Market dynamics

Weekend Khichdi - update on political news & weekend shopping trip observations

noreply@blogger.com (Vivekanand) — Sun, 15 May 2011 09:27:00 +0000

What a week it's been! The left routed out from WB; a photo finish in Kerala and a mega come-back by JJ in TN. In TN, for the first time in many years, the leader of the opposition in the assembly is a non-DMK-ADMK party...make way for Vijaykant's DMDK, who won more seats than the DMK!
The congress has won in 3 of the 5 states (Pondicherry included) on expected lines.
But what about the nation's principal opposition party - BJP? It's busy licking its wounds after drawing blanks in TN, WB and Kerala. Why contest all the seats in these states, when the party isn't equipped to do so? Specific focus on a few seats would've surely yielded better results than this outcome!
Now that elections are over, the govt. by hiking petrol prices says 'Can we get on with price hikes' :)

Apart from politics, some observations from my weekend shopping trips (to the retail store - since I'm new to this area, I chose organised retail over the neighbourhood Kirana store)

> Private labels everywhere in foodgrains: I can't seem to find small quantities of cereals. Everything seems to be coming in big packet sizes and that too in the private label of the store.

> Competition heating up in the various foods segments - case in point - Noodles. How many of us have asked for Maggi when we really meant noodles! Now there are many different 'Maggi's' on the shelves of stores - Chings Secret, the retailers private lable, foodles and Yipee! Such competition will surely result in margin pressures for the leaders. But then again, it's hard to say if these rivals can match the distribution muscle of Maggi!

What's making news these days

noreply@blogger.com (Vivekanand) — Sat, 07 May 2011 14:52:00 +0000

There is so much is happening in such a short time-frame... and this is across sectors

> In general news, election action in 5 states. This seems to be a watershed year for these states as key people are fighting tough battles - Karunanidhi vs. Jaya in TN, VSA vs. Chandy in Kerala, Mamata vs. the left in WB, Cong. vs. incumbency in Assam.
The markets, especially Sun TV holders will be glued to the TN results... due to obvious reasons!

> Markets - what a cut back! RBI's actions has led to a broad based sell-off
> Commodities - is the dream run over? What about agri-commodities? Will food inflation be tamed this year?
> the RBI's actions have also pummeled NBFC's out of shape as the priority sector status goes out of the window for all NBFC loans (ex-MFI).

Other sectors are seeing mixed trends and I guess, the results which are out, are showing that corporate India is seeing good topline growth, but weak bottomline performance - inflation linked margin pressures are taking a toll on companies.
In that context the RBI tightening seems to be appropriate.

Banks to brace for a savings battle...especially considering the impending deregulation of savings rates. Newbies having very low CASA will surely be aggressively gunning for 'SA' post deregulation.

We live in interesting times!

Where does a retail investor go now?

noreply@blogger.com (Vivekanand) — Sun, 06 Mar 2011 07:08:00 +0000

I see that a lot of people around me have become much smarter after 2008 - they seem to get interested in the markets after falls!
This, to mind, is a very healthy sign and indicates the maturing of the much maligned (by TV channels) retail investor.
Experts on business channels keep talking about the markets being conducive to long term investing (3-5 year investing) despite near term worries such as high commodity prices, inflation, interest rate shocks and FII outflows. But then again, there is this sudden market decline that is so frequent, making our stock purchase look foolish (with a 5-10% decline the very next day after our purchase!).
In this scenario, what should an investor do now?
For starters, I would like investors to refer to a book 'One up on Wall Street,' written by a revered fund manager, Peter Llynch.
Peter makes the case for an average investor to make significant returns from the markets by using his/her common sense in entering stocks which may not be feasible (or maybe un-noticed) to occupy large portions of fund managers' portfolios. An average individual, if, interested and does appropriate due diligence, can surely spot ideas, which can create wealth on a sustained period. Take for example, the construction boom: While one witnesses a lot of activity on the ground, the nature of the construction business is such that a lot of money is trapped in working capital (as high at 1/2 a year to a year of sales in several cases). Although, the sector seems to be doing well, there is a significant delay in cash flow generation from an investors perspective. This is one of the reason for the sector's poor performance. However, if one digs deeper into this boom, one can also make out that banks, which have an ability to manage risk effectively, are able to lend to this sector and make good money out of it. The markets have also noticed this and banks have performed very well in the markets. Even so, other opportunities also exist.
Specifically, I notice that there are players in ancillary industries (to the construction boom) such as plastics, equipment handlers, which appear to be doing well. These players don't suffer from the same issues that the dog the construction industry, and yet trade at very cheap valuations (examples include Elecon engineering - a gear maker, Supreme industries - a plastics company, ACE and Sanghvi movers - construction equipment companies). An investor would do well to identify a few players which appear to be doing well, and analyse the numbers, and finally make an investment when the markets are headed downwards.
Finally, coming to the question of the markets correcting immediately after one purchases a stock - well, one needs to remember that, in order to make money in the markets one needs to have an ability to tide over short term volatility to expect meaningful returns.
Happy investing!

PS: The above mentioned companies are based on what I've noticed on the ground, I have no positions and do not recommend these companies. I have checked basic valuations though - all of them seem to be trading in mid to high single digit trailing twelve month PE's. I'll need to find out more before recommending anything.

Getting back to the basics - financial planning and analysis

noreply@blogger.com (Vivekanand) — Wed, 26 Jan 2011 12:03:00 +0000

This is a very good time to be looking at planning ones finances. The new year, last quarter of FY11 (4QFY11), and other events present a good opportunity for people to inject discipline, save tax and grow money.

Some thumb rules.

> In India, the compounding engine has been and is going to work for equity investors (or so I think, as we're still not a mature market). Just check the 3, 5 year and since inception CAGRs of mutual funds/ETF's (ETF's haven't been around for a very long time, so mutual fund returns are more sensible to check.)
For the US, there is however, a concern. The below NYtimes graphic shows that the compounding engine doesn't work too well in the US. So timing is far more relevant there.
http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?source=patrick.net#interactiveShell
So for friends out there who don't want to bother themselves with knowing much about the markets and yet want to get an exposure to the markets (owing to the perceived higher returns), get an SIP in a mutual fund or an ETF.

> Have a disciplined savings habit - I find quite a few of my friends scrambling for cash in the last quarter to invest to save taxes. I feel that it'd be much better if one apportions towards the 80C investments every month. Again, a SIP or a disciplined savings approach would help.

> During this period, when one looks at investing, one should also look at making a rough budget. It's not that hard - just have a look at the quarterly statements of all bank accounts you use and see the debit entries. If you spend mostly by credit card, then also have a look at the card statements to see where your money has gone. This would definitely give you an idea of where you stand and what you can stack up.
This is what companies do every quarter while making their profit and loss statements and balance sheets.

For the more informed investor, the best thing to do is to keep studying businesses one understands, determine entry points that are in sync with the fundamentals and start ploughing cash as markets take your stock to that level. Patience is key, as there must be some reason why the market would've priced your stock at the current level, as against your estimate of fair value which might be significantly more than today's price. Below is an interesting article explaining this
http://www.thehindubusinessline.com/iw/2011/01/23/stories/2011012350140700.htm

Scams, corporates and some comments on the markets

noreply@blogger.com (Vivekanand) — Sat, 11 Dec 2010 09:29:00 +0000

The recent events, and, a book that I just finished reading have brewed some fresh thoughts in my mind.

The government is trying its best to make our economy as restricted as possible. License raaj seems to be coming back by way of mysterious actions of entities such as the environment ministry (the minister, by the way, is now finding newer ways to compromise India's health at Cancun), coal ministry, telecom ministry etc.

India's public private growth engine viz. public spending and private executing driving growth, is in grave danger with graft, red-tape and oneupmanship threatening to derail this avenue (or make it very unattractive for investors).

This apart, the recent events also reinforce the fact that the opportunity in our markets is so immense that corporates will go that extra mile to cater to it (and make money of it). Real GDP growth of 8-9%, plus an inflation adjustment of 5-7% points to an AVERAGE REVENUE growth of 13-16%. This is a heady number in the global scheme of things.
The telecom industry, which is being capitalised upon despite near anarchic policy making, is case in point, where corporates have, against all odds made an attempt to cater to the consumer demand.
The travails of the corporates in the telecom sector are akin to the challenges faced by the entrepreneur who set up India's largest listed company (as I read, in a book authored by Hamish Macdonald).

With all the scams being highlighted these days, I'm increasingly convinced that the government hasn't changed a bit.
All the public glare on the government has suddenly woken up the nation's 'premier investigating agency.' It is now acting as an over-zealous loser who's been charged up by a strong dose of dope!
The old meddlesome politicking attitude of the government is now manifesting into several scams (the outcome of which, in most cases, will eventually go to fill the coffers of the polity).
While I concur that, the witch-hunt that's currently on, is good for the country as it cleanses the system and brings fear in the minds of officials who see bribing as a way of life. However, the collateral damage is the targeting of companies which are either close to the opposition or aren't part of the coterie of the ruling party.

Meanwhile, the markets are dwindling down, while mid-caps are melting due to investors getting 'scam spooked.' Additionally, there's a healthy correction in the banking sector due to 1/ undoing of the rerating in public sector banks, owing to scam fears 2/ fears of a margin squeeze coinciding with increases in defaults leading to a double whammy for banks.
Amidst all this, I would like to highlight that some public sector banks such as OBC, Allahabad bank are now trading at 1x FY12E book.
While one can't say if stocks will correct further or bounce back from here. But, one thing that investors should keep in mind, is that, corrections and uncertainties, have more often than not, passed as buying opportunities (mostly in hindsight, though!).

Compilation of articles - the way our market-men operate

noreply@blogger.com (Vivekanand) — Sat, 27 Nov 2010 07:25:00 +0000

A brief while back ET carried a few articles about the workings of the markets, thus explaining some job profiles of market participants. Below is the list:

1> A market fixer talks about the hidden talents of promoters (their market timing skills!!!)- http://economictimes.indiatimes.com/markets/analysis/Promoters-are-the-biggest-players-in-the-stock-market/articleshow/6891685.cms

2> A trader who talks about the importance of connectedness
http://economictimes.indiatimes.com/markets/analysis/Market-trader-Never-be-the-engine-of-trade-always-be-a-bogie/articleshow/6898011.cms

3/ An I-banker who talks about his way of working
http://economictimes.indiatimes.com/markets/analysis/Market-Banker-Promoters-better-than-5-investment-banks-put-together/articleshow/6904562.cms

4/ An equity sales guy
http://economictimes.indiatimes.com/markets/analysis/D-street-Equity-sellers-must-be-dynamic--diverse-than-equity-analysts/articleshow/6910942.cms

5/ A fund manager on the vastness of the markets
http://economictimes.indiatimes.com/markets/analysis/D-Street-Fund-managers-should-be-on-top-of-at-least-100-cos/articleshow/6916541.cms

The interesting thing about these articles is the candid manner in which each person explains her job. In my view, these articles should be a nice read for anyone interested in the markets

PS: Back from a Diwali and New Year blog-break :)

Offer valid till stocks last - 'Teji' is back!!!

noreply@blogger.com (Vivekanand) — Sat, 06 Nov 2010 15:56:00 +0000

What a Diwali & New Year this is turning out to be!

- First up the stock markets: Investors have been treated with awesome listing gains in Coal India (CIL) - this has translated to real, tangible gains due to the quantum of allotment. 199 shares were alloted to retail investors bidding for a full application of 400 shares - this resulted in a day 1 gain of anywhere between Rs. 15-20k (depending on the time of the day one booked profits in CIL!).

- The real markets: This season, wherever I've gone, shops are full and bustling with activity. Retailers must be having a field Diwali - I'm pretty sure that this Diwali season is going to be step jump when compared the previous one!!! Expect fundoo car, clothing, jewellery and other consumer sales.

- Housing market boom: US Quantitative Easing 2 (QE2) - bring it on!!!
Housing is all about buyers/sellers' expectations of supply/demand. I was checking out Mumbai/Thane based real estate projects during weekends; till a fortnight before Diwali, and everywhere, the same, 'hurry up - the management may hike prices soon,' fear psychosis was at play.
How is QE2 going to support a booming real estate market - well, the Indian markets are going to remain bouyant, as more foreign money is going to chase returns; this will result in real estate companies continuing to remain confident of funding (via easy equity). Hence, builders will get cocky (or is it cockier???) and continue to hike rates despite clear indications from the markets that sales aren't going to sustain at these prices.

The above clearly indicates that 'Teji' is back and is here to stay on at least for a brief while!!!

PS: A couple of other thoughts
1> Kudos to the RBI for attempting to put brakes on the real estate investment casino - people tell me that the 10:90 housing demand is almost entirely fuelled by Investor (viz. Speculator) demand. For buyers, please note that this is RBI's way of telling you to be ultra-careful while going for a property purchase (at this point of time).
2> The news channels are now showing Obama for most part of the day. I'm already starting to miss scandalous news :P

The mobile market - Nokia's response to the 'newbie onslaught'

noreply@blogger.com (Vivekanand) — Sun, 31 Oct 2010 18:39:00 +0000

An interesting article in business line discusses how we are spoilt for choice while deciding which mobile phone/tech gadget we should purchase.

The mobile handset market despite being so competitive remains an enigma!

Handset companies pay hefty commissions to dealers to promote and push their phones, yet, the same companies forget a basic customer mindset – the try before you buy approach. Most of these high technology devices including the smartphones, androids etc are nice and come with a very hefty price tag – yet one wonders how dealers expect a customer to just shell out anywhere between Rs.5-20k without even trying out the features of the handset. This is out of personal experience that I have noted!
However, things seem to be changing due to the handset war. Let me give you a perspective on the war in the handset market...

IDC in a recent press release tells us the following
- ‘Emerging vendors’ have cornered a third of of total India mobile handset shipments in Apr-Jun 2010 (1QFY11).
- Nokia is on No.1 spot with a market share of just 36.3% in terms of units shipped.
- Samsung is at #2 and China based G-Five at #3

The biggest loser here is Nokia, whose share of handsets has dipped from 54% in calendar year 2009 to just over a third of the markets in the above given period.

What is interesting, is the response of Nokia - the, all out user engagement campaign that it has launched, attempts at educating customers the features of it's cool gizmo - the N8. I have also come across exhibitions in Mumbai malls for the same.
Clearly, Nokia, through it's distribution muscle and deep pockets, is attempting to regain lost glory.
The try before you buy choice is being given to customers in stores such such as Chroma,Nokia Priority/Concept Centres and exhibitions in malls.

The battle for the handset market has now become so much more interesting!!!
In my view, all this, is eventually making the customer the biggest beneficiary; as handset makers are becoming responsive and providing more options at very reasonable price points.

Why do companies, on their own websites, carry google ads?

noreply@blogger.com (Vivekanand) — Wed, 20 Oct 2010 14:30:00 +0000

There are companies that carry big brands of their own such as the Bombay Stock Exchange, which is in possession of the brand 'SENSEX.' Yet, when you log on to www.bseindia.com and check price quotes or go to other sections of the website, you notice tiny google ads customised to the stock or page section that you explore.
This leaves me wondering – why would a company on its website promote someone else's brand? Isn't this dilutive to the brand that the company stands for?

I have seen the above in other company websites too – this, again, seems very ridiculous to me!

I think that this concept of making your website earn for you has been taken too seriously by these companies – a classic case of penny wise, pound foolish.

If I had a great brand/product – my company's website would have represented and carried the essence of the brand/product; so as to firmly imprint in the minds of my customers the brand!
The recall that a company can create through it's website is phenomenal, given that most people who come to the company's website, do so, by their own choice.
Any views on this?

PS: Thanks Saurabh, for this interesting post idea!

IDFC's infra bond offering

noreply@blogger.com (Vivekanand) — Fri, 08 Oct 2010 13:47:00 +0000

Came across some hoardings in Mumbai advertising IDFC's latest infra bond offering.

Here are a few links that discuss about the above issue and infra bonds in general (and their benefits).

> The official site http://www.idfc.com/infrastructure_bonds.htm

> A couple of articles http://www.finwinonline.com/2010/08/save-more-taxes-invest-in-ifci.html
http://economictimes.indiatimes.com/features/investors-guide/Should-you-invest-in-IDFCs-tax-saving-infrastructure-bonds/articleshow/6676243.cms

I am not going to repeat the calculation that most people show to make a case for investing in infra bonds, viz. if you're taxed at 10%, you save xxx Rs. etc.
But, my sense is that, an average person who doesn't make > 9-10% returns a year (in investments which carry little risk) should invest in this issue.
Anyway, you get your taxed income to punt in the equity markets/make other risky investments; so you might as well put the mandated amount (that the govt. encourages you to save), conservatively in fixed income instruments such as this bond.

What could be better though, is an LIC infra bond - media sources have mentioned that LIC will come out with an infra bond issue with similar interest rates and offer you a life cover of 1-2 lac in addition to the returns :)

How big is our market, impact of MF's and FIIs

noreply@blogger.com (Vivekanand) — Mon, 04 Oct 2010 08:59:00 +0000

How big is our market? - the below image explains it all

India's market cap hit an all time high on Oct 1st - Rs. 71 lac cr (as per NSE data).
It becomes apparent that FII inflows have a major impact on the markets when one looks at the FII investments to total market-cap - 14% versus the ENTIRE MF industry which has a combined AUM of just 10% of the market cap.
Additionally, for the above mentioned period, FII inflows have been in tandem with the direction of the markets!

Banks - a comparison of the previous bull run vs. now

noreply@blogger.com (Vivekanand) — Tue, 28 Sep 2010 07:14:00 +0000

I had a discussion with a friend who pointed out that banks have now run up 15% higher than previous bull peaks. He felt that banks should correct as earnings may or may not sustain, but valuations may not.
My views on the same
******************

1> The difference between 2007 and now is the size of book (equity or net worth)- with a 15%(average) compounded annual growth rate (CAGR) from FY09-FY12; the FY12E book is effectively 1.5x FY09 book.
Hence even with a discount on peak PB’s (of 2007), you get higher prices. The markets were giving 2-5x FY09 PB's towards the close of 2007; while now banks are trading at 1.5-4x FY12E PBs. This suggests a tempering down of multiples, despite the steep run up in prices.
Additionally, the interest rate cycle is very different now – then the cycle was that of bottoming interest rates, now it’s of upward trending rates.

Finally, asset quality has improved – BOTH gross and net NPA’s are much lower than 2008/09 levels

From a trading perspective banks have been BIG outperformers hence are a potential target for some quick profit booking, in case anyone wants to realize her portfolio’s gains during this upmove.

Of course, despite the above positives, there are concerns such as asset liabilities challenges - owing to a high credit growth vis-a-vis a negligible deposit growth

Other trades being played are the PSU/Pvt sector valuation gap – facilitating the catch up trade in PSU’s, old vs. new pvt sector banks, management changes prompting massive rallies on banks – Indusind, Dhanlakshmi bank etc.
2> What's next for the financial services/banking space - I'm looking at a few things such as banks vs. NBFCs vs. housing finance cos.

******************
Thoughts/comments on the above are welcome

Weekend trip - comments on real estate

noreply@blogger.com (Vivekanand) — Wed, 22 Sep 2010 14:35:00 +0000

Had gone on a home trip (Guj-Vadodara/Amdavad) and am back with some observations.
It's all about real estate, real estate and telecom! My home trip included a visit to some construction sites, where I inquired about the going rates. Highlights of the same
> Rates are firm - builders are quoting seemingly insane amounts for projects in far flung areas in Vadodara - the psf rate for Maneja (an industrial suburb, 15 kms from the city centre) is Rs. 2,000-2,500. Builders seem to be members of the landowning community who have decided to 'unlock' the value of their land by constructing Ground + 2 floors to sell them for a neat sum of money instead of just selling plots!
> Robustness in the real estate market seems to be back - Apartments/tenements seem to get booked really quickly - in my site visit there were a couple of projects which were to deliver in a year or two, but were fully booked right now. Additionally, both in Amdavad and Vadodara, most of the big billboards in the prime localities carry real estate/telecom advertisements. Telecom seems to be a one-off as uninor has launched services in Gujarat in a big bang fashion.

However, Mumbai seems to be mired in D-street fever. An interesting comment a friend of mine - 'This morning while driving, it seemed to me that Mumbai has more posters of IPOs than those of movies.'

More real estate hoardings than ever before in Gujarat. Pharma entrepreneurs are now township builders - case in point Alembic pharma.

For now, there seems to be no stopping the upward spiral of real estate prices (people tell me that prices have risen 30-50% in the past 1 year). Additionally, builders are firm in their demand of a high 'cash' proportion (40-60% of total costs!!!).

In my view, this jacking up of real estate prices is due to demand from the 'cash buyers'. Maybe this isn't sustainable as the cash liquidation of buyers is a one time process (or is it - as the builder recirculates this cash - please let me know if you have any thoughts on the same).

Finally, I conclude with a question that I ponder upon, after this trip
Are we heading towards a bubble for tier-2 city real estate?

Upcoming IPO's - some crude views

noreply@blogger.com (Vivekanand) — Mon, 20 Sep 2010 13:53:00 +0000

I haven't been able to research the IPO's in detail - however, a quick look at various web sources has permitted me to comment on Eros and Career Point - Eros is priced at 13-17x FY11E PE: quite reasonable compared to a not so similar peer UTV soft (FY11E 28-35x - I am not aware of any other comparables for EROS); Career Point seems high priced (my analysis - shows 18.5 PE for FY12E if earnings grow @ 30% from 2010-12). Career Point's business model is focused on just one town (Kota - 59% of its FY10 revs came from that centre) and the co. operates in a very difficult operating environment (threat of substitutes!!!).

Career Point (CP) wants to raise money for (a) Constructing and developing an integrated campus facility - this according to the company, is necessary, as the company run training centre in Kota attracts the highest number of students in terms of enrollments (the company has 17 owned centres and 16 franchise operated ones). An integrated facility in Kota, will help CP attract higher enrollments. (b) to meet costs of expansions and increase in infra (c) to scout for strategic acquisitions
Below is the mix of enrollments for the company - as is visible, AIEEE is the biggest contributor

Market participants view: the key thing about these two stocks (others haven't attracted as much interest) is that both are unique biz. models - so the markets might give a premium to them as long as there is adequate liquidity. Additionally, there is a view that some market participants find the secondary markets over-priced; and hence, might shift to the primary markets - hence revving up the demand for these issues.

Footnote - Career Point number crunching - see for yourselves - For a 30% earnings CAGR you get this business for 18.5x FY12E and 8.9x FY12E. The company has been able to grow it's earnings at 14% - so do you give it such a juicy multiple - your call.

Recommendation - 1/ For a pure satta play you might punt on it; however, this issue seems high priced to me 2/ I have some concerns with the co's numbers - too much money stuck in investments and other current assets – why do they need money if they’ve got a lot of money parked in these assets. The co has a –ve operating cash flow owing to the above ‘working capital mis-management.’
My experience with tuition centres has shown that these are high cash, +ve working cap businesses. I don’t know how CP has this unique working capital position
Ref: Quick balance sheet for size of investments. The amount raised by the co. @ Rs. 315 (upper end of the price band) is Rs. 1,150mn while the co's FY10 cash + investments + other current assets total Rs.1,891mn

This week in review

noreply@blogger.com (Vivekanand) — Fri, 17 Sep 2010 13:42:00 +0000

A strong close for the week; after a decline yesterday.
Here's an amusing comment by a friend of mine 'the day markets in India fall, the SENSEX falls by 100 points; but when markets rise, the NIFTY rises by 100 points.' This is very indicative of the current state of the markets.
People are now focusing on less fancied sectors - telecom and cement. And the action seems to be back in the primary market - oversubscribed books, high demand by anchor investors et all.

The week was eventful - beginning with the announcement of a new base year (2004-05 as against 1993-94) for the wholesale price inflation (WPI) series, followed by a rate hike of 50bps (reverse repo) and 25bps (repo).

Observations from the RBI's mid quarter review
> The global economy doesn’t look as bad as it appeared some time back. The European Central bank has revised upward its forecast for second half growth and China seems to have bounced back
> India - Growth improving – seen in the sharp recovery of the index of industrial production. Agriculture is looking good as well, due to good monsoons; and the service sector activity points to sustained growth.
> Inflation continues to worry the RBI. The new series has better coverage of items, with manufacturing products having greater weightage than before. The avg. monthly inflation for Q1 FY11 is 10.6% as per the new series
The RBI feels that inflation rates have reached a plateau; however, it is likely to remain at unacceptably high levels for some months. Food price inflation continues to worry showing a 14% yoy increase in August.
> The RBI was also concerned about high inflation resulting in negative real rates and feels that for a good deposit growth, increases in interest rates are needed.
> Overall, the RBI feels that the ‘normalisation’ process ensuing rate hikes are non-disruptive to growth and have managed to keep in check monetary expectations.

PS: For the sake of clarity: reverse repo is the rate which banks receive for parking funds with the RBI; while the repo rate is the rate at which banks can avail funds from the RBI.

NBFCs - going the Jubilant/Talwalkar way?

noreply@blogger.com (Vivekanand) — Wed, 15 Sep 2010 05:02:00 +0000

The banking run up continues - markets remain buoyant with banks pulling the index further up.

1> NBFCs - Consensus now seems to have turned cautious on NBFC's - everyone's started talking about the high implied growth rates in valuations, default risks, interest risk etc. Despite all this, usually consensus gets such things wrong. Do we see a Jubilant foodworks/Talwalkar redux in NBFCs?- time will tell!!!
<Jubilant foodworks, CMP Rs.550, in a very short span of time turned out to be an anti-consensus multi-bagger: even at the issue price of Rs. 145, analysts complained of valuations - yes, indeed they were a stretch even then - however, the stock has defied all expectations rallying to dizzying highs on factors such as 'the gargantuan India opportunity,' 'scarcity premium' and interest by the FIIs. Same is the case with Talwalkars fitness>

2> the oft-quoted PSU catch up trade in banking - this has already been played in the large-cap space. Do we see something similar in mid/smaller PSU banks?

3> Finally,are you in the mood for some IPO Satta - pre-2008 days anyone?
Below is the long list of September releases
Indo Solar Ltd.
Microsec Finance
Commercial Engineers & Body Builders Co Limited
V A TECH WABAG LIMITED.
Career Point Infosystems Ltd.
Orient Green Power Co. Ltd.
Ashoka Buildcon
Eros International
You Boradband & Cable India Ltd.
Electrosteel Integrated Limited
Inventure Growth
Sea TV Network Limited
Techpro System

Unrelated edit - Wohoo! Rafa's completed the career golden slam!

When Roger won Roland Garros, people were asking questions of the legitimacy of his achievement, as he didn’t go past Rafa to claim his throne.

Shouldn’t these same people raise a flag on Rafa’s achievement given that he’s won the US Open without beating Roger?

Finally, ending this post with an awesome Rafa quote 'I don't go to the practice court to practice. I go to the practice court to learn'

NBFC analysis - Shriram transport

noreply@blogger.com (Vivekanand) — Tue, 14 Sep 2010 07:28:00 +0000

The recent market rally has resulted in stretched valuations for banks/NBFCs. Below I outline my observations on Shriram Transport Finance - an NBFC which focuses on old CV financing

Observations
> Despite factoring a shifting from FY11 to FY12 in SHTF's trading bands - At CMP the co is trading at 3xFY12E BV
> My computations indicate that the price is assuming a 7yr. Average CAGR of c25% @ 28% ROE followed by a terminal growth assumption of 6% growth with an ROE of 15%
> The above valuation has been computed on 1/Cost of equity of a low 12.5% and 2/ Payout ratio of 50%

Time to buy or sell - you decide.Common logic indicates that you'd buy SHTF if you expect the company to perform better than the modest growth expectations that the CMP is currently factoring in

Quick edit - Placing orders GFD and IOC

noreply@blogger.com (Vivekanand) — Mon, 13 Sep 2010 15:14:00 +0000

Definitions

GFD - good for the day
-> Meaning that your order will get queued in the exchange & if the price that you ask/bid for is achieved (at anytime of the day) then the trade will be executed
-> IOC is immediate or cancel - as the name suggests - the order will get executed immediately (if you have a buyer or a seller accepting your price) or get cancelled

Usage
In options the price is very dynamic; so for a trader, it's better to give IOC orders.
Let me illustrate with an example - if the current option price is 100.00 and you want to buy it at 99.8; you can put an IOC and try your hand.
Now if you place a GFD at 99.8; you might regret your trade as options are quite volatile and the price can dip much below the level that you've specified i.e. you might get stuck with options bought at 99.8 while the market price for the option has dipped sharply to 80 (unless of course, you keep modifying the price of the GFD order)

An investor who wants to buy in the cash market would do well to place a GFD order. This is because, you wouldn't be too bothered about the 1-2% volatility that a stock price experiences through the day; and the headache of continuously placing IOC orders till you get your 'desired price' is simply too much for a person buying over the long term.

Comments on an ET article - Training: The secret of India’s high-tech success http://bit.ly/cfSBAY

noreply@blogger.com (Vivekanand) — Sun, 25 Apr 2010 12:59:00 +0000

Comments on an ET article - Training: The secret of India's high-tech success http://bit.ly/cfSBAY

As the title suggests, the author argues that India's service sector firms have built up great training facilities which are the cornerstone of India's service sector prowess.
In addition to what has been mentioned in the artile, below, I am going to highlight a few observations
The interesting thing here is the willingness of innovative Indian companies to look beyond the IITs and the top tier engineering colleges. This has given them two things - 1/ access to reasonably priced engineering talent 2/ the best of the whole lot rather than picking up the mediocre of the best lot (which would be the case in IIT's where the Indian employers might not have the werewithal to match the astronomical salaries of their MNC peers).
Additionally, I think that the rigorous off-campus screening process of the IT/top-notch engineering companies ensured that the best of the employable pool could be picked up.
Once these companies hired people, they would invest significantly in training and make sure that the talent they picked up would have top-notch working skills!

Truly a success story that can be replicated even by the more labour intensive industries in India - viz. engineering cos. for building a pool of robust and skilled technicians.

The success of the training carried out by these firms leads me to believe that the 'finishing school' training concept is going to remain a very big cash cow in the Indian markets.

PS: Won't give any gyan on resuming this blog. Lets see how things go from here

The Indian economy - tough choices!

noreply@blogger.com (Vivekanand) — Mon, 05 Oct 2009 19:09:00 +0000

Dr. D.V Subbarao's (Dr. DVS)speech on the Emerging Market concerns: The Indian Perspective (Oct 5 - G 30 banking seminar - Istanbul) succinctly describes the problems faced by India
1/ high inflation (despite muted economic growth - causing stagflation - a phenomenon where an economy slows down, yet faces high inflation, hurting everyone!) - on account of high food prices
2/ possibility of a surge in capital inflows (especially if rates are increased!)
3/ monetary transmission mechanism - the translation of monetary easing to credit disbursal to the real economy
4/ a poor fiscal condition - with huge fiscal and current account deficits - although current account deficits are going to come down from 2.6% of the GDP in 08/09 to much lower levels in 09/10 (on account of the lower oil import bill).
Dr. DVS must surely be in a fix considering that despite low WPI - 0.84% for the week ended 19/09/2009, food price inflation is in the double digits. And despite the monetary easing (with key rates kept at levels unseen in the last 5 years), bank credit growth stands at a measly 13.2% y-o-y (as of 11th Sep 2009) versus 26.3%!
The RBI, in its next monetary policy meeting must make some tough choices. On one hand, a low credit growth is a problem and the RBI must ensure that the rates are kept low enough for good credit off-take, and on the other, it must ensure that the ghost of inflation doesn't haunt us.

Various brokerages suggest that the RBI isn't going to raise rates just yet and will wait till Q3 FY10 or Q1CY10 to raise rates.

PS: Will discuss how our banks are doing in the coming posts

Analyst upgrades continue as the markets spiral upwards!

noreply@blogger.com (Vivekanand) — Tue, 22 Sep 2009 19:42:00 +0000

As you can easily observe – The last post in this blog has been written over a year ago

Yeah, I admit, I've been lazy, really lazy...had plans to blog on a sustained basis, but couldn't motivate myself to do so.

However, now, I hope to revive my dream of blogging on a sustainable basis. So, here I am restarting the blog with a few updates (most of which is common knowledge)

→ The Indian markets dipped to levels that were last seen in May 2006! - the NIFTY went down to 25xx in Oct '08 and 27xx in Mar '09.

→ the NIFTY is now at 5020, returning almost 100%, from its October trough level! Many stocks have doubled/trebled/quadrupled.

→ Several developed economies have shown signs of a surpising recovery. Analysts/agencies across the world are revising earnings forecasts upwards!

What's happening now – well, most analysts are now calling the Oct '08-Mar'09 period, a trough and everyone seems to be very happy and smug with the bull-ride that the markets have given this year.

Secondly, no one wants this to end – this is resulting in every good news being amplified and used as a justification to chase the markets!

And finally, people are investing like there's no tomorrow. It seems that those who missed out on the rally (yours' truly included) are now coming back with a vengeance wearing 'Better late than never' and 'I believe in the greater fool theory' t-shirts.

Well, despite the trough valuations in Oct '08 and Mar '09, I am still un-invested in the markets. Things (lame excuses) that prevented me from investing – 1/ My poor time management which prevented me from analysing companies from an investment perspective 2/ A business idea (which kept me busy in Q4 FY 09) 3/ the panic that set in during October!

So, why am I restarting this blog. 1/ I know that I am not going to invest in the markets unless I make an informed investment decision. This blog will help me keep a log of the work and enable a feedback on the same (if you people oblige :) ) 2/ by getting the ball rolling and writing a few posts, I hope the habit will spur me on and make me a better investor.

Meanwhile, here's some stuff that's really kept me interested in the period I was missing

1> the NSE market map -

http://www.nseindia.com/marketinfo/marketmap/NseMaps.jsp – this continues to fascinate me as I faithfully check the map to catch glimpses of the day's trading

2> the RBI RSS feeds – finally an alternative to hitting refresh on rbi.org.in - http://rbi.org.in/rss.aspx

PS: A personal update – cleared CFA L1 in June :)

The 'Buy buy...Bye' syndrome

noreply@blogger.com (Vivekanand) — Thu, 07 Aug 2008 06:57:00 +0000

There are times when we decide a price that we're willing to pay to own a fundamentally good stock, say when it's trading at 20-30% discount to its intrinsic value.
And in a falling market, we find that the stock comes tantalizingly close the intrinsic value just to bounce back to the old unattractive levels.
Let me give you an example of this... In recent times, a company that I felt was trading at a discount to its fair value was SBI

SBI touched a high of 2540 on 14th Jan 2008, and since then it has breached a strong support line and resumed its uptrend... as shown below

@ CMP of Rs. 1,565...Here are a few estimates of the P/BV of SBI

P/BV P/E

FY09E FY10E FY09E FY10E

Citi 2.17 2.06 14.53 10.63

Kotak 2.05 1.84 16.65 13.08

Consensus 2.11 1.95 15.59 11.86

SBI touched it's year low of 1025 on 1st July 2008...and was trading at the following consensus multiples

FY09E FY10E FY09E FY10E

1007 1.36 1.25 10.02 7.62

1100 1.48 1.37 10.95 8.33

1200 1.62 1.49 11.95 9.08

Very attractive multiples for the India's top bank by M-Cap, Assets/loans/deposits...
ONGC's case is similar as it tested new lows and resume its upward march....
These cases make me think...whether we should invest in a very active manner and pounce on opportunities, or should we buy into good companies in a systematic manner...
I will try to answer this in the next post

The Art of selling stocks

noreply@blogger.com (Vivekanand) — Tue, 01 Jul 2008 17:36:00 +0000

The current state of the markets reveals a thing or two about the behaviour of investors.I saw an article on rediff discussing about what mutual funds have been buying/selling.

The top 5 'sells' by mutual funds are the following

> Jaiprakash associates

> Cairn India

> Zee entertainment

> IDFC and

> Satyam computers.

3 of the above companies, Jaiprakash, Cairn, IDFC have delivered stupendous returns to investors who'd entered 2-3 years back. Jaiprakash associates at today's closing price of Rs. 73 has still managed to give a 2 year return of 73% while IDFC has returned 85% during the same period (taking today's closing prices for all companies), Cairn delivered 86%.

Many companies which have collapsed in this fall are companies which have given a good return over a period of 2-3 years... despite the steep correction. The sell off in market out-performers is reflective of how we as investors behave.

During a market fall when we see our portfolios, we tend to sell off the assets which are in the green (making profits), and hope that the rest of our portfolio recovers. This is because a loss causes much more pain than the satisfaction that an equivalent gain would bring us.We can compare our practice of selling profitable investments during bearish phases, with the shorting of an investment that has outperformed the market till now.

Whether this is correct or not, is something that the fundamentals and other factors will tell us. However, if the fundamentals of these companies are sound then there is no reason why such stocks shouldn't bounce higher than the markets on a rebound.

For those of you, who've seen your well researched profitable picks pare their profits due to purely 'technical reasons,' I have one thing to say... Hold your horses or sell off if you feel that these technical sell-offs will take your stock to the lowest of lows but remember that you will find it tough to buy them back at the lowest of lows, as it's almost impossible to pick the bottom.

Psychology and investing

noreply@blogger.com (Vivekanand) — Tue, 10 Jun 2008 18:42:00 +0000

While reading Fooled by Randomness and More than you know... I encountered a term called the Babe Ruth effect. This term was used to explain the simple concept of expected return of an investment, which is the sum of the products of the returns and their probabilities of occurrences. To make it simpler here's an example: An investment having two payoffs: a 100% upside with a probability of 20% and a 10% downside with a probability of 80%. This investment will have an expected return which is as follows: 100% *20% + (-10%) * 80% = 20% - 8% = 12%.

The Frequency v/s Magnitude trade-off

The noteworthy feature of the above example is that seeing the probability of return i.e. 80% chance of getting a negative return and 20% chance of getting a positive return, it would be very tempting to write a call or go short on the security. However, it is very important for us to understand the effect of the magnitude of the return for the probabilities while taking decisions. This is also known as the frequency v/s magnitude trade-off.

This is the Babe Ruth effect, as Michael Maubossin and Bartholdson call it in their paper. They named this observation after a legendary baseball player Babe Ruth, who exhibited similar characteristics with respect to his hitting.

Investment lessons

The paper on the Babe Ruth effect gives some advice on approaching investments which include thinking in terms of decision trees, focusing on things we know, making the most of the limited opportunities and understanding that we don't need to put everything in stake every time.

Apart from the lessons mentioned, we must also delve deeper into the investment decision tree which may lead us to conclude various things.

Problems with this approach

I'm afraid that most investing decisions we take are not simplistic enough to enable us work in the decision tree manner and gauge the magnitude/probabilities so explicitly.

More rumination in this area may bring us to issues like: Whether we should sell puts/calls when we spot gaps which may result in a high probability low return event and be content with a paltry return or buy a put/call which will lead to us forgoing the premiums in maximum occasions while leading to massive payoffs in the unlikely event scenario. Taleb seems to favour the second scenario.

Other thoughts on the same tune...

Hold on to your beliefs in tough times

The continuous movement of the markets and the news that flows influences us in a such a way that we tend to sway our loyalties/discard our personal beliefs in favour of some research by a bank which hasn't been able to guard itself from this crisis. This is something that we must be wary of. We shouldn't let these blips or short term concerns override the decisions that we've based on our sound judgment.
I say this because, this crisis and all the other crises in the past have shown how foolish these institutions are in guarding the interests of their own shareholders... Some have had their asset bases shaved off to quarter of the what they had in the peak of the bull run!
And in a desperate bid to save themselves from utter damnation (read: the bear stearns episode) many are seeking capital from Middle east investors... the same sovereign wealth funds which the westerns considered anathema are now rescuing them.

PS: Back after a long hiatus for CFA preparation. Please pour in with your views to help me improve my thought process.

Comment based addendum: The frequency magnitude trade-off... The sheer magnitude of the return in the event of a positive earnings surprise should prompt an investor to go long despite a very high chance of negative return or opportunity loss (0% return). Please check the below figure.

When is it a bear market?

noreply@blogger.com (Vivekanand) — Tue, 08 Apr 2008 10:42:00 +0000

Just found a really hilarious article on Business standard

When is it a bear market?

Mudar Patherya provides some key signs of a bear market.

You know it is a bear market when…

# Someone who has been earning Rs 75,000 a month (including DA) suddenly starts asking herself philosophic questions like “Can I eke out an existence at Rs 7,500 a month?”

# You suddenly swipe your card into work at 9.30 am, coast over the irritable desire to look at the watch at 9.54 am or excuse yourself to the toilet at 9.55 am if only to conduct hushed conversations with a mechanical voice at the other end

# You start getting ‘great work cards’ from colleagues; seniors call you into their cabin wanting to know the raaz behind your sudden increase in productivity

# You start impressing the neighbour’s daughter with the use of words like ‘planning’, ‘portfolio construct’ and ‘instrument mix’

# You move from page 1 to the back page of business newspapers’ Money and Markets by reflex action

# You go to the doctor with the ‘sinking feeling in the solar plexus complaint’ but she checks your pulse and there is nothing wrong, she asks you to say ‘aaah’, stick your tongue out and you are absolutely fine

# Your favourite fantasy is not running around trees in the rain wearing white shoes behind Mallika Sherawat but for some curious reason ‘9.56 am, 21 January’

# You boast at a party of having shorted the market at 21,000 and suddenly the listeners drift

# You start taking a perverse consolation from the fact that we are better than ‘Gayatriben’s husband, who had to sell 30 per cent of his inventory to pay the broker’

# The children start getting the drift that the world has changed in some way they are yet to fathom because the holiday destination has been switched from Phuket to Puri and the carrier from Thai International to Puri Express second class and all the parents will proffer is a stoical ‘Paisey phainkne ki kya zaroorat’

# All those people who would arrogantly demand “Will it double in two months?” now venture to tentatively explore “Will it get back to the prices we bought in two years?”

# You stop getting cold calls – ‘Good morning Mr Patherya, how is your day? Can we come and see you for five minutes? Send you the proposal on the email? No, we would like to come and see you instead’ - prospecting your brokerage business from financial securities firms

# When you get a mail on Narayan Murthy’s ‘simple living, high thinking’ stuff and you cc it to 23 people in office who in turn cc it to 250 others, who in turn forward it to 1,563 people who in turn send it to 12,304 people – and within 37 hours, it pops back into your mail with an interesting addition ‘If you circulate this to 7 people in the next hour, your portfolio will bottom out; if you don’t then the company in which you hold stock will do a buyback and your letter of offer will be waylaid in post’

# You start having tea with friends and lunch with in-laws; the word ‘social’ doesn’t remind you of an awful waste of time

# You can actually have a business meeting without sms alerts on market movements

# The restaurant steward motions you to the tables closest to the television (featuring CNBC) and you tell him ‘Somewhere where we are not distracted please’

# Experts when they find calls coming in from business channels offer their mobiles pleadingly to colleagues with ‘Please keh do ki I am in a meeting and main phone karoonga but after 3.30’

# People suddenly discover they have relatives in the US who they have not spoken to for 18 years and then they confront them with the opening line of ‘Tya badhu barobar’

# When Marc Faber predicts that the index will go down to 12,000 and in the same newspaper edition a consensus of brokers indicates an index of 19,000 by the year’s end

# When the envelope carrying the dividend cheque is treated with considerable respect

# When you ask for the ‘Black Swan’ by Nicholas Nassim Taleb at the bookstore and the manager responds with ‘Kya baat hai, every third walk-in is asking for this?’

# When merchant bankers tell IPO clients “You will need to leave value on the table for investors”

# When an effective stress test becomes dirt cheap; all you need is the financial newspaper and if after the 37th line of the stock quotations page you find your pulse accelerating and breath halting, then you need a GP

# When the broker calls and you tell him ‘Aap mat call keejiyega! Darkaar hogi to main karoonga’

# When you want to do a fund raiser and you diplomatically skirt anyone connected with the stock market

# When your chartered accountant calls and says ‘Bhaiji, problem solved. Is baar losses khareedney ki naubat nahi aayegi’

# When you invite the guy who had a big problem meeting his margin calls and he says ‘Aajkal to mein kahi baahar jaata nahi hu, sirf office and back’

# When the standard escape route for every analyst becomes ‘ghatey to liyo’ and when the stock declines, they say the same

# When the word ‘neevra’ is used in every seventh line by brokers, analysts, tipsters, jobbers and market writers

# When even a casual ‘ghabraao nahi’ lifts the clouds enough for the caller to call three others and say ‘Babubhai kahey chhey hay ghabraavnu jehvu chhej nahi’ and within half an hour of frantic calling and re-calling, some 23 people are walking in a better frame of mind to office

# Everyone is poorer, but bloody hell, no one is admitting it.

PS: Here's the source http://business-standard.com/common/storypage_c.php?leftnm=10&autono=319183