Satyam Maytas Deal - Audaciously Appalling

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"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

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

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

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

"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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Blue Star - Shinning Star

I was reading the Blue Star balance sheet and it was a breath of fresh air. I was pleasantly surprised by the candidness and the clarity of management thought process.

Enclosing a few excerpts of the Chairman’s speech

“Actually we have been successful in controlling expenses for a number of years with a conceptually simple yet effective approach. Basically, we ensure that the increase in total expenses is significantly less than the increase in Gross Margin.

Blue Stars operating managers are well versed in a culture of accountability and cost consciousness and are entrusted to deliver business results while managing costs and cash flow. They did a excellent job last year. For ex, while Operating Income grew by 39% and Gross Margin by 51%, total expenses grew by only 24%. The difference flowed straight into PBT which grew by 137%. The mathematics is simple, but the results dramatic.”

Some more

“Capital turnover improved dramatically from 5.32 to 7.48. Borrowing reduced from 89 crores to 37 crores and debt/equit ratio reduced from 0.42 to only 0.14. This was a encouraging development because we clearly have proven a self financing business model. At a time when capital is likely to become scarce and more expensive, it is reassuring to have good internal cash generation and a strong balnce sheet”.

I just love the focus on costs in a year where the company increase topline from 1607 crores to 2270 cores and net profit showed a dramatic 145% jump from 71 crores to 174 crores. There is clarity of thought and the orientation to focus on profitable growth and not just growth.

I have experienced that in most balance sheets the “ management discussion & analysis” part is really given lip service and managements typically mouths some platitudes. The Blue Star discussion was excellent with detailed analysis of each of the business segments, plants & various functions. It was informative and the management has made a genuine attempt to educate as opposed to just informing the shareholder.

The business had a great time last year and things might slowdown a little bit this year bcos of the general slowdown.

Here’s a company which delivered RONW of 66% and ROCE of 81% last year. Consistent growth in profits in the last 10 years. The stock has a PE of about 20

So what’s the call …

I m clear that I will own stock in this company someday not just for performance but more importantly for the clarity of management thought process. At 20 PE I m unable to break the mental barrier of paying top dollar for a good business. So I will wait patiently and hope for a bad quarter or some bad news when the market irrationally hammers the stock down.

But then like I said in one of my earlier post maybe …

Yeh Na Thi Hamari Kismat, Ke wisaal-e-yaar, hota,
(It was not in my destiny, to be united with my lover)

Agar aur jeete rehete, Yahi Intezaar Hota
(If I had lived any more , I would still be waiting for it) …… Mirza Ghalib

Tata Motors

I had in my earlier post on innovation and investment talked about how the Tata group made it to the 6th position in Forbes Survey of most innovative companies. This was driven by the innovative work that went it to creating the Nano at the $ 2500 price point which could potentially revolutionise road transportation in the developing world.

I was reading the Tata Motors balance sheet and a lot of interesting things stood out.

The company has evolved over the years from a truck major to a full fledged auto major with interests spread across the globe.

1) Commercial vehicles
The company continues to hold over 60 % of the marketshare in the Indian market. The company has managed to maintain marketshare with products like the ACE. It is interesting to see extensions that the company has managed by extending the ACE platform to products like Magic & Winger. Sitting in the cities we might not notice these products but in rural India ACE has been a great success.

The company has registered export growth of about 11% to 39850 vehicles.

Bus Segment : The company is aggressively expanding its marketshare in the Bus segment. It has setup a joint venture in India with Marcopolo from Brazil for the same. The company also holds a 38% stake in Automobile Corp of Goa which is one of the largest bus body supplies in India. It is constantly increasing its stake in the company.

Defence: The company is aggressively looking at the defence segment in line with the groups strategy of focusing on this segment. It has unveiled a range of products in the current Auto Expo for the defence segment.

Global Network
Korea - Tata Daewoo commercial vehicle company managed a 38% growth in volumes. It increase marketshare from 24% to 32% in the HCV segment and from 28% to 34% in the MCV segment. It is the largest exporter from Korea in the HCV segment. Net profit increased by 81%.

Thailand & Asean countries- It has setup a subsidiary in Thailand and has introduced a 1 ton pickup truck in Thailand. The Thailand subsidiary will cater to the Asean market.

South Africa - It has setup a subsidiary in South Africa for assembling and marketing of the companys product in the African market.

Spain - It acquired a 21% stake in Hispano Carrocera which is a leading bus manufacturer in Spain. Tata Motors has a option to up its stake in the company. Hispano has a manufacturing plant in Spain which caters to the European market and one in Casablanca to cater to the Moroccan and North African markets.

Assembly Operations - The company has assembly operations in Malaysia, Kenya, Bangladesh, Spain, Ukraine, Russia and Senegal..

Beyond this the company has its sales and distribution network spread across the world. This link on the company site gives a nice flavour on the distributor network .

2) Cars - Passenger Vehicles
The car portfolio of the company comprises of the Indica, Indigo, Sumo & the Safari. Though the car business lost marketshare last year because of the delay in the launch of the new Indica, the company should gain traction with new launches this year.

The biggest upside in the car business would be the launch of the Nano in the second half this year.

The Jaguar and Land Rover acquisition moves the company up the value chain and more importantly takes the car business to the next level in terms of international spread. JLR has sales in over 100 countries with over 2200 dealers. It clocked abou $15 billion of revenues for the year ended Dec07. Jaguars launch of the XF series has improved both sales and bottomline in the first quarter.

The company also has a joint venture with Fiat in India for the manufacture and distribution of Fiat cars in India like the Palio and Stile.

3) Construction equipment.
The company has 60% stake in a joint venture with Hitachi in India called Telcon and recorded sales of over Rs 2700 crores last year. Telcon also acquired stake last year in two Spanish companies Serviplem and Comoplesa by acquiring 79% and 60% of these companies.

4) Other Business
a) Tata Motor Finance
The company disbursed nearly 9000 crores last year for financing of commercial vehicles and cars making it one of the largest vehicle finance companys in the country.

b) Auto Components
Tata Autocomp ( TACO) - The company owns a 50% stake in Tata Autocomp which is the groups holding company for promoting domestic and foreign joint ventures in auto components and systems.

Tal Manufacturing - Subsidary in the area of machine tools, fluid systems etc. It signed up a deal to supply structural components to Boeing for the Dreamliner 787 project.

HV Transmissions - Manufactures gear boxes and axles for heacy vehicles.

c) Tata Technologies - provides specialised Engg & Design Services, PLM, etc to leading global manufactures. It crossed the 1000 crores mark last year in terms of topline.

Conclusion
I like the the way the company is both expanding its product and global footprint. I have great faith in the Tata groups ability to handle cross border acquisitions and make them profitable. They demonstrated it with Tetley & Daewoo motors and are managing the Corus acquisition fairly well.

The company did about Rs 40,000 crores of consolidated topline last year with a bottomline of 2000 crores. The stock has got hammered down on count of higher fuel prices , economic slowdown and higher input costs.

Stock is available on a PE of about 8 at Rs 400. I am not recommending a buy at this point and wait to see the level of equity dilution that will take place to fund the JLR deal. Also the next few quarters are going to be challenging for the company. But on a more long terms basis I like the way the company is evolving itself to become a serious player in the global automotive market.

DLF announces buyback

Circa 2007
DLF did a IPO last year around the same time at around Rs 525 per share. The IPO has a series of controversies around it and took its time to get SEBI approval. It finally managed to sail through. The promoters diluted about 12% in the company and still continue to hold about 88% in the company. The real estate markets were on a song and the promoters got a good price for the dilution.

The objective of the IPO I presume was to raise capital so as to deploy the same in profitable projects earning returns for the shareholders.

Cut to 2008

Property markets are in a slump. Most developers are unable to raise capital from the equity markets, AIM, PE funds etc and the cost of debt has gone up substantially. Developers are facing severe cash crunch as demand has contracted at such high property prices.

So in such a tough environment where capital is scarce, what does the largest real estate company want to do?. It wants to return capital thru a buyback because it believes its share price should be higher.

Guys why did u take it in the first place last year when u didn’t need it? Or
Is managing the share price more important than managing the business?

“U cant fool all of the people all of the time” (or maybe you can). I can lay a bet that not a single share would get bought back. Anyway with a 88% promoter holding, there is only 2% of the capital that can be bought back without attracting the delisting norms.

I think SEBI should start questioning these strings of open ended buyback announcements where nothing happens other than trying to prop up the share price.

PS: Well Mr Ambani did his buyback of Reliance Infrastructure and it doesn’t seem to have helped the share price. Subsidiary Rel Power raised capital because it needed it and parent returns it back because it doesn’t need it. Well they could have transferred it from the parent to the subsidiary and saved us all the trouble. When something is expensive, all the propping up doesn’t help.

Oversexed guy in a whorehouse.

Warren Buffett once quoted this when Forbes asked him how he was feeling with the market crash in 1974

Well that’s how I am feeling :-). Unfortunately unlike Buffett, I don’t have the spare money to enjoy (and a wife who is watching over my shoulders :-)).

Though everybody is shouting from the rooftops on how the environment is vitiating and how the market can go below 12,000 and then 10,000, I will stick my neck out and say that this is the time to start building on your portfolio.

I m not saying buying stocks like RNRL, Ispat etc just because they have fallen 75 % from the top. They could and most likely will shrink further, But there are a lot of great companies with visible earnings available at mouth watering valuations. I agree that valuations might become even more mouth watering ( what is cheap can become cheaper) but then its tough to catch the top and bottom of the market.

I believe that equities are the best bet to ride out inflation. They might underperform in the short run due to sentiment but companies with low debt on the books and strong cashflow’s will be better positioned to increase marketshare and hence encash as the cycles turn.

One of the advantages of inflation is the fact that replacement costs for companies which have already build capacities in terms of land, plant & machinery etc keeps going up. It provides a natural hedge to the depreciating value of your money as the value of those assets go up. Look at historical costs of putting up a cement plant or building a brand compared to putting up or building one now.

Avoid companies where a lot of the valuation is based on future growth which requires capital. These companies will or have already witnessed serious contraction in their PE ratio as growth tapers off due to lack of capital or that it comes at a high cost.

Stock Idea - Abbott India - Update

CMP - 550
Sensex - 13802

In my earlier post I had recommended Abbott India. The stock has since moved up by 2 % as compared to the Sensex which has lost 16 % in the same period.

The buyback through the form of a tender offer which I had stated in my blog has finally received SEBI approval. The buyback of 5.83% of the equity of the company will happen at Rs 650 per share.

The company also announced its Q2 results. Sales was up from 157 crores in Q2 07 to 170 crores in Q208, a rise of 8%. Profits however remained flat at 18 crores with cost pressures kicking in.

The company will however deliver EPS growth because of reduction in the equity capital post the buyback.

Yeh na thi Hamaari Kismat ……

Yeh Na Thi Hamari Kismat, Ke wisaal-e-yaar, hota,
(It was not in my destiny, to be united with my lover)
Agar aur jeete rehete, Yahi Intezaar Hota
(If I had lived any more , I would still be waiting for it) …… Mirza Ghalib

Well what does Ghalib have to do with investing other than feeling poignant with the current state of the capital markets :-).

I have been struggling over the years to overcome one of the behavioural biases that I suffer while placing a order. In a fairly well traded stock there is enough liquidity and the impact cost of a trade is very small. So the market at a particular moment has the right price for the stock ( I m not talking about valuations here) based on the buyers and the sellers in the market.

The bias that I am referring to originates when I am buying a stock, I tend to put a price slightly lower than what the market is trading at to get a so called better deal. The implicit assumption by doing this is that one believes the market at that moment is inefficient and the actual price of the stock should be lower than what it is traded at.

Similarly when one is selling, one tends to place the sell order at a slightly higher price than where the stock is currently trading. Same implicit assumption that the market is inefficient however, this time the view is diametrically opposite that the market is paying less than what you believe is the fair price.

This is the dissonance where the market can’t be inefficient both ways. I have missed out on a lot of buying or selling opportunities and like Ghalib waited forever for the price to come :-).

Raymonds – Doesn’t feel like heaven

I was running through the Raymond balance sheet for 2007 – 08. The company closed today at about 224 and has a 52 week high of about 474. It is trading around the 52 week lows. It caught the fancy of the markets with the real estate story.

The company has two divisions Textiles and the Files & tools division. The company hived off its denim business which was losing money into a joint venture. Sales was up for the year from 1374 crores to 1460 crores but profits were down from 201 crores to about 66 crores.

Now comes the interesting part ….

1) In the Directors report with respect to the textile division performance ( which is 85 % of the company), the management states and I quote

“ The growth in revenues was largely due to increase in volumes. High wool
prices, employment cost increases and issues in the ERP implementation has
resulted in decline in profit before interest and tax of the division from Rs
228 crores to 166 crores)”.

I can understand raw material cost increases and employee costs ( which went up from 225 crores to 233 crores - just 8 crores). Compared to this rent went up from 20 crores to 38 crores.

But the brilliant one is dip in profits because of teething problems in the ERP implementation :-). I have mixed emotions on this one. This really takes the cake.

2) The company has quoted investments of over 1000 crores invested in about 100 odd stocks and they traded in about 45 odd shares through the year. If I wanted a equity fund manager I would go to a mutual fund and not to Raymond. It would be wiser for the company to repay about 800 crores that it has on its balance sheet as opposed to dabbling in the stockmarkets.

3) In such tough times one would expect the company to work towards cutting costs. Well the company has a Aircraft on its balance sheet worth 98 crores. Maybe they have to fly the fabric in the skies to make it feel like heaven.

Lol and behold guess what … They bought 67 crores worth of boats and water equipment this year. I am speechless. Well Mr Singhania’s Page 3 lifestyle surely feels like heaven.

I don’t own stock in Raymonds and don’t intent to change that.

The times they are a changin

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

One wonders if Dylan was singing about the markets and watching the sectors churn by the sidelines.

Well the times they are surely changing as the old sweethearts like Real Estate, Power, Infrastructure etc are going through their phase of PE contraction as money has moved into beaten down sectors like IT, Pharma etc. Equities have made way to commodities and commodities will make way to what i dont know.

The cycle will repeat and the times will keep changing :-).

Innovation and Investment

I was reading the BusinessWeek dated last week of April ( better late than never :-)). The cover story is about the annual global survey that BusinessWeek does on the “Most Innovative Companies”.

It was heartening to see two Indian companies in the top 25, the Tata group and Reliance Industries. The Tata group made it to the list, fuelled by the $2500 Nano for the masses.

The brief description given on GE which stands 4th in the ranking list was about the $ 1500 Electrograph which its engineers based out of India have created focussing on servicing the bottom of the pyramid in developing countries.

One of the things that we tend to do in our minds is to equate innovation with industries like Pharma, Technology, Engineering etc. But innovation is far beyond this and covers the smallest of things in the smallest of industries. It is about the small sachets of shampoo to the rock bottom pricing that we have seen in the telecom industry.

How do you blend innovation and investment?

It is critical to look at companies which have innovation ingrained in their DNA. In this I don’t mean R & D spends which though important is not the be all and end all of the process of innovation.

Are the companies that one invests in, capable of coming up with disruptive technologies and processes which could change the rules of the game. Reliance made it to the list for the way it is rewriting the rules of the retailing industry in India.

In the current world of higher food prices Walmart has managed to bring food prices down. How did they manage it? Most cereal makers put their product in large sized boxes ( Compare a Kellogs box with the amount of cornflakes in it). They do this to enable greater shelf space and branding. All Walmart did was promise the same amount of shelf space for their products but pushed mfgs to reduce box sizes. This reduced not just the amount spent on paperboard but also reduced the transportation costs as more boxes got fitted in the same trailer.

A latter post on how innovation has kept the US economy going and reinventing itself.

Daiichi & Ranbaxy - (Weak + Weak = Strong)

It is interesting how two organisations that are respectively struggling believe that this deal would make both of them stronger post the exercise.

Ranbaxy’s promoters have got a great deal for themselves but is this a great deal for Ranbaxy. Ranbaxy clearly has been struggling last few years with abysmal ROE and struggling to make all the acquisitions pay for themselves. The R & D pipeline hasn’t been great and the Lipitor patent appeals against Pfizer hasn’t been going its way. Ranbaxy has raised $ 440 million of FCCB’s for acquiring Terapia which is the largest generics company in Romania. The FCCB conversion price is about Rs 716 per share. Clearly the FCCB is not going to be converted into equity considering the current market price and Ranbaxy was lined up to repay this loan. The Romanian acquisition has not paid off for Ranbaxy with it getting subjected to healthcare reforms post joining the European union.

Daiichi has delivered about 6-7 % ROE over the last 3 years. Net sales for Fy 2007 in Japan declined by 10.4 % and in the US declined by 7.1%. Net Sales in the other regions increased by 48% on a smaller base. Japan still constitutes about 68 % of their sales and with the Japanese market slowing down, it needed a generics play to expand the generics market in Japan. So effectively they are hoping to buy themselves growth with the Ranbaxy acquisition.

I m not getting into the valuation bit on whether they overpaid but Ranbaxy had a great time over the years buying growth through the acquisition route and now when the time was coming to make those acquisitions work, the Singh family has magically palmed off that headache to the Japs.

The Japs who have been struggling at home believe that this is their magic bullet to deliver growth. It wouldn’t surprise me if Daiichi itself gets taken over in a few years time :-).

But then we have Pfizer to jump into the fray :-).

Daiichi takeover of Ranbaxy

In my previous post on Ranbaxy, I had expressed my concern on how the balance sheet was looking and the fact that other income was driving bottomline. Well I guess the promoters were concerned about the same :-).

Daiichi Sankyo has bought Ranbaxy and the promoters, the Singh family, have made a good exit for themselves and are laughing to the bank. Emotions apart I think they have got a great deal for themselves.

To be honest the deal completely caught me by surprise and is a example of a white swan which comes along the way occasionally.

I hold a few shares in the company and was planning to exit post the demerger of the R&D business ( which has now been put on hold). So what should the retail shareholder do?

The open offer price at Rs 737 though attractive will only pick up about 1/3 th of the share that will get tendered. The stock might languish much lower post the open offer from the current price of Rs 560. I plan to exit if I get a spike in the share price closer to the open offer date.

Black Swan

“Black Swan” is a book written by Nassim Nicholas Taleb. The central thesis of the book is the inability of the human mind to either visualise or predict event which have great impact on markets and life in general. The “unknown unknown” as he puts it differently from the “known unknown”. The outliers which exist beyond the six sigma bell curve. Ex 9/11 bombing, Oil at $135, Subprime etc

I will not dwell too much into the contents of the book as there is good summary available on Wikipedia. No point rehashing the same thing or doing cut paste :-) to increase content on my blog.

I will move forward to how do I factor in Black Swans in my investing process. The starting point is to acknowledge that black swans exist and the futility of trying to predict 10-15-20 years ahead.

In our investing lives we encounter both black and white swans ( positive ones). These are random in nature, however we tend to more often than not rationalise the white swans as a proof of our vision and insight and not attribute it to the roll of the dice.

Assuming that we encounter black and white swans in a equal probability of 50:50. The investment strategy should be that on a black swan the portfolio loses less than what the portfolio can gain on a white swan, hence on a net off basis remain ahead of the game.

To achieve this we come back to the original Benjamin Graham principle “Margin of Safety” in what we buy. If the portfolio has adequate margin of safety to ride out the black swans then any white swan will result in the portfolio outperforming the market.

PS: I like the cover of the book :-).

“Nitwitted ninepins” – ( Captain Haddock in Tintin& the Land of Black Gold)

Billions of blue blistering barnacles, they finally did it.

In my earlier post I had written on the worry variable associated with oil. The markets have moved substantially lower since then.

The government finally developed a spine and did the right thing in my opinion. The move from the government will ease the pressure on the oil marketing companies and the associated fiscal deficit build up. More importantly passing down the costs will result in greater energy efficiency in the economy and will hopefully contract demand.

I think this move could have a interesting fallout. It could actually lead oil prices lower. With demand contracting across the world in economies that are passing on the cost of oil, India and China were the last major bastions where subsidised oil was fuelling demand. China I suspect wont move till the Olympics are through but India’s move might trigger a move down in oil which is increasingly getting bracketed as a bubble.

We of course have to wait and watch.

Stock Idea - Abbott India

CMP - 540.6

Sensex - 16525

Abbott India is the subsidiary of Abbott Laboratories which is a century old company with operations across 130 countries. Abbott in India has a strong brand equity and has a network of 18 distribution points, which cater to 11,000 stockists and 70,000 retailers.

Abbott India’s product portfolio in India covers

1. Primary Care, which markets products in the areas of Pain Management, Gastroenterology, with well-known brands like Brufen, Digene, Cremaffin.
2. Specialty Care – Metaboloics & Urology provides solutions in the areas of Thyroid, Obesity, Diabetes and Benign Prostratic Hyperplasia.
3. Specialty Care - Neuroscience has a varied portfolio, with specialty products in the Neurology and Psychiatric segments.
4. Hospital Care, offers products in the field of anesthesiology and neonatology namely Forane, Sevorane and Survanta.

Financals

Let me start the discussion with assumption that I am going and buying this business out. The current equity base of the company is about 14.47 crores. At the current market price of Rs 540 the company has a market cap of Rs 826 crores.

The company had approx Rs 167 crores as of Nov 07 ( FY 2007) of cash lying on its balance sheet.

So we are buying the business for about Rs 659 crores. The business did a topline of about Rs 620 crores for FY 07. The company has increased topline from Rs 459 crores in FY 2005 to current Rs 620 crores in 07 on a net block which has gone up marginally from 31 crores to 36 crores.

Net profit has increased from 59 crores to 68 crores but more imp EPS has increased at a faster pace from 38.72 to 46.43 in the same period due to reduction in share capital from 15.3 crores to 14.5 crores.

The business generated a bottomline of approx Rs 51 crores from operations excluding the other income generated on the investment portfolio so is available on a PE of 10.9 on current years earnings.

Management Philosophy

The parent Abbott limited has a track record of increasing dividends for 35 consecutive years. The parent spent > $ 1 billion is share repurchases worldwide in 2007 and has plans to increase that to $ 2.5 billion worldwide. It generates about $ 4 billion of operating cashflows every year. The presentations available on the parents website will give you a flavour of the same.


The Indian company paid a dividend of 17.5 % dividend for the FY 2007 and hence provides a dividend yield of 3.2 %. The company carried out a share buyback of 5 % of the companys capital at Rs 650 per share through the year and has filed for buyback of a additional 5% of the company at Rs 650 per share which should happen in the first half of calendar FY 08.

Investment Rationale.

Beyond the stable earnings growth which is defensive in nature and not subject to economic cycles, good ROCE etc what is it that interests me in the stock ?

There are other MNC pharma companies like Pfizer, Merck etc which deliver similar numbers and are sitting with cash on their balance sheet and have a strong product portfolio. So why Abbott ?

I believe the key challenge for a value investor is not finding out companies that have cash on their balance sheet and are cheaply available. It is in finding out what the management would do with that cash. In India where shareholder activism is non existent or at a very nascent stage, it is imp to have managements that use that cash judiciously.

I like Abbott on that variable where it derives its philosophy from its parent. The management consistently maintains a high dividend payout ratio and utilises cash for share buybacks. The public shareholding is about 34% so effectively 1/7th of your portfolio in Abbott will deliver 20% assured return this year as the company finsishes it 5% share buyback program.

The stock wont be multi bagger but I believe that one wont lose money on this one.

Disclaimer - I m not recommending buying the stock based on my statements. Kindly do u r own analysis to reach that conclusion.

Interest Rates

News article in today’s Economic Times

“Sensing tight liquidity conditions country’s largest bank, State Bank of India has decided to raise interest rates on longer tenure deposits by 25 to 50 basis points.

SBI will offer 8.75% for 2 to 3years, 8.85 % for 3 to 5 year deposits and 5 – 10 years is 9%. The bank was offering 8.5% for all the three slabs earlier.”

The interesting part is not the rise in the interest rates in the short term 2-3 year range which is anticipated considering tight liquidity conditions and inflation which could clearly take sometime to cool down.

What is interesting is the offer of 9% for the the 5- 10 year term. Clearly the largest bank in the country is signalling that we could be in a high interest rate scenario over a much longer time horizon.

Are we making a structural change from a low interest rate environment which has fuelled asset price rise over the last 3-4 years to a higher interest rate zone ?

Ranbaxy Laboratories

Was running through the 2007 Ranbaxy balance sheet dated Dec 31st 2007. A few interesting things that stuck me.

The PBT for the year was about 998 crores out of which Rs 443 crores was on account of other income namely foreign exchange gain which is nearly 50%.

The consolidated balance sheet size is about Rs 7274 crores. Out of this Rs 4269 crores is invested in its Netherlands subsidiary which is about 58 % of the balance sheet size. The subsidiary clocked a net profit of about 105 crores. Not exactly the greatest of ROCE.

The Fixed asset base of the consolidated company is about Rs 4204 crores. Out of which Goodwill is about Rs 1929 crores which is nearly 45% of the total fixed asset base.

To be honest I haven’t dwelled too much into understanding the company or can claim any great understanding of the business but prima facie the way the balance sheet is looking at this point of time I m a lil sceptical. Not very comfortable in the way the company is allocating capital.

Come on baby, light my fire

You know that it would be untrue
You know that I would be a liar
If I was to say to you
Girl, we couldn't get much higher ( than $ 135 a barrel :-))
Come on baby, light my fire
Come on baby, light my fire - The DOORS

Well how much higher is oil going to go. At over $ 135 dollars a barrel it sure is going to burn down a few economies including us.

Are we at the beginning of the beginning or are we nearing the end of the end of the bull run that we have seen in oil. I for one have no clue on this one.

But I know that the current subsidy situation that exits in India and countries like China, Indonesia etc is unsustainable. Demand needs to start contracting as it is in the countries that are passing thru the cost to the consumers.

We are anyway burning down the oil marketing companies with the subsidy bill.

I don’t think markets in India have factored in the implication of oil other than downgrading a few auto stocks or companies which use petroleum derivatives as inputs, or the interest rate sensitive’s.

Sustained oil prices at this level will start affecting both the world and the Indian economy in a more dramatic fashion and could induce some paradigm shifts. Both politically and economically.

I m more worried with oil at $135 than I was when the markets were sub 15000.

Infosys - Cost of Capital

The management states that

“ Our policy is to earn 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 is 13.3%. At present we earn 41.4 % on average capital employed and 71.1% on average invested capital. We aim to maintain adequate cash balances to meet our strategic objectives while earning adequate returns”.

So Infosys is effectively stating that it cost of equity capital is about 13.3% since it is virtually a zero debt company.

As per its current balance sheet over 55% of the capital employed is in cash and equivalent assets which at max might earn about 5-6 % on a post tax basis clearly lower than the 13.3 % cost of capital.

Infosys has defined for itself a hurdle rate of twice the cost of capital as the basis for deciding capital outlay for both organic growth and acquisitions. Considering that the company has today deployed over 50% of the capital at less than cost of capital, it might make sense for the company to either return money back to the shareholders or should be open to look at options which can deliver returns around the cost of capital.