Wordsworth

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 Paradigm though still used fairly extensively has now been replaced by a more easy to pronounce “ Plane”.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

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

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

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

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

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

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

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

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.