Multibaggers for future

Apple, Google and Buffett

2009-11-03T11:56:00.000-08:00

What is similar between Apple, Google and Buffett?

Nothing at the first glance, dig a bit deeper and one comes across multibagger personalities. All of them are in different businesses rarely encountering others as competitors but I can’t help myself imagining the ever upwards sales and profit charts for these companies (Berkshire Hathaway in case of Buffett). All three of them share some common traits.

Core business

Apple and Google excelled in their initial businesses of computer hardware and internet search. None of them were the first entrants (a number of mainframe makers were present when Apple started) but harnessed the potential of being ‘not so late’ entrants.

Buffett, on his part can easily find a place in the list of all time great investors on the basis of his early investment in Coke and Gillette. It was the firm belief in the value investing ideals that he refused to invest in any of the dot coms. Needless to say, Buffett had the last laugh.

Diversification

Apple has always been great with software but has never played the ‘software alone’ card till now. Rather, the company has always focused on the combination of hardware and software. Not paying heed to the naysayers for entering into the portable music player industry, Apple took on the challenge and created a profitable niche for iPod in the industry dominated by the likes of Sony and Philips.

Google saw a logical stagnation in its income merely being a search engine and providing contextual text advertisement along with search results. The company thus widened the scope of its contextual advertising by diversifying into email and acquiring YouTube.

The Oracle of Omaha officially says that he prefers to invest in the businesses he understands. But he has repeatedly made investments which defies the logic. Latest in the list is the investment in Chinese battery maker, BYD. The investment is something which even Charlie Munger claims Buffett wouldn’t have done five years ago. Buffett learns. Now Buffett and Berkshire Hathaway have the clout to earn US$1bn profit on such investment in less than a year

Reinvent

It is interesting to note how Apple reinvented itself after losing its first mover advantage in GUI based operating system to Microsoft. First notebooks and then mp3 players, the company created new markets. Latest feather in the cap for the company is the surging sales of its smart phone, iPhone. Again, Apple took on the industry leaders including Nokia, Sony and BlackBerry. A dip into the latest regulatory filing of Apple will tell us that the company books more sales by selling phones and music players overtaking the traditional Mac business.

Google has now become an internet powerhouse offering web search, video hosting, web browser and maps. Bill Gates is surely threatened by the idea of a Google developed operating system. However, apart from the internet, Google has many other offerings. The company is at the forefront of changing the electricity consumption pattern. Google recently showcased a power monitoring system which puts more options in the hands of users by providing consumption details every 15 minutes.
Google’s variety of the products stems from the fact that the company officially earmarks some hours every week in which employees are encouraged to pursue projects of their interest.

Markets have revisited the theory of value investing after every stock market collapse to find a self assured Buffett. It doesn’t happen so often that the chief of an investment firm of the size of Berkshire Hathaway keeps US$30bn in cash earning nothing on it but finally walks all the way to bank with investments in firms such as Goldman Sachs, Harley Davidson and Wells Fargo at favorable terms. In the hindsight, it appears that Buffett seldom deviates from the value investing principles while the rest of market goes too far ultimately resulting in a crash landing.

Startup Valuations: Too much, too early?

2009-07-14T00:31:00.000-07:00

Corporate valuations of the cleantech firms have always been an issue of fervent debate. On one hand, a set of market participants advocates usage of traditional valuation methods (discounted cash flow, comparable company analysis etc.) to arrive at a figure, while another school of thought propagates the consideration of intangible variables like the impact of new technology on common masses and the quantum change the technology promises to bring in daily life of an average user. Automotive battery and electric vehicle manufacturers are no exceptions with a number of low sales, concept stage companies receiving high valuations. Here are a few examples.

A123Systems Inc.
The company was incubated in MIT in 2001. After initial rounds of funding and dropping the original idea of self-organizing batteries, A123 scored big with a contract to supply batteries to Black & Decker power tools in 2005. The company has raised around US$300m in as much as six rounds of funding excluding the common shares placed early last year. GE has been the largest investor in the company and its US$70m investment till now accounts for a close to 10% equity stake in the company. Apart from GE, the company counts North Bridge Venture Partners, Motorola, Sequoia Capital, Qualcomm and Procter and Gamble among its investors.
As expected, the latest round of funding is more of a pre IPO placement rather than a VC funding. However, with 1,100 employees worldwide A123 is hardly a start-up anymore. The company has secured orders from GM, Chrysler and SAIC.
In its S-1 filing in August 2008, the company wanted to raise an additional US$175m through an IPO at an enterprise valuation of US$1bn. IPO plans were scrapped later due to the crunch in financial markets but the company is hopeful to launch the IPO sometime in 2010.

Tesla
Luxury electric vehicle manufacturer Tesla Motors, incorporated in 2003 has received funding from PayPal co-founder Elon Musk, Google founders Sergey Brin & Larry Page, VantagePoint Venture Partners and Draper Fisher Jurvetson. To its credit, the company has sold 500 premier Roadsters till June 2009 and plans to launch a more affordable Model S sedan by 2011. On the flip side, the company doesn’t have a strong product line or technology barriers as far as batteries are concerned.
Tesla is riddled with some management failures in the past and is currently under litigation through its founder and former CEO Martin Eberhard regarding the ownership of the founder title. However, its poor track record at handling the investor money has not stopped Daimler from investing in the start-up. The German automaker acquired a 9% stake in Tesla by investing US$50m in May 2009. Going by the deal, valuation of Tesla works out at close to US$550m.
As if the US$550m price tag wasn’t enough, the company has been valued at an eye-popping US$1bn in a private equity marketplace on 16 June 2009. Though the service was only a simulation and didn’t reflect the real-life market situations and serious buyers in Tesla shares, the valuation still provides a rough estimate of private equity investors.

BYD
BYD is not exactly an early stage company with venture capital. It is also not an unproven and speculative business model, but being the only listed company among the pack makes the details more trustworthy.
In September 2008, at the time of the deal with Berkshire Hathaway, BYD was valued at US$2.3bn on the basis of US$230m investment for 10% stake. The market capitalisation of the company has now swelled to US$9.2bn.
The Warren Buffett company invested at a PE multiple of 12.3 which has now increased to 52.5. Given that a lot in the appreciation of the valuation of the company has to do with the Berkshire investment, strong performance by the company in recent months should not be ignored.
Corporate valuations have always been debatable but investments in the recent times are significant as they promise to change the course of mankind. Altruism apart, free markets have their own rationale of arriving at the valuations. But the exorbitantly high valuations in one of the most credit starved times in modern history have surely left the analysts wondering.

Alternative Propulsion Systems: ETV Motors gets US$12m in initial round of funding

2009-04-30T20:56:00.000-07:00

Alternative energy storage and powertrain investments have been on rise lately. Apart from many venture capitalists taking a U-turn on their investment policies (Vinod Khosla being the prominent one), encashing the old industrial investments and dedicating significant portion of their corpus for clean technology (Former president candidate Al Gore's Generation Investment Management Fund et al). After the recently completed investments of Berkshire Hathaway in BYD and GE’s investment in A123 (battery manufacturer) and Think Global (makers of TH!NK City electric vehicle), an Israeli company has raised US$12m in Series A funding for the development of electric vehicle propulsion technology.
Quercus Trust and 21Ventures LLC jointly invested in ETV Motors. The company is developing micro-turbine technology, another possible ‘game changer’ in plug-in hybrid-electric vehicle (PHEV) market. ETV is contelplating the vehicle propulsion system as a combination of high voltage lithium-ion battery and micro-turbine. The company has replaced the internal combustion engine with the micro-turbine to charge the battery. The development stage miniaturized turbines are smaller and lighter than the traditional internal combustion engines.

Meanwhile another stealth company, EEStor announced the ‘huge milestone’ of verification of its Barium-Titanate powder’s high relative permittivity by a third party.

I am no kill-joy for the new technologies, but I hate it when the new kids on the block often accuse the internal combustion engine for gross inefficiencies. While true in their criticism, they forget that the technology is more than 100 years old and no major changes have occurred in its design till date. Not that the changes were never suggested, but either the cost of implementing the changes was prohibitively high or the changes were difficult to achieve technically. Latest in the series is the Scuderi family trying their hand at a new design which is expected to increase the IC engine efficiency from 33% to 40%.

So far so good, we still have to see a reliable technology which can work on roads, not just the research laboratories.

Lead Carbon: Rising upto the challange

2009-04-20T01:57:00.000-07:00

Automotive battery market is heating up. Last week, the state of Michigan approved investments by four battery producers amounting to US$1.7 billion. Lithium-ion battery technology, which is often touted as the most mature technology for the automotive use dominated the investment space in the state.

However, the week also witnessed a rather unusual deal between battery major Exide Technologies and relatively unknown Axion Power International. Axion is a small company focusing on Lead Carbon battery technology. The company is working on the similar lines as Australia’s Commonwealth Scientific and Industrial Research Organisation (CSIRO) in developing the activated carbon battery. Axion Power is taking a slightly different approach with its battery technology replacing the negative electrode with microporous activated carbon. The company is confident that by doing so it will be able to overcome major drawbacks of lead acid batteries namely high weight and low energy density.

While CSIRO’s ultrabattery has been road tested on Honda Insight for 100,000 miles and licensed to Furukawa and East Penn, Axion power states that battery technology is still in development phases. However, significant cost advantages of lead carbon technology over NiMH and Lithium-ion prompted Exide to enter into a supply agreement with Axion Power.

Lithium-ion is the default choice among the automakers for motive power including GM, Ford, Chrysler and Renault Nissan. Longtime NiMH champion Toyota is also following a Lithium-ion development program for its 2010 model of Prius. However Lithium-ion’s prohibitively high cost makes it unaffordable to most of the buyers. Approximately half of US$40,000 price tag of Chevrolet Volt is attributed to the Lithium-ion battery packs. One of the reasons behind Lithium-ion’s dominance is the absence of a worthy competitor. Large-format NiMH deployment in automobiles is restricted due to Cobasys’ patents and standard lead acid batteries are good for SLI (Starting, Lighting and Ignition) only. Let’s hope the Lead Carbon batteries change the game.

Road to recovery???

2009-04-19T20:47:00.000-07:00

Are we out of the woods now??? I'm not sure about it, but going by the laws of physics it looks the worst is over. After the months of bad news flow, even the absence of bad news is positive for the markets. So here we go, US automotive sales in the first quarter is a down by some gruesome number and the US treasury department continues to burn lots of green after the Detroit automakers and their supplier entourage for the cars no one would like to drive five years down the line.

But the government can be spared on the ground of being a mere economic agent for the redistribution of wealth. Some individual portfolio investments in the current gloom however stand out. Warren Buffett has invested in a Chinese automobile and battery manufacturer BYD thinking that electric is the future of automotive industry (People will drive something afterall…the Oracle has also secured a pillion ride in Harley Davidson). This ‘never say die’ spirit is impressive, eventually everything that goes down comes back to equilibrium.

Meanwhile positive effects of the recession back home in India are the low levels of inflation and healthy corrections in the asset valuation across industries. BSE Sensex has appreciated from their October lows to a more encouraging figure of 11,000. A lot of smart money which was sitting on the banks earlier took plunge at the lower levels. Here comes the big question, is it sustainable??? Analysts point out that India’s growth story remains intact but going forward general elections hold the key for Indian stock markets. A mere thought of SP or third front coming into power disrupts my thinking process. Keeping my fingers crossed for now. Ahem!!!

Solar thermal: Siemens AG acquires stake in Archimede Solar Energy

2009-03-26T20:26:00.000-07:00

German engineering and energy giant Siemens AG has acquired 28% stake in Italian solar thermal company Archimede Solar Energy (ASE) for an undisclosed amount. The terms of the acquisition allows Siemens AG to increase its stake in the company to the majority level. Archimede, a subsidiary of Italian industrial group Angelantoni Industrie is a producer of solar receivers which use molten salt as the heat transfer fluid. The capital raised from the acquisition would be used in the expansion of Archimede’s production capacities.

Siemens believes that the solar thermal market is set to cross €10bn mark by 2015. While Siemens is already a market leader in steam turbine-generators for solar thermal power plants, the acquisition has paved the way for the company to become a major solution provider for solar thermal plants.

Solar thermal power plants use high temperature collectors to concentrate sunlight using mirrors or lenses. The concentrated energy is used by the heat transfer fluid to power the turbine at high temperatures. Besides being a non polluting energy, Solar thermal power is most land-use efficient technology.

Renewable energy sector has occupied the top slot in the mind share of the energy analysts and companies especially after the oil spike last year to US$160 barrel. Solar thermal energy as one of the most potentially viable technologies has seen hastened activities. Ausra Inc., a developer of large-scale solar thermal energy systems received US$60.6m funding in October 2008 from arguably the best of the pack venture capitalists including Khosla Ventures and Kleiner Perkins Caufield & Byers. Ausra is currently operating a 5MW solar thermal power project in Bakersfield, California apart from a similar facility in Australia.

Clear Skies Solar invests in India

2008-10-23T20:37:00.000-07:00

Clear Skies Solar has announced an investment in India to setup a solar power plant. The New York (US) based company has tied up with India’s Prayag Green Solar Power. Both the companies will be jointly developing a 2MW solar power plant in Uttar Pradesh by the end of the year. The plant entails an investment of US$8m.

This is second major investment of Clear Skies Solar in India this year. Earlier in April, the company ventured with Power Cube to develop a 5MW solar power plant which is expected to become operational by early 2009.

Alternative energy market in India is witnessing a lot of action. Moser Baer has won contracts to supply silicon thin film panels worth US$500m by 2012. Singapore based Environ Energy announced an investment plan amounting to US$1.27bn for a solar wafer manufacturing facility in India.

Morgan Stanley deal values Biotor ahead of Roshini

2008-09-28T21:06:00.000-07:00

Alternate Energy space is sizzling hot amidst falling markets world over. In one of the recent deals, Morgan Stanley has reportedly picked up close to 30% stake in a Mumbai based cleantech firm. The company, Biotor Industries received INR2.4bn (US$53m) from the private equity arm of Morgan Stanley. The investment is in the form of equity and compulsorily convertible preference shares amounting to 30.4% of the post issue paid up capital of the firm.

Biotor makes castor oil based products and has fully owned subsidiaries in US and Germany for marketing and distribution. It also has a contract manufacturing subsidiary and plans to set up a manufacturing unit in Gujarat.

Total valuation of the firm after the deal is pegged at INR7.9bn (US$175m), ahead of Hyderabad based Roshini Biotech which was valued at INR6.8bn based on a second round investment from Goldman Sachs. While Roshini has long term plans of going public in 2011, AE biofuel’s Indian subsidiary Universal biofuels is in talks with private equity players to raise around INR2bn (US$44.3m) in a pre IPO deal. The company owns a 50 million gallon per year biodiesel facility on the east coast of India, and is planning a 75 million gallon per year biodiesel facility in Argentina.

Capital flight: Banks clamouring for liquidity

2008-09-25T23:31:00.000-07:00

US fed has more work to finish after the recent investment bank meltdown. A lot has already been said and written about what should have been done and what not, but as humans, financial institutions are prone to mistakes. So, the big daddy bails out AIG and other blue-chips banks going for a song is a ritual performed every 15-20 years or so. Though the price is a little too much this time, but that’s ok given the regulator’s high level of tolerance.

Anyway, the latest to add in the list is the amount of liquidity required in the system. After the mayhem, banks are being inundated with lines of credit requests. These are the agreements the banks entered into when the grass was green and the meadows were lush. Again, no wonder the banks went on a spree and committed US$1.4 trillion in such arrangements. These are the short term loans for working capital, but the sheer size of the amount required is enough to make your eyes go round.

The rush for short term credit is another drag on the balance sheets of the banks, which are already stretched after the recent crisis after swallowing US$521bn of write downs and losses. Citigroup is leading the pack with US$471bn in such agreements, while Bank of America and JPMorgan each have short term line of credit commitments amounting to US$388bn and US$255bn respectively.

And the companies are flocking to improve their liquidity positions. General Motors plans to make use of the remaining US$3.5bn revolving line of credit to cover its restructuring costs. International Lease Finance Corporation has also tapped Citigroup and other banks for its US$2.5bn syndicated credit loan.

RBI move to clamp foreign VC investment in Real Estate

2008-08-07T20:55:00.000-07:00

After the failed attempts to contain inflation even by restricting money supply, RBI is coming round to the view that foreign funds into real estate are creating an asset bubble. To avoid a hard landing as seen in US economy, RBI proposes curbs on foreign venture capital investments (FVCIs) funds. The central bank notes that this route has opened a parallel channel of investment thus opening a regulatory arbitrage window. Majority of such funds have their base in tax havens like Cayman Islands, Mauritius and Cyprus.

FVCIs enjoy significant benefits which are not available to domestic VCs including full tax exemptions and minimum capital base of INR50m. Besides, FVCIs enjoys full exemption from entry and exit pricing norms which are applicable to foreign investors in form of FDI, exemption from one year lock in period for sale after IPO.

All these exemptions prompted foreign funds and Indian firms to set up companies abroad (usually in tax havens), raise funds at cheaper rates and then reinvest in India. VC firms (domestic as well as foreign) usually invest in real estate through their private equity (PE) arms. Couple that with favourable interest rates and you have a perfect recipe for sky high prices. Last couple of years have witnessed unprecedented growth in real estate valuations.

However, the proposed move is not without opposition. Along with curbs on investment in real estate, RBI is also proposing discontinuation of the automatic route for FVCI investment and limit the same to nine industries only. Experts feel that the move is grossly retrograde and discourage evolution of financial and social intermediation.

Indian financial regulators have the long legacy of waking up late. By the time, damage is already done. So we have a new item to add to the long list of IPO cooking up in 90s, Harshad Mehta, Ketan Parekh, NBFC failures, Plantation schemes etc. Last year many real estate companies with little land bank, low visibility and poor execution skills tapped IPO market with high valuations only to flounder afterwards. Most of them are now trading at less than half of IPO cut off price. Industry experts reckon the current market price as fair value.

Sintex acquires German plastics supplier Geiger Technik

2008-08-01T04:19:00.000-07:00

India based Sintex Industries Ltd has acquired a German auto component supplier. It has acquired a 90% stake in Geiger Technik GmBH for US$50m (€35.6m). The acquisition has been done through its wholly owned Netherlands-based subsidiary Sintex Holding BV. Remaining 10% will be held by the Geiger family.

Geiger produces precision plastic parts including tanks and reservoirs, piping, air ducts, cooling and fuel tank components. The company has four manufacturing plants including three in Germany and one in Poland. Geiger has a clientele including BMW, Daimler, Volkswagen, Siemens etc and its sales in 2008 are expected to be around US$165.7m (€118m).

With this acquisition, Sintex has expanded its manufacturing operations in Germany which is the largest automotive market in Europe. The acquisition will assist the company to further enhance its presence in the European market. Sintex has made a number of acquisitions in Europe, US and Africa in the last year.

Indian auto component space is hot following recent announcements by Amtek and Mahindra & Mahindra. Amtek is leading the race for German metalcast company KSM castings while Mahindra & Mahindra acquired Italian company Engines Engineering SpA and plans to manufacture small engines.

SpiceJet gets US$80m from Wilbur Ross

2008-07-17T23:26:00.000-07:00

Indian low cost carrier (LCC) SpiceJet has secured INR3.45bn (US$80m) in investments from PE firm Wilbur Ross & Co. The company is India’s second largest budget carrier with a fleet of 17 Boeing B737 planes and 10% market share. Financial details of the deal were not disclosed but the stake is likely to be limited at 15% as any transaction involving more than 15% will trigger an open offer.

The airline was in talks with Vijay Mallya’s Kingfisher Airlines which closed the negotiations citing steep valuation for the budget airline. But industry experts report that management control may be the actual reason behind the failure. Vijay Mallya has already secured the leading position in low cost model after taking control of Deccan Aviation and reasonably enough, wasn’t ready to shell out extra cash for another ‘strategic investment’. SpiceJet owners, Kansagra family and Dubai based Istithmar, on the other side were not prepared to lose management control.

Apparently, cutting a deal with Wilbur Ross was the preferred move for SpiceJet. With Wilbur Ross on board, the company must be more cautious though. Ross has made a reputation as a turnaround king for distressed industries. In the process he is often ruthless with the purchased entities and their management.

About Wilbur Ross: Ross entered the steel industry in 2002

and sewed up five deals within three years, investing US$2.2bn in the ailing steel plants of LTV and Bethlehem among others. In less than three years, Wilbur Ross sold his steel portfolio to LN Mittal pocketing US$4.5bn. Since then, he has turned focus on automotive components industry. In the recent times, the vulture (As New York Post calls him) has acquired a clutch of auto parts firms including Collins & Aikman, Oxford etc and formed a JV with interior specialist Lear Corporation.

Amtek Auto: ChrysCap picks up 7%

2008-07-03T23:34:00.000-07:00

Private Equity (PE) firm ChrysCapital has acquired 7% stake in India’s leading auto ancillary company Amtek Auto. The investment is in the form of P-Note holding. ChrysCapital has mopped up over 9.3m shares through six bulk deals transacted at different prices on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Apart from ChrysCapital, Amtek Auto has many other foreign investors on the board including Warburg Pincus, Citigroup, Swiss Finance Corporation and Oppenheimer Funds.

Amtek Auto is on a global investment drive, both organic and inorganic. The Gurgaon based company recently acquired UK-based gear company, Triplex Ketlon. Now, Amtek is leading the race for a controlling stake in German castings company KSM Castings for around EUR250m (around INR17bn). If the deal is successful, it will be one of the largest acquisitions by an Indian company in the automotive forging category. The proposed acquisition will consolidate its business in the mature western European market, where Amtek already enjoys 40% market share.

Private Equity: Goldman Sachs to invest in Roshini Biotech

2008-07-02T01:40:00.000-07:00

Goldman Sachs is reportedly picking up a minority stake in Hyderabad based bio-diesel company Roshini Biotech. It is learnt that Goldman Sachs is picking up a 25% stake in the company for INR1.7bn. The price being paid pegs the valuation of the plantation company at INR6.8bn.

The company says that the investment will be used to expand its overseas operations. It is planning to expand its overseas operations and enter countries such as Uganda, Sri Lanka and Indonesia amongst others. Roshini Biotech has already won 25,000 acres of land from the Ugandan government to cultivate pongamia seeds.

Roshini Biotech is a bio-fuel company engaged in the bio-energy value chain. It has the world’s largest plantation of non-edible feedstock with more than 40 million trees and seedlings. Pongamia Pinnata, in which the company deals, is a non-edible and drought resistant tree with high yields of crude oil that recaptures rapidly -growing greenhouse gas emissions and generates income to poor farmers and rural communities.

This is the second round of PE funding for the company. Last year an investment and strategic advisory company focused on Chinese and Indian markets, Origo Sino-India Plc picked up 20% equity stake in Roshni Biotech. The company plans to go public in 2011.

LinkedIn Valuation: US$1bn

2008-06-18T03:26:00.000-07:00

After astronomical valuations of Facebook, here comes LinkedIn. The professional networking site has received US$53m investment in fourth round of funding. The transaction involving investment from Bain Capital, Sequoia Capital, Bessemer Venture Partners and Greylock Partners values the company at US$1bn.

Microsoft invested US$240m late last year in Facebook for a 1.6% stake valuating the social network at US$15bn. The high price tag attached with these deals puts all traditional valuation matrices like net profit, book value, PE ratio etc at back burner. While many analysts claimed that the deal reflected Microsoft's urge to grow its advertising business more than Facebook’s true worth, LinkedIn deal appears more balanced though still on the higher side. LinkedIn has 23 million members whereas Facebook had 50 million members at the time of the deal.

Some simple back of the envelope calculations show that deal valued Facebook at a PE multiple of more than 300 and sales multiple of 100!!! On the other hand traditional manufacturing including automotive component companies are being sold at annual sales multiple of 1 or even less. Are we missing something??? The situation resembles tech bubble euphoria. Last year, eBay admitted that it overpaid for the internet telephone service provider Skype when it bought it for US$2.6bn in 2005. Back home Satyam paid hefty INR4.99bn for some Indiaworld (I doubt if anyone remembers it now except Rajesh Jain) at the height of dot com bubble.

Unlike Facebook, LinkedIn is making profits and generates revenue from advertising and premium subscriptions. The company also may make acquisitions with its new cash. Let’s hope it’s not the other bubble in the offing.

PIPE deals: PE players caught on the wrong foot

2008-06-17T03:53:00.000-07:00

Ahhhh…. sounds like consolation, but it’s not just retailers losing money in the market. Even the valuation experts were taken by storm in the recent bull market.

Apart from the usual investment in unlisted companies with 2-3 years timeline, Private Equity (PE) players invest in some listed companies as well. These kinds of deals are known as private investment in public enterprises (PIPE).

It not a written law in some market bible that PE firms can’t invest in listed companies, but they usually refrain from doing so and for good. Last bull market saw many PE firms charting PIPE deals at exorbitantly high valuations only to see their money vanishing in a jiffy.

A market study by Venture Intelligence shows at least 33 such deals are already out of money. The impact gets magnified with additional information that PE players striked 51 PIPE deals last year.

The deal book has all big names including Carlyle's investment in Allsec Technologies, Reliance Capital's in Maxwell Industries, Goldman Sachs Investments' in Spentex Industries, New Vernon's in JB Chemicals and Unichem Laboratories, Clearwater's in Kopran, ICICI Venture's in Geometric Software. Nalanda Capital lost heavily in Vaibhav Gems where it invested at Rs230 per share. The scrip is trading at Rs70 nowadays.
However, the deal format is not likely to fade away. Most players see market reaction as a temporary blip and are really not bothered. The PE funds are likely to play a more activist role in running their investee companies.

25% returns strategy: Way to go

2008-06-16T20:42:00.000-07:00

Financial year 2007-2008 has ended and Indian stock markets are off the radar of global investors. Most mutual funds gave excellent returns as long as the market was in top gear and there is a clutch of funds with superb numbers even after the January crash. However, retail investor is again trapped with no solution in sight.

If the situation is prompting you to think that stock markets are a perfect destination for becoming millionaire by investing billions, please stop reading this. With all sincerity and after taking a heavy beating on my own portfolio, I still believe that stocks are perfect to make serious money without sharing the same risks of running a business. World’s richest person got all his greens from investing in stocks, after all.

The description should ideally lead to the conclusion that rampant and wild directionless investment albeit large size is not going to get anywhere except at the bottom of the pile. Simultaneously, it calls for a change in investment strategy. Talking about one year outlook from here, almost everyone will agree that markets will appreciate by 25% (assuming 18.75K with one year from 15K now). But very few can claim to generate 25% returns on their individual portfolios.

This is in contrast to the fact that generating decent returns from here is relatively easy as compared to the situation 4 months back. Investor’s response to the same question would have been positive just 4 months back.

The logic of overreacting markets while technically correct lacks conviction here. Broader markets appreciated much more than Sensex or Nifty with penny stocks touching dizzy heights. Markets have reacted like this only in the past and there are no indications of change in its way.

Intermediate concerns about inflation, rising oil prices, impending elections and fears of drop in corporate earnings are all just and fine. I’m calling them intermediate as these concerns loose ground as soon as market starts going up. So, for die-hard bulls, here is the way to go. I wouldn’t be dwelling into the time tested axiom to invest in blue chips as it has already been assumed.

1. Cash is still king
I assume most of the investors have lately started to appreciate the beauty of this cliché, with compelling valuations but no cash to invest. Last year, Warren Buffet was being criticized for sitting on cash (no small amount, US$38bn), eventually he was laughing all the way to the bank. While we are not investors with a high degree of sophistication, it makes sense to exit the market at the high levels and keep the cash to be invested at lower levels. Use small rallies to sell.

2. Cash itches….a lot
Most investors, after pocketing reasonable returns and holding on cash soon develop the urge to reinvest the amount. Wait for the market to come down. Sustain the temptation now, remember it later for good.

3. Invest in a staggered way
No one has got money these days. Dedicate a certain amount every month to be invested in market. You will see your money growing six months down the line.

4. Plan B: Get aggressive at bottoms
There is no business in the world without risks and surprises. Stock market is no exception. Just like there are chances of failure in any other business, stock market has its share too. And just like any other business, there should be a plan B for this market as well. This is for all those dare devils who want positive returns at any rate. Leverage your portfolio by pledging the shares. In any case, you are not going to sell the shares at these valuations. Pledge them, get loans against securities and invest the amount at lower levels.

Gammon Infra: Fears come true

2008-04-03T19:53:00.000-07:00

Gammon Infrastructure Projects Ltd (GIPL) listed yesterday at a price of Rs 170 and touched high of Rs 185 before closing the day at Rs 158, well below issue price of Rs 167. The closing price indicates a discount of 5.3% to issue price a price earning (P/E) ratio of 255.

With this IPO, the company has made entry in 'flop IPO' hall of fame. Markets are still volatile and may break out in the negative as well (Nightmares for the retail investores as smart players have already exited the counter).

Looking forward, next company to get listed in this month is Sita Shree Food Products and Titagarh Wagons. While grey market premium for Sita Shree Food Products is at Rs 6 against issue price of Rs 27-30, Titagarh Wagons appears to be good bet for long term with visible incremental earnings and reasonable (infact discounted) P/E ratio of 24. Its high time companies learn to leave some change on the table for retailers.

Bear Stearns: Indian Connection

2008-03-18T02:58:00.000-07:00

The news that global investment banking and brokerage firm Bear Stearns has been acquired by JPMorgan will go down the memory lane exactly the same way as we remember debacle of Barings Bank in 1995 and Societe General more recently (I believe no one remembers them).

Bear Stearns was sold at a valuation of US$2 per share against market price of US$30 per share. It replicates the situation when Barings Bank was sold for a song to ING Group (£1 to be precise….no billions here).

Probably nobody reading this blog remembers Barings or Nick Leeson, but this time many investors will remember Bear Stearns. Reasoning for this is very simple, Bear Stearns sold shares in Indian markets worth Rs 265 crores in last couple of days. While the amount was not particularly large, bears made sure that Big Bear gets its due share in Indian stock market history. Sensex tumbled by approximately 1000 points. Almost all Bear Stearns shares including Madhucon Projects, Clutch Auto, Dabur Pharma, Indo tech Transformers and Jaiprakash Associates fell flat on the bourses. Retail investors in these stocks were taken by surprise by the abrupt fall in share prices.

India has been historically insulated from global turmoils but now its markets are more linked to international markets (There is no decoupling yet). This time atleast some of the investors will remember the Big Bear.

New Listing: REC

2008-03-11T22:52:00.000-07:00

Rural Electrification Corporation (REC) listed today at a premium amidst good market sentiments. The stock listed at Rs 126 versus an issue price of Rs 105. The company has made an External Commercial Borrowing (ECB) application with RBI. It earlier said it plans to raise Rs 4,040 crore from ECB route. The company expects to see continued growth of 25-30% and plans to do business of Rs 1.35 lakh crore over the next 5 years.

GIPL: Where the angels fear to tread

2008-03-05T00:31:00.000-08:00

Gammon Infrastructure Projects Ltd (GIPL) may join the list of withdrawn IPOs due to lack of subscription. GIPL is offering 11.45% of its post-issue paid up capital for a price of Rs 167 to Rs 200 per share. This translates into a range of Rs 276.385 crore to Rs 331 crore. Accordingly the company is valued in the range of Rs 2413.8 crore to Rs 2890.8 crore.

These valuations are difficult to justify by any standards particularly when the stock markets are bleeding. The fact that the company is asking for a Price Earnings (PE) ratio of over 100 based on Estimated FY08 earnings is simply ridiculous. At this time, Infrastructure companies with sound financials like IVRCL Infra are available at a Trailing Twelve Month (TTM) PE ratio of 27. It was only last month when investors saw Infra IPOs like KNR and IRB trading below their issue price.

While the chips are down after the Budget and retail investors shying away from share markets, subscription of the retail portion (30%) looks a distant dream. Qualified Institutional Buyer (QIB) portion (60%) may be fully subscribed.

Punj Lloyd: A real gem

2008-03-04T19:51:00.000-08:00

Engineering & Construction (E&C) major Punj Lloyd has corrected by 40% from its high of Rs 585 to Rs 350. The stock seems to have fallen out of investor’s radar. Bad news or is it a good news in disguise??? The company needs no introduction but for starters, here is one.

Punj Lloyd is an Indian E&C company catering to the hydrocarbons and civil construction sectors across India, Asia and the Middle East. Its services include laying pipelines, building roads, and constructing refineries and tankages, power plants, and other infrastructure facilities.

Last year, it acquired Sembawang Engineers, which helped it scale up its expertise to upstream oil & gas, airports, jetties and tunneling. The acquisition enabled Punj Lloyd to be pre-qualified for larger and more complex project bids.

For the quarter ended 31 December 2007, the company recorded exceptional one time loss of Rs 68 crores on the back of legacy orders of Sembawang Engineers. However consolidated figures were up by 48% for Net sales and 13% for Profit after tax. Moreover, standalone numbers were inline with profit margins intact.

The company is one of the promoters of Pipavav Shipyard Ltd (PSL) holding 25% equity stake. PSL is proposing to enter capital markets with an IPO in near future.

Punj Lloyd is perhaps the only mid-cap Indian construction company that can give L&T a run for its money. The company has an order backlog of Rs16000 crore, largest after BHEL and L&T and provides visibility of two years' revenues.

It’s not everyday that a company like Punj Lloyd is available at such valuations (TTM PE multiple of 32 at current price). We believe that accumulating the stock at Rs 330 would be a great buy.

Upcoming IPO: Gammon Infrastructure Projects Ltd

2008-03-04T19:46:00.000-08:00

Gammon Infrastructure Projects Ltd (GIPL) is entering the capital market with its initial public offering of 16.55 crore equity shares of Rs 10 each in price band of Rs 167 to Rs 200 per share. The issue will constitute 11.45% of the post-issue paid up capital.

The issue will open on 10 March 2008 and close on 13 March 2008. The issue has been graded by Credit Analysis & Research as CARE IPO Grade 4, indicating above average fundamentals.

GIPL is offering part payment facility to retail and non-institutional investors. The amount payable on submission of the bid cum application form is Rs 50 per equity share, with the balance to be paid by the due date.

The company undertakes and develops projects such as roads, bridges, ports, hydroelectric power and biomass power projects on a Public Private Partnership (PPP) basis.

GIPL plans to use the proceeds for investments in its various projects being developed by its subsidiaries in Uttar Pradesh, Maharashtra and Sikkim.

Budget 2008: Good times ahead

2008-02-28T20:02:00.000-08:00

PC is going to present Union budget for the 7th time, and this time its a far cry from the good old days with share market in shambles. And it is expected to remain in the same state of inertia for the time being unless the budget is a hugely populist one. Chidambaram is notoriously famous in investor community with his share of Capital gains tax, ST tax, Service tax and 'whatelseisremaining' tax. But this time, investors can expect relief (read no new taxes) and he may infact lend a helping hand in the form of reduced income taxes, ofcourse for a helping hand in return (Congress).

Whatever be the budget, India's long term growth story remains intact. So, Happy investing....

Last week for IPO market

2008-02-24T22:22:00.000-08:00

Last week registered three important events for Indian capital markets including oversubscription of REC IPO, listing of OnMobile Global and bonus declaration from Reliance Power. While nothing can be said categorically about REC, many market participants believe that the IPO could mark reversal in trend in primary market.

OnMobile Global listed at a good premium and climbed further in subsequent trading sessions to touch a high of 579. Strong listing even in choppy market conditions is another proof of fundamental soundness of company. While listing of KNR Constructions & Bang Overseas was lackluster, which later fell like a pack of cards, they were not expected to be out-performer at the first place. KNR is a fairly small infrastructure company with neither broadness nor depth in operations, like IVRCL or Simplex. On the other hand OnMobile is a specialized software company with high margins.

The lesson is, retail investors should come out of the mould of quick listing gains mentality. While they might make money in some IPOs, but the chances of getting stuck with a dud stock are equally even.

Reliance Power announced a bonus for all investors save promoters in the ratio of 3:5 (i.e. 3 new shares for 5 held). While the valuations of Reliance Power can be contested, one should understand that sometimes it’s simply not possible to evaluate a company on conventional matrices like P/E ratio, especially when the Reliance tag is prefixed to a Power or Infratel or anything else.

On another note, bonus declaration is a welcome surprise by someone who raised Corporate Governance issues 3 years back at the time of separation. This is not to hail Anil Ambani, but a similar move can not be expected from a KNR or Bang Overseas. Or is it a masterstroke in a bid to outdo the organized hammering of the scrip by some operators as Ambani Junior earlier accused. Who knows or who cares, Shall I say?