past couple of years experienced that though we might share the same framework and thought process for some explicable reasons the portfolio of value investors rarely seem to match beyond maybe 20 – 30% of stocks. I regularly compare notes with my fellow friends and value investors Rohit Chauhan and Neeraj Marathe ( and a few more ) and funnily I have found that all of us have different stocks that we are comfortable with.

So it was a interesting that during the last week of December it transpired out of conversations/emails that all three of us have been independently looking at a company - Nesco Ltd. So we decided that post the year end break without discussing individual thought processes or our view on the company, we will put out posts on our blogs with our perspective on this investment opportunity. We thought it would be an interesting exercise for us as well as the readers of our blogs to have a post on the same company at the same time. The idea is not to see who is right or who is wrong. All three of us know that even if we reach a consensus, all three of us could be very wrong and even if all of us have different conclusions, all three could be very right! Well thats the best thing about investing, there is no one way of doing things.

You can check out Neeraj Marathe’s post at http://neerajmarathe.blogspot.com/ and Rohit Chauhan's post at http://valueinvestorindia.blogspot.com/

So here goes my side of the story

Nesco Ltd was established in 1939 as New Std Engg and operated in the capital goods business. The company had plants in multiple locations in Mumbai which it finally consolidated at a single location in Goregaon on the Western suburbs of Mumbai with a 70 acre plot.

The company started incurring losses in its capital goods business and gradually shifted to the business to Gujarat and converted the Mumbai land bank into a exhibition and convention centre. The size of the land bank coupled with close proximity to the airports and the national highway has enabled it to become one of the premier exhibition centres in the country and has conducted over 500 exhibitions and events at the location. The closest competitor in Mumbai, Nehru Centre is less than 1/15^th the size in terms of exhibition space.

The company has also converted its old plant sheds into IT parks and is in the process of constructing a large IT park ( IT park 3). IT park III will have nearly 8,00,000 sq feet of space and the company has leased out a significant chunk of this project which is under construction and should be ready for fit outs in the next couple of months.

The management has been conservative and has repaid the debt on the books and has used the internal accrual route to fund expansion for the IT park that it is setting up. The management has clearly stated plans for IT park IV and IT park V where it intends to use the cash flow generated out of the exhibition business and rental income to fund construction of the remaining IT parks.

Financials

FY 2011

a) Income

1) Convention Business - 65.62 crores ( up 21% over previous year)

2) IT Park ( rent Income ) – 51.61 crores

3) Capital Goods business - 16.82 crores ( Down from 24.8 crores in the previous year)

4) Income from investments and other income - 10 crores

b) Cash/ Investments on Balance sheet - 168 crores

c) Net Profit - 68 crores

d) Cashflow from operations - 78 crores

HY - 2011 -2012

a) Income

1) Convention Business - 25 crores ( HY 2011 - 21 crores )

2) IT Park ( rent Income ) – 51.61 crores

3) Capital Goods business - 15.29 crores (HY 2011 - 6.61 crores )

4) Income from investments and other income - 3.15 crores ( HY 2011 - 3.63 crores )

b) Cash/ Investments on Balance sheet - 215 crores

c) Net Profit - 25 crores

Dividend policy

The dividend payout ratio has been poor because the management has chosen to reinvest the cashflow in construction of the new IT building. The management intends to maintain the same as it is averse to taking debt and will use internal accrual to fund further construction over the next four to five years. One can’t argue against this thought process of the management considering the high operating margin and ROCE.

Valuation

The company is currently available at a market cap of Rs 800 crores with no debt on books. Against which we have

Cash / Investment on Books - 215 crores

Net Profit – 68 crores ( Last year)

IT Park III should start contributing from next year and on a conservative estimate of Rs 80 per sq feet should generate an additional Rs 50 crores of revenue in FY12-13.

So net cash of the company is available at 5-6 times and which would appear low for a company with high ROE and with steady cashflow and huge entry barrier to the business.

Risks

1) Though cashflows over the next 4- 5 years are slated to be lined up for construction of IT park IV and V, subsequent to which there is lack of clarity on what the management intends to do with the cashflow going forward. The bladder problem of management either earmarking the cash for its capital good business or blowing it up into unrelated diversifications exists.

2) The historical low dividend payout ratio though can be argued as logically correct at this stage of the business could however turn out to be a constant thought process for the management.

3) The biggest risk that I perceive is that the entire business model is constructed around a piece of land in a single location in Mumbai. Mumbai is currently the most expensive city in this country with respect to real estate prices. There is a situation of oversupply of commercial property in Mumbai. The company stands exposed to not just a generic correction in real estate prices ( hence associated rent income ) but more importantly derating of the Mumbai real estate market. There is a increasing trend of companies shifting their IT / ITES operations out of Mumbai to other locations like Bangalore/ Pune/ Gurgaon etc. Case in point is that Intelenet which occupies one of the building did shift a significantly large process of over 2000 ppl to Aurangabad. TCS Eserve which occupies one of the other buildings is expanding its operations in Ahmedabad and other Tier II cities. Considering the 4- 5 year window when shareholders could possibly look at actual cashflow, this is a large risk that the business carries.

My viewpoint

Prima facie the company appears to be cheap with relatively steady cashflows. I intend to look at company from a different angle.

Is Nesco a cash bargain / holding company and hence should be valued accordingly?

Lets examine the management competency variables

1) The biggest achievement of NESCO is the piece of land at Goregaon which it fortuitously acquired a long time back.

2) The current business model and cashflows are dependent on this piece of land.

3) Can we say the management has competency in the real estate business and can take up more projects beyond this piece of land like any other real estate developer.

4) Is the same true about the Convention business? Do we think the management has competency to set up x more convention centres across the country and run it?

5) The only operating business that management is running which is the capital good business has a chequered past track record.

So lets flip the coin and look at NESCO as a holding company / cash bargain opportunity. We have a plot of land which on a conservative basis can be valued at RS 2000 crores + 200 crores ( Cash on balance sheet) = Rs 2200 crores.

This piece of land through rent and the convention centre generated about 68 crores of net profit last year . (I m keeping the calculations simple at this point of time without valuing the capital goods business separately)

Effective yield of 3.4%. This yield should go up to about 5 % with the IT building III coming to play.

The market today values

Holding companies - 25% of intrinsic value

Cash bargains - 40-50% of cash on balance sheet

( One can argue on the merits and demerits of these discounts but if one feels otherwise clearly there are better managements who could be looked at for cash bargains)

Considering the relatively lower yield being earned as compared to other cash bargains and management risk we can value the company at about 40% holding value.

Value of the company - 40%* Rs 2200 crores - 880 crores

Current market cap - Rs 800 crores.

Conclusion

Considering the lack of visibility of cashflow payout to the shareholders over the next 4- 5 years, I would like to look at this opportunity a couple of years down the line as clarity emerges on the management’s thought process and visibility on dividend payout and deployment of future cashflows.

Wordsworth

2011-11-16T03:42:00.000-08:00

Like women’s fashion, there are words and phrases which come into our daily lives at light speed and disappear equally fast. Very few stick around to become part of our long term vocabulary. I have experienced this in all facets of life over the years whether in College/Corporate world/ Indian movies or in the investing space.

I of course rue words and phrases which are dear to me disappear gradually from the popular vocabulary. For Ex the word “Zulf” was so intrinsic to Hindi romantic songs but has been gradually replaced by the crude “Baal”.

When I was in management school the word “ Paradigm” had just emerged as the new paradigm of corporate lingo and everything kept moving to newer paradigms. Paradigm though still used fairly extensively has now been replaced by a more easy to pronounce “ Plane”. We all now seem to moving onto different planes and of course try to land on the “Same Page”.

The investing world also has its fair share of words and phrases that come and go like flavours of the month. It was with much amusement that I was recollecting just about 6 – 12 months back one of the most popular pair of words that most TVanchors and pink newspapers were mouthing was “ Coupling” and “ Decoupling”. I am sure most of you have a wry smile about this one.

Readers would recollect we used to be “Coupled” one week and miraculously used to get “Decoupled” the next week and again get coupled the next week. It was like speed dating and I thought it would have been easier to track Liz Taylor’s everchanging marital status than figuring out where our markets were in their love affair with global markets.

I of course am not so sure whether we are currently coupled or decoupled though our correlation or the lack of it with the global markets remain the same.

A new phrase that I m increasingly hearing for the last 6 months and has entered the Tv anchors lingo is “Risk Aversion”. It would be interesting to see how long “ Risk Aversion” lasts or will it also disappear gradually if markets go up.

To end, a nice phrase from the English romantic poet William Wordsworth

The mind that is wise mourns less for what age takes away; than what it leaves behind.

Interesting Accounting - Jyothy Laboratories

2011-11-13T07:57:00.000-08:00

I was listening to the current quarter concall of Jyothy Laboratories and came across some interesting accounting.

In the month of May 11, Jyothy Laboratories announced the acquisition of Henkel’s stake in its Indian subsidiary Henkel India, gaining a foothold in the detergent market. Henkel India has been losing money for sometime and Jyothy has initiated action in turning the business around. As part of the exercise Jyothy has borrowed money on its balance sheet and lent that money to Henkel to manage debt on its books.

In the current quarter Jyothy has borrowed over Rs 460 crores ( 4600 Rated Taxable Zero Coupon Non Convertible Debentures of a face value of Rs 10 lacs) by issuing short term debentures to the bank and lent the same to Henkel India. The debenture has been issued for a period of 91 days and will be redeemable at a premium of Rs 26,801.47 per debenture.

Now comes the interesting part. Jyothy in its current quarters results has booked other income of 14.82 crores. Nearly about 12 crores of it is interest paid by Henkel India to the parent for the money that Jyothy has lent to it. It is a significant amount considering the fact that Jyothy’s PBT for the quarter is Rs 16.93 crores.

But guess what, there is no corresponding interest expense booked in Jyothy’s accounts against the income that they are booking. On the concall the management said that since it is a zero coupon debenture which is being redeemed at a premium, the company is allowed to write of the redemption premium ( which is essentially interest) from the reserve and surplus. So magically they are booking interest income in the profit and loss account and expensing it out in the balance sheet.

Not really Ujjala bright and clean I must admit

Endowment Bias and our wives – Interesting paradox

2011-10-07T23:38:00.000-07:00

I have been besieged with increasing demand from my fans ( Fan club of two people - My pet frog and my pet rock) to start writing on the blog again. So here goes …

I m sure most of you have read about endowment bias on multiple blogs. Prof Bakshi has written on it and so have my friends Rohit and Neeraj commented on it.

Endowment bias or effect is the phenomenon where people start valuing something more after they own it. It is the effect where people would demand a considerable higher price for a product that they own as opposed to what they would be prepared to pay for it before they own it.

A practical example is that people will always expect a higher amount for their home when they are selling as compared to what the prevalent market rate. In case of the house part of the value ascribed comes from the effort put in over the years in converting the house to a home at a emotional level. The buyer of course has no such emotional attachment to the house. A car once purchased, miraculously seems to better features than the neighbours car and so does our television or tablet etc

Endowment bias seeps into our stockpicking when suddenly the company we buy transforms from a ugly duckling into a white swan. It begins to look very precious with great business opportunity, great management, ability to increase marketshare, ability to increase margins etc. This flaw also plays out in our decision to sell the business when we always perceive it to be more valuable than what the market is willing to pay for it.

The paradox of course is that we suddenly don’t find our wives more beautiful or more precious after we marry them ( hopefully my wife is not reading this). I haven’t encountered men (even women) paying glowing tributes to their spouses like saying “ How good a cook my wife is or how beautiful/ intelligent she is or how caring my husband is etc

One way of looking at the paradox is that we really don’t own our wives :-). A lovely song by the Beatles called the “Norwegian Wood” comes to my mind immediately

“I once had a girl, or should I say, she once had me …"

Punjab Alkalis Update

2011-03-08T23:15:00.000-08:00

I had earlier written on the opportunity arising out of the possible disinvestment of Punjab Alkalis by the Punjab state government.
The opportunity seems to have taken a ominous turn with an update that I read on the website which states that no bids have been received before the due date. The link is enclosed below
http://www.pbdisinvest.nic.in/html/approver_current_status_PSU.htm
Though I cant make out whether this is a old update when initial interest for the disinvestment was called for or a fresh update for the financial bids. Part of it could originate from the floor price that the government has defined or structure of the deal.
There could be fresh round of bids called with some concession from the government, I would rather err on the side of caution. Considering there is no valuation comfort, it makes sense to exit the situation without having to live thru the risk.

Humour in Results

2011-02-19T00:09:00.000-08:00

It is my honest belief that there is a lot of humour all around us if we look at things with a slightly open mind.

As I was browsing through announcements on the BSE site, I came across a interesting announcement made by Gujarat Alkalies and Chemicals ltd regarding their results.

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Gujarat_Alkalies_and_Chemicals_Ltd_140211.pdf

In the Press release Shri Guruprasad Mohapatra, IAS, MD of the company announced that financial ratios have improved significantly at the end of the third quarter as compared to year end March 10

1) Price Earning Ratio - 13.15 times from 5.37 times

2) Current Ratio - 1.68 times to 1.56 times

3) Debt Equity Ratio - 0.13 times to 0.17:1 times

4) Book Value - Rs 193 from Rs 185

Now you would wonder what magic did the management did to improve PE ratio. It is news to me that management’s are now beginning to be judged by how well they can talk to the markets and improve their PE ratios.

Coming down to the magic that the management did to improve this PE ratio. It was a goal that they achieved by reducing the nine months profits of the company from 86 crores to 58 crores. Forget the price just reduce the earnings. I m waiting for the day they bring down the profits to zero and increase the PE ratio to infinity :-).

Midday / Nirma Update

2011-01-21T17:57:00.000-08:00

Midday

I had initially written about the midday demerger opportunity and followed it up with a subsequent post when I exited the trade. Links to the post are enclosed below

1) http://investingvalues.blogspot.com/2011/01/take-midday-break.html

2) http://investingvalues.blogspot.com/2011/01/midday-update.html

The stock went Ex on the 20th and the market finally valued the radio business at Rs 8.60 per share on the closing of the day. This was in sync with my estimates of Rs 8-10 per share with 10 bucks on the outside.

Nirma

I had written earlier on the Nirma Delisting opportunity and the structure of the transaction. Link of the post is enclosed below

http://investingvalues.blogspot.com/2011/01/nirma-delisting.html

The reverse bookbuilding closed and the company has garnered enough shares to make the delisting successful at a price of Rs260. The management has till Feb 02nd to announce its acceptance / rejection of this discovered price.

There is a side trade that can be done now that the book has closed. Typically in the event of the management accepting the price, the stock will move towards the Rs 255 mark with the arbitrageurs sealing the gap. At the current price of Rs 248 there is Rs 6-7 bucks on the table in a 10 day period. However in case the management decides otherwise and rejects the offer then the stock could settle 25% lower from here. To quote Buffett/Munger this is the classic “Picking pennies in front of the roadroller” :-) and I for sure don’t have the appetite for it.

Nirma - Delisting

2011-01-19T05:57:00.000-08:00

The promoters of Nirma in their announcement on 11th of October stated their intent to take the company private and de-list it form the exchanges. I have in the past invested in multiple delisting opportunities and had also put out a guest post on my friend Rohit blog detailing out the framework that we follow while evaluating a delisting opportunity. The link to that post is here
Using that framework let me quickly run thru the thought process in evaluating this special situation opportunity. In any delisting opportunity and the same framework can broadly be applied across other special opportunities, there are 3 risk points in the transaction

1) Time Risk
2) Price Risk
3) Deal Risk

Let me address each of these risks with respect to the Nirma opportunity.
1) Time Risk - The entry point for the transaction was timed post the shareholder approval. Post which filing is done with the exchanges. By monitoring various milestones in the deal, Time risk was constantly tracked.
2) Deal Risk – The promoters owned 77% stake in the company. For the reverse bookbuilding to succeed the promoters had to garner atleast 13% in the process.
Analysis of the shareholding structure indicated that institutions held about 2.56% shares and 42 individuals owned about 14.97% shares in the company. Clearly the company had to manage these shareholder to ensure that the delisting takes place.
3) Price Risk - This is where the opportunity really opened up. The promoters in their communication indicated Rs 235 as the fair prices for the delisting process. This effectively set the floor for the delisting.

Transaction Details
As stated earlier the floor price on the transaction was effectively set at Rs 235 as the promoters had indicated that they were comfortable with this price. I entered the trade around the last week of November in the price range of Rs 222 - 225. Surprisingly inspite of the Rs 235 floor set, the market was effectively paying me option money to take up this position.

The reverse bookbuilding started on the 17th of Jan and is on till the 20th which is tomorrow. I exited the position today in the range of Rs 245-247 on the exchanges. The trade gave me a return of 10% on capital in a span of 2 months.

There could be more return on the table as the book appears to be closing in the 250 -260 range but I m comfortable taking my money home without having to live thru the risk.

Midday - Update

2011-01-18T06:33:00.000-08:00

I had posted yesterday on the small position that I had created in Midday at Rs 38.2 as part of the merger process. I promptly exited the position today at Rs 40.2. A gain of about 5% in 15 days. Might not sound too exciting for most ppl but I like trades like this. If I can do just 5 -6 trades like this in a year on assigned capital, i would be more than happy. Attaching the payoff matrix. Will continue to track the situation to see how it finally progresses.

Take a Midday break

2011-01-17T05:45:00.000-08:00

One of the resolutions that I made this year was to be regular on the blog both in terms of posting as well as responding to queries. It has of course taken me 17 days in the new year to move on this resolution. It is not really the best of starts but the intent is to be more regular this year in terms of posting on the various special situation transactions that I look at and also in terms of long term value picks.

I have been tracking a special situation case covering the acquisition of Midday’s print business by Jagran Prakash.

Midday as a company can be broken up into 2 pieces the relatively valuable print business with a good franchise and the cash guzzling radio business.

Structure of the deal

Under the scheme of arrangement Jagran Prakash will acquire the print business on a slump sale basis. As part of the arrangement the Midday shareholder will get compensation with shares issued by Jagran Prakash. The ratio proposed under the scheme of arrangement is 2 shares of Jagran Prakash for every 7 shares of Midday.

The residual Midday will consist of the radio business which did a topline of about 30 crores and a loss of 15 crores last year. Clearly this business is in its investment phase of building up the franchise in terms of radio property.

I have been tracking the deal for sometime and have been registering the price of the residual shares of Midday at every milestone in the life of the transaction. Considering the nature of the radio business and the timelines involved, I had refrained from building a position the stock and the intent was to do it very close to the actual record date.

I took up a small position on the 3^rd of Jan at Rs 38.2 once the announcement had got made for the board meeting for deciding the record date. The reason for the small position was more a combination of having a learning process coupled with not too much comfort in terms of underlying valuations for the radio business. I would value the radio business on the outside at Rs 10 per share.

Punjab Alkalis - Divestment

2010-10-26T07:44:00.000-07:00

I’ve had a long break from the blog. Part work pressure part inactivity to do with the current market activity level. Posting on a spl situation opportunity.

Punjab Alkalis - Divestment

CMP - Rs 42

Punjab Alkali is a PSU owned by the Punjab government. The government has initiated a divestment process by which they intend to sell their stake in the company. The government had called for bids for their stake and Aug 16th was the last date for submitting bids. On completion of the process the divestment will trigger a open offer.

News report from the Business Standard - August 16th

Fourteen companies, including Jai Prakash Associates, Nirma, Grasim Industries today submitted bids for buying stake in the Punjab government-owned Punjab Alkalies & Chemicals (PACL).

"We have received 14 bids from the companies for the disinvestment of PACL," Punjab Directorate of Disinvestment Director V.K. Singh told reporters here today.

Other companies which submitted their bids were Surya Pharmaceuticals, KUDOs Resources, Amtek Auto, Nectar Lifesciences, Goyal MG Gases, DCM Shriram Credit & Investment, KLJ Resources, Panoli Intermediates (India), Lords Chloro Alkali, Jay Polychem (India) and Bhushan Power & Steel

Some serious players like Grasim, Nirma and a bunch of players who I have no clue what they are upto.

Opportunity

The company has a 90000 TPA caustic soda plant and the associated chlorine & hydrogen plant. It is a loss making unit currently

Valuations

Market Cap - 86 crores

Debt - 83 crores

Total EV - 169 cores

Replacement cost of this plant

On a conservative estimate setting up a 90000 TPA capacity would cost Rs 350 crores including power plant. Since Punjab Alkalis doesn’t have a power plant and which was the key reason for its losses, we can pare down the replacement cost to around Rs 250 crores.

Factor in additional cost for VRS and transactional costs we can expect conservatively bidding should be around the Rs 225 crores EV minus Debt 83 crores = Equity value of Rs 142 crores as opposed to current market cap of Rs 86 crores resulting in a spread of about 65%.

Risk

Like all divestment programs, there is always the risk of delay. To a certain extent the delay has already taken place. Of the 14 bidders, 12 qualified the technical round to put in the financial bids. The Divestment dept in the Punjab government has put the bids of the remaining 2 bidders to the ministerial committee. Post the ministerial committee meeting the approval for the remaining bidders will come thru and the financial bids called in.

Disclosure: I could have a position in the stock and I recommend readers to do their own analysis before investing in the stock.

Genetically Irrational

2010-08-11T21:12:00.000-07:00

Cant blame us for being irrational. Its in the genes afterall. Nice video on TED

Zenotech Labs - Bitter Pill

2010-07-17T05:59:00.000-07:00

I had earlier posted on Zenotech Labs laying down the original premise of the trade in a post here.

http://investingvalues.blogspot.com/2009/11/curious-case-of-zenotech-labs.html

After much delay the supreme court judgement came and the court ruled in the favour of Daichhi and the minority shareholders lost the case. The open offer will now happen at Rs 113.6. The stock promptly corrected to the Rs 100 mark where I exited my position taking a loss of about 10-12% on the trade.

A bitter pill to swallow but the downside was factored in the trade in case the judgement came in favour Daiichi.

The stock has subsequently moved down to the Rs 94 level and at some point of time will start becoming attractive considering the high acceptance ratio on the open offer.

Positioning for Luck

2010-07-04T06:01:00.000-07:00

In my previous post on Abbott Labs, I had written how part of the returns that the stock delivered for me was good stock picking and part of it was pure luck.

Can u position yourself to get lucky? How do u ensure that u get hit by good luck more often than bad luck.

I want to put across a example from my life in terms of how one can be positioned for luck. On finishing my 12th Std/ HSC/ Jr college, I took up admission into a engineering college in the stream of production engineering. A friend of mine from the same batch took up admission in a stream of medicine called “ Occupational therapy”.

In my batch of 80 students, there were 3 girls and 77 boys. In his batch of 50 students there were 2 boys and 48 girls. I m sure you will appreciate who amongst the two was positioned for luck :-). So even if I was a cute guy with a great sense of humour and extremely sensitive ( I cant claim I m any of the above), the stakes were just loaded against me to be able to woo a charming lady. My friend of course was in such a envious position that he would really have to shoot himself in the foot to get it all wrong.

There is of course always the probability that I managed to woo one of those three girls and my friend managed to get it all wrong but I would assign a very low probability to it.

He was just positioned to be lucky.

When we come to stock picking, unlike choosing u r graduation stream we have the option of choosing what stocks to buy and what to avoid. We can work our way to get lucky more often than been unlucky. Spot more white swans coming our way as opposed to encountering black swans.

Lets look at IT companies right now. Both Infosys and TCS are great companies with great business models. But at 26 PE with the world economy slowing down, currency turbulence, political pressures etc we are positioning ourselves to get unlucky on this one. These companies could still deliver great numbers and growth but at these valuations there is a high probability that we could get unlucky on these stocks. I cannot at this point visualise what possible events could happen which could make me lucky in these stocks.

I bought Clariant chemicals in my portfolio a couple of months around the Rs 430-440 mark. The stock came on my radar after I heard a global announcement about a plant shutdown in thane which would release some prime property ( about 36 acres) and unlock value. On the operating level the company has been delivering great numbers and improving performance on all fronts. I bought the stock around the 8-9 PE mark.

Beyond this Clariant has about 120 acres of land more at another plant in Kolshet Thane. It has maintained a very high dividend payout ratio over the years. The parent is in a bad shape and is rumoured to be up for sale. A possible sale will trigger a open offer in India.

Of the above variables only the operating performance and the land sale are known variables. All other variables are events that I could possibly get lucky with. They might not necessarily happen but when I bought the stock at 8-9 PE, I was positioned more to get lucky as opposed to get unlucky.

There is of course the other way of doing this

It was to get your parents to name you “Lucky” which would have resulted in you being lucky for the rest of your life :-).

Abbott Labs

2010-06-19T21:40:00.000-07:00

I had originally put out a post on Abbott labs about 2 year back when I added it in my portfolio. The link is enclosed below.

http://investingvalues.blogspot.com/2008/05/stock-idea-abbott-india.html

I had bought it around the Rs 540 mark when the markets were around the 16500 range. The stock ended today at 1134 with the index at 17,400 levels. Along the way I sold about 50% of my holding around the 735 mark and continued to hold the rest.

So on a like to like comparison Abbott has delivered me over 110% return as compared to the Index which delivered about 4% in the same period. ( I haven’t factored in the dividends that came thru and the share buyback that took place).

Thought process

1) My original premise on Abbott was the fact that it was a great business with high ROE and throwing out surplus cash every year. Though there are other pharma companies with a similar structure, what I liked about Abbott was the fact that the parent globally had a philosophy of returning cash back to shareholders in the form of dividend or share buybacks which made it more attractive as a holding.

2) I also along the way anticipated that the parent which was generating surplus cash would direct that surplus cash into acquisitions with a greater focus on emerging markets. Abbott acquired Solvay and followed up with its current acquisition of Piramal Healthcare making it the largest pharma company in the country.
The market has of course carried out a round of PE re-rating and assigned it a PE in sync with large MNC pharma companies from the tier 2 pharma company PE that it was getting.

Doesn’t all of the above make me sound like a great analyst?

I want to bring here the interesting concept of “Hindsight Bias”. To quote Wikipedia “Hindsight bias is the inclination to see events that have occurred as more predictable than they in fact were before they took place”. Simply put we believe that we predicted or were prepared for event that have happened in the past. Invariably most people will recognise hindsight bias when something goes wrong. For Ex Most people will tell you that they knew that the sub prime crisis was waiting to happen.

The real challenge of hindsight bias to recognise it when something goes right for you. For ex In Abbott’s case my hypothesis was based on point 1 of the thought process that I have listed above.

Point 2 of how I predicted that they would be acquiring companies in India and become the largest pharma company in the country is complete hogwash and a attempt at making me look very intelligent and insightful.

So the return that the stock generated from about Rs 540 to about Rs 725 was my stock picking skills but the return from there onwards to 1100 bucks is pure luck :-). But then I m not complaining.

I though however believe in a concept which I call “ Positioning for luck”. Will write a separate post on that.

Nowhere Man

2010-06-01T07:10:00.000-07:00

After my previous post on women and investing, I must admit there is one woman beyond my wife that I observe everyday. She is my daughter who is currently three years old and hence, the boss of the house :-).

Is there something to learn from observing her?

If u have a child around the same age or maybe + 2-3 years you will observe a interesting phenomenon. The child has infinite amount of physical energy. It is extremely difficult to restrain the child in a given place or position beyond a few seconds. She is in a constant state of physical motion with arms flaying and legs moving. Try getting a child to do nothing for 10 minutes and u will accept defeat even before you start the task. Getting her to stand still beyond a few seconds is a non starter. It’s like Brownian motion

So the point is

I want to quote Blaise Pascal here. The man I disliked in my engineering days for giving us hydraulics but the man who came up with very interesting insights in human behaviour.

“All human evil comes from a single cause, man's inability to sit still in a room”.

Like the child we crave for activity. Maybe not physically but our brain never stops. It wants action, wants to be in the thick of action and if not anything create action where non exists. The itch to put in the next trade or buy the next stock that you analyse.

And like the child, it really is not in control of its actions.

I have been in the last 15 days working hard to do nothing :-). Caught up on some reading, steered clear of annual reports and spent time thinking.

The title of this post of course comes from a nice song by The Beatles

Nowhere Man

"He's a real nowhere man,

Sitting in his Nowhere Land,

Making all his nowhere plans

for nobody"

Post on Stockshastra

2010-05-22T00:34:00.000-07:00

Stockshastra which is a new initiative by Moneyworks4me with the objective of providing timeless principles of stock investing had invited me to participate in a blog carnival tittled " How I arrived at my style of stock investing".

I was in my writing moods so wrote a slightly different post. The link is attached below.

http://stockshastra.moneyworks4me.com/guest-articles/ninad-kunders-style-of-stock-investing/

Time to attain rationality

2010-05-10T05:11:00.000-07:00

I had earlier posted about a trade that was carried out in Britannia industries where the company issued bonus debuntures and the markets mispriced the stock post the record date giving reasonable returns in the time frame that the trade was carried out. The link to the post is enclosed below.

http://investingvalues.blogspot.com/2010/04/britannia-bonus-debentures.html

I had a round of email exchanges with a friend whose bone of contention or query was

How do u that the market will misprice when u initiate the trade? Is it just experience or a element of probability or pure luck?.

I am attaching the email response that I had sent him …

The starting point in a trade like this is to ensure

1) The market risk is very low which is to time the trade very close to the actual event date or the record date.

2) More importantly - valuation comfort. If everything else goes wrong are u still comfortable holding the stock from a valuation standpoint.

Without valuation comfort the trade is a strict No go.

Lets look at the markets are irrational part. True markets do turn irrational at times but i want to inverse that statement. Markets are not rational all the times which is not saying that they are irrational but they take time to reach a level of rationality. I dont know whether I am able to spell out the subtle difference by inversing that statement. The time that market takes to attain that rationality is the time window that a arbitrageur gets for the trade.

So it comes both from experience/ insight and probability. The market has diff kinds of participants day traders, arbitrageurs, tech analysts, long term investors who look individually look at diff information points so at a given point a participant would not have not digested all the news points. For ex If i am buying a stock from a long term objective i might not have look at the technicals ( i anyway dont believe in technicals) and vice versa. So not all participants would have digested a particular corporate action. If it is a bonus or a dividend then most participants would digest it but other corporate actions which have a element of complexity dont get digested as fast.

This is more true in the midcap/ small cap segment which is under researched and uder tracked. If HLL had done a similar exercise i would doubt the arbitrage window would have existed.

It isnt risk free by any stretch of imagination. Its just about how much risk can u eliminate and dont get into a situation of picking pennies in front of a roadroller.

Trust that could add some value.

Cheers
Ninad

PS: Remembered a interesting exchange from Alice in Wonderland
Alice: But I don't want to go among mad people.
The Cat: Oh, you can't help that. We're all mad here. I'm mad. You're mad.
Alice: How do you know I'm mad?
The Cat: You must be. Or you wouldn't have come here.
Alice: And how do you know that you're mad?
The Cat: To begin with, a dog's not mad. You grant that?
Alice: I suppose so,
The Cat: Well, then, you see, a dog growls when it's angry, and wags its tail when it's pleased. Now I growl when I'm pleased, and wag my tail when I'm angry. Therefore I'm mad.

HSBC Investdirect - Exit

2010-05-01T00:22:00.000-07:00

This one worked out better than I expected. I had earlier posted on the delisting opportunity of HSBC Investdirect. The link is enclosed below

http://investingvalues.blogspot.com/2010/04/hsbc-investdirect-delisting.html

As the book opened for delisting the initial bids came at the Rs 350 mark. The markets promptly anchored to this price and the stock ran up from the 300 band to a high of 335 yesterday. I promptly exited my position at a average rate of Rs 328 without waiting to find the delisting price. Afterall there is a huge risk that the 2 large players Mathews and Deutsche could tender it at a price lower than 350. This was better than my initial expectation of delisting in the 315-325 mark.

This transaction delivered me a return of 41% on my original investment in a 3&½ month period and about 16% on the second tranche of my investment in a months time.

Off to searching newer opportunities which are becoming very scarce with the run up in stock prices.

Breaking (Zee) News - Demerger

2010-04-16T03:21:00.000-07:00

There was breaking news of a different variety in Zee news. Zee News went through a scheme of arrangement involving demerger of the General entertainment channels from Zee news and merging them into Zee entertainment.

The shareholders of Zee news as per the arrangement were eligible for 4 shares of Zee entertainment for every 19 shares held in Zee news. They would continue to hold the news business in Zee news.

We tracked the deal from the initial announcement stage and monitored the price movement at every milestone. Find below the various milestones and the cost of creating the residual Zee News

The record date for the transaction was set for 16th April. Arpit had arrived at a fair value for the Zee news share in the Rs 9- 10 bracket. Post the ex date the market traded the stock in the Rs 18-20 price band and there was clearly returns to be made on the deal.

This however is with the benefit of hindsight. I never invested in this deal as there was clearly time risk involved with no clear timelines on when the court order could come thru. Though I think there was a opportunity just after the court approval came thru. It was a interesting transaction to monitor in terms of price movement at every milestone.

But once in a while it is ok to be a spectator and stay away from the news :-)

HSBC Investdirect - Delisting

2010-04-15T21:30:00.000-07:00

I had created this note on HSBC Investdirect's delisting around end of January 2010. I had also invested in the stock around the same time.

I have a history of investment in this particular counter betting originally on the delisting happening. Links to those post are enclosed below.

1) This was betting on the delisting in Nov 2008.

http://investingvalues.blogspot.com/2008/11/dabur-pharma-il-investmart-two-to-tango.html

2) Subsequent posts when the delisting got announced and my exit

a) http://investingvalues.blogspot.com/2009/06/il-investmart-bingo.html

b) http://investingvalues.blogspot.com/2009/10/long-hiatus.html

The note that I had written in Jan 10

Opportunity Type - Delisiting

Company: HSBC Investdirect

Exchange - BSE

CMP - Rs 231

Equity Base – 70.39

Current market Cap - 1626

Public shareholding – 6.89%

Free float - 112 crores

HSBC InvestDirect was originally floated by the ILFS group and was called ILFS Investmart.

Historical Milestones

• HSBC acquired IL&FS Investmart from the IL& FS group and acquired 73.21% stake by a share purchase agreement.

• It subsequently made a open offer to acquire 20% of the shares by its letter dated May 20th 2008 at a price of Rs 200.

• On completion of the open offer HSBC raised its stake in the company to 93.86%.

• Having acquired 93.86% stake which is higher than the listing agreement, HSBC had to either dilute stake below 90% or initiate the delisting process.

• Company name changed proposed from Il&FS investmart to HSBC Investdirect by a board resolution in April 2009.

Delisting Milestones

• HSBC initiated the delisting process on June 16th 2009 on receipt of a letter from the promoters to initiate the delisting process.

• Notice of postal ballot for shareholder approval was despatched on June 26th 2009

• Result of postal ballot with the approval of shareholders was acquired on July 28th 2009.

Milestones Pending

• Filing with exchanges for delisting approval. - Approval process takes 15 days post filing.

• Initiation of reverse book building process for arriving at the delisting price - Process takes one month post receipt of approval from exchanges

• Acceptance of the delisting price and despatch of acceptance amount - 15 days post the reverse bookbuilding process.

Current Holding Structure

Company - HSBC InvestDirect

Promotor – HSBC group - 93.86%

Public

Mathews Fund – 2.05%

Deutsche Mutual Fund – 1.21%

Other public shareholders - 2.88%

Delisting Laws

There are two important criteria in the delisting laws

• The promoters have to acquire a minimum of 50% of the public shareholding when arriving at the reverse bookbuilding price.

• The promoter stake should go above 90% post the delisting process.

In the case of HSBC Investdirect, the stake of the two institutional holders would be sufficient to cover for the 50% criteria. HSBC anyway holds more than 90% of the stake to fulfil the other criteria.

Deal Analysis

In any special situation case there are three important risk to be ascertained.

1) Price Risk - Deutsche mutual find which is one of the large shareholders had acquired its stake post the delisting announcement in the 260-270 price band. That effectively creates a floor for the delisting price. Our estimate is that the delisting price would be in the 315 -325 mark.

2) Time Risk - HSBC has to complete the entire process within 12 months of the board resolution which will expire in June 2010. So effectively we have about 4 months as the outside time limit on the deal.

3) Deal Risk - The delisting process has got delayed so far because with new SEBI amendment in the takeover code the company has to extinguish all convertibles like GDR’s, ESOP’s etc before it carry’s out the delisting process. The company has existing Esop’s which need to be extinguished and hence there has been a delay in the process. Our understanding post talking to the company secretary and the merchant banker is that they would be able to manage the timeline.

Return Matrix

Scenario 1 - Exit thru Bookbuilding Process

Current market Price – 231

Exit Price – 325

Period ( months ) – 4

% Absolute return - 40.7%

Scenario 2 - Exit prior to bookbuilding Process

Current market Price – 231

Exit Price – 280

Period ( months ) – 2

% Absolute return - 21.2%

Current Update

The company has managed to overcome the ESOP hurdle and made the public announcement on the delisting schedule. The reverse bookbuilding is to open on the 28th of April and will close on the 5th of May. Post the PA the stock jumped from the 230-240 band that it was trading at to the 280-285 band. I bought some additional position ( thought my major position was built in the 230-240 range) at the 281 mark factoring in the clear timelines and my expectations of 6-7% return from here in a months time.

Micro Inks - Delisting exercise

2010-04-10T08:19:00.000-07:00

Micro Inks is the subsidiary of the German chemicals company Huber. Huber announced a delisting on the 9th of Dec. The event unfolded with the following time schedule

1) Board meeting for delisting announcement - 9th Dec 2009

2) Postal ballot result – 16th Jan 2010

3) Announcement of delisting schedule - 3rd Feb 2010

4) Opening of Reverse Bookbuilding process – 2nd March 2010

5) Closure of the reverse bookbuilding process. - 5th march 2010

Risk / Return analysis

Let me run thru the risk/ return analysis of the deal based on the framework that I had put out on a guest post on Rohit’s blog. The link to that is as attached below

http://valueinvestorindia.blogspot.com/2010/02/special-opportunity-framework.html

1) Time Risk

The time risk in the deal was managed by entering the deal only after the delisting schedule had been announced. So there was clear timeline defined on the trade.

2) Deal Risk

Deal risk in a delisting opportunity could stem from two fronts

a) Inability to garner the requisite shares

In the case of Micro Inks the promoters held 74% of the stake in the complete. For delisting to succeed they had to garner 16% shares so as to reach the 90% hurdle that needs to be covered for delisting to be successful

In Micro Inks, Reliance Mutual fund held 7.23% stake and HDFC mutual fund had 3.69% stake. They along with other institutions held 12.25% stake in the company. This ensured a high probability of the transaction happening.

b) Likelyhood of the discovered price being unacceptable to the promotor

In the case of Micro Inks, Huber launched the delisting offer even before appointing the merchant bankers to the deal. It was a strong cue to the fact that the company was confident that the delisting will go thru. Our assumption was that some kind of indicative price would have been discussed / agreed with the institutions.

3) Price Risk

Huber had defined the floor price at Rs550 for the transaction. I entered the stock around the Rs595 mark. Our assumption was that the deal should close in the 650-675 mark giving a possible return of 10 – 12 % in a 1 month time period. We were also comfortable from the underlying valuation standpoint.

Post deal analysis

The reverse bookbuilding opened on the 2nd of March and I must admit it was well managed by Kotak Securities the investment banker. They had done a good job of sealing the institutions and lo and behold both HDFC and Reliance tendered at the same day around the same time at the same price of Rs 640. This effectively created the anchor price for the delisting exercise.

The company successfully managed to close the book and delist at Rs 640.

I had 2 options

1) Either to exit through the stockmarkets around the Rs 625-627 mark post the closure of the bookbuilding exercise.

2) Wait for the stock to get suspended followed by the delisting and then tender to the company at Rs 640. I chose this option bcos along the way Micro Inks also announced a dividend of Rs 6 with a ex date of 12th April. Considering the current level of markets with not too many alternatives to deploy capital, I was comfortable letting my capital lie here and earn the extra 1% tax free return.

So the way I see it I will wind up making about 8.5% on invested capital in a period of 2-2.5 months. Good for me.

Innovative Foods - Money for Nothing, Sequel 2

2010-04-06T07:50:00.000-07:00

I had written earlier about a special situation opportunity in Innovative Foods. The link is enclosed below.

http://investingvalues.blogspot.com/2009/11/innovative-foods-money-for-nothing.html

The interesting part in this opportunity arose post the closure of the delisting offer that the promoter made at Rs 34.5. As per SEBI laws a company has to provide the last open offer/ delisting price to all the remaining shareholders post delisting of the company for a period of 6 months.

So you are assured of Rs 34.5 for your holding even if u hadn’t tendered it in the delisting offer. Typically it takes around 45-60 days post the closure of the delisting offer for the actual delisting to take place. It should on the outside take about a month more to tender your shares to the company and get your money.

So the opportunity arose bcos post the closure of the offer, I was able to buy the stock in the market between Rs 31.75 and Rs 33 with a average acquisition cost of Rs 32.05.

It took me about 4 months in the entire transaction. Part of the delay was bcos I went on a vacation and hence missed one of the redemption cycles. But overall it gave me risk free return of about 7.5% in a four month tenure. Might not excite too many ppl but I love risk free return like this.

Britannia - Bonus Debentures

2010-04-01T08:23:00.000-07:00

There was a scheme of arrangement in Britannia which involved issuing bonus debentures to shareholders with a face value of Rs 170 and a annual coupon of 8.25% redeemable at the end of 36 months.

I will not get into finer details of this transaction as there is a nice post put out by Prof Bakshi whose link I have enclosed below

http://fundooprofessor.wordpress.com/2010/03/15/britannias-bonds-are-tastier-than-its-cookies/

I had a very small miniscule position in this special situation and the record date for this transaction was March 9th 2010.

Now I come to the interesting part and the reason for this post. The bonds got listed today on the exchanges and lo and behold they got traded as high as Rs 177 on the NSE.

This one completely beats me. The guy who bought it at Rs 177 will make a compounded annualised return of 6.69% on this bond over a three year tenure without factoring in brokerage costs. HDFC Bank is currently offering 8% for a 3 year fixed deposit. Though one must admit it doesnt offer the thrill of sitting in front of a trading terminal and experiencing the dopamine kicking in.

No wonder they say beauty lies in the eyes of the beholder.

Delisting - Interesting Play

2010-03-12T20:54:00.000-08:00

I have been involved in multiple delisting opportunities where I work closely with my friends Rohit Chauhan and Arpit Ranka.

Rohit had written on his blog about one of the delisting opportunities that we had analysed and were involved together. The company involved was Elantas Beck. The link to it is attached here

First post
http://valueinvestorindia.blogspot.com/2010/01/arbitrage-case-study-elantas-beck.html

Follow up post
http://valueinvestorindia.blogspot.com/2010/01/clarifications-on-previous-post.html

I had subsequently written a guest post on Rohit’s blog talking about the framework that is employed by us to look at evaluating delisting and other special situation opportunities. The link to that post is attached below.
http://valueinvestorindia.blogspot.com/2010/02/special-opportunity-framework.html

Subsequent to these posts we also analysed / invested in the delisting of Micro Inks and I plan to put out a separate post on how this particular opportunity was evaluated and the returns it generated.

Zenotech Update - Final closure

2010-03-12T20:38:00.000-08:00

The case hearing has finally concluded :-). We should hopefully have the judgement within a week bringing to close a long drawn saga. The link to the earlier post is given below

http://investingvalues.blogspot.com/2010/01/zenotech-update.html

From the Supreme Court site

UPON hearing counsel the Court made the following

O R D E R

Mr. F.S.Nariman, learned senior counsel, made his submissions from 10.35 a.m. to 12.40 p.m. Mr.Ashok Desai, learned senior counsel, thereafter, made his submissions for fifteen minutes. Mr.C.A.Sundaram, learned senior counsel, thereafter, advanced his arguments upto 3.05 p.m. Learned Attorney General made his submissions for about fifteen minutes.

Hearing concluded. Judgment reserved.

Liberty to parties to file written submissions within one week.

Hungry Kya ?

2010-02-11T11:02:00.000-08:00

Are we Indian’s more hungry than the Americans. Afterall what else can justify the following comparison

Jubliant Fooodworks ( Domino’s Franchisee) - Dec quarter
Market Cap - 1500 crores
Sales – 117 crores
Profit - 11 crores
P/E- 30

Domino’s Pizza ( US – parent company) - Sept quarter
Market cap - 3000 crores
Sales – 1350 crores
Profit - 82 crores
P/E- 9.74

So we have the Indian company which is just a licensee of the Domino’s brand and doesn’t even own it sells at 3 times PE of the parent company.

I guess one needs to have a appetite for it. I am off on a diet.

Tail wagging the dog - Solvay & Abbott

2010-02-11T10:41:00.000-08:00

I had earlier posted about the global takeover of Solvay by Abbott.

http://investingvalues.blogspot.com/2009/10/kahi-pe-nighaein-kahi-pe-nishaana.html

I had subsequently posted about exiting my position in Solvay.

http://investingvalues.blogspot.com/2009/10/flurry-of-activity-altered-annual.html

What has happened subsequently is very interesting. The Solvay stock has skyrocketed from the 900 mark to over Rs 3000 in a span of 4 months. ( Ooch that hurt me :-().

Lets examine the fundamentals of both the companies.

Abbott - FY 09 = Nov 09
Sales - 766 crores
Net Profit - 77 crores
Market cap - 1096 crores

Solvay - FY 09 – Dec 09
Sales - 243 crores
Net Profit - 40 crores
Market cap - 1555 crores

So we have Solvay which got acquired by Abbott, has nearly 1/3rd the sales and ½ the profit of Abbott but is selling at 50% more market cap.

Interesting case of cornering and ramping up the stock so as to push up the open offer price. Would be interesting to see the endgame.

Zenotech Update

2010-01-29T07:19:00.000-08:00

Back on the blog after a break.

I had earlier posted on Zenotech as a special situation opportunity. The link is enclosed below.

http://investingvalues.blogspot.com/2009/11/curious-case-of-zenotech-labs.html

The case has had 2 rounds of hearing and now the next round of hearing is lined up for Feb 25th – 27th. From the original premise there has been clearly delay in terms of the opportunity cost of time. This will applicable if the minority shareholders lose the case. In case Daiichi loses the case they have anyway agreed to pay interest for the time delay so it isn’t such a detrimental variable.

Trade within the trade

What however interesting is the trade within the trade that I have been observing over the last few months. The stock has been inching to the 118-119 mark as we near the hearing date and then moves down to the 113 once the next date is lined up. So there is a 3-4% return on a 1 month’s time frame. Might not be good for a lot of ppl but good for me :-).

It closed at 114 today and it would be in interesting to see if it follows the same pattern as the hearing date nears.

“Everybody has a plan …..”

2009-11-25T06:30:00.000-08:00

“Everybody has a plan till they get punched in the face”. This brilliant quote can be credited to the famous American philosopher “Mike Tyson” :-) . ( His detractors might point out his fetish for ears but didn’t Vincent Van Gogh also cut off his ears).

It’s a extremely impactful statement with implications for any participant in the stock markets. We plan for all kinds of scenarios that the market throws at us. For ex Looking at the market right now we could plan that if the market corrects by 20% we could deploy additional capital into the markets. Simple statement of intent or plan factoring in a possible scenario.

It becomes easy to implement this plan if the market gradually drifts down a percent or two every week and winds up going down 20% over a six month period. It’s a series of small punches that the markets throws at you which tires you out but keeps you in play to deploy the action plan that you had thought thru.

The challenge is when you get punched in your face by the markets when they correct 20% in a week or fortnight. At that moment the mind freezes and all the best laid plans of men and mice go waste. Fear and self doubt seeps in and the reptilian brain takes over.

The R-complex as it is called overrides the more rational functions of the brain and results in primitive behaviour where the survival instinct takes over. We of course see that in the rush to the exit door that happens with market participants.

Can we work our way thru this and retain our rationality? I think the first step is being able to recognise when our mind starts moving into this state.
The awareness of it might helps us deal with a few punches thrown between our eyes.

Paradox of Choice - Prof Barry Schwartz

2009-11-21T05:16:00.000-08:00

Prof Barry Schwartz's Talk on the "Paradox of Choice" at the TED conference. It has very interesting implications beyond the fact of why we still savour the limited choices that Doordarshan used to offer as opposed to the plethora of channels now which seem to have nothing to offer.

As the markets offer us more and more instruments and asset classes like equities, debuntures, options, gold, copper, art, interest rate futures, forex futures etc, we start spreading ourselves thin not willing to limit or restrict our choices to particular asset classes.

The curious case of Zenotech Labs

2009-11-18T06:08:00.000-08:00

This saga should give Ekta kapoor a complex for the twists and turns and the never ending nature of its existence.

Circa Oct 2007
Ranbaxy enters into a definitive agreement to increase its stake in Zenotech to 45% by purchasing of shares from promoters and preferential offer.

Jan 2008
Ranbaxy completes open offer and acquires 2.2% shares through the open offer at a price of Rs 160 per share. Ranbaxy’ stake goes upto 46.79%.

June 2008
Daiichi buy’s out Ranbaxy from the Singh brothers and hence becomes owner of the 46% owned by ranbaxy in Zenotech which results in triggering of the open offer due to the indirect acquisition.

Jan 2009
Daiichi makes a open offer to acquire 20% from the public shareholders at a price of Rs 113. 62 per share.
The promoter Dr Jayaram Chigurupati claims that Daiichi had in a meeting promised to pay Rs 160 to the shareholders.

The battle begins

Dr Chigurupati and retail shareholders file cases in the court and with SEBI to ensure that the open offer happens at Rs 160.

Feb 2009
SEBI dismisses the case and Daiichi prepares to rollout the open offer at Rs 113. Dr Chigurupati and the retail shareholders take the case to SAT.

Oct 09
SAT rules in favour of the retail shareholder and directs Daiichi to do the open offer at Rs 160.

Nov 09
Case is also filed in SAT to ensure that Daiichi pays interest for the delay
Daiichi takes the case to supreme court and agrees in Supreme court to pay interest in case it loses the case.

The supreme court has decided that Dec 02 2009 will be the final date of hearing and the judgement should follow.

There are of course multiple cases being fought between Daiichi/ Ranbaxy and Dr Chigurupati in the CLB also.

Where do we stand now

Current shareholding
Dr Chigurupati & associates - 25.76%
Ranbaxy - 46.85%
Public shareholders - 27.39

Precedence suggests that Supreme Court tends to go with SAT order though precedence is no guarantee.

1) Supreme Court rules in favour of retail shareholders
Open Offer Price - Rs 160 + Rs 10 ( approx interest) = Rs 170

2) Supreme Court rules in favour of Daiichi
Open offer prices - Rs 113.

CMP - Rs 115

I had bought stock in the Rs 108-112 levels. The way I see it is the downside is restricted to around 8-10 bucks where as the upside could be around Rs 140-150 on the stock, with the information that SAT ruled in favour of the retail shareholders.

The most important thing is that this long drawn saga will come to an end with clear defined timelines.

To take a quote that I like from “ The curious case of Benjamin Button”
“Life can only be understood looking backward. It must be lived forward.”

Predictably Irrational - Prof Dan Ariely

2009-11-15T08:54:00.000-08:00

I am currently reading Prof Dan Ariely's book "Predictably Irrational". Enclosing one of his videos which gives a flavour of the kind of work he has been doing in the area of behavioural finance. The book is a interesting read. This video is from a presentation he made at the TED conference.

Areva T & D - Impending Corporate Action

2009-11-15T08:34:00.000-08:00

Areva T& D is the Indian subsidiary of the French nuclear power major Areva. The Indian listed subsidiary is focussed on the Power T & D business.

In the month of June 09 the parent announced its intent to globally sell its T& D business and invited bids for the same. The company which is listed, has its majority stake owned by the French government.

The stock in India reacted on this news positively in the month of June but like all other corporate events the markets tend to forget.

I have been tracking the deal for sometime and finally the company made a press release that 3 bidders have submitted their final bids and the bids are getting assessed.

1) Alstom / Schneider
2) General Electric
3) Toshiba / INCJ

I have enclosed the link to this press announcement.

http://www.areva.com/servlet/cp_td_09_11_2009-c-PressRelease-cid-1257776944025-en.html

The French government has always maintained in its announcement that the deal will be closed by the end of this year. Reuters had also given out a release though quoting unnamed sources that the announcement date of the winner will be Nov 15th.

Either ways the deal is in its last stage and I would assign a very low probability of the deal not materialising considering the intent of the French government and 3 shortlisted bidders.

Announcement of the winner will immediate trigger the open offer clause as per SEBI’s takeover code. The risk in the transaction is that Areva T & D ivery expensively priced on all valuation parameters and the stock could correct in the interim period.
CMP – 280.75

Innovative Foods - Money for Nothing

2009-11-15T08:17:00.000-08:00

I came across this corporate announcement on Innovative Foods.
http://bseindia.com/qresann/news.asp?newsid={4038BCAC-2189-44EE-AD2C-807B2263BE72}&param1=1

Innovative Foods is a Chennai based company which was a BIFR case. Based on the BIFR proceedings the promoters were asked to bring additional capital which resulted in their stake increasing to 93%. According to the BIFR order the promoters has to give a exit option to the remaining shareholders of the company and the company arrived at the exit price of Rs 34.5 to paid to all public shareholder who tender their shares. I have enclosed the link to the offer document.

http://bseindia.com/xml-data/corpfiling/announcement/Innovative_Foods_Ltd_091109.pdf

The offer is open till Nov 19th.
The stock was trading around the 32.15 mark after the announcement date and currently trades around 33.65.

So u can technically buy the stock in the market at this prices and tender at Rs 34.5 and be assured that 100% of you shares will be accepted and money paid to you.

So whats the catch?
Not enough trading volumes and high impact cost so u can deploy very small amounts of capital.

But it is a case of “ Money for Nothing”.

Gwalior Chemicals – Shareholders Gain, Arbitrageur lose

2009-11-15T07:52:00.000-08:00

I’ve had a small break from the blog due to work pressure. Along the way a lot of water has flown under the bridge both on the Gwalior Chemicals front and a lot of other special situations opportunities have come on my radar.

The board of Gwalior Chemicals made the following announcement after the board meeting
In the first phase the Company proposes to buy back maximum of 40,50,000 shares at Rs. 120 per share through a tender offer route in this financial year. The aggregate amount Rs. 48.60 crores is the maximum permissible buy-back in this financial year ended March 31, 2010 as per Section 77A of the Companies Act 1956.

The market of course didn’t like it and the stock promptly went down to Rs 90 and has been hovering around there.

Lets examine what it the management is trying to achieve I spoke to the company secretary and asked him on the thought process. According to him the company intends to deploy Rs 100 crores as stated in the original press release to buyback shares in 2 phases

1) Phase 1 - This is the announcement that we read above.

2) Phase 2 - Will be done in the next financial year and I would assume somewhere around the Sept – Nov 10 kind of time frame.

So this brings out the logical chain of questions some of which I have received as comments

1) Why the share buyback in 2 phases?
This is because under Section 77 A of the Companies act a company can in a financial year buyback only 25% of the paid up capita+ free reserves of the company. This acts as a upper limit to the amount that can be deployed towards the buyback process hence a 2 stage buyback.

2) Why no dividend?
The management’s view is that share buyback is value accretive to the shareholders of the company and is clearly more tax friendly to the long term shareholders of the company. Factoring in either indexation or without it long term capital gains is lower than the dividend distribution tax that the company would have been borne out of the amount. I cant argue against it.

3) Will the promoters participate in the buyback?
The promoters will be participating in the buyback. The promoters would have to participate in the buyback bcos under the SEBI Takeover code, they cant increase their stake beyond 5% in a given year. Any increase beyond that will force them to make a open offer.

4) What will be the acceptance ratio?
The acceptance ratio is about 1/6th of the shares tendered as the buyback is of 40 lac shares on a equity base of 2.4 crores shares. Assuming about 10% brain dead shareholders who don’t tender we can at best assume a acceptance ratio of 1/5th or 20% of the shares tendered. This is presuming that the promoters will tender in full. The promoters could tender partially and use this as a route to increase their stake by 5% which will further improve acceptance ratio.

I have just worked out a sheet below listing down how the event can play out and the associated returns. I have assigned multiple scenarios giving different haircut to the terminal value that market will assign to the stock based on holding company discount. There is however a potential upside as according to the company secretary the company is looking at potential acquisitions. This will reduce the terminal value discount if the market factors it as a operating company.

So am I happy or unhappy?
I think the arbitrageur has lost in this transaction at the expense of the long term shareholder. I cant fault the management for its actions though I might lose money in the interim.

So what should I be doing?
I entered the transaction wearing a special situation arbitrageur hat and today have the option to wear the long term shareholder hat. I have always been advised by my fellow special situation arbitrageurs with whom I compare notes to never change my hats.

If u entered with a spl sit hat and that went wrong then exit the trade and not to change boats in mid seas. I think I will go with that though somewhere still not convinced that the trade has really gone wrong.

Kalindee Rail - Kabhi Haa Kabhi Naa

2009-10-27T11:00:00.000-07:00

I saw a innocuous piece of corporate announcement on the BSE with respect to Kalindee Rail.

Kalindee Rail Nirman (Engineers) Ltd has informed BSE that the Board of Directors of the Company at its meeting held on October 26, 2009, inter alia, has approved refund of Warrant Application money received from Promoters / Prospective Allottees.

The warrants were issued after getting a go ahead from shareholders in a special EGM held on Sept 08 2009. Just after a month on Oct 15th a announcement is made about a board meeting detailing out refunding of the warrant application money to the promoters.

I didn’t know one can get refund of warrant application money. I love this call option where u get u r option premium back if you choose to.

Gwalior Chemicals - Udpate

2009-10-27T09:27:00.000-07:00

I had earlier posted an update about the Gwalior Chemcials opportunity

http://investingvalues.blogspot.com/2009/10/gwalior-chemicals-update.html

The dates are finally out for the board meeting to discuss the dividend and /or share buyback. The board meeting is slated for Oct 30th and the agenda is as listed on the BSE site

Gwalior Chemical Industries Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on October 30, 2009, inter alia, to consider the following:

1. To take the decision on distribution of dividend payout and /or share buyback.

2. To consider and take on record the financial results for the quarter ended September, 2009.

3. To change the registered office of the Company within the local limits of the city.

We should hear the final act on this special situation.

Flurry of activity - Altered Annual Averages

2009-10-13T10:18:00.000-07:00

Last week was a flurry of activity for me in terms of the transactions done in the market. I think I managed to alter my annual averages. I tend to rarely trade so it is invariably 1 or 2 transactions a month on which I would disturb my broker.

Solvay Pharma
I had written earlier on Solvay Pharma after the global announcement by Abbott Labs to takeover the Pharma division of Solvay Pharma globally.
http://investingvalues.blogspot.com/2009/10/kahi-pe-nighaein-kahi-pe-nishaana.html

I had entered the stock with the thought of seeing where the market prices the stock post the announcement. The stock has finally settled around the 900-920 mark and I exited the stock with a nominal loss. Will now wait and monitor to look at opportunities where the market could potentially misprice the stock. Afterall there is atleast 6-9 months before the open offer could get announced.

Abbott Labs
I had originally posted on Abbott Labs here.
I had also written about the Solvay acquisition seems to have unintended consequence to the Abbott stock. I exited 50% of my holding in Abbott around the 735 mark. The stock has given me a 36% return versus the Bse sensex which has delivered about 3% return in the same time frame. I haven't factored a additional 3% dividend return and the share buyback that happened along the way.

Suashish Diamonds

I entered and exited Suashish Diamonds on last Friday. One of the few day trades that I would have done. Will write a separate post on this interesting case.

Gwalior Chemicals Update

2009-10-08T10:17:00.000-07:00

I had earlier posted on Gwalior Chemicals at this discussing about the opportunity.

http://investingvalues.blogspot.com/2009/06/gwalior-chemicals-special-situation.html

The deal has been consummated with shareholder and regulatory approvals coming through. Except for a amount of 75-100 crores the company has received the balance amount. This amount is currently lying in a escrow account which will be released to the company on achieving some of the deliverables stated in the deal. I at this stage don’t see to much hiccups on this count.

Management had announced a board meeting on the 23rd Sept to discuss the dividend/ share buyback. However the board of directors had to make a unscheduled trip to the US hence the same has got postponed. I last spoke to Sanjeev Pathak the company secretary yesterday and the directors were still not back. According to him the board meeting should ideally happen before the 15th of October.

Kahi pe Nighaein kahi pe Nishaana - Solvay pharma & Abbott Labs

2009-10-03T20:02:00.000-07:00

Solvay Pharma
Last Monday I came across the news article of Abbott Laboratories globally taking over the Pharma division of Solvay. Solvay in India has a listed pharma subsidiary called Solvay Pharma.

Since Monday was a holiday on account of Dussera, I expected the market to not react to the news very fast and digest it completely. The stock had closed the previous trading day at Rs 818. The stock open at 860 and gradually made its way up till and by afternoon I think CNBC had picked up the news and the stock finally closed at 949. I managed to pick stock from 861 to 940 with a average price of Rs 920. Couldn’t move fast in the morning as I got stuck in a meeting but there was clearly a window of opportunity in the morning.

From the way the deal is structured globally there is a open offer that needs to happen according to me from Abbott.

Solvay India released their press release the next day on the deal

http://www1.bseindia.com/xml-data/corpfiling/announcement/Solvay_Pharma_India_Ltd_300909.pdf

Quoting a line from the press release

“ This transaction is expected to closed in the first quarter of 2010, pending the approval by the relevant competition authorities”.

First quarter 2010 sounds so far away that the market lost interest promptly pushed the stock price down and it closed at 909. On Thursday the stock closed at 919 after trading as low as 863 thru the day. Lets see how this plays out.

Now let me come to the more important reason for this post. The law of unintended consequence came into play.

Abbott labs.

I had earlier in my post in May 2008 recommended Abbott at a price of Rs 540 and the Sensex was at 16525. The link is enclosed here. The rationale was a impending buyback at that point at Rs 630. More importantly the parent and the Indian subsidiary had a track record of buybacks and the business throws out steady cash.

The company did a 5% buyback at Rs 630 and announced a Rs 14 per share dividend along the way.

So how did Abbott India react to the news

25/09 – 577 ( Before the news)
29/09 – 679 ( On Tuesday – up 17.5 %)
30/09 – 731
01/10 - 692

The stock is up 20% since the day of announcement. Frankly I don’t see what role Abbott India will have in this acquisition expect for a possible merger at a later date. I am not complaining :-).

Like the title of this post Kahi pe Nighaein kahi pe Nishaana ( Aim somewhere and hit something else)

kahee pe nigaahe, kahee pe nishaanaa

jeene do jaalim banaao naa deewaanaa

Movie - CID ( 1956 )
Singer - Shamshad begum
Music - Op Nayyar
Here’s the Youtube link to it.
http://www.youtube.com/watch?v=m0M669No30c

Long hiatus

2009-10-02T05:59:00.000-07:00

Back after a long hiatus to writing the blog. Part dictated by work part by a vacation in Kerala. I have been there before but it always amazes me the diversity in beauty that India has from the rain shadowed vast expanse of Leh to the thick tropical kind of greenery of Kerala.

Update

IL& FS Investmart
I had written earlier on IL&FS Investmart covering the original hypothesis and the follow up action on the idea.

1) http://investingvalues.blogspot.com/2008/11/dabur-pharma-il-investmart-two-to-tango.html - Nov 2008

2) http://investingvalues.blogspot.com/2009/06/dabur-pharma-il-investmart-update.html - June 2008

3) http://investingvalues.blogspot.com/2009/06/il-investmart-bingo.html - June 2008

I finally exited the stock in the Rs 270 range where it has been hovering for sometime. Along the way the company has now become HSBC Investdirect. The delisting process is on track with shareholder approval been received for the same.

I decided to exit as opposed to wait till the final delisting event as my belief is that there is maybe a further 10% on the table. Looking at deploying the money in other opportunities or sit on cash.

From my original investment at Rs 84, the stock has delivered a absolute return of 221% over a 10 month period. If only I could find one like this every 6 months :-)

Where do we go now?

2009-08-25T21:43:00.000-07:00

I remember a interesting exchange that Taleb had written in one of his books either the “ Black Swan” or “ Fooled by randomness”, I cant recollect which one.

In one of the customary morning meetings that are part of all securities firms one of the traders asked him what would he assign a higher probability to the markets going up or down next week. Taleb’s view was that he would assign a higher probability of the markets going up.

The trader asked him his follow up question on what Taleb’s position was. He replied he was going short on the market which of course perplexed the trader.

It is a interesting exchange. The trader of course missed the point that what is important is not just about the probability of the market moving in a particular direction but how much can the market move in a particular direction.

So there could be a 70% probability of the market moving up 10% and a 30% probability of the market moving down 40%. The payoff in the probability matrix of the market moving down is much higher.

Why did this thought cross my mind? The current market seems to be poised at a interesting juncture. Though the momentum seems to indicate a higher probability of it moving up, the quantum of downside if it plays out will be much higher.

Where do we go
Where do we go now
Where do we go
Sweet child o' mine - Guns & Roses

Profit Growth versus EPS growth

2009-08-06T06:47:00.000-07:00

Sales up 15%. Profit up 20%.

I am sure you have seen a lot of advertisements over the last few days which look fairly similar. So where is the gap in this storyline? Does all this profit growth necessarily translate into EPS growth? The answer is no and that’s where we miss the wood for the trees.

There is a lot of equity dilution that is happening out there in the marketplace. All these QIP’s / GDR’s that the markets are applauding, ultimately lead to equity dilution. A lot of FCCB’s are getting repriced post negotiations to current market prices which are leading to substantially larger equity dilutions.

Preferential allotments are happening to promoter groups at substantially lower prices because of depressed stock prices over the last six months. And of course there is always Esops which expand the equity base.

The devil as they say is always in the details and in this case the EPS numbers.

May the force be wth you - Part 2 ( Industry Strikes Back)

2009-07-31T07:09:00.000-07:00

I have at numerous instances in life encounter people who argue with me that education is not a necessary condition for success. The classic example that they quote is of Dirubhai Ambani. Look at what he achieved as a school dropout. Didn’t Bill Gates also drop out of college to start Microsoft in a garage?

It is important to understand what a outlier event is or survivor bias is. I think it is critical for every individual to understand some basic statistics. The principle of normal distribution and basic probability.

To believe that Dirubhai Ambani who is essentially a outlier event beyond the six sigma levels reflects the mean is a folly. The average graduate would do better than a average under-graduate and taking it forward a average post grad would do better than an average graduate.

So what does this have to do with investing and my previous post on Porter’s model for industry analysis.

It for me answers why it is important to understand a industry structure.

There are industries where the dice is loaded against the participants in the industry. Ex Airlines where it is rare to find profitable companies. There are industries like commodity companies which follow cycles and it is difficult for a individual company to break out of cycle.

Does this mean that all participants in these industries are doomed? The answer is no. However the dice is loaded against the company. There could be a great airlines company which could be extremely profitable but would essentially reflect the outlier and not the mean of the industry.

So while analysing a company it is important to understand the industry structure under which operates so as to get a fair picture of what are the forces acting against or for the company.

As Buffett says “"When a manager for a reputation for brilliance tackles a business with a reputation for poor fundamental economics, then its the reputation of the business that remains unchanged”.

May the force be with you

2009-07-22T07:13:00.000-07:00

I remember Obi Wan Kenobi telling Luke Skywalker in Star Wars “ May the force be with you” and “ Use the Force Luke”.

It brings back memories of a era gone by and reminds me also of something that I read a long time back Michael Porters “ 5 Forces Model”. To be honest there is a certain amount of cynicism that one displays during one’s MBA days for stuff that one would call “ management gyan”.

But like the way I appreciate Asterix comics or Calvin & Hobbes differently from the way I enjoyed them maybe 10 years back, Porter’s 5 forces model provides a nice framework to analyse a industry.

Buffett talks about the moat principle where the business should have adequate competitive advantage. I believe Porters “5 Forces Model” meshes in nicely with what Buffet said and provides a starting framework for evaluating a company.

The Five Forces
The threat of substitute products
The existence of close substitute reduces the leverage that a company has to raise prices as it lead to customers switching to substitutes. Also there could be substitutes which could make the current product irrelevant. Technology products are a classic example of this.

The threat of the entry of new competition
Low entry barriers into a business will ensure that the arbitrage of supernormal profits will get wiped out as more and more competition enters the business.

The intensity of competitive rivalry
Higher competitive rivalry could lead to the race to the bottom in terms of pricing and profitability. Airlines industries is a classic example.

The bargaining power of customers
Classic example would be concentrated set of buyers. Or the risk of buyers backward integrating or switching to substitute products.

The bargaining power of suppliers
Again concentrated set of suppliers could easily squeeze margins and ensure that the business cannot earn supernormal profits.

Porters 5 Forces model is a good starting off point in evaluating the moat around the company. Of course there are other variables that can be added to the process.

Which brings us to the question “ Why do we need to evaluate a industry structure in analysing a company”? That is for the next post.

Till then “ May Porters 5 Forces be with you”.

Addition to the Blog

2009-07-19T06:52:00.000-07:00

I have added a new series of links in the blog which covers links to blogs / websites of professors / academicians.

My areas of interests is in the domain of economics, capital markets and behavioural finance. I would be most happy if readers of the blog have suggestions in terms of academicians in these domains, links to whom I could add to the blog .

Piramal Life Sciences or Slot machines

2009-07-15T06:22:00.000-07:00

I was reading the balance sheet of Piramal Life Sciences that a friend of mine handed over for me to evaluate.

Piramal Life sciences is the demerged arm of Piramal healthcare which is a research driven drug discovery company. It was formally the R&D unit at Nicholas Piramal. It focussed on four therapeutic areas cancer, diabetes, inflammation and infectious disease.

The balance sheet was a interesting read. The company has zero or negligible sales and is burning cash/ posting net loss of about Rs 25 crores a quarter. It posted a net loss of Rs 110 cores for FY 09 and has accumulated losses of about Rs 202 crores.

This is against a equity and reserve base of about Rs 183.6 cores effectively wiping out the balance sheet. Most of their molecules are still in Stage 1 and 2 of clinical trials.

They have been funding themselves thru short term ICD loans from the parent company and the auditor has even made a remark about using short term funding for long term asset.

Drug Discovery - Risky business
Drug discovery is a risky business with very high upfront capital commitment and low success rate. The payoff’s could be extremely high for a blockbuster molecule but it is tough to assign probabilities. The demerger model is essentially to derisk the parent company from vagaries of drug discovery.

Which brings us to the reason for this post …..

How does a retail investor believe that he can understand the risk return payoff of the drug discovery business when the parent pharma company itself is not sure on this?

I can understand venture funds investing in a business like this bcos that’s there capability set but a retail investor getting into a stock like this is beyond me.

I would rather go with a slot machine even though I know the odds are against me but atleast I understand the odds. The stock incidentally is quoting at Rs 55 giving it a market cap of about 125 crores.

Nilekani farewell at Infosys

2009-07-09T19:56:00.000-07:00

I was reading about the news article covering Nandan Nilekani's farewell at Infosys after 28 years as he moves into the government.

Came across CEO Kris Gopalakrishnan's quote which I liked and sharing it
" I have known u for longer than I have not known you". :-)

Dr Reddys Laboratries

2009-07-02T22:28:00.000-07:00

When I was enroute to office today I started reading Dr Reddys balance sheet in the car. It had a interesting piece of data that I thought of sharing.

Dr Anji Reddy the chairman writes and I quote

“ If any shareholder had purchased 100 shares during your company’s IPO in Aug 1986, plus the 60% rights issue in Aug 1989, and held on these till date, the person would be owning a total of 5760 shares at a face value of Rs 5 per share. Against a outlay of Rs 2500 ( Rs 1000 in the IPO and Rs 1500 to purchase 60 shares of the rights issue at Rs 25 per share), that investor would have earned a total of Rs 1.95 lacs of divided, including current years proposed dividend.

On 31st March your company’s share on BSE was being quoted at Rs 488.65. Thus, the value of the investors portfolio would have been Rs 28.15 lakhs”.

Now that’s a 1000 bagger in 23 years. A fixed income instrument assuming doubling every 6 years would have been grown 16 times in that period.

If only I had spent less time and money chasing girls in my teens :-). Now I know where Warren Buffett got it right by starting early.

Disclaimer: I am not recommending the Dr Reddy’s stock and I own all of 10 shares, kept just to get the balance sheet :-).

Gwalior Chemicals - Update

2009-06-27T11:12:00.000-07:00

I already written about the Gwalior Chemcials deal with Lanxess and the investment opportunity. As part of the process the company has sent across the notice for the postal ballot. I am enclosing a link to the same.

http://www.bseindia.com/xml-data/corpfiling/announcement/Gwalior_Chemical_Industries_Ltd_240609.pdf

The management has reiterated its decision to distribute Rs 100 crores to the shareholders in this communciation.

To wait or not to wait

2009-06-24T21:59:00.000-07:00

In one of my previous post Reverend put across a query to me and i quote

“Your views on Mphasis as a potential delisting candidate? An article I came across suggests that HP has no listed subsidiaries in the 170 countries it operates and makes a case for delisting. They have cited Digital (a subsidiary of Compaq) which they delisted. Happened in 2001 or so.. Your insights please?”.

It’s a interesting question and I understand the thought process that goes behind this opportunity. I have also in the past and continue to analyse similar companies.

Lets examine the structure of evaluating such a opportunity.

Mphasis was acquired by EDS which subsequently got acquired by HP globally. HP globally doesn’t have listed subsidiaries and at some point of time would probably go in for a delisting exercise for Mphasis.

The logic is fair and there is strong likelihood of this happening. The important question is when? Next month, Next year or 5 years down the line.

This is a huge uncertainty that one has to live with. Mphasis currently quotes at about 393. In the intermittent period till the delisting happens what level could the stock go down to. This is absolutely critical which leads us to the next stage.

Would I buy Mphasis without factoring in a delisting opportunity? Am I comfortable with financials, performance, industry outlook etc of Mphasis? Is there a margin of safety in the stock without the delisting?

If the answer to these questions is yes? Then it makes sense to look at the opportunity. If intrinsically one is comfortable to hold Mphasis then a possible delisting is a added bonus.

Else one needs to factor in the possible downside in the stock, the likely timeline for a corporate action and the opportunity cost with respect to the general market.

I hold a stock where there is similar logic waiting to play out. Will write on it in my subsequent posts.

On a side note Reverend, I wouldn’t see a straight delisiting exercise in Mphasis. EDS currently holds about 60%. If they were to do this I would expect them to do it 2 stages. Phase 1 do a open offer and increase their stake to either 75% or 90% based on the listing requirements and then in Phase 2 actually go thru the delisting process.

Remembered a old Rafi and Asha song on this ….
ham intezaar karenge
ham intezaar karenge tera qayaamat tak
khudaa kare ke qayaamat ho, aur tu aaye
ham intezaar karenge …

TCS - Management Stockholding

2009-06-24T19:04:00.000-07:00

I saw some interesting piece of information in yesterdays ET in the insider trading disclosure on TCS. The top management of TCS got alloted the following number of shares by virtue of the 1:1 bonus issue. The actual holding is double of this.

Mr Ratan Tata - 761628
Phiroz Vandrewala - 50304
N Chandrashekaran - 44264
S Ramadorai - 99560
S Mahalingam - 80840
Mrs Lalitha - 60

Came as a surprise to me that Ratan Tata owns stock in TCS in a individual capacity.

Book Review - Market Panic

2009-06-21T08:05:00.000-07:00

I just finished reading the book “ Market Panic” by Stephen Vines. I would say more like browsed through it. The book is ok read slightly repetitive but did have a few good things.

I liked the author’s structure on the various stages of a stockmarket cycle leading to the final panic exit that most markets demonstrate at the end of the cycle.

Listing down how the author has described the various stages of the cycle

Stage I
The cycle starts with some kind of external shock the system that creates important opportunities for atleast one sector of the economy. It could be a event like a war or new inventions like the railways or more recently the rise of the internet

Stage 2
This boom then gets enlarged largely fuelled by expansion of bank credit expanding money supply ( Greenspan being a case in point).

Stage 3
With greater liquidity in the system euphoria takes over and as “Adam Smith” put overtrading. This results in greater trading volumes and higher level of speculation and leverage that builds into the system

Stage 4
As the author quotes “There is nothing so disturbing to one’s well being and judgement to see a friend get rich”. So everyone one wants to get rich. People who haven’t thought of entering the stockmarkets suddenly start investing in the markets.

Stage 5
The real danger signals starts when the stockmarket news moves from the inner pages of non financial newspapers to the front pages. I quote the author “Illustrating this point was the alarming appearance of mutual funds as a “Playboy” cover story. When stocks replace scantily clad young ladies who are well endowed on the cover, logic has clearly taken a holiday’.

Stage 6
Not only does the stockmarkets get inundated with inexperienced participants but their very presence increases demand leading to the temptation and opportunity for many new equity issues designed to capitalise on the window of opportunity for selling all manner of assets at an inflated price. This also leads creation of new derivative products allegedly aimed at sophisticated investors increasing leverage in the system and building pressure. This starts process where lenders start calling in additional margin with central bankers stepping in to deflate the bubble.

Stage 7
As the bubble grows the markets starts losing all sense of connect with the underlying assets.

Stage 8
At this stage a number of scams and dubious investments start coming out. This is interesting as a symptom if not the cause of stockmarket panics.

Stage 9
At this stage the savvy investors sense the top and start exiting from the market. Newer players are unsure and tend to stay put resulting in brakes on the rapid upward price movement. As the “greater fool” becomes difficult to find there is increasing movement from assets into cash resulting in depressing prices leading to unwinding of leveraged positions.

Stage 10
Now the market is in full retreat and there is competition to get out or the rush thru the door. This is typically led/ followed by the dramatic failure of a bank or other institutions or a particular scam.

Stage 11
This is final stage where the very assets which were darlings of the market become the object of revulsion and there is a market wide panic that builds up invariably leading to the regulator putting on cap in terms of limits or acting as a lender of last resort to bring stability and confidence to the markets

I have personally seen about three cycles and I can say that this is a fair template of how the markets move. Of course to add to it I always hear the magical four words “ This time its different” :-).

IL&FS Investmart - Bingo :-)

2009-06-16T09:11:00.000-07:00

I had earlier posted here on a special situation transaction covering IL&FS Investsmart and Dabur Pharma. I had just few days back put in a update on the status of this special situation transaction.

IL&FS Investsmart today came out with a announcement that its promoters HSBC are seeking to go in for a delisting :-) Whoopie. The link is enclosed here.

Atleast one leg of the transaction paid off and will hopefully deliver some good bottomline. Lets see how the market reacts to the news tomorrow. I expect the delisting to happen anywhere in the Rs 200 to Rs 250 band. The original price of the transaction was around Rs 84. Will come back with more updates on this as and when the transaction moves forward.

Gwalior Chemicals - Economic Times Update

2009-06-12T22:49:00.000-07:00

I had posted earlier thru the week on a special situations case arising in the Gwalior Chemicals stock. The economic times today put out a article on similar lines and I am enclosing the link here to the article.

I am reassured that I haven’t got the numbers wrong or have missed something in my analysis because the economic times argument and numbers are in sync with what I put out in my post.

It of course is now upto the market how they want to value cash especially one which is coming tax free in the hand as opposed to letting it lie in the bush.

Dabur Pharma & IL&FS Investmart Update

2009-06-12T02:15:00.000-07:00

I had in the month of November written a post on a potential arbitrage opportunity covering Dabur Pharma and IL& FS Investmart.

A lot of water has since flown below the bridge and due to the fact that I have been irregular on the blog I didn’t put out a update on the opportunity.

The basic premise was the fact that post their respective open offers the promoter holding on both these companies had crossed the 90% mark. The bet was that either the promoters would have to sell their residual stake and bring it below 90% or delist the company. In case a delisting was to take place then the promoters would have to offer the last open offer price to the remaining shareholders.

I m listing down what was the potential payoff matrix at that time.
Dabur Pharma

Current Price – 38.5

Exit Price - 76.5

Delisting Return - 98%

Potential Downside - 20%

IL&FS Investmart

Current Price – 84

Exit Price - 200

Delisting Return - 138%

Potential Downside - 20%

Possible scenarios

1) Both get delisted - Returns - 118% ( Too good to be true :-)) – Probabaility – 25%

2) Dabur delisted, ILFS stays listed - Return 39% - Probability – 25%

3) ILFS delisted, Dabur stays listed - Return 59% - Probability – 25%

4) Both stay listed - Return (-20%) Probability - 25%

Potential Payoff - ( 0.25*118% + 0.25*39% + 0.25*59% + .25*(-20%) )= 49%

Now the update on this arbitrage bet.

Flawed understanding
My understanding of the process was flawed in terms of what happened when promoter holding goes beyond 90%. I spoke to a investment banker who is in the capital markets domain and this is the download that I got.

Delisting happens once the public shareholding fall below the minimum level as defined in the listing agreement. This need not necessarily be 10% but could be higher at 25% also. Once the public shareholding falls below the minimum level then as per the delisting laws the exchanges will give the company one year to comply with the listing norms. The promoter in the meantime has to either dilute or make a reverse bookbuilding offer for delisting. The price that is thrown up through this is the price at which delisting will take place.

Dabur Pharma Update

Fresenius Kabi which chose to acquire Dabur Pharma chose to dilute its holding by making a preferential allotment to Atlas – Vermoegensverwaltungs at a price of Rs 44.95.

This enabled them to bring down their holding to the 90% mark and continue with listing Dabur Pharma which has now been renamed as Fresinius Kabi Oncology Ltd.

The original premise of the arbitrage didn’t play out in this case. However the current stock price of Dabur Pharma is Rs 50. A return of about 30% over the investment price of Rs 38.5.

IL&FS Investmart Update
In case of IL&FS there has been no update with HSBC not making a move either in diluting stake or a delisting offer.
However the last few days the stock has been gradually moving up on the circuit. Maybe the market is smelling some corporate action playing out. The stock is currently at the Rs 140 mark generating a return of about 66% on the invested price. Waiting to see how this arbitrage plays out.

Gwalior Chemicals - Special Situation

2009-06-11T10:17:00.000-07:00

Gwalior Chemicals announced on the 8th of June that it was selling its chemical business to Lanxess. The total enterprise value of the deal is Rs 536 crores with Lanxess taking over debt of Rs 156 crores. The equity value accruing to the company would be Rs 380 crores. The company would be still left with a plant at Ankhleshwar.

The management has gone on record saying that they intend to return 100 crores out of Rs 380 crores to the shareholders either thru a one time dividend or share buyback.

The current equity capital of the company is Rs 24.67 crores.

So we are saying that the shareholder will accrue a sale value of Rs 154 per share out of which the company intends to return approximately Rs 40 per share either in the form of dividend or share buyback.

The current stock price of the company is Rs 92. A classic Graham opportunity. Either the market hasn’t figured this out or there is something that I m missing here. Looks like a very attractive deal.

Infosys - Stable friend

2009-05-30T22:46:00.000-07:00

I have laid my hands on the current years Infosys balance sheet. As always it a joy to read for both the quantity and quality of disclosures.

Consolidated income has gone upto Rs 21693 crores a jump of 29.96% over the previous year. Net profit has grown to Rs 6828 crores from Rs 4941 crores a jump of 38%. The company continues to improve performance on all cost varaibales as a % of sales with operating profit at 34.08% . Sundry Debtor cycle has been bought down and stands at 16.7 % of revenues as opposed to 19.8% of sales last year.

EPS increased by 31.1% to Rs 99.76 per share from Rs 76.2 per share. Return on capital employed has improved from 41.38% to 42.9%.

Infosys continues to be a high margin high ROCE business with impeccable management track record. I see a few challenging years ahead but Infosys has the management and the organisational competency to ride thru this challenging phase.

A few other observations.

Cost of Capital
I had written last year about Infosys’s computation of cost of capital and the management decision to look at a minimum return of twice the cost of capital on average capital employed and thrice the cost of capital on average invested capital. The current cost of capital for Infosys is 12.18%. it has come down from 13.32% last year as Infosys has factored in 7% as return on risk free capital as opposed to 8% last year for computing cost of capital.

Dividend policy
The company has stated and is maintaining a dividend payout ratio of 30% of net profits which they has listed down as a strategy last year.

Cash on the balance sheet :-(
Cash and cash equivalents on the balance sheet have increased to nearly Rs 10000 crores which is invested in fixed deposits. This has been my only sore point with Infosys. I don’t get the logic on maintaining such high cash levels which is depressing ROCE.

Infosys management has always maintained that they would not be keen in looking at aggressive acquisitions to grow. It would invariably be niche acquisitions to fill skillset or geographical gaps. The business remains immensely profitable and throws out substantial amounts of cash every year. Infosys had also restructured its biggest cost variable - employee cost in the last downturn to incorporate a significant chunk of variable component in it to factor in significant downturns.
With so much buffer available in place I really don’t see the logic of maintaining such high cash levels. Ideally I would want the management to constantly buyback shares so as to reduce the equity base and improve EPS and ROCE.

I don’t even mind a lower dividend payout ratio and a higher share buyback program bcos share buyback is more tax friendly.

I continue to hold some Infosys shares and plan to retain them but not planning to add more as of now.

Out of body experience

2009-05-23T08:17:00.000-07:00

Wikipedia defines an “Out-of-body experience” (OBE or sometimes OOBE), is an experience that typically involves a sensation of floating outside of one's body and, in some cases, perceiving one's physical body from a place outside one's body.

The ability to stand away from oneself and watch ourselves and our behaviour in a particular situation.

I want to take extend this concept to a “Out of market” experience. Can we take ourselves out of the market and observe our own thoughts and behaviour at every stage of the market ?

A few months back everybody and their grandmothers were talking about a market which having jumped off the cliff was very likely to continue falling. To quote Munger “ The light at the end of the tunnel appears to be of the incoming train”.

I remember a few participants in the market talking about a bear market rally and I specifically remember Shankar Sharma doing it. His thought was that though we are in secular bear market there could be swift bear market rallies which could take the market up by nearly 50%. I was at that point wondering how do market participants behave in a bear market rally?. Wouldn’t the belief/ knowledge that it is a bear market rally curb the rally or does one tend to alter outlook when one reaches the situation?

This brings me back to my original thought of “ Out of market” experience. Can I at this stage take myself out of the exuberance that I experience right now seeing my stock go up 20% everyday and ponder?

Ponder on whether is the worst over or are we amidst a sharp bear market rally and the jump from the cliff has landed us with Alice in Wonderland.

For ppl who have had the privilege to watch Darby, Tigger & Pooh along with their children( I do with my daughter) it’s the time to move that finger to their heads and “Think Think Think”.

Bull Market Blogger

2009-05-23T07:44:00.000-07:00

I am at a risk of being labelled as the “bull market blogger” who appears when the markets perk up and disappears as the down cycle starts :-).

I have been fairly irregular on the blog over the last few months primarily due to the fact that I had to make a choice between saving my business and saving my blog :-). Clearing business won over the blog.

Plan to write more often and provide a update on the past ideas that I had listed in the blog.

Aditya Birla Chemicals ( Bihar Caustic) - Q3 results

2009-03-05T10:01:00.000-08:00

Sensex - 8197
Price - 31.15

I had originally posted on Aditya Birla Chem here followed by updates on the Q1 and Q2 results.

The company’s Q3 results are back on track post slight downturn in Q2 because of the boiler blast which affected production. Sales has grown sequentially from Rs 46 crores in Q2 to Rs 49.8 crores in Q3. More importantly Net profit has grown from Rs 6.4 crores to Rs 12 crores where the Q2 profitability was affected due to one time expense on repair and maintenance. Quarterly EPS moved up from 2.78 to 5.14.

Cumulative EPS for first nine months 13.6 and annualise EPS works out to be Rs 18.33. The stock currently is trading at nearly 1/3rd its book value and a P/E ratio of 1.71 times.

The company also got rechristened to Aditya Birla Chemicals from Bihar Caustic. I continue to hold the stock and add at opportunities

Odds & Ends

2009-02-11T22:56:00.000-08:00

On one of my previous post regarding Alex from Moneyvidya posed a question to me and I quote him

“Are margins of safety not based on intrinsic values which can only be estimated from the fundamentals. Do you know of a way to create or measure a margin of safety for an investment which protects you from the possibility that all your knowledge of the fundamental properties of the security are incorrect?”

I think one of the most important things in investing or in all aspects of our lives is to understand the concept of probability and the potential payoff arising out a probable event.

When we buy a lottery ticket lets assume the following structure
Scenario 1

Price of ticket – Rs 1
No of participant - 100
Potential payoff = Rs 100 – Rs 10 ( Lottery provider’s fees) – Rs 20 ( Government taxes)= Rs 70

So for a probability of 1 in a 100 we have a potential payoff of 70 times.

The net payoff of this transaction is 1*(70) + 99*(-1) = -29

Most lotteries/ casinos are structured in such a manner where the participants lose money.

Scenario 2
Now let us assume that the lottery provider waived of his fees and the government its taxes and some benevolent donor added a extra Rs 25 to the kitty. Lets examine the structure now

Price of ticket – Rs 1
No of participant - 100
Donor contribution Rs 25
Potential payoff = Rs 100 + Rs 25 = Rs 125

So for a probability of 1 in a 100 we have a potential payoff of 125 times.
The net payoff of this transaction is 1*(125) + 99*(-1) = +26 times

In scenario 2 the odds are structured in our favour and hence a margin of safety is built in the trade. This need not necessarily mean that you will win the lottery but the odds are stacked in your favour.

Lets take this forward to stocks. When I evaluate stocks my starting point is management. What is the margin of safety in terms of management?. When I see a promoters personal yacht being put on the companies books it doesn’t necessarily mean the promoter will take the company down like Satyam but for me the odds are against me on this variable. There is a higher probability that the promoter will siphon out a bigger chunk on a latter date or indulge in corporate actions that is detrimental to shareholders.

I remember in one of my chats discussing real estate with one of my fellow bloggers and he telling me how can u expect ethical promoters in a business which is intrinsically unethical in India. It was a wonderful insight. So whether there is a problem today or not the odds are extremely high of encountering a black swan event in a real estate stock because of promoter action.

Will it happen? Not necessarily but the odds are stacked against you. To compensate for this is the margin of safety high enough on the financials in terms of intrinsic value to price and on a net off basis factoring both this variables is the odds in your favour.

Let us say that one has a portfolio of 10 stocks with positive payoffs on each stock. Lets look at the following structure

Number of stocks - 10
Probability of + returns on each stock - 60%
Probability of – returns on each stock - 40%
Can I eliminate a potential black swan event in a individual stock? The answer is no. To answer Alex’s question, we might encounter a black swan event in a single stock which cannot be eliminated but by building a margin of safety in each stock position one will on a overall portfolio basis achieve positive returns.

Déjà vu

2009-02-06T22:03:00.000-08:00

This story is about a organisation which was structured to look at potential mispricing in the bond markets in terms of spreads between 2 instruments and look at those spreads reaching the long term average. The organisation worked its models around bonds, mortgages, equities and derivatives across myraid asset classes. The organisation spearheaded extensive use of quant and modeling in bond trading.

The organisation worked on magnifying its return by taking enormous amount of leverage 30:1. In a 5 year tenure it delivered a return of over 40% per annum. However its enormous leverage in the derivatives market of over $1 trillion wend bad in a month when markets across the world collapsed with a correlation of 1 throwing all the models out of the window. So we reached the stage where the organisation was on the verge of bankruptcy and threatened to take the entire financial system down with them. The huge counterparty risk coupled with fear threatened to freeze markets across the globe.

The bankers of course rushed to the big daddy FED who promptly worked out a bailout package to save the organisation and the markets. And we all lived happily ever after or did we?

I m sure most of us will look at this and the names that will come to our mind are Lehman Bros, AIG, Citi etc

Well this was about a hedge fund called Long Terms Capital Management which went down under in 1998 before the bailout.

The fund was started by John Meriwether ex head of bond trading for Salomon Brothers where he was forced to resign after his top bond trader admitted to falsifying bids in the US treasury auction. J M managed to rope in Nobel price winners Robert Merton and Myron Scholes of the famous Black Scholes model as partners and the funds partners were positioned as a intellectual breed apart. I just finished the book When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein. Interesting read.

There is a strong sense of déjà vu that creeps in as you see the same cycle repeating itself bringing financial markets to a crisis and I can lay a bet that we will see it play out again. “We learn from history that we don’t learn from history” - I had earlier written a blog on this.

PS: Here’s the amazing follow up to the storyline - John Meriwether post the LTCM fiasco went on along with his colleagues to start JWM partners which floated a Relative Value Opportunity Fund where the fund document stated that it would keep its leverage down to 15:1.

The funds posted gains for several years, but in the first quarter of 2008 posted losses, of 31% in the flagship Relative Value Opportunity bond fund.

JM quotes “While we are clearly disappointed by our recent performance, we remain optimistic about the current opportunity set,".
"While we do not welcome the increased volatility in our returns, we believe that increased market volatility is one of the primary preconditions for creating interesting relative value situations," he added
And this was first quarter last year. Bond spreads kept widening significantly post that. History repeats.

The Satyam Saga - Key learnings

2009-01-13T23:15:00.000-08:00

Lot has been written on the Satyam Saga and I had earlier posted on it when the Maytas deal was announced by Raju. The intention of this post is not to run threadbare on the scam as there is enough information in the public domain on this. I intend to focus on two key learnings for me from the scam

Lies, Damned Lies and Management.
This event has reinforced by belief that the starting point of any stock selection process is to understand the management and its track record. The ethical values that the management has displayed both in terms of their business dealings as well as dealings with the shareholders.

Its amazing how if a friend, relative, neighbour of ours asks us to become a partner and invest money in a business opportunity, our first instinctive reaction is to check whether we trust the person. The next step is to check whether the business opportunity is attractive. But when we buy stock which is effectively becoming a partner we seem to overlook this variable.

In my experience a detailed running thru the balance sheet more often than not gives you a flavour of the management and how they value the various stakeholders.

Management quality could become a go-no go criteria or should atleast form a significant weightage in the stock selection process.

Black & White Swans
I had earlier written about how I factor in Black Swans in my investment strategy. The Satyam event is a classic Black Swan event that nobody saw coming. This has reinforced by belief in my previous hypothesis that it is critical to build a portfolio factoring in a adequate “ Margin of Safety” to ride out the black swans that one might encounter in the investment journey.

Also being able to accept Black Swans ( negative surprises ) and acknowledge White swans ( positive surprises) helps in building a temperament which doesn’t get unduly ruffled by the vagaries of the market.

Satyam Maytas Deal - Audaciously Appalling

2008-12-16T09:49:00.000-08:00

It rarely surprises me to see promoters pulling a fast one on minority shareholders but the Satyam proposed buying out of Maytas has really surprised me for the sheer audacity of the promoters.

I will not run into the finer mechanics of the deal as there is enough information on the web but the sheer magnitude of money ( US$ 1.3 Billion) being siphoned out to bailout Ramlinga Raju’s son is appalling.

The market has always been sceptical about Mr Raju’s ethical standards. Remember the 500 crore Indiaworld deal that was done during the dotcom boom. The market was abuzz with rumours on how a significant chunk of the money went back to Mr Raju and his family and got siphoned out of the Satyam balance sheet.

No wonder Satyam always trails Infosys and TCS in terms of valuation. This would be a test case to see how far institutional investors push the promoters and ensure that the deal is reversed.

Incidentally “MAYTAS” is the reverse of “SATYAM”.

Andhra Cement

2008-12-12T22:38:00.000-08:00

This week there was a news report in the economic times talking about how MNC cement companies like Lafarge, CRH, Italicement have envisaged interest in taking over Andhra Cements which is part of the Duncan Goenka Group.

The ET also speculated that the buyout could happen around the Rs 75 mark looking at historical M& A benchmarks in the industry. The stock promptly closed the day up 20% on the circuit at Rs 18.72. The stock has been moving circuit to circuit and closed at 24.70 yesterday.

I unfortunately haven't been on this gravy train :-) and I don’t see how I will get on as a I think the stock would continue moving up on the circuit till maybe the Rs 50 mark.

So what is it that interests me in the stock?

The current promoter holding is about 73.19% and of the remaining 26.81% the holding pattern has

IDFC - 6.6%
Fidelity - 5.58%
HDFC - 4.53%
Total - 16.70%

There is very less public shareholding in the stock. Once the dust settles down post the deal announcement and based on where the price settles down there could be a arbitrage opportunity playing out during the open offer and a potential delisting play.

FCCB - Buyback time

2008-12-10T09:12:00.000-08:00

Last week RBI in its press release announced allowing Indian corporates to prematurely buyback FCCB’s that have been issued.

1) The RBI has decided to permit corporates to premature buyback of FCCBs where the source of funds for the buyback is:
i) Foreign currency resources held in India (including funds held in EEFC accounts) or abroad and/or
ii) Fresh ECB raised in conformity with the current ECB norms, provided there is a minimum discount of 15 per cent on the book value of the FCCB.

2) In addition, the Reserve Bank will consider applications for buyback of FCCBs out of rupee resources provided that:
(i) There is a minimum discount of 25 per cent on the book value;
(ii) The amount of the buyback is limited to US $ 50 million of the redemption value per company; and
(iii The resources for buyback are drawn out of internal accruals of the company as certified by the statutory auditor.

Indian corporates have used the FCCB route to raise capital in the current investment cycle. These low cost funds which were pegged to aggressive stock prices for conversion were now coming back to haunt balance sheets. Clearly with the stockmarket crash FCCB’s were either unlikely to be converted into equity or converted at a lower rate ( Ex Pyramid Saimara) resulting in greater equity dilution.

The current credit crunch has come as a boon in disguise for corporates that are sitting on cash or have a steady stream of export income. FCCB’s are quoting at a significant discount to the face value and it is a ideal opportunity for corporates to buyback these bonds and clean up their balance sheets.

I can see a lot of corporates ( Ex Ranbaxy ) using the RBI go ahead effectively. In these tough times it is better to buyback your debt at a discount than equity.

Mather & Platt Delisting - Offer Acceptance

2008-11-26T09:05:00.000-08:00

I had written earlier here about the delisting opportunity in Mather & Platt. The company through its announcement has accepted the discovered price of Rs 250 for delisting. I had expected the acceptance price to be in the 200-220 mark but it has turned out to be more attractive.

All shareholders who tendered in the open offer will get paid Rs 250 per share for shares tendered. For shareholders who have not tendered shares they can do the same post delisting which might take about 2 months. The share price for Mather has subsequently moved above the 240 mark filling in the potential arbitrage opportunity.

I have exited my remaining positions by tendering in the open offer.

Tata Steel CCPS - Better bet

2008-11-20T08:35:00.000-08:00

Tata Steel issued 547,251,605 2% Convertible Cumulative Preference Shares (CCPS) of Rs. 100 each at an issue price of Rs. 100 each aggregating to Rs. 5,473 crores in Sept 07. As per the terms of the issue, six CCPS of Rs.100 each are compulsorily and automatically convertible on 1st September, 2009,into one Ordinary Share of Rs. 10 each, at a premium of Rs. 590 per share

Since it is a preference issue the preference shareholder has a higher right to the dividend than the equity shareholder. So unlikely that Tata Steel will skip dividend on the CCPS. The outflow is about 110 crores in terms of dividend.

A lot of water has flown below the bridge since then and the CCPS is currently trading around the Rs 23-24 mark. The Tata Steel stock has got hammered down in the current downturn with steel prices on a downward spiral.

I have listed down possible scenarios in terms of the Tata Steel stock price a year down the line. Looked at 5 possibilities, price remaining same, +10%, +20%, -10% & 20%. So if we buy 6 CCPS and multiples thereof I have listed down the cashflows out of the trade and the payoff in terms of return ( IRR)

Bihar Caustic - Q2 Results Update

2008-11-18T05:16:00.000-08:00

BSE Sensex - 8937
CMP - 31.7

I have written about Bihar caustic here and followed up with a update on the first quarter result here.

The second quarter result came in disappointing with both a sequential as well as YOY drop in net profit. The company had a blast at its boiler plant and hence resulted in lower production ad additional one time expense in repairing the plant. It also resulted in increase of fuel cost for production as the boiler plant was catering to the captive power plant.

So minus the one time impact the results would have been much better

But the stock has got hammered down post the results and closed today at Rs 31.7 down 57% from where I had originally looked at the stock. The stock is currently available at

Equity - Rs 23.3 crores
Reserves - Rs 193.8 crores
Book Value - Rs 93
Price/ Book Value - 0.33
H1 EPS - 8.89
Annualised P/E – 1.74

Negatives
Commodity prices have spiralled down worldwide so Q3 & Q4 operating and net profit margins will get affected. So we will see the downturn on that count.

Corporate Action
The Board has passed a resolution rechristening the company to Aditya Birla Chemicals Limited.

I continue to hold the stock and add more to my positions.

Mather & Platt Pumps - Delisting Play

2008-11-12T10:02:00.000-08:00

Last month amidst the chaos that was playing out, I came across a announcement on the BSE (18th of October) about the outcome of the EGM conducted at Mather & Platt Pumps.

Mather & Platt Pumps is owned by Wilo which is a German company.

Details of the EGM is linked here and it gave a go ahead to the management to explore potential delisting of the company. The stock was hovering around the Rs 146 mark and I bought some stock. The company announced its delisting offer on the 23rd of October. I have enclosed the link here. Was caught up in work so didnt focus too much on it.

Surprisingly in the panic the stock still didn’t move. I managed to pick some additional stock at Rs 149 on the 27th of October. So the information was available in the public domain for over a week and the stock refused to move at all.

It started moving subsequently and I exited some of my positions today around the Rs 200 mark. My estimate is that the bookbuilding will throw up a price around the 200 – 220 mark. Not waiting to catch the top and also it is more tax efficient to exit through the stock exchanges.

Dabur Pharma & IL&FS Investmart - Two to Tango - Arbitrage Bet

2008-11-11T10:07:00.001-08:00

I had written earlier on the potential arbitrage opportunity in Dabur Pharma and here on how it almost didn’t play out. The arbitrage has become far more attractive now.

Dabur Pharma
A quick recap. Dabur Pharma was acquired by Fresenius and it made a open offer at Rs 76.50 and acquired the mandatory 20% in the open offer. Fresenius’s stake post the open offer is 90.89% in the company.

IL& FS Investmart
IL&FS Investmart was sold off by Etrade to HSBC which wanted to expand its securities business in India. HSBC also made the mandatory 20% open offer at Rs 200. Its stake post the open offer in ILFS Investmart is 93.86%.

So what is the bet?

In both the cases the public shareholding has fallen below 10% post the open offer and according to SEBI both the companies have to either delist or the respective promoters have to offload their stake to bring it down below 90%.

In the event of the company delisting then as per SEBI rules the last open offer price has to be offered to the remaining shareholders to exit for a period of 6 months after delisting.

What are the potential payoffs?

Dabur Pharma
Current Price – 38.5
Exit Price - 76.5
Delisting Return - 98%
Potential Downside - 20%

ILFS Investmart
Current Price – 84
Exit Price - 200
Delisting Return - 138%
Potential Downside - 20%

Possible scenarios

1) Both get delisted - Returns - 118% ( Too good to be true :-)) – Probabaility – 25%
2) Dabur delisted, ILFS stays listed - Return 39% - Probability – 25%
3) ILFS delisted, Dabur stays listed - Return 59% - Probability – 25%
4) Both stay listed - Return (-20%) Probability - 25%
Potential Payoff - ( 0.25*118% + 0.25*39% + 0.25*59% + .25*(-20%) )= 49%

Disclaimer - I have a position in both the stocks and kindly do u r own due diligence before taking a decision.

Repro Ind - Q2 results

2008-10-21T08:34:00.000-07:00

Index - 10683
CMP - 86.7

I had written here about Repro Industries and my liking for the business and the stock. I had followed that up with analysing the Q1 results here.

The company announced its Q2 results and it is in line with expectations. Sales increased dramatically over last year from Rs 44 crores to Rs 63 crores a increase of 43%. The increase sequentially over the Q1 quarter is about 36%.

The Q2 quarter invariably has higher sales due to the balance sheet printing business however it has lower margins.

The net profit has grown at 10% over last year from 3.8 crores to 4.2 crores. The reduced net profit margin is due to a mark to mark provisioning of Rs 2 crores on forex loss. Minus that the net profit would have moved from 3.8 crores to 5.4 crores a jump of nearly 42% at the operational level.

Half yearly EPS stands at Rs 8.57 per share and the cash EPS stands at Rs 12.26 per share.

I have added more to my position on the stock around the Rs 90 mark. Stock is available around a PE of 5-6 on FY09 profits.

I have uploaded the FY 2008 balance sheet here

K Sera Sera - What would be would be

2008-10-14T09:14:00.000-07:00

I was browsing thru announcements on the BSE site and came across this

"K Sera Sera Productions Ltd has informed BSE that the Board of Directors of the Company at its meeting held on October 13, 2008, inter alia, has considered the following points.

1. The Board has constituted the committee, who shall allot the Fully Convertible Warrants to Yes Bank Ltd on preferential Basis."

Yes bank making movies :-)

Clearly the company is in a bad shape and I m sure this is Yes Bank's way of converting a dud loan into a equity stake. I m sure we will see a lot of this going forward.

Tata Motors acquires Miljo Grenland

2008-10-14T03:50:00.000-07:00

I had in a earlier post talked about how I like the way Tata Motors has and is in the process of evolving into a global auto major with both geographical diversity and expanded product portfolio covering cars, trucks, buses, earth moving equipment etc.

A step in the process has been a small ticket acquisition that they announced today.

From the Business Standard
Tata European Technical Centre plc, a UK-based subsidiary company of India's third largest passenger vehicle manufacturer Tata Motors, has today acquired a 50.3 per cent holding in Norway-based Miljo Grenland/Innovasjon, a company specialising in development of electric vehicles, for Rs 9.40 crore.
The balance of shares will be retained by the existing shareholders who will continue to be associated with the venture, the company said in a press release. Miljo will produce electric vehicles based on Tata Motors’ products, besides manufacturing of state-of-the-art super polymer lithium ion batteries and the development of related technologies.
"Tata Motors believes that this investment in Miljo will help the company realise its strategy to develop convenient, affordable and sustainable mobility solutions through electric and hybrid vehicles", stated the release.

Niche acquisition which will enable Tata Motors to expand their electric and hybrid car portfolio. Another piece of the jigsaw falling in place.

We learn from history that we don’t learn from history - Part 2

2008-10-13T09:02:00.000-07:00

I had in my earlier post talked about two trends that history tends to repeat. One was the cyclical nature of markets, the other is the fact that

All Empires Die
Francis Kukuyama wrote a essay in 1989 “ The End of History” presumptuously arguing that the advent of Western liberal democracy reflects the end point of the mankind’s ideological evolution.

Mr Kukuyama seems to have missed out on the rationalising ability of all winners in believing “ Since I won, I was right”. It is this belief that makes all winners propagate their way of life to the rest of the world. Alexander thought of doing it so did the Romans. The Spanish decided that Christianity is the best religion and carried out their inquisitions. The British followed it up with their way of life and the British sense of fairness ( as they plundered the world) was what the world needed.

And of course now the American way of life that pervades every aspect of our lives from Coke to free markets and exotic derivatives.

The denizens of these empire tend to lose touch with reality and believe that the moral high ground arising out of victory translates into a easy life. The greed of a empire works towards propagating itself hoping to make the rest of the world pay for its upkeep. It peaks at the height of the enterprising ability of its citizens and slowly deteriorates as its citizens start enjoying the fruits of the efforts of their forefathers.

From the point that it starts living off its vassal states and their citizens to the point where it gets lazy to be enterprising and slowly giving that advantage off.

America the empire that took over from the British is in a decline and is slowly giving up its right to rule the world. You can’t be a king with tattered clothes and IOU’s to your subjects. It wont happen tomorrow but it is happening as the power shifts and I suspect will shift to the Chinese who will rule the world over the next century. Though this is apparent to an outsider as he sees the Americans sell off their family jewels to feed themselves, for Americans I don’t think the wake up call has happened.

It is the rationalising nature of the human mind which believes that the good old American way of life will continue, failing to read the writing on the wall or the path of history that will lead to the decay of the empire.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin.
And the first one now
Will later be last For the times they are a-changin. - Bob Dylan

Some humour to make us feel young again

2008-10-10T21:59:00.000-07:00

While reading through the web I came across Eddie Cantor who was a comedian and here's a quip by him during the Great Depression of 1929.

Eddie Cantor, said that his broker had told him "To buy this stock for my old age. It worked wonderfully. Within a week I was an old man!" :-)

We learn from history that we don’t learn from history - Part 1

2008-10-10T04:51:00.000-07:00

This is amongst my favourite paradoxes and I savour the deep meaning that the paradox throws at us.

It is human to experience the wide range of emotions which enrich our lives. From the exhilarating highs to the depressing lows. Markets are like mirrors that stare back at us, displaying our own emotions and blurring the picture over a period of time. Do our emotions define the markets or does the market define our emotions? Who is the dog and who is the tail gets lost in the concoction of emotions that wag around us.

History poses the same problem to the human mind. Does history define the path that we will walk or do we chart the path which will rewrite history?. Surprisingly, though science has progressed on all frontiers, the human mind still remains where it was and experiences the same set of emotions. The thrill of a hunting kill is the twin sister of the kick in executing that profitable trade. Our primal emotions have moved unaltered through history and are bounded by the framework that history defines for us. We are destined to operate within those boundaries, believing that we will rewrite history as history makes us repeat it.

There are two discernable trends that I want to touch upon where history keeps repeating itself.

Cyclical nature of all markets
Man is not a rational animal but a rationalising one. The ability of the human mind to rationalise everything from valuing eyeballs during the dotcom boom to sending millions of Jews to the ghetto is amazing. We don’t find answers for our questions but define the questions for the answers that we have already decided on.

This rationalising ability of the human mind makes it experience the exhilarating high to the depressing lows.

“Greed is good” said Ivan Boesky at Berkeley’s which Michael Douglas ( Gordon Gekko) later made it famous in the movie “Wall Street”.

Combine greed with the rationalising nature of the human mind and we get “irrational exuberance”. To covet the other man’s land, gold or his wife while keeping our‘s at home has driven human civilisations through history and it will continue. Fear of losing your life or your wealth over it is the flipside of that pursuit. Can we overcome the cycle of greed and fear? We haven’t in 8000 years of human evolution and I don’t see we managing it now. So we will go thru this fear phase to experience the next round of unbridled greed. The actors in the play might change but the play will go on.

To quote Shakespeare

“All the world's a stage,
And all the men and women merely players:
They have their exits and their entrances”

To be continued ......

Iceland getting chilled out

2008-10-08T09:07:00.000-07:00

The wonderful small little country of Iceland which is inhabitated with about 3,20,000 denizens is heading for bankruptcy. It is on the verge of joining the elite group comprising Lehman Bros, AIG, Washington Mutual and could become the first country to go down in the current credit crisis.

What is interesting is not the fact that a country is heading for bankruptcy, a lot of them have in the past from Asian to African countries. What however is interesting is the fact that it would be amongst the first so called "developed" "rich" countries which will go down.

We live in interesting times. The times they are a changin.

End of Year Closing Sale

2008-10-08T00:17:00.000-07:00

We have a end of the year closing sale going on. One on One free :-)

To quote Mark Twain " We are now interested on the return of our money and not the return on our money".
Well thats how the market is behaving as it stampedes itself thru the exit door.

Balaji Telefilms – Smoke on the water

2008-09-25T09:22:00.000-07:00

I had put a earlier post on Balaji Telefilms commenting on the divorce with the Star Group and how things could play out in terms of the Star stake sale.

Last few days I have been seeing a flurry of news items on the company. It started with news article stating that the company is planning to setup its own Hindi channel. So from a content provider it would make its transition to become a general entertainment channel. The divorce with Star clearly made sense as they would start competing in the same space. However this is speculation which the company has denied

It was followed by news reports that Balaji is taking over 9x channel from Indrani and Peter Mukhreja.

Too many news items swirling around. Clearly there is some fire smouldering somewhere which is generating all this smoke.

Plan to monitor this and analyse the business a little more.

Its Darkest before Dawn

2008-09-17T22:03:00.000-07:00

"The Door's" wonderful song " The End" comes to my mind when we look at the current gloom hanging over the world

This is the end
Beautiful friend
This is the end
My only friend, the end

Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
I'll never look into your eyes...again

Can you picture what will be
So limitless and free
Desperately in need...of some...stranger's hand
In a...desperate land
......
.........
..........
The west is the best
The west is the best
Get here, and we'll do the rest .......... :-)

Ironically Jim Morisson wrote this a few decades back and I m sure Wall street wasnt there on this mind when he wrote this.

But on a serious note the seeds of a bull market are planted in the abyss of a bear market. There is some great value that is today available on the streets. It is darkest before dawn.

The 3C’s of Investing

2008-09-07T08:56:00.000-07:00

When I went passed out of my B School and stepped into the corporate world, I left behind the golden rule of marketing that Mr Kotler’s blue coloured marketing management book listed down. The 4P’s of marketing. By the time I was passing out the 5th P was getting added to it called Packaging.

I moved to the 3C’s of marketing in the real world.

1) Convince
2) Confuse
3) Corrupt

It was simple and effective.

Convince - You start with a product and try convincing the customer on how great the product is and better than the competition. Like how u r shampoo will make hair more silkier and beautiful. If this doesn’t work then move to the next stage …

Confuse – If refuses to be convinced, confuse him. He needs to buy your product bcos it has ZPTO, AFGO, Booster technology, Oxidation technology, Salt crystals etc. Most customers will get adequately confused to buy the product. If this doesn’t works move to Step 3.

Corrupt – Buy 1 get 1 free, get 30% more, buy shampoo get toothpaste free, Rs 10 off etc. Economists will call it incentives. Problem is when everybody is working on corrupting the customer.

Well the 3C’s works as well in the investing domain. Companies / Management go thru the same cycle marketing their stock.

Convince - Managements will make some nice presentations and give the relevant sound bites to convince investors on the great future of the business and the company. If this doesn’t convince investors to chase the stock, move to step 2.

Confuse - Announce increase in FII limits and a few takeovers across the world. ( It doesn’t matter some of these are shell companies owned by the promoters sister in law). Float about 15 subsidiaries so it is really tough to figure out whether any of those takeovers are covering for the cost of capital.

Announce a few large scale diversification into current hot sectors or flavour of the month - Telecom licenses, real estate, infrastructure. If this doesn’t work move to Step 3

Corrupt - Announce a stock split. Thrown in a bonus issue as a bonus. And if all this doesn’t work announce a share buyback DLF, Sasken, Mastek, Reliance Infrastructure …….. This one works for sure.

Arbitrage that went right - ICICI PRU FMP Series 36 Plan A – Growth

2008-09-03T06:21:00.000-07:00

I had in my earlier post written about an arbitrage that didn’t work out ( Dabur Pharma) as I had thought it through. Listing down one that did go right.

Arbitrage opportunities tend to get thrown up around panic selloffs. Around the third week of Jan markets corrected significantly from the highs of the 20,000 peak to around the 16500 – 17500 range.

I encountered this arbitrage opportunity around that time. ICICI Pru had a Fixed Maturity Plan listed on the BSE with a 18 month tenure. The tenure for the plan comes to a closure in the month of November 08. It was a pure play debt product with no exposure to the equity markets and would give a annualised return of 8-9% for investors like most FMP’s would.

It had a NAV of around 10.6 at that time and it was trading in the 9.22-9.23 range on the BSE. It was clearly additional return available at virtually no risk. Though it is relatively illiquid managed to buy some position in it.

I exited my position last week in the 11.02-11.03 range managing a absolute return of 19% and annualised return of 25% post brokerage. The NAV has gone up to Rs11.2 but I choose to exit early and not wait for redemption to avoid higher taxation rates. The markets in the meantime have gone down by about 14% in the same time frame.

The importance in such a transaction is to have patience and be comfortable with seeing NAV rise at a supersonic speed of Rs 0.02 every week :-) and wait for the gap between the market price and intrinsic value narrowing down.

It doesn’t appear “sexy and hot” as the next potential ten bagger but I like opportunities like these.

Infosys Axon Deal- The times they are a changing

2008-08-29T09:47:00.000-07:00

I had in my earlier post on Infosys commented on the investment policy that Infosys had laid out in its balance sheet by laying out a hurdle rate of twice the average cost of capital.

I had also commented on Infosys either needs to lower its hurdle rate to the cost of capital else return capital to shareholders. Clearly the times they are a changing :-).

I think the Axon deal is a positive for Infosys as opposed to earning interest on ICICI fixed deposits.

This will enable them to build a strong foothold in the SAP domain and move up the value chain. The deal is valued at 20 times current year earnings. Infosys will clearly be able to up the margins on Axon by increasing the offshoring content. I personally have dealt with Infosys as a organisation and am confident in the management ability to assimilate this deal and handle a smooth transition.

To me this is a flavour of things to come for the big 3 in the IT sector. Though TCS and Wipro have historically been relatively more aggressive in inorganic growth, I see Infosys utilising the spare cash on it balance sheet more aggressively.

DLF - To raise capital

2008-08-26T21:31:00.000-07:00

"DLF, the country's largest property developer, plans to seek shareholder approval to raise as much as Rs 10,000 crore from institutional investors over the next 12 months, the company said in a notice to shareholders

The company will place a special resolution for a qualified institutional placement (QIP) before shareholders at its annual general meeting (AGM) on September 30, the company said. DLF may sell shares to investors within 12 months of getting the approval"

I had in my earlier post on 3rd July on DLF questioned the logic of the management in announcing a share buyback when clearly the core business was slowing and capital was scarce for real estate companies.

Now a month down the line the management is back trying to take approval from shareholders a to raise about Rs 10,000 crores of capital from institutional investors by doing a QIP. What can i say?

I had speculated in my earlier post that no significant buyback will take place and i will stick to that speculation.

Piramal Glass – Till debt does us apart

2008-08-24T05:38:00.000-07:00

I was running through the Piramal Glass balance sheet and here are some observations. The company has operations in India, Srilanka and a plant in the US. The US operations are bleeding and clearly some of the acquisitions have been pretty expensive.

The company has a networth of Rs 155 crores against which it has a debt of Rs 1041 crores. Debt – Equity ratio of 6.7:1. Now that is a hell lot of debt on the books.

The company made a loss of 22 crores last year on a turnover of 817 crores. Marginally improved over last year where it made a loss of 37 crores. Operations generated a cash flow of 17 crores against which they paid a interest of 64 crores. So effectively they had to borrow money just to pay interest. They added about 336 crores of debt on the balance sheet.

Power & fuel constitute a significant chunk of the cost, almost 17% of sales. This will go up further this year hitting bottomline. About 510 crores worth of loans are repayable this year which effectively means that they would get funded at a higher cost increasing interest expenses.

On running through the balance sheet, the thought which came to my mind was that these guys are in some serious trouble. I then went to the BSE site and looked at the Q1 results.

It just keeps getting worse. Q1 loss of 11.4 crores as opposed to a FY 08 loss of 22 crores. Q1 interest cost has ballooned to 25 crores against a full year interest of 64 crores last year. Power & Fuel costs have gone up to 21% of sales.

This is a classic case of misplaced overleveraged acquisitions which can bleed a company dry.

But the best part is still to come, the company paid a dividend of 15% to the shareholders because the standalone results don’t reflect the loss. Paid out of borrowed money of course.

The stock is currently ruling at around the 145-150 levels against a book value of Rs 90 which is shrinking every year. The stock price has come down from the Rs 400 mark where it was hovering around six month back.

It would be interesting to watch how they dig themselves out of this hole.

Balaji Telefilms & Star Group Divorce

2008-08-23T10:11:00.000-07:00

Few days back Balaji Telefilms announced parting of ways with the Star group with this press release.

Balaji Telefilms will have to acquire 25.99% stake that Star holds at a aggregate price of Rs 190 per share within a period of 240 days. In the event that the promoters Ekta Kapoor and family are unable to buy the stake, then Star has a option to sell this stake to a third party.

The press has been agog with all kinds of rumours as to who will buy Star’s stake. It started with ADAG and Eros and then followed up with PE funds like 3i, New Silk Route, Kotak etc.

The interesting part is the shareholding structure. Ekta Kapoor & family own 40% of the company. If ADAG or Eros were to acquire Star’s entire stake, it will result in the open offer getting triggered for 20% and could result in there stake being higher than Ekta Kapoor’s ( 25.99%+20% = 45.99%). It would be true if any of the private equity funds were to do the same.

The most likely scenario would be this stake being distributed across a few investors and not being acquired by a single investor. It would be interesting to see how things play out.

Arbitrage Trade Gone Wrong ( Almost) - Dabur Pharma

2008-08-18T06:48:00.000-07:00

I spotted a potential arbitrage opportunity last month in Dabur Pharma and invested on that basis. Let me list down the chain of events.

1) Dabur Pharma got acquired by Fresenius as the Burman’s exited the business. Fresenius made a open offer for the stock at Rs 76.5 per share.
2) The open offer opened in June 20th and ended on July 09th
3) Fresenius before the open offer by way of share purchase agreement bought 73.27% stake in the company.
4) 25th July - The post open offer status was communicated to the exchanges. The company had managed to garner 17.62% shares in the open offer and had increased its holding to 90.89%.
5) The stock ended 25th July at around Rs 61.50 which was a Friday and the announcement was done post market hours.

Investment Rationale

Having garnered 90.89% stake, as per SEBI norms the company would have to delist its shares as the public shareholding was less than 10%. There were two possible possibilities here

1) Option 1 - Fresenius choses to delist Dabur Pharma in which case the remaining shareholders have to be provided a exit at the last open offer price of Rs 76.50. This was a clean 24% return on investment in a 2-3 month horizon.

2) Option 2 - Fresenius choses not to delist Dabur Pharma in which case it would have to sell its stake so as to bring it below 90%.

I betted that Option 1 is what Fresenius would go with. While putting together the initial share purchase agreement Fresenius assiduously went about acquiring shares from all possible significant shareholding group and not just the promoters. It acquired stake from IFC ( International Finance Corporation) and also acquired all ESOP’s that were issued to employees something that it didn’t have to go about doing.

Also Fresinius already had a 100% subsidiary in India called Fresenius Kabi India Pvt Ltd so it made logical sense to go that route.

I bought the stock on Monday / Tuesday in the price range of Rs 61.50 – Rs 62.5.

Events post that

1) 11th August - The erstwhile board of directors along with the CEO resigned and a new board was elected driven by Fresenius
2) 11th August - The new board on the same day acknowledged receipt of a proposal from Fresenius Kabi AG to jointly develop business, increase operational efficiencies and provide access to markets for products manufactured by Dabur Pharma.
3) On the same day in a press conference in Delhi Rainer Baule the CEO of Fresenius Kabi stated that Fresenius will invest 30 million Euros in Dabur Pharma to double capacity. He also said that the company will sell 1% of its stake to a strategic investor to keep Dabur Pharma listed.

There went my arbitrage trade though there is still no official announcement on this. Luckily the stock went up post this announcement and currently hovers around the Rs 68 -69 mark. I have a 1 month compliance issue before I can sell the stock and intend to sell post that.

Though the fundamental story might be good and the stock could potentially go higher but that is a independent assessment. I wouldn’t want to rationalise a arbitrage call into a fundamental call because the arbitrage story might not play out.

Abbott India - Buyback Update

2008-08-18T05:52:00.000-07:00

I had in my previous post stated about the pending buyback offer. The buyback offer through the tender has commenced from today and will be on till Sept 2nd. The link to the details and forms are available here.

The company is buying back 7,97,500 shares at a price of Rs 630 per share. The management has gone for a lower buyback price compared to Rs 650 offered in the previous buyback. The paid up equity capital will reduce from Rs 14.47 crores to Rs 13.68 crores.

I wouldn’t be surprised if another buyback is announced post completion of this one as the parents philosophy is to aggressively buyback shares worldover.

ITC Bingo - 2

2008-08-09T03:45:00.000-07:00

In my previous post, as was rightly pointed out to me I had missed out on 2 business divisions in ITC

9) ITC Infotech

The company registered a total income of about Rs 400 crores on a consolidated basis and a bottom line of about Rs 10 crores. Not exactly a great set of numbers considering the peer group

10) Education & Stationary Products
The company registered a growth of 72% last year in terms of topline albeit on a small base. Its two flagship brands are “Classmate” for the student community and “PaperKraft” for the discerning working executive.

Some observations on ITC
1) Branding - The company has always managed to create a slight premium positioning for its brands. So whether it is the hotels business or Wills Lifestyle or Fiama Lifestyle. This has enabled the company to address the mass maket effectively whenever it has moved the brand down. It is relatively easier to move a brand from the premium segment to the mass market as opposed to the other way around.

2) The company boasts of a phenomenonal distribution network like HUL and hence is able to leverage that as it keeps expanding its product portfolio.

3) The E-choupal initiative is a great asset to have both from a sourcing as well as sales perspective for most of the divisions. This could potentially become one of the most attractive pieces in the ITC portfolio.

4) Management is clearly working aggressively in expanding the non tobacco portfolio and it wouldn’t surprise me if ITC sells off the tobacco business on a 10-15 year horizon and becomes a huge FMCG player taking on the MNC players like HLL, P& G, Nestle etc

5) Financial ratios like RONW might lower in the near future as the company invests money aggressively in building the FMCG business.

Investment Call
ITC to me is clearly a long term call on a 5- 10 year ( Not 2-3 years) horizon in which the company will transform itself. It is a compounding story which might compound at 15-18% a year unless something drastic comes up on the tobacco regulation front.

The stock however is currently available at 23 times last years EPS of 8.35. I would wait for it to reach lower levels before I buy the stock.

ITC - Bingo

2008-08-06T09:14:00.000-07:00

I like the way ITC is evolving after running through its annual report. The company has been continuously de-risking itself from the tobacco business into other areas over the last few years.

The tobacco business continues to be the cash cow in the portfolio that generates the cashflow to be invested into the other business segments. The net income of the company has grown from Rs 4353 crores in 2001 to about Rs 14558 crores in 2008. I have taken net income as cigarettes have very high excise duties and levies and tends to skew the topline.

The interesting part is that Non cigarette income has grown from Rs 900 corores which was about 20% of Net turnover to about Rs 7300 crores which is over 50% of the net turnover.

ITC effectively today has a bigger non tobacco business than the tobacco business. It’s a dramatic metamorphosis of such large corporation. The company is doing some very interesting things in the agri domain which could potentially become a huge play for the corporate sector as Indian agriculture open ups.

A brief snapshot of the various business divisions and the brand portfolio that the company has built.

1) Cigarettes / Tobacco

The company is clearly the numero uno in this business and is the cash cow for the company. The company has no great competition in the domain and will maintain its marketshare in this business. The biggest challenge arises from the fact that finance ministers love cigarettes or atleast the revenues that come out of it. So it remains the favourite whipping boy in terms of taxes being levied.

2) FMCG - Food
a) Branded Packaged Foods

The company has built up a significant share in this segment. Both Aashirwad and Sunfeast are 1000 crore brands. The company launched the “Bingo” range of chips last year and is beginning to give Lays a run for its money.
b) Confectionaries
The confectionaries business grew by 40% last year. The company has 2 strong brands Minto and Candyman in the segment.
c) Ready to Eat Segment
The company sells products like Sunfeast Pasta, Aashirvaad Instant Mixes and has a strong export business where it markets under the “ Kitchens of India” brand.

3) Personal Care
The company entered the personal care business last year and has brands like Fiama Di Wills, Vivel Di Wills, Vivel & Superia. This is a 20,000 crore market with HUL being the big daddy of this business.

4) Hotels
It has emerged as the second largest hotel chain in India offering over 90 hotels across 77 destinations under 4 different brand propositions – ITC Hotels, Welcom Hotel, Fortune, Welcome Heritage & the Sheraton Franchisee aggregating about 6000 rooms. Turnover crossed the 1000 crore mark this year.

5) Lifestyle Clothing
The company has managed to carve a niche in the premium segment of the lifestyle retailing segment with the Wills Lifestyle range. The company has added a popular segment brand John Players to expand its portfolio.

6) Paperboards & speciality Paper
The paperboard segment delivered a growth of 13% last year with revenues of Rs 2364 crores

7) Safety Matches / Aroma Sticks
The company is the largest manufacturer of safety matches after it acquired Wimco Ltd. It also has a strong presence in the incense sticks segment with brands like Mangaldeep.

8) Agri Trading
This is clearly ITC’s pioneering work in terms of addressing and working closing the Indian agricultural economy. Its e-choupal model is a acknowledged case study in this domain and is today replicated by other organsiations. The divisions performance got hampered due to the ban on exports of agri commodities. However the company has constantly expanded its portfolio from tobacco to high value frozen foods, potatoes, spices, staples etc.

Will continue in my next post in terms of my take on ITC and whether it is a good bet at current prices.

Sachin Tendulkar, Rahul Dravid, Rakesh Jhunjhunwala

2008-08-01T06:42:00.000-07:00

What does Sachin Tendulkar have to do with Investing? I think a lot and to me forms the basis of how I approach investing.

Sachin Tendulkar is a phenomenonal batsman and a thinking cricketer. He clearly the best batsman this country has produced if the not the world. I think he was born gifted and has a amazing sense of timing and hand eye co-ordination. He showed it, way early in his career and progressed by building on it. He is, as I would say a “natural”.

Every single Indian who picks up a bat aspires to be like Sachin Tendulkar. Mother pray and fathers bray in coaxing their litters into wielding the willow. But for every Tendulkar, there are a million who fall by the wayside and are left selling credit cards and writing blogs :-).

Let me examine another cricketer - Rahul Dravid. I wouldn’t by any stretch of imagination call him a natural. Dravid is the hard working, technically correct cricketer who puts in a lot of effort and displays tenacity. He unfortunately is not gifted with the raw natural talent that Sachin has ( This is true for 99.99% of us ). So he has made that up with sheer hard work and getting down to the basics. I would put Anil Kumble in a similar bracket as Dravid.

Dravid will not be as great as Sachin but he has left his indelible mark on Indian cricket.

The problem is that all of us aspire to be like Sachin when we are as talented as Dravid, if not worse. We walk in believing that we are potential god’s gift to mankind and leave the field with dreams shattered and egos hurt.

The key to success is to realise whether you have the natural talent of Sachin and if not, to change tack and become like the hardworking Dravid. Strategy No 2 clearly has a higher probability of success.

So what does this have to do with stockmarkets?
I think most people behave very similar when it comes to the stockmarkets. We all believe that we are the Sachin Tendulkars of the market with inborn insights and natural stock picking abilities.

There are people who have those abilities and I have met people like that. People who have the right instincts in terms of timing the market or the ability to look at a trading screen and see patterns. I have met people who can look at a balance sheet’s and come up with amazing insights.

Unfortunately these people constitute just 0.01 % of the population that exists in the stockmarkets. The remaining 99.99 % of us are not born with natural instincts. And a significant chunk of this population enters the market believing that they are the next Rakesh Jhunjhunwala’s of the world.

They leave disheartened and disillusioned by the experience and unfortunately some a lot poorer.

The way I look at the markets for myself is to position myself as a Dravid ( Knowing fairly well that I m not a Sachin). Nudging here and there, scoring those singles and twos and hopefully a few fours and sixes along the way.

The key to scoring runs is to retain your wicket or your portfolio to play the next day.

Performance Update

2008-07-31T08:56:00.000-07:00

I started this blog in the month of May and it has as a process helped me clear some of my own thoughts and formulate my investing strategies.

I have so far recommended 3 stocks based on analysis. ( I m a lil slow, cant think of one every week :-)). Posting a performance update on these stocks and plan to do this on a quarterly basis.

Peninsula Land

2008-07-28T10:37:00.000-07:00

I was running through the Peninsula Land annual report for the year 2008. The report threw up some interesting things and in a sense reflects the kind off trouble that the real estate industry is facing.

Like they say the devil is always in the details, I think in case of a real estate company the devil is in the numerous subsidiaries and SPV’s that get floated.

Rs in crores

The company’s sales numbers have decelerated considering the previous period is for nine months. Net profits have also shrunk and so have the Net Profit Margins.

But the interesting part is that though on a standalone basis inventory has gone up from 224 crores to 279 crores, the devil is really in the consolidated numbers. The increase in investments and loans and advances in the standalone numbers are essentially money routed to the various subsidiaries which hold the inventory.

So on a consolidated basis inventory is about 546 crores most of which would be undeveloped land. The real value of developed stock would be much higher. Total Sales last year of Rs 357 crores and unsold inventory of Rs 546 cores. With the environment turning negative, some of these balance sheets are not going to be looking very good for a few years to come.

Stock Update - Bihar Caustic - Q1 Results

2008-07-22T22:38:00.000-07:00

I had in my earlier post recommended Bihar Caustic. The company announced its Q1 results yesterday and the results were on track or better than expected.

Sales and net profit grew by 11% on a trailing quarter basis. On a year on year basis the growth is very impressive. The company should clock a EPS of over Rs 20 for the year and should increase book value to over Rs 100 per share.

The stock is available at a PE of 3 and closed yesterday at Rs 68.

Repro India - Q1 results

2008-07-18T07:10:00.000-07:00

I had in my earlier post recommended Repro India. The company announced its Q1 results today.

Sales have improved from 37 crores to 46 crores a jump of 24%. Net profit improved by over 70% growing from 3.02 crores to 5.15 crores. Quarterly EPS moved from 2.75 to 4.69.

More importantly OPM improved from 17% to 20% primarily driven by growth in exports which now constitute 47% of sales. International business has a higher operating margin as compared to domestic business.

The only downside is that having been caught in work, I havent had the time to add to my position :-(. Post results today the stock moved to the upper circuit closing at 113. I guess a few down days on the market should help me buy some more of this stock.

Ranbaxy - The Soap Opera continues

2008-07-15T18:14:00.000-07:00

I had written in a earlier post on how I was uncomfortable with the way Ranbaxy was shaping up after going thru its balance sheet. The stock was hovering around the 500 mark then.

Then came the news of the Daiichi takeover. I had written a post then on how it was a merger of two organisations that were struggling for different reasons, coming together and hoping to build something strong out of it. Stock moved to around the 600 mark and I sold off a large % of my very very small holding :-).

Now the US FDA has pulled up Ranbaxy. Not the first time though, Ranbaxy has a history of run-ins with the US FDA. Their US Hq got raided in FEB 2007. Here’s a link to that story. There are rumours of Daiichi exiting the deal flying around.

I now come to the reason for this post.

I read this interesting piece on Bloomberg. UBS pharma analyst Sonal Gupta states and I quote
"We believe there could be close to 50 percent downside to the stock if Daiichi Sankyo were to withdraw its current offer to buy a majority stake in the company,''.

So UBS believes that minus Daiichi taking over, Ranbaxy is worth only Rs 250 a share. Daiichi is buying Ranbaxy at nearly three times that at around Rs 729 per share.

UBS's call is building up a self fulfilling prophecy where based on the value assigned by UBS, would Daiichi withdraw the offer which would lead the stock to reach the 250 level.

What will Daiichi do? The soap opera continues …..

Repro India - Value Added Print Solutions

2008-07-13T02:08:00.000-07:00

CMP - Rs 108

Sensex - 13469

My one and a half year old daughter liked the balance sheet. The numbers appeared to seem a lil boring for her but she identified with the animation characters that smiled back at her from the balance sheet :-). Considering the fact that she is one of the key objectives of my savings plan, it is natural for her to have a say in the matter. Well she whole heartedly recommends my decision on Repro India.

I like the company and the simplicity of its business model. Importantly if the management gets it right it has the potential to be a good multibagger.

Lot of us would have over the years unknowingly, experienced a Repro product. The company has been one of the largest designers and printers of balance sheet over the years. Tata Steel, Wipro, Vedanta, Hindustan Unilever, DLF etc

Company
Repro is one of India’s largest integrated print solutions companies. The company has evolved over the years from catering to the domestic market to expanding its capabilities across the world.

Printing process outsourcing is one of the new evolving stories in the outsourcing business. India is emerging as a significant outsourcing option for companies and publishers across the world. Advantages of outsourcing to India beyond the cost is the availability of English speaking talent which is evolved in cutting edge graphic arts technology.

1) Domestic business
Out of a turnover of about 155 crores, nearly 80 crores came out of India. Customer segments that the company addresses.

a) Retails & Childrens Educational books - Educational books covering text books, nursery rhymes, colouring books etc catering to publishers like Orient Longman, Egmont Imagination, Encyclopedia Brittanica, Oxford press, Jeevandeep publishers etc.

b) IT books and Manuals- Repro handles the entire print based fulfilment for Microsoft operating system and other application products. So the next time you buy a Windows Xp or Vista pack, the print material that comes with is printed by Repro. It client base in this segment includes IBM, Sun Microsystem, HP, Compaq, Aptech, NIIT .etc

c) Catalogues & Magazines- The company prints magazines like PC quest, Gladrags, Seventeen, Cine Blitz, Business Barons, Femina Girl etc.

d) Lottery tickets - It is India’s largest solution provider in the area if lottery tickets servicing customers like Playwin Lotto etc.

e) Corporate balance sheets – As discussed before servicing clients like Tata Steel, Wipro, Vedanta, Hindustan Unilever, DLF etc

f) Stationary Products - Makes customised stationary products for corporates.

2) International business
This is where the real traction is coming thru. The company has over the last few years expanded the international business. It has customers base across Africa, USA & UK.
Surprisingly Africa constitutes a lions share of the international business.

The company in the international segment works closely with educational publishers like Mcgraw Hill, Longman, Pearson , Oxford University Press, Heinemann etc. It also works with mass market publishers like Mordern publishing, Igloo, Arctus, Beaver Books etc.

It works closely with the largest publishers in South Africa, Nigeria, Ghana etc.

The company is expanding its relationship with these publishers across geographies. The company is in the process of setting up a facility in a SEZ to cater to the international markets.

Financials
The company increased sales from 131 crores in FY 07 to 155 crore in FY 08 largely driven by increase in export revenues. PAT grew from 9.4 crores to 15.5 crores. EPS grew from Rs 9 to Rs 14.24.

Cash EPS went up from Rs 14.35 to Rs 20.08. RONW improved from 11% to 16%.

The stock is currently trading at 108 available at a PE discounting at about 7.5 times last years earning. I would recommend a buy on the stock.

Ps: One of the interesting things about the company is the list of non executive directors
Mr J J Irani - CEO of Tata Steel
Mr Alyque Padamsee – Lintas
Mr U R Bhatt - Ex Head of Jardine Fleming
Mr Sanjay Asher - Partner Crawford & Bailey
P Krishnmurthy - Ex Vice Chairman of J M Morgan Stanley

Well a pretty strong list of corporate chieftains who have agreed to be on the board of a 150 crore company. If not for anything else, I would atleast be assured that the numbers printed on the balance sheet are accurate.

Disclaimer - I m not recommending buying the stock based on my statements. Kindly do u r own analysis to reach that conclusion.