Monday, October 30, 2006

Shaking foundations, says the Time on Mr.Ratan Tata

The Time Magazine has an article on Mr.Ratan Tata, the chairman of the Tata group. A small excerpt:

You wouldn't expect the head of Tata group, India's largest conglomerate, to say the rich are boring. But Ratan Tata comes close. Acting rich doesn't interest him. "I've never had the desire to own a yacht, to flaunt," he says. Nor does the Prada-wearing class excite him as a marketing opportunity. China and India, with their growing ranks of tycoons, should attract multinational businesses, not because of the spare million in a few fat wallets, he argues, but because of the spare change in a billion slim ones. "Everyone is catering to the top of the pyramid," says the 68-year-old at his office in Bombay House, Tata group's elegant Edwardian headquarters in India's business capital. "The challenge we've given to all our companies is to address a different market. Pare your margins. Create new markets."

Always a great feeling to see an Indian company taking up the challenge of becoming global and then becoming one. Unlike in the past when some of the great Indian brands simply sold out to MNCs. The best example that I can think of is the sell-out of the soft drink brands - Thumbs Up, Limca, & Gold Spot. I think these brands had in them what it takes to be global....maybe there promoters did not. The entire article on Mr.Tata in the Time Magazine can be read here.

Saturday, October 28, 2006

Why do we have a 10-digit mobile number? Why not 6/7/8/9-digit?

Why do we have 10-digit mobile numbers? This is probably something most of us do not really think about. But it has a very sound logic to it. And, I realised the same today while reading a book "Innumeracy" by John Allen Paulos.

The logic: The number of digits in a mobile phone number decide the maximum mobile phones we can have without dialing the country code, ie. 91 (for India). To understand this we need to go back to school. Remember permutations & combinations. Suppose I had a pair of jeans (J1-2) and four tee-shirts (T1-4). The possible combinations are: J1T1, J1T2, J1T3, J1T4, J2T1, J2T2, J2T3, and J2T4, ie. 8 combinations {2 (no. of jeans) X 4 (no. of tee-shirts)}.

The same logic is used when computing the digits in a mobile phone number or for that any numbers such as those for vehicles, land-line telephone numbers, etc. Now suppose if we had a 6-digit cell number, the maximum number of unique cell numbers possible would have been (10 x 10 x 10 x 10 x 10 x 10), ie. a maximum of 1,000,000 subscribers. We have already crossed the 100-million mark in India. So obviously we could not have had a 6-digit cell phone number. Not even a 7-digit because that would've resulted in a capacity of 10 million, not even 8-digit (100 million subscribers), and not even a 9-digit (ie. 1000 million or 100 crore, since our population is close to 125 crore and growing).

A 10-digit cell number offers us a capacity to have 10 billion (1000 crore) subscribers, which is far more than what our country can even achieve. We are v.v.v.unlikely to have a population or a subscriber base of 1000 crore but there is a remote likelihood of us having 100 crore subscribers. Hence, a 10-digit mobile phone number.

Friday, October 27, 2006

Who is financing India's largest LBO; Tata Steel-Corus deal

Financeasia has an insight into how India's biggest ever leveraged buyout, Tata Steel's takeover of the UK-based Corus Steel, was financed. An excerpt from the article:

The financing package accompanying Tata Steel's $8.23 billion leveraged buyout of UK steel producer Corus is multi-faceted. The deal, which sees Tata assume some debt on the Corus balance sheet and agreed pension liabilities, comprises a $3.88 billion equity contribution from Tata Steel, a fully underwritten non-recourse debt package of $5.63 billion, and a revolving credit facility of $669 million. The deal represents India’s largest cross-border outbound acquisition ever and also the largest leveraged buyout (LBO) attempted by an Indian company.

Tata Steel appointed ABN AMRO and Deutsche Bank to advise on the transaction and raise the required financing for the acquisition. But somewhere along the way, the appointed banks were unable to commit the debt required. Sources close to the deal suggest the transaction was almost derailed at this stage.

So Corus turned to a bank it was close to, Credit Suisse, to resolve the impasse. Credit Suisse was advising Corus on the Tata deal.

Read the full article here.

Wednesday, October 25, 2006

Early bookings on! Take ur pick in the domestic broking biz, Investsmartindia, Geojit, Indiabulls, Sharekhan....

The domestic stock broking business looks to be headed for days of hectic M&A activity. We may soon have a whole host of foreign companies buying out Indian companies. Things have started moving in this direction already. Take a look at some of the deals that have been struck over the past few months:

1). Sharekhan (Promoted by SSKI): Interested parties - New Atlantic Partners and IDFC.

2). Investsmartindia (Promoted by IL&FS): E*Trade.

3). Geojit Financial Services: BNP Paribas.

4). Motilal Oswal: New Vernon Private Equity Ltd and Bessemer Venture Partners.

5). Indiabulls: No single strategic investor. But there seems to be a beeline of foriegn investors for this company. They have a phenomenal 53 per cent stake in this company. See the Sept'06 shareholding pattern.

I think quite a few of these will be sold off sooner than later. Their share prices have witnessed good jump in recent times. However, among the listed broking firms, there is one company called "Indiainfoline". This company has so far remained out of the limelight. Difficult to believe that it hasn't been approached by any of the large foriegn investor yet. I think something could be cooking up here as well. My conspiracy theory is that it will be bought out by Anil Dhirubhai Ambani's new venture R Trade. Having already missed the rally in Indiabulls, IL&FS Investsmart India, Geojit; Indiainfoline is a company one should watch out for in days to come.

Saturday, October 21, 2006

Indian Banks: As shareholders we cheer, but as your customers we cry!

Sucheta Dalal has an eye-opener on the way banks treat their customers in India. Here's an excerpt:

Sharad Jain, an HDFC Bank account holder was happy to learn that he had pre-qualified for a Gold Credit card, but his application was rejected on processing. After persistent efforts he was shocked to discover that some bank had entered his name on the ‘defaulters’ / negative list. Jain says that he has several credit cards and has never defaulted on any account, and in fact enjoys an excellent credit rating.

Jain is outraged, because his credibility and reputation are at stake. Having your name on a negative list ends any chance of getting a new credit card and leads to constant fear about transactions being rejected by merchant establishments. In trying to help him, we discovered how the Reserve Bank of India (RBI) had rushed to pass legislation that protects banks, without bothering to ensure adequate consumer protection measures at the same time.

A few years ago, RBI allowed the creation of the Credit Information Bureau of India Ltd (CIBIL), which is a databank of individual credit histories. Banks can subscribe to CIBIL’s services to check the credit history of prospective customers and weed out habitual defaulters or trouble makers. But the law that enabled the setting up of CIBIL deliberately did not provide any recourse to customers victimised by banks. I say deliberately, because such recourse was already available in the US and CIBIL has a tie-up with the best global name in this business.

RBI later tried to make amends through the Credit Information Act, which has already been passed by Parliament. However, unless rules and regulations under the Act are framed and notified (they will again need approval from Parliament), the passing of the Act is meaningless to consumers.

Jain has been told that his only recourse is a Consumer Court — not even the Banking Ombudsman. Or, he can persuade his bank to informally help him discover which bank reported him as a defaulter and then have the entry corrected. He tried that, but HDFC Bank, which had pre-qualified him for a gold card refuses to help. Jain is not the only sufferer. A few months ago, the HR chief of a multinational company discovered that the bank, whose credit card he still uses regularly, had wrongly reported him as a defaulter.

Ironically, even the RBI does not seem to be able to resolve this complaint by accessing the CIBIL database. Banking sources tell us that people whose combination of name and surname are common will be more prone to suffer from such mistakes. If this is obvious, why was consumer interest not a part of the statute that protects banks?

The same ‘damn the customer’ attitude extends to other aspects of banking today. The RBI set up a committee to examine the rationality of bank charges because it realised how the dice was loaded against ordinary customers. But barely six weeks after the committee submitted its report one continues to discover new ways in which customers suffer due to mistakes made by banks.

The entire article can be read here.

I've had bad experiences with one such bank - Andhra Bank. They have one of the most dismal customer response service. My debit card got stuck in an ATM machine thrice over a period of three months and each time the bank took over a months time to reverse the amount that was debited from my account. Yes, my card got stuck in the ATM machine and I did not get any cash out of it and yet it was debited from my a/c. While it is fine till here, I mean this can happen. But, when you ask the branch manager about the reversal the usual answer was "Sir, this is a PSU. Do not expect us to reverse your debit transaction so quickly. It will take atleast 15 days to reverse the same. Please come after two weeks to check the status." The two weeks got extended to over a month the first time around and a little less than a month in the remaining two instances.

Another bad experience with the same bank was of non-availability of Andhra Bank's owned ATM machines. In early days, we were allowed free withdrawals from some of the other banks such as SBI & associates and IDBI bank. But a few months ago, the bank said it will charge us for any transaction from a non-Andhra Bank ATM machine. This to us was insane. From where our office was located: a). there was no Andhra Bank ATM machine, and b). the immediately accessible ATM machine was located in Bandra (30 mins from my office), Borivali (again 30 mins from office) and Ghatkopar (some 30 odd mins again). So in effect the bank was saying I will give you ATM service but in two ways, either you use my non-existent ATM network and do your transactions for free or alternatively use other banks ATM and pay a charge. If the bank had a ATM network as strong as ICICI's or UTI's then one would have accepted Andhra Bank's logic. But when you have a mere 3-4 ATMs between Borivali and Bandra, there is a problem. Ofcourse, the bank had no problem at all. Because, it does not care. It derives most of its biz from Andhra Pradesh and not from I am sure it is ok with it. And, ofcourse, we too did a "Good bye Andhra Bank".

Thursday, October 19, 2006

Its Diwali in India and on the Wallstreet!

Wishing everyone a very happy diwali and a profitable new year, both in India and to Indians across the globe.

Wednesday, October 18, 2006

Stock markets and 'denigration of history'

I am currently reading a book "Fooled by Randomness" by Nassim Nicholas Taleb. The book is all about the hidden role of chance in stock markets and life. The book was chosen by Fortune as a part of the "ultimate reading list". In the second chapter of this book there is an interesting note on "denigration of history". Denigration, by the way, means to treat as lacking in value or importance. Here's an excerpt:

Reality is far more viscious than Russian Roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. This is related to a problem called denigration of history as gamblers, investors, and decision makers feel that the sort of things that happen to others would not necessarily happen to them.

Second, unlike a well-defined precise game like Russian Roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. Very rarely is the generator visible to the naked eye. One is thus capable of unwittingly playing Russian Roulette - and calling it by some alternative "low risk" name. We see the wealth being generated, never the processor, a matter that makes people lose sight of their risks, and never the losers. The game seems terribly easy and we play along blithely.

The note reflects how investors tend to behave during bullruns. Valuations are pushed up to unrealistic levels like they were once in case of IT stocks during 1999-2000. IT companies such Infosys, Wipro, Satyam, HCL Tech, etc. were all trading at P/Es of over 70-75 times. Investments in these companies at that point would have probably evened out now, ie. after six years. Atleast, these evened out. What about investments in scrips like Global Telesystems, Himachal Futuristic Communications, Silverline, Zee Telefilms, Pentamedia, etc.? I am sure these will never recover, atleast not in this lifetime. Though some like Silverline Technologies are trying hard to get investor interest as can be seen by these announcements: 1, 2 and 3. I think they are best avoided.

Do we see such instances of "denigration of history" in todays markets? Maybe. I think real estate companies could belong to such a category. Companies such as Unitech, Mahindra Gesco Developers, Phoenix Mills, Ansal Properties & Infrastruture. These companies are trading P/Es of between 50-240 times. With the bigger companies trading at even higher P/E ratios. Unitech is quoting at a mcap of over Rs.25,000 crore. This for a company that earned a mere Rs.135 crore over the preceding four quarters. Something sounds really inexplicable there. There were news reports that DLF, a Delhi-based real estate developer which is coming out with an IPO was expected to be valued at a phenomenal mcap of over Rs.100,000 crore. All this sounds crazy to me. Maybe I am wrong, but I would like to proven wrong, convincingly. Will monitor these companies closely over the next few quarters.

Btwn the book "Fooled by Randomness" is simply awesome. A must read for any investor.

Wednesday, October 11, 2006

Wow, what a company! Infosys Technologies (INFY).

Infosys Technologies reported yet another robust financial performance for the quarter ended Sept'06. The company recorded a phenomenal 50.8 per cent growth in sales to Rs.3,273 crore. I use the word phenomenal, because, the growth comes on top of a 28.4 per cent growth in sales in the Sep'05 quarter. In fact, a look at the growth recorded by the company in the last five quarters indicates an acceleration in the same.

Q2'07 - 50.8%
Q1'07 - 45.7%
Q4'06 - 31.2%
Q3'06 - 33.3%
Q2'06 - 28.4%
Q1'06 - 33.7%

All this while the company has been successful in earning net margins of around 24-25%. For greater details of the company's results check the link.

Now for the interesting part, the future and how it can pan out:

The company's FY'07 sales forecast of Rs.13,853 crore and PAT forecast of Rs.3,437.8 crore looks to be on course. Taking these into account, the average annual growth over the past five years comes to around 48.8 per cent in sales and 40.5 per cent in net profit. Lets use these numbers to get some idea of the future:

Scene 1 - Most optimistic: The company retains this CAGR over the next five years.

Sales at the end of year 2012: Rs.101,055.2 crore (Phew!!)
Net profit @ end of year 2012: Rs.18,821.9 crore
Probability of this happening: 1% (Since nothing can be ruled out in this world...not even this unlikely scenario).

Scene 2: Optimistic: The CAGR halves to 24.4% and 20.25%, respectively.

Sales at the end of year 2012: Rs.41,271.1 crore
Net profit @ end of year 2012: Rs.8,643.9 crore
Probability of this happening: 49%

Scene 3: Pessimistic: The CAGR drops to 10% at both the topline and bottomline.

Sales at the end of year 2012: Rs.22,310.4 crore
Net profit @ end of year 2012: Rs.5536.6 crore
Probability of this happening: 50%

Summing up of all probabilities:

Estimated sales @ end of year 2012: Rs.32,388.6 crore.
Estimated net profit @ end of year 2012: Rs. 7,192.0 crore.

Discounting the NPAT of year 2012:

P/E = 10 times, Mcap = 71,920 crore
P/E = 15 times, Mcap = 107,880 crore
P/E = 20 times, Mcap = 143,841 crore
P/E = 25 times, Mcap = 179,800 crore

A P/E of 25 times five years down the line maybe difficult to achieve, given an estimated growth rate of less than 20%. I think a more realistic P/E ratio would be somewhere close to 20 times. That would take Infosys' target mcap to Rs.143,841 crore. Given that its current mcap is around Rs.110,000 crore, there could be an upside of 31 per cent over the next five years. Translate this into a CAGR and the return per annum over the next five years could be in the range of 5.5 per cent.

Which brings me to a question: Is Infosys a good investment at these levels?

PS: The analysis would mostly seem naive and quite honestly it is. I have no great knowledge of the software industry and nor am I very good at predictions. Its just a rough extrapolation of the company's performance over the last few years. But, I think I can confidently claim that a repeat of last five years performance will be highly unlikely over the next. I think the company's growth rate would come down dramatically, as it did during 2001-06, compared to over 100% growth during 1996-01.

Thursday, October 05, 2006

A cigar butt (cheap stock): SPL Industries

I bought shares of SPL Industries (@ 42.5) yesterday. It is Delhi-based medium-sized garment manufacturer with an annual turnover of around Rs.250 crore. See the link for the company's latest year financials. For more information about the company click here.

Reasons for buying the scrip:

1).P/E < 10 times
2).P/B < 1 times
3).EV/EBDITA < 7 times
4).Debt-to-equity < 1 times
5).Stable growth
6).Healthy margins
7).Interest cover > 3 times.

Downside risk: Not much at current prices.

Earnings shock: Likely in a scenario where raw materials witness a sharp jump (unlikely in the near term). The main raw material for the company is yarns, production capacity of which is rising at a rapid pace. Most of the yarn companies in India are expanding there capacities by leaps & bounds, in anticipation of higher demand from domestic garments companies in the post-MFA era.

Upside: 20-30% with no growth from current levels. Could he higher, if the company is able to maintain the growth of the last two quarters.

Conclusion: SPL is a classic "cigar butt" (in Charlie Munger's words), it is trading at a significantly modest valuations at current prices vis-a-vis other garment manufacturers like Gokaldas Exports, Zodiac Clothing, etc. I think even if the company were to not record any growth over the next few years, it should still be trading at a 9-10 times its earnings, giving an upside of around 20%+.