Thursday, March 27, 2008

Titagarh Wagons IPO - Subscribe

theIPOguru has a new issue analysis note on Titagarh Wagons. theIPOguru's recommendation is:

"Overall, the positives far outweigh the negatives. The company at its higher band is available at a price multiple of less than 20 times and market cap to sales of less than 4 times. A brief comparison with its listed peer suggests that the company is available at attractive valuations. Given that its future prospects appear encouraging, discerning investors could consider investment in the shares of TWL with a long-term view."

The full article can be accessed here.

The Union Railway Budget for 2008-09 had a host of announcements for the wagons manufacturing industry. Some of the excerpts from the Railway Minister's Budget speech are as follows:

  • Modernization of Rolling Stock

While in 2003-04, 6,300 wagons were manufactured whereas in 2007-08, 15,000 wagons are expected to be manufactured. In 2008-09, manufacture of 20,000 wagons is planned which would be the highest level of wagon productions so far. Similarly, in 2008-09, 250 diesel and 220 electric locomotives will be manufactured which would be a record in itself. Production of new generation diesel and electric locomotives will also be stepped up substantially.

  • Manufacture of new design wagons by wagon manufacturers

Till now, wagon manufacturers have been manufacturing wagons in accordance with standard designs prescribed by RDSO. As a result most of the wagons in use on Railways are of the design of 70s and 80s. We have formulated a new policy to promote induction of wagons with modern and new designs in the Railways. This policy makes adequate provision for simplifying the process of certifying and accepting the new wagon designs and protecting the intellectual property rights of the companies. Wagon manufacturers will now also be able to import technology from abroad to bring modern designs into the Indian Railways. This policy will facilitate continuous upgradation in the wagon technology.

  • New Wagon Leasing Policy

In order to develop the wagon leasing market, we have prepared a new wagon leasing policy under which, rail customers and container operators will be able to take wagons on lease. For getting registered under the scheme, wagon leasing companies should have a minimum net worth of Rs. 250 cr and will have to deposit Rs. 5 cr as registration fee. Registration will be valid for 20 years and will be renewable for another 10 years on rendering satisfactory services. Leasing companies have been given full rights to choose or change their lessees. These companies will lease out special purpose wagons, high capacity wagons and container wagons.

  • New Wagon Investment Scheme

The Wagon Investment Scheme announced in the year 2005-06 has been extremely popular amongs iron-ore customers. During the last three years, approval has been accorded for an investment of over Rs. 1,500 cr for procurement of 138 rakes. Against this, 42 rakes have been received so far at a cost of around Rs. 500 cr.The old Wagon Investment Scheme has not been popular with other than iron-ore customers. Therefore a new liberalized Wagon Investment Scheme has been prepared. Under this scheme, investments can be made for procurement or leasing of special purpose and high capacity wagons. Freight discounts at prescribed rates will be granted for investment in special purpose wagons and high capacity wagons.

  • Container Business-Mission 100 MT

In the last three years, 15 operators have been given licenses for running container trains. Presently, 146 trains of Container Corporation and 44 container trains of other container operators are running. The number of trains run by other operators is expected to increase to 50-55 by the end of this year. The total container traffic is expected to be 26 million tonnes in 2007-08 including 2 million tonnes contributed by new operators. Presently 60 container depots are operational including three constructed by private parties. It is expected that eight container depots by Container Corporation and 40 by other operators would be developed in the coming years.

Each of the aforesaid announcements are expected to boost demand for wagons substantially over the next few years.

Sunday, March 23, 2008

Partying like It's 1929, says Paul Krugman

According to Paul Krugman the US is currently going through what it witnessed in 1929-30-31, i.e. Great Depression.

His article "Partying like It's 1929" can be read here.

A brief excerpt from the article ...

If Ben Bernanke manages to save the financial system from collapse, he will — rightly — be praised for his heroic efforts.

But what we should be asking is: How did we get here? Why does the financial system need salvation? Why do mild-mannered economists have to become superheroes? The answer, at a fundamental level, is that we’re paying the price for willful amnesia. We chose to forget what happened in the 1930s — and having refused to learn from history, we’re repeating it.

Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931. This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

As the decades passed, however, that lesson was forgotten — and now we’re relearning it, the hard way.

Saturday, March 22, 2008

Deccan Gold Mines to begin production by end FY10

Deccan Gold Mines is the only listed gold mining company in India. According to a news report last week, the company expects to begin gold mining by end of 2010 and is looking to clock annual volumes of around 4 tonnes. I've written about Deccan Gold Mines in the past.

Annual gold production of 4 tonnes is significant. Here's a back of the envelope computation -

Assuming average realisation on Gold - Rs.8,500 per 10 gm (equivalent of a 'tola' in India)
1 kg = Rs.8.5 lac
1 tonne = Rs.85 crore
4 tonnes = Rs.340 crore

Most mining make anywhere between 25-30% profit at the net level, be it gold or iron ore or any other mineral. Eg. NMDC, GMDC, ONGC, Sesa Goa, etc.

At a production level of 4 tonnes, Deccan Gold stands to make around Rs.85-102 crore.

At the current market price of Rs.33.8 per share, the stock is quoting at a market capitalization of Rs.198 crore. Discounting the stock by around 10 times, renders it a value equal to Rs.1020 crore, resulting in a five times upside from the current levels.

That, over a period of 3 years !

The risk associated with this would be the following:

- Delay in mining operations
- Less than expected gold deposits
- Regulatory roadblocks

The risks associated with this stock have a significant probability of being realised. However, as I had mentioned in my previous post on Deccan Gold Mines, it should be seen more as a long term call option.

The news report that carried the article on Deccan Gold Mines is as follows:

India's Deccan Gold Mines Ltd expects to start gold production by end-2010 with the new mines policy likely to help the company speed up its exploration activity, a company official said on Wednesday.

"There has been a lack of adequate exploration in India because of regulatory issues," Sandeep Lakhwara, managing director of Deccan Gold, told Reuters in an interview.

"The new policy addresses these concerns and is a confidence building measure."

The company is targeting 4 tonnes of gold production annually, he said.

India's cabinet approved a long-delayed mining policy last week that could ease investment by foreign and domestic companies in the mining sector.

The policy could ease delays in grant of permits, guarantee a hassle-free move from prospecting to mining stage, and give a bigger time frame for exploration activity, Lakhwara said.

Currently, Deccan Gold, along with its associate mining companies, is awaiting the government's nod for 70 prospecting licences, 30 of which are for gold prospecting.

The company has been engaged in preliminary exploration since 2000 under reconnaissance permits from the government, Lakhwara said.

"Not all the 30 locations could have gold deposits. Even if we set up some mines it would be a huge success," he added.

With preliminary exploration focussed on Karnataka, Andhra Pradesh, Kerala and Rajasthan, Deccan Gold believes a target of 4 tonnes of gold production a year would be "feasible," Lakhwara said.

Deccan Gold, listed on the Bombay Stock Exchange, is owned by Rama (Mines) Mauritius Ltd, a company promoted by Australian individuals.

It expects some of its prospecting licences, that allow it to conduct detailed feasibility studies to ascertain gold deposits, within six months of the new mines policy coming into place.

At the next stage, that could take a year or two, the company could set up processing and production facilities, Lakhwara said.

India is believed to have rich deposits of gold, he said.

"Geologically, India is very similar to other countries where gold deposits have been found and on that basis, India should have a large quantum of gold," Lakhwara said naming Australia, Africa and Canada.

India's gold production is just a speck in the world's output of around 2,500 tonnes, the only producer being Hutti Gold Mines in Karnataka with about 3.5 tonnes of gold annually.

Thursday, March 20, 2008

Human Nature towards money and capital remains the same...

Wall Street, is one of my all-time favorite movies. The movie describes the human nature (and its attitude) towards money and capital in the most apt (& naked) form. It's a classic and a 'must watch' for anyone whose got anything to do with the capital markets.

The following are some of the quotes from the movie -

  • It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.
  • This painting here, I bought it 10 years ago for $60,000, I can sell it today for 600 [$600,000]; the illusion, has become real, and the more real it becomes, the more desperate they want it—capitalism at its finest.
  • We make the rules, pal. The news, war, peace, famine, upheaval, the price of a paper clip. We pick that rabbit out of a hat while everybody sits around wondering how the hell we did it. Now you’re not na├»ve enough to think that we’re living in a democracy, are you, Buddy? It’s the free market, and you’re part of it.
  • Ever wonder why fund managers can't beat the S&P 500? Because they're sheep, and sheep get slaughtered.
  • Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms, greed for life, for money, for love, knowledge has marked the upward surge of mankind.
  • First lesson in business, don't get emotional about a stock.
  • What the hell is Cromwell doing giving a lecture tour when he's losing $60 million a quarter? Guess he's giving lectures in how to lose money. Jesus Christ, if this guy owned a funeral parlour no one would die!
Awesome Movie ! Michael Douglas at is best, but for this movie, Basic Instinct wud have been his best ;)

Wednesday, March 19, 2008

JPM to buy Bear Sterns @ 2$ a piece, yet the stk is trading @ $6 ?

Bear Sterns went belly up a couple of days [link]

JP Morgan Chase with the Federal Reserve's support has offered to buy Bear Sterns out at $2 a piece. This technically means that shares of Bear Sterns are worth nothing more than $2 per share, provided the deal goes through, which in all probability it will.

However, the Bear Sterns stock continues to trade above $ 5-6 a share. This more than 150% more than the JPM bid. Why is it trading at such a high level?


Barry Ritholz has an explanation -

There is a simpler explanation, one that might surprise you: BOND HOLDERS are buying up Bears loose stock. As much as they can get.


Consider: there is ~$75 billion in outstanding bonds (see Bloomberg screen below), and another $75 billion in other miscellaneous paper. (UPDATE: The NYT pegs it at $300B). Prior to the BSC/JPM deal's announcement, the BSC Bonds were trading for 80 cents on the dollar.

Imagine your fund owned a one billion dollars worth of Bear bonds (mark to market = $800 million). Isn't it worth buying 10 million shares or so at $3 - 4 or so dollars a share? You will get $2 per share in JPM stock, so buying it a few bucks over the takeover price isn't all that risky. Remember, insiders own 30%, and Joe Lewis also owns about 10%.

So as mad as the accumulation appears, its actually quite rational -- IF YOU ARE A MAJOR BOND HOLDER, and are doing this to capture voting stock. (All the other idiots buying BSC are pretty much fucked).

[Link to the entire article]


Felix Salmon of also has a similar explanation -

In a nutshell: those shares are being bought by Bear's creditors, in the hope that the deal will go through and the stock will fall.

The big winners from the Bear Stearns acquisition are Bear's bondholders. They came close to an event of default this weekend; if all goes according to plan, they'll soon own nice safe debt from JP Morgan Chase. The only thing which can derail their glide path (if Krugman can mix his metaphors, so can I) would be if the deal doesn't go through at $2 as planned.

The main thing that needs to happen for the deal to go through is that shareholders vote in favor. And the only way that bondholders can ensure yes votes for the deal is to own those shares and vote them themselves. Says Neubert: "They will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt."

[Link to the entire article]

Readings: Subprime mess, Fed rate cut & Impact on India

> Was JPM's takeover of BSMA @ USD 2 per share a bailout? - NOPE, says James Hamilton

> Is the US headed for Doomsday? - THINK NOT, says Dr. Ajay Shah.

> Will the 75 basis point cut help the US economy? MAYBE NOT, says the Economist.

> Treat the Federal Reserve as a Bank? And you want to Question their lending practices, says Hellasious

Tuesday, March 18, 2008

Luxottica short circuits Rayban Sun Optics shareholders

Luxottica, the parent company of Rayban Sun Optics India (the erstwhile Bausch & Lomb), seems to have short circuited the retail shareholders of Rayban Sun Optics India by making the following announcement (dated: 24-Dec-07) -

Rayban Sun Optics India Ltd has informed BSE that in line with the previous communication of Luxottica Group S.p.A. dated January 11, 2007 and following the release of the related Non Objection Certificate by the Company, the Board of Directors have received a communication from Luxottica Group S.p.A. vide their letter dated December 17, 2007 that the Luxottica Group has incorporated a wholly owned subsidiary in India by the name, Luxottica India Eyewear Pvt Ltd.

Luxottica Group S.p.A has further advised that with effect from January 2008, Luxottica India Eyewear Pvt Ltd plans to commence distribution of luxury and fashion brand eyewear, other than RayBan, on a wholesale cash and carry basis.

Ever since this announcement was made the stock has taken a big plunge. Take a look at the following chart:

Since the announcement was made, the stock has dropped by 52% as against a 25% decline in Sensex. Now a lot of stocks have dropped by as much as 50-60% (including the Ambani pack), but they were also amongst the ones which had run-up like there's no tomorrow. Infact, Rayban was a gross underperformer during a large part of the 'now-historical' bull run. So why is that the stock witnessed such a drop. The explanation lies in the notification released to the BSE and that included in the 'notes to accounts' section of the recently concluded quarter.

The statements:

- Luxottica Group has incorporated a wholly owned subsidiary in India by the name, Luxottica India Eyewear Pvt Ltd.

Luxottica Group S.p.A has further advised that with effect from January 2008, Luxottica India Eyewear Pvt Ltd plans to commence distribution of luxury and fashion brand eyewear, other than RayBan, on a wholesale cash and carry basis.

- The Board of Directors of the Company in their meeting held on December 21, 2007 noted the letter of December 17, 2007 received from Luxottica Group SPA Italy informing the company on their plan to transfer the business of distribution and sale of various luxury frames and sunglasses, other than RayBan brand to Luxottica India Eyewear Pvt Ltd a wholly owned subsidiary company of Luxottica Group SPA Italy. Accordingly, Luxottica Group SPA Italy discontinued supply of non RayBan brands to company [ Rayban Sunoptics, i.e.] with effect from February 2008. (Source: Notes to Accounts of the Dec'07 results).

The effect:

Even though this business was less profitable as compared to the company's core business in India of selling branded eye wear stuff under the aegis of the Ray Ban brand, it accounted for more than 60% of its business. The company had in recent times launched internationally famous fashion products under the brand of Dolce and Gabana. A significant part of Rayban's topline growth in recent years can be attributed to such new launches.

All this will be gone, starting this year.

The listed company is therefore likely to witness a significant drop in sales & profits starting the Mar'08 quarter.

A sharp drop in the share price reflects this, or so i think.

At the current price - Buy/Sell?

Before we write-off the stock, here's a few data points to consider:

- Mcap at current price (Rs.61): Rs.150 crore

- Cash & Cash equivalents: Rs.88 crore (69.8 cr as per Dec'06 AR + 18 cr cash profit in CY07)

- Mcap_net of Cash: Rs.62 cr

- PAT_from the overall biz in '07: Rs.17 crore (treasury inc - 7 cr + trading - 3 cr [assuming a 5% margin in the trading business] + 7 crore in core business [assuming a 18-20% margin in the core business])

P/E ratio_net of the trading biz and treasury: less than 10 times.

Not a bad investment if you think hard and do the back calculations. The stock provides significant margin of safety, but does it provide enough head room for growth ??? I am still exploring that !!

Comments / counter-points??

Monday, March 17, 2008

Readings: Dancing with the Devil ?

The subprime troubles in the US shouldn't have troubled our economy / markets, but they have. Why? and what's next ? Mr. Ajit Dayal of explains this nicely in his article - Island of Sanity. A brief excerpt of the article is as below:


Email your friends, cousins, children in USA. Ask them to walk around their homes and make a list of all the things that they own. Request them to note down in which country that item was made. And what that item cost them. Add it up, get a total for all the “things” they have in their homes: the beds, the tables, the sofa, the chairs, the kitchen appliances, the TV, the stereo, their clothes, their shoes. Now ask them: how much of these “things” they own have a “Made in India” tag.

If the people you sent the email to are of Indian origin, chances are that they have some Indian furniture, the pressure cooker to make rice, and a few Indian paintings on the wall. The total value of “Made in India” products may be 5% of the value of all the things they have in their home. If the people you sent the email to are not of Indian origin, the chances are that the total value of “Made in India” products is likely to be zero.

India, as a country, is not an export-led economy.
India had nothing to benefit from the massive build out in new home construction in USA.
India should have nothing to lose from the massive decline in new home construction.

A recession in USA should have little impact on India’s economy.

Yet, the Indian stock market swoons and twists to every piece of news on the condition and health of the US economy. Blame our lust to Dance with the Devil for that.


Read the entire article here [Link].

Friday, March 14, 2008

Cash with Indian Mutual Funds - Rs.24,000 crore !!

I had written about the cash holdings with Indian Mutual Funds a few days ago. As per the computations based on data till Jan'08, the net cash available with mutual funds (equity) amounted to around Rs.16,000 crore.

Funds mobility data for the month of February from the AMFI indicates a further addition of Rs.7,500 odd crores. This was largely on the back of NFOs (raising Rs.6,266 crore) and existing schemes adding about Rs.1266 crore (including ELSS) in Feb.

The cumulative cash available with domestic mutual funds in India, as of Feb'08, thus approximates Rs.24,000 crore.

Two important things to note here is that:

a). MFs are NOT facing redemption pressures, despite such a sharp fall since the beginning of the year.

2). And, despite sitting on such a large cash position (equivalent of around 12.5% of the total assets under management), MFs were net sellers in the secondary market (during the last two months).

Thursday, March 13, 2008

Power Grid Corporation - Overvalued !!

Just finished reading an updated research report by a broking firm, which recently got listed on the bourses and the one which is sponsoring the shorter version of Cricket, on Power Grid Corporation. The firm has an "Accumulate" rating on the stock.

However, what strikes me is the price at which the rating has been put out - Rs.110 (on 7-Feb-08). This is the same price at which the firm had put a 'Reduce' rating on the stock, exactly seven days before, i.e. as on 31-Jan-08. Strange are the ways in which Stocks are being rated on Dalal Street.

As for my view, I think the stock is quite overvalued at current levels. Despite having an envious business model and a near monopolistic position in the power transmission business, I think the price just isn't right. At the current price (Rs.104 per share), the Power Grid Corpn stock is quoting at a P/E of around 28 times.

That for a stock which is unlikely to be able to expand its earnings (at the net level) by more than 20-25% over the next few years, that too providing its telecom towers biz does well. Further, and more importantly, Power Grid Corpn earns a fixed return on equity (as stipulated by the Government) of 14%, with upside, if any.

I would be comfortable buying it at around Rs.70-75, given its growth prospects and the near monopolistic status. At the current price, there's significant room for disappointment on the downside.

Sunday, March 09, 2008

Readings: Ten Great Investors (Warren Buffet, Phil Fisher...etc)

The following links provide a brief overview of ten great investors, viz.

Warren Buffett - Buffett is widely regarded as the most successful investor of all time, with a compound return of around 22.3% over 36 years.

T Rowe Price - Price published a sample family portfolio to show how he had turned $1,000 invested in 1934 into $271,201 by the end of 1972 - a compound return of about 15.4% over 39 years.

Philip A Fisher

Kenneth L Fisher

Jim Slater

Peter Lynch - During his tenure at Magellan, Lynch averaged 29% compound over 13 years. This remains a record for funds of this size.

Ralph Wanger - The Acorn Fund returned 17.2% annually between 1970 and 1998, against a return from the S&P500 index of 14.4%.

William O'Neil - 'Neil's track record has had its ups and downs, particularly during and just after the 'go-go' years of the Sixties. But he is thought to have averaged an annual return of over 40% on his personal account in the ten years up to 1989

Sir John Templeton - From 1954-2000, the Templeton Growth Fund averaged gains of around 15% a year.

John Neff - The average annual total return from the Windsor Fund during Neff's 32-year tenure was 13.7%, against a return from the S&P500 index of 10.6%.

The entire article can be accessed here. Nice read.

Friday, March 07, 2008

Investment update - Patel Integrated Logistics

I recently picked up a few shares of a logistics company based out of Mumbai - Patel Integrated Logistics. At the current market price of Rs.63, the company is valued at a Mcap of Rs.100 crore (on a fully diluted basis). This for a company that possibly has the widest presence in India, so far as logistics and transportation are concerned.

Patel Integrated Logistics operates a fleet of around 1000 trucks and boasts of a pan-India presence. However, unlike many of the other leading players in the logistics space which provide all kinds of transport facilities - surface, air and sea-based, Patel offered only surface transport services.

It was more of a truck operator.

However, things seem to be changing for the good. The company is taking a lot of initiatives to offer full-fledged logistics services. These include - warehousing, FTL (full truck load), LTD (less than truck load), express delivery services (i.e. door-to-door, godown-to-door pick up and delivery, etc.), among others.

The company recently tied with Ashok Leyland to replace some of its old trucks and further induct new ones (225 trucks in toto). Further, it is also looking to fit vehicle tracking systems in all its trucks, thereby allowing it to track its fleet on a real time basis and optimally utilize trucks, in terms of route deployment and manpower. Each of these initiatives is likely to result in lower costs for the company in the years to come.

The single most important risk with Patel Integrated Logistics is the "Management's ability to Deliver".

However, given its reach and the scalability in the logistics space, Patel Integrated Logistics is an ideal takeover candidate. If the print media is to be believed, two major business houses (Mukesh Ambani-led RIL and the Future Group) were quite keen to takeover this company and the valuations on offer were in the vicinity of Rs.125-150 crore, a good 25-50% above the current levels.

Stock details:

CMP - Rs.63
Mcap - Rs.100 crore (on a fully diluted basis)
TTM Sales - Rs.282 crore
TTM PAT - Rs.5.1 crore
Trailing P/E - 20 times.
Dec'07 sales (y-o-y % change) - 8%
Dec'07 PAT (y-o-y % change) - 38%

While on a relative basis the stock is not inexpensive, it does offer significant upside from current levels, provided the management delivers or sells out to someone like RIL or the Future Group. Even if neither happens, and the company continues to operate at current levels of profitability, the downside could be in the range of 20-25%.

Imp Links:

Patel Integrated Logistics [link]
Patel Retail [link]
Patel Roadways [link]
Quarterly performance [link]

Sector outlook:

- India has one of the largest road networks in the world, carrying nearly 80% of the passenger traffic and 65 % of freight traffic throughout the country.

- Growth in demand for logistics services is directly correlated to the growth of the economy.

- Further, expenditure on logistics services in India amounts to about 13 per cent of the GDP against less than 10 per cent in most developed nations.

- This is largely on account of a grossly underdeveloped infrastructure. With Government's thrust on Infrastructure and development of Roads, the expenditure in this segment is expected to remain robust.

- In its bid to improve this scenario, Government of India has chalked out plans to invest about USD 350 billion in upgrading and creating infrastructure in India.

- This augurs well for logistics service providers in India.

Wednesday, March 05, 2008

Banks take the hit, say both Chidrambram and Bernanke

Ben Bernanke, the Fed Chairman, made a surprising statement the other day. It reads something like this -

"In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances . For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source. A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default. This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision. Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool."

Source: []
Link to the original article [click here]

This sounds so similar to what Mr.Chidambaram proposed in his Budget Speech for 2008-09. However, in this case, unlike the US, it is the taxpayers money that will be used to make good bank's losses.

The point really is - Are we setting poor precedents, when it comes to public borrowing?

While on this topic you may want to read two insightful articles by Dr.Ajay Shah [link] and Andy Mukherjee [link].

Sunday, March 02, 2008

Warren Buffet's Letter to Shareholders (FY2007)

Warren Buffet's Letter to Shareholders for the year ended 2007 is now available. Click here to download. The Iconic investor had yet another year of outperformance. Gain is Berkshire Hathaway's book value amounted to 11.0% in 2007, outperforming the S&P 500 by 5.5%.

Saturday, March 01, 2008

Nicco Corporation Scheme of Arrangement

Nicco Corporation released the following announcement to the BSE on 4th Feb.

Nicco Corporation Ltd informed BSE that the Company has filed a Scheme of Arrangement with the Hon. High Court of Calcutta for transfer of its Cable business, to its wholly owned subsidiary Nicco Cables Ltd. This subsidiary will be convened to a Joint Venture with Prysmian (60% stake in the Joint Venture) a world leader in the energy and telecommunications cables industry with strong market position in higher-added value market segments.

Nicco will retain the remaining 40% in the Joint Venture and will receive a consideration price of Rs 133 crores (subject to adjustments) for the transfer of its cables division.
The transaction will also result in, inter—alia, the debt relating to the cables business getting transferred from Nicco to the Joint Venture (subject to Hon. High Court, lenders and CDR approval).

Once the Scheme is implemented, Nicco Corporation Ltd will be a debt-free Company and will be able to employ the consideration from the transaction to aggressively grow its existing Project & Engineering Business in the Infrastructure, Petrochemical and Environmental areas. The current Order Book position of the Project Division is approximately Rs 300 crores and it has more orders in its pipeline, where it has emerged as the preferred L1 Bidder.

Sounds like a good deal for the existing shareholders. Given that Nicco Corporation, post the Scheme of Arrangement, will have the following characteristics:

- Debt free status
- an EPC business with an order book of over Rs.300 crore
- Cash infusion of Rs.130 crore
- Plenty of 'developable' land in Kolkata, that too are prime locations

Given that most Engg. companies are currently quoting at a Mcap / Sales ratio of anywhere between 2-3 times. If Nicco Corporation were to be quoting at anywhere near that number, the company's mcap could be quoting in the north of Rs.300-350 crore (primarily based on its Engg. business, compared to the current mcap of around Rs.250 crore). In addition, some value will be ascribed to its 40% holding in Nicco Cables (which will be owned and run by Prysmian as per the JV signed between the two companies a few months ago. Personally, I think, the Company is also looking to develop some of the large land it owns in Kolkata. That should provide a further filip to the stock price in the future.

Ofcourse, my argument is based on the following hypothesis:

- the Engg. will be profitable
- the Company will develop its land
- Prysmian will turn around and make Nicco Cables a profitable company

I've written about this company in the past [Link1, Link2 and Link3] and I hold shares of Nicco Corporation, bought at Rs. 24 per share, compared to the CMP of Rs.29.

Indian Mutual Funds sitting on close to Rs.16,000 crore of cash !!

Indian equity mutual funds invested close to Rs.10,000 crore in the last three months ended February 2008 and in all have invested close to Rs.17,000 crore during the first eleven months of the current fiscal.

However, during the comparable period (i.e. Apr'07-Feb'08), they raised assets approximating Rs.33,000 crore.

Result - a net inflow of Rs.16,000 crore. This is a large number considering the fact that equity MFs poured in an equivalent sum over a 11 month period. This provides (hopefully, i.e.) for some sort of cushion to the market on the downside given that global markets (especially the US) are still looking extremely nervous.

Notably, while this figure includes MF's secondary market operations in Feb'08 but does not include funds raised during the month of Feb'08 (by way of NFOs or sale of existing schemes). Further, it also does not include redemption numbers for the month of Feb'08.

I don't the redemption numbers are likely to be significantly large even though NFO figures may surprise on the upside. The NFOs for which data is not yet available are: Lotus Agile Fund, AIG Infrastructure & Economic Reform Fund and Reliance Natural Resources Fund.