Tuesday, January 30, 2007

Results update: Ankur Drugs

I've written about Ankur Drugs in the past. I continue to hold the stock, though I booked some profits a few weeks ago and re-entered at lower levels, at around a price of Rs.135-145. The company came out with phenomenal numbers for the quarter ended December 2006.

Sales up 91% to Rs.66.7 crore
Net profit up 200% to Rs.6.9 crore.

Another good thing about this counter is the fact that promoters are buying shares from the cash market. Take a look at the non-promoters holding pattern over the trailing four quarters:

Mar'06 - 6,276,745
Jun'06 - 6,175,798
Sep'06 - 6,090,122
Dec'06 - 6,067,766

At the current market price of Rs.165, the scrip is trading at a price-to-earnings ratio of a mere 6.5 times. Going ahead, I expect the company to record a healthy topline and bottomline growth of close to 25%. The scrip can easily go up to Rs.250 per share from hereon. But, given a pending FCCB conversion, and therefore a dilution of equity, the upside maybe restricted to around Rs.225-230 per share. I plan to start booking profits beyond a price of Rs.200 per share, a further upside of close to 25%+.

Monday, January 29, 2007

A strong contrarian view on Indian equity markets

What the inflation numbers indicate? by Chadrakant Sampat of capitalideasonline.

I believe that money has now shifted from low velocity to high velocity; velocity is going to decide what inflation will be. Inflation rates are increasing and will continue to increase. Asset inflation across all classes is already rampant.

Peter Drucker wrote in his book “The Frontiers of Management”: “By now we know, as Schumpeter knew fifty years ago, that every one of these Keynesian answers is the wrong answer. At least they are valid only for special cases and within fairly narrow ranges. Take, for instance, Keynes’s key theorem; that monetary events – government deficits, interest rates, credit volume, and volume of money in circulation – determine demand and with it economic conditions. This assumes, as Keynes himself stressed, that the turnover velocity of money is constant and not capable of being changed over the short term by individuals or firms. Schumpeter pointed out fifty years ago that all evidence negates this assumption. And indeed, whenever tried, Keynesian economic policies, whether in the original Keynesian or in the modified Friedman version, have been defeated by the microeconomy of business and individuals, unpredictably and without warning, changing the turnover velocity of money almost overnight.”

As Drucker pointed out, “The home is a durable consumer good, albeit one that has a high resale value or wealth. Investment in the home is not “capital formation.” As he wrote “The more affluent a society becomes, and the more the broad masses become the sole recipients of national income through wages and salaries, the less do personal savings equate with capital formation. The more successful a society is in prolonging the individual lifespan, the lower inevitably is the rate of genuine capital formation by individuals.”

For the last few years the values at real estate are compounding at unbelievable rate and this class of asset can now be securitized and that process enhances liquidity.

Rise in stock market cap does not form capital; productivity and competitiveness of society does. Productivity does not expand in relation to market capitalization in last few years market cap of real estate, & capital markets have compounded at approximately 40%. Has productivity kept pace with it? The answer is no.

Consumer debt flourishes in the liquidity glut. Savings are exhausted by expectations in capital market, real estate, consumerism and financing government deficits. Capital is not forming. Let us think through on going fiscal deficit (10% of GDP including states). It is moving towards 1tr $ in next few years. Let us correct “market expectation” that changes liquidity multiplier.

Take heed to history-societies do not tolerate – corruption, greed, short terminism and no care for commoner. This is what we are exactly doing.

Link to the article.

They are not interested in companies, but only in making money!

Read this phrase in a book I am currently reading - The Money Game by Michael Lewis, author of the famous book - Liars Poker. The phrase is in reference to the tactics used by brokers in the eighties and during the IT boom of late nineties.

A brokerate firm would create a fictitious company, which will co-incidently belong to the hottest sector of that time, to dupe gullible investors like doctors, engineers, lawyers, housewives, old pensioners, etc. They used to trap them by making them believe that their fictitious company was for real, and that it was the next Microsoft, Intel or Pfizer thereby inducing them to make token investments, of say - 10-20,000 dollars.

There comes a phase in a bull market, when pple are only interested in making money and are least interested to know about the company. So as a broker, what you gotto effectively do is give them hope to make money, without bothering too much about the underlying company. The 'title' of this article reflects investing attitude of such times.

The trap works particularly well towards the end of a bull market. Smart investors are always on the look out of such desperations to identify market tops.

Most investors, small or big, get at some or the other time get affected by this type of a desperate investing attitude. People stuck with scrips like DSQ Software, Silverline Technologies, HFCL, Global Telesystems (now called as GTL Ltd.), Aftek Infosys, etc. are victims of such mindless buying of scrips, recommended either by the friendly broker (who by the way never tells u to hold on to a scrip for life or who never advocates long term investing) and the friendly neighbour, who happens to be privy to some smart "tips", even though they never seem to be doing any good to them in the long run (financially, ie).

I think investors should watch three movies and read the following two books before taking investment decisions:

The movies:
1).The Wall Street
2).Boiler Room
3).Barbarians at the Gate

The books:
1).The Intelligent Investor by Benjamin Graham
2).A Random Walk Down Wallstreet by Burton Malkiel.

PS: I too have been a victim of one-such mindless act where I purchased shares of a company called IFSL. And, this is not too long ago. Maybe even I was trying to simply make money, without bothering too much about the how & why of it!

Saturday, January 20, 2007

Time spent taking investment decisions?

Amount of time spent on:

Real estate investment = 45-60 days
New vehicle (car/bike) = 15-20 days
Jewellery/Expensive watch = 3-4 hrs
Vegetables/fruits = 30-40 mins
Stock investments = ??????

So how much time do you spend on stock market investments? My guess is the average is far less than what we spend when buying jewellery. Any thoughts????

Sunday, January 07, 2007

The obvious is obviously wrong?

Came across an interesting article by Fiend on the state of the US economy and an outlook on US financial markets in 2007. An excerpt:

The S & P 500 WILL BE UP 10 to 15% IN 2007?
For the first time since 2001 all the analysts surveyed by Barron’s are in unanimous agreement that the S & P 500 will be up 10% at the very least. Well the surest bet for 2007 isthat not only will the market NOT be up but it is my firm conviction that it will be down at least 10%.

THE FED’S Conundrum?
The question that most analysts and especially Bernanke are asking is: Why were long term interest rates still not rising in the face of 17 consecutive ¼ point discount rate increases? The answer my friends is both simple and very worrisome. All these Banks, Hedge Funds and other financial institutions that have had it so good for so long, making all that easy money are now between a “rock and a hard place”, as they are now locked since their positions are too big to liquidate (CASH OUT). They can’t get out because there is nobody to sell to. They are all forced to continue to keep playing the game until the bitter end.

The same holds true for all the Central Banks that have been buying up all the US government’s newly issued paper. They too are caught between the proverbial Rock and a Hard Place. In order to maintain employment in their countries, they must continue to export and protect the value of the US dollar. They can talk all they want about diversification of their reserves but they too, like the arbitragers have no one to sell to. They are all locked in and must continue to play the game. However, all this used to depend on both the US FED and the BOJ, but now it’s all in the hands of the BOJ and should the YEN start to appreciate especially against the Dollar and the Euro; watch out below as the easy profits turn into even easier losses on the biggest bets ever taken.

Read the entire article here.

Saturday, January 06, 2007

Nice articles & the story of jobbers/arbitrageurs to begin the new year!

Today's Business Standard has some nice articles, one by Surjit Bhalla and the other by T N Ninan. The first one talks about the fiscal deficit where Mr.Bhalla argues that the RBI probably has it wrong (almost the same way it got it wrong in the mid-nineties) and that the hike in interest rates may not have been necessary, here's the link. The other one by T N Ninan argues in favour of opening up of sectors thereby inducing greater private sector participation. Here's the link.

The last week of 2006 witnessed listing of the once unknown, but now famous, Nissan Copper. The company came out with a public offer of 64.1 lakh shares at Rs.39 and it barely managed full subscription. However, it witnessed a phenomenal listing.

After opening at Rs.40, the scrip shot up to over Rs.100 and clocked volumes of over 13 crore shares (BSE + NSE). In comparison, the company's total shares outstanding is a mere 1.45 crore shares. After recording a gain of over 300 per cent on the opening day, shares of Nissan Copper hit the 20% upper circuit (ie. Rs.157 per share) on the subsequent day. But, it could not hold on to these gains and ended the second day at Rs.118, down 10%. Its been hitting lower circuits (5%) ever since and closed at Rs.101 on 5-Jan, down a whopping 36 per cent from the top of Rs.157, but still a phenomenal 159 per cent above the issue price. Look at the statistics for the five days of Nissan Copper's trading:

Date, Issue price, High, Close, Volume (BSE+NSE)
29-Dec-06, Rs.39 , Rs.137, Rs.131, 131,096,640
02-Jan-07, -NA- , Rs.157, Rs.118, 46,919,015
03-Jan-07, -NA- , Rs.112, Rs.112, 38,324

04-Jan-07, -NA- , Rs.106, Rs.106, 27,323
05-Jan-07, -NA- , Rs.101, Rs.101, 5,260

Sucheta Dalal has a nice article on this here.

While everyone has been talking about price manipulation and circular trading (which I think was quite apparent in this case), I decided to look at something else - the bulk deals data (available both on the BSE and NSE).

In all 64 bulk deals were reported on the BSE. Together they accounted for 59 per cent of the total volume on the BSE, ie. around 3.6 crore shares out of a total of 6.1 crore shares. However, one interesting aspect of this was that a major portion of these bulk deals were done by jobbers/arbitrageurs.

These are people (hired mostly by marwari & gujarati proprietary brokers) who purchase securities on one exchange (say, BSE) for immediate resale in the other exchange (say, NSE) to profit from the price differential. More often than not the differential is less than a percent. Arbitrageurs who frequently report differential of over a percent are monitored and are infact fired if they are persistantly found to be squaring up trades at higher price differentials (4-5% is considered very high in this kind of a job since higher differentials indicate speculation whereas these people are hired to do arbitraging, interesting isn't it?). So how much did these guys make that day: Rs.25 lac. That, on a turnover of Rs.211 crore and a volume of 2.3 crore shares on the BSE.

The profit numbers may look miniscule in comparison to the turnover that these jobbers generate but they are not unusual. Jobbing/arbitraging is a sprawling business and a tremendous employment generator. There are virtually thousands of pple employed in Bombay just to do one thing, buy on BSE and sell on NSE. My gut feel is that they contribute a substantial portion to the daily volumes on both the BSE and NSE. I think the number could be around 15-20% (I could be overestimating this, but I would like to be corrected here!). This business works in the following fashion:

A broker employs two pple, one to monitor prices on the BSE and the other to monitor prices on the NSE. The profit sharing works like this: 50-60% goes to the broker and the rest is divided amongst the two. The broker gives these two pple some shares to play with, say for example 10,000 shares of Reliance Petroleum. These two jobbers are now expected to buy and sell these shares whenever they see a difference in the price on the BSE and NSE. So for eg. if Reliance Petroleum is trading at Rs.61 on the BSE and at Rs.61.25 on the NSE, these guys would quickly buy 10,ooo shares of RPL on the BSE and sell them on the NSE @ Rs.61.35, in the process making a risk-less profit of 35 paise or Rs.2,500. Sometimes the difference in price in lesser. Once this transaction is executed these pple look for a reverse transaction, ie. a lower price on the NSE to buy and a slightly higher price on the BSE to sell so that at the end of day they have squared up their positions on the two exchanges. Even if they do not get this opportunity, they still make the profit, because the broker has provided them with 10,000 shares, which can be delivered. The delivery of 10,000 shares plays a crucial role in this whole thing since it provides a sense of security, in times when share prices witness sudden spurts and squaring becomes a loss making propostion.

A lot of the business on the BSE & NSE is done by such jobbers/arbitrageurs and not by small retail investors (as many of us would like to believe). These pple (mostly undergraduates from Rajasthan, especially from Phalodi and Gujarat) flock to stock markets when they are booming and generate significantly higher volumes. An average jobber makes something like Rs.10-12,000 per month, substantially more than compared to what they earn back home. They live here in dormitory-like houses in North Mumbai, almost same as the factory workers in China, share their rents, cook on their own, so that at the end of each month a third of their earnings can be sent back to their villages/towns. I wonder what will happen to these pple the day program trading in allowed in India?


The Nissan Copper scrip continues to hit lower circuits and was quoting at Rs.82.4, down almost 50% from its peak of Rs.157. Volumes too remain shallow. The scrip attracts volumes of less than 10,000 shares on both the NSE and BSE. Given its fundamentals, the first price target for the scrip on the downside could well be the issue price, and maybe further down. ;)