George Soros’ Quantum Fund has purchased a 4% Equity Stake in BSE from shareholder Dubai Financial for US $ 35 Million…this works out to @ Rs 380/share

In December 2009 I had updated the Value of the BSE Share which I had initiated in August 2008

Updated Valuation of BSE Ltd (December 8,2009) and

SHARES OF BSE LTD LOSING VALUE (August 5,2008)

So what’s the BSE Value in August 2010 ?

Let’s have a look at it’s latest unaudited performance for Q 1 FY 11

Clearly BSE is facing challenges….Average Turnover is declining…Profits are just about being maintained….if it were not for the cushion of  Income from Investments and Deposits,it would have a tough time meeting expenses

Current View on BSE Valuation

Let’s assume BSE just about maintains Profits in FY 11…this would mean a Net Profit of over Rs 200 crs and an EPS of Rs 19 and a 20 Multiple would mean Rs 380….thats what Soros has purchased into BSE at right now

The Reserves at March 31,2010 are Rs 1882 crs…these should move to @ Rs 2050 crs net of Dividend at March 31,2011…With Equity at Rs 10.34 crs the Networth should move from Rs 1892 crs in FY 10 to @ 2060 crs in FY 11…Thus Book Value would be @ Rs 200….At Two Book Multiple the BSE Share will be valued at Rs 400

BSE will face increasing Competition from existing and newer Equity Exchanges

Competition should be hotting up…BSE has lost ground in both Spot and Derivatives markets to NSE…In fact Derivatives has been a still born baby on BSE…..Now it will have MCX to contend with also…SEBI has been delaying giving the Green Signal to MCX to commence Equity Trading….MCX has gone to Court and SEBI has been directed to make a decision by September 30,2010 on this

Financial Gleanings from the Annual Report of BSE for FY 10

• BSE’s Networth of Rs 1892 crs at March 31,2010 is represented by Net Fixed Assets of Rs 85 crs,Investments of Rs 1917 crs ( Long term Rs 1383 crs and Current Rs 534 crs),Net Current Assets of Rs 169 crs net of Deposits from Members of Rs 278 crs and Other liability of Rs One Cr
• Net Fixed Assets of Rs 85 crs includes Freehold Land of Rs 10 crs and Buildings of Rs 9.4 crs….BSE’s 28 storey Jeejeebhoy Towers (not all is owned by BSE) and the Rotunda are icons for India’s Equity Markets….surely their Value is significantly much more…Tangible Fixed Assets are stated at Cost less accumulated Depreciation and Impairment…would be interesting and serve the need for more transperancy if a small note on potential revaluation is included in the Annual Report
• Investments have a market value of just @ Rs 40 crs more than on Books at March 31,2010
• Total Income includes Rs 59 crs from Services to Corporates….this constitutes Rs 19 crs as Listing Fees,Rs 10 crs from Bookbuilding Software and Rs 30 crs from Other Services
• Total Income also includes Rs 40 crs from Income from Other Services…these largely constitute Rs 13.5 crs from Rent and Maintenance,Rs 18.8 crs from Data Dissemination Fees (Rs 14.7 crs from Overseas) ad Rs 7.5 crs Miscellaneous Income

Conclusion

India Vision 2025 clearly sees India Poised to move smartly ahead in context of Sensex,Market Capitalisation and Equity Fund Inflows

BSE may face increased compettion from the likes of NSE and MCX and any others that may emerge….but the Pie is increasing in Size and BSE will strive to cut out a good piece for itself

A New Professional Team is now at the helm and a lot of ‘excess baggage and complacency’ is being dealt with…surely some good must come out of this….the true test is whether BSE is able to revive Turnover Volumes in Spot and bring to Life it’s F & O Market

BSE is debt free….It clearly has Land and Building Value in excess of what it shows under Fixed Assets

It needs to meet Annual Expenses of @ Rs Rs 180 to Rs 200 crs….Rs 50 crs for Computers,Rs 50 crs for Staff (over 500 Employees),Rs 40 crs for Admin & other Expenses and Rs 40 crs for Depreciation (Non Cash)…It earns Rs 245 crs from Income only from Investments and Deposits…this is thus it’s cushion….Contingent Liabilities reveal Rs 107 crs as possible legal claims against BSE of which Rs 103 crs have been assessed as remotely materialising

In this context paying Rs 380 to Rs 400 for a BSE Share is not really unjustified

My Intuition…reason in a hurry….. tells me that even if the View is Long term,an Investment in BSE Shares may just give you a healthy return even in the short to medium term

At Rs 380,BSE is valued just under Rs 4000 crs or under a Billion Dollars

The Future ahead may be challenging…but in these challenges lie the Opportunities on Scale ….and a Listing of BSE (delayed but should happen) will surely unlock this Potential going forward

Oh ! and BSE has contributed nearly Rs 4 crs to SEBI in FY 10

Cheers !

I’ve been asked to Value newly listed Emami Infrastructure Ltd (EIL) after it’s Price Acrobatics displayed on the first day of Listing,on Wednesday last week!  

I needed a ‘Saridon’ at the end of the Interesting and quite revealing Valuation exercise !…there should be a law against the number of companies that a Real Estate Player opens in the Group !…you will understand once you go through this blog

Emami Infrastructure Ltd listed on Wednesday,July 28,2010 and Price swings were crazy…opening at Rs 250 on NSE and then touching  heights of Rs 598.80 and lows of Rs 86 and closing at Rs 104.8…closed lower at Rs 101 on BSE…and today it’s Rs 91

On the first day of Listing,there are no Circuit Breakers…so price mischief through volatile swings is easily facilitated…seems Emami Infrastructure too is a prey to this Game…SEBI is planning to investigate Listing Day swings…also have a look at the Bulk deals on that day on BSE (source bse website)

BULK DEALS ON BSE ON THE FIRST DAY OF LISTING OF EMAMI INFRASTRUCTURE LTD

Scrip Code:533218   Date : Wednesday ,July 28,2010

Except for one,all have squared off at marginal profits…the only genuine sale is by an FII, T Rowe…they were in the Top Ten Shareholders list at the time of the Scheme of Arrangement…..clearly these are synchronised bulk trades to create volumes on the bourse…they do not serve the purpose of efficient price discovery,or genuine,credible and authentic trading……it’s a rampant misuse of the Bulk Trade Window….but why does this misuse continue !?……no prizes for guessing !….a lot of people,part of a nexus, should be brought to book for destroying the sanctity of our markets

Let’s turn to the Valuation of Emami Infrastructure Ltd….but before I do that,let’s revist how Emami took over Zandu in 2008  

An Ambitious Emami Group wins a Hostile Bid for Zandu

Remember how in 2008 for Rs 700 crs the Agarwals of Emami Group took over Zandu Pharmaceuticals from the Parikhs (no relations of mine!) in a hostile takeover battle…with more than a little help from the Anand Rathi Group…a lot of Coincidences here that surround the Birla Group….Emami Promoters are ex Birla Group Managers from the 1970s…Anand Rathi too headed the Finance Function in a leading Birla Company….Birla Financial Companies were aggressively buying Zandu in 2007/8 before the takeover bid….A Zandu share of FV Rs 100  was available below Rs 1000….the hostile takeover took it to Rs 20000 !…Friday,Zandu share was quoted at Rs 3100…..but effectively yet near Rs 16000 as a Zandu Shareholder was given 14 free shares of flagship, Emami Ltd of FV Rs 2 for every one share of FV Rs 100 held in Zandu under the Scheme of Arrangement of 2009..last week Emami split the FV from Rs 2 to Rs 1 and is quoted now at Rs 457 for a FV Rs 1 Share 

So what’s this great Scheme of Arrangement ? and what led to it ?

The answer lies in Zandu Pharmaceuticals…… it is headquartered in Dadar,a prime area in midtown Mumbai…it has 2.4 acres here…..Today’s papers report that a 2.39 acre property of NTC’s Poddar Mills at Worli Naka,also midtown Mumbai, was sold for a whopping Rs 474 crs in a winning e-bid by Indiabulls Real Estate,one of the eight bidders against a reserve price of Rs 250 crs…Zandu’s market cap today with share price at Rs 3100 levels is Rs 250 crs…it has 806400 shares of FV Rs 100 outstanding and records as of March 31,2010 show that the Emami Group holds 286329 shares or 35.51% of Zandu through just one company, Emami Rainbow Niketan Pvt Ltd….down from the 587055 shares or 72.80 % held by it through group six group companies at September 30,2009

This brings to the fore my first curiousity …. why has Emami reduced it’s holdings from 72.80 % to 35.51 % in Zandu Realty Ltd ? …Oh Yes,Zandu Pharmaceuticals ,after demergering the FMCG Business to Emami,has been renamed Zandu Realty Ltd……or has Emami merely sold partial stake to known people not forming part of Promoter or Promoter Group ?  

In 2009,Emami,probably working on it’s Zandu takeover gameplan, decided to demerge it’s Realty Business from it’s FMCG Business….even for Zandu

A scheme of Arrangement was arrived at with even help from a Big Four Firm,E & Y….in fact interestingly Emami Infrastructure Ltd boasts of just a 26 year old as one of it’s Directors…his address,interestingly also happens to be in the same building in Mumbai where my office is located !…actually that caught my eye first!…the Information memorandum released by the company http://www.emamiltd.in/press/eil.pdf profiles him as “he possesses  extensive knowledge and experience as Lead Advisory and Transaction Advisory Services in Ernst & Young India Ltd”  ….Wow! all at the young age of 26 !

The Gist of the Scheme of Arrangement is as below

• Zandu Pharmaceuticals will demerge it’s FMCG Business to Emami Ltd and it will be renamed Zandu Realty Ltd to reflect it’s continuing business….Every Shareholder of Zandu will retain his existing holding in Zandu and in addition will get 14 equity Shares of Emami Ltd of FV Rs 2 for every One Share of Zandu held of FV Rs 100…Emami has just split it’s FV further to Rs 1…thus effectively the Zandu Shareholder gets 28 Emami Shares of FV Rs 1 for every share he holds in Zandu  
• Simultaneously,Emami Ltd will demerge it’s Realty Business to Emami Infrastructure Ltd (EIL)….Every shareholder of Emami Ltd will get One Equity Share of EIL of FV Rs 2 for every Three Equity Shares of FV Rs 2 held in Emami Ltd…The Share Capital of Emami will stand as it is…so the Emami Shareholder will continue to hold his Emami shares + hold free entitled shares in EIL…the Realty Business transferred to EIL consists basically of two Investments….Rs 9.8 crs through  20 lakh shares or 100% holding in Emami Realty Ltd and Rs 165.3 crs through 555636 Shares or 68.9% holding in Zandu….A Zandu Shareholder entitled for Emami Shares will not be entitled for Shares in EIL through the new Emami Holding
• EIL will be listed seperately on BSE,NSE and KSE

An updated Information memorandum filed in July 2010 just before Listing of EIL provides the latest Financials as of March 31,2010….the earlier Information Memorandum of 2009 showed Financials as of September 30,2009

There is a huge difference in both….In the six months between September 30,2009 and March 31,2010,EIL has sold off it’s 555636 shares in Zandu Realty for Rs 210.64 crs.making a Profit of Rs 45.34 crs…it’s cost was Rs 165.3 crs,computing to Rs 2975/share…while sale computes to Rs 3791/share…Current Zandu Price is @ Rs 3100

This Rs 211 crs received by EIL has been applied as below as inferred from Financials of September 30,2009 and March 31,2010

• Repayment of Unsecured Loan  : Rs 144 crs…..Rounded of Difference between Unsecured loans of Rs 156.72 crs and Rs 12.55 crs at 30/9/2009 and 31/3/2010 respectively
• Donation : Rs 10 crs……clubbed under  Administration and Other Expenses in the P & L A/c
• Interest  : Rs 23 crs…..shown in the P/L A/c at 31/3/2010
• Rs 34 crs given as Loans and Advances : This is the addition to the Current Assets at 31/3/2010

EIL’s Equity Capital  (FV Rs 2) is Rs 4.86 crs……At March 31,2010,the Profit on Sale of Zandu Shares is Rs 45.34 crs…but after adjusting Rs 23 crs for Interest and Rs 10 crs for Donation and Rs 2.25 crs for Tax and normal expenses,the Net Profit  is Rs 10.68 crs…This gives an EPS of Rs 4.4 and on Share Price of Rs 91,a  Multiple of 20…..However the Auditor has taken 5289250 shares as the weighted avergae shares in the denominator to show an EPS of Rs 20.20….Perhaps this may have been the misunderstanding that led to a crazy near Rs 600 Share Price on Listing Day…The Actual Number of Shares of FV Rs 2 existing for EIL is 24298392

EIL’s Networth at March 31,2010 is Rs 38.97 crs giving a Book Value per share of Rs 16…that’s a near 6 Book Multiple…Reserves are Rs 34.10 crs of which the Capital Reserves are Rs 23.42 crs   

The Balance Sheet at March 31,2010 also interestingly shows a Lower Unsecured Loan amount of Rs 12.55 crs…there are no Fixed Assets and the only Investment is Rs 9.8 crs in wholly owened subsidiary ERL…it has Strong Net Current Assets of @ Rs 45 crs at March 31,2010…,but while cash is Rs 5.4 crs,Loans and Advances are hefty at Rs 39.93 crs…Of these Loans and Advances,Rs 27.62 crs are made to Parties other than Subsidiaries and Rs 7.4 crs are Recoverables in Value…Why keep Unsecured Loans Pending and dole out Loans & Advances ! ?

The Structure of EIL

EIL has a wholly owned Subsidary Emami Realty Ltd (ERL)….ERL in turn has several subsidiaries as below

100% Holding

Emami Ashiana Pvt Ltd

Emami Rainbow Niketan Pvt Ltd….owns 286329 shares or 35.51%  in Zandu Realty at March 31,2010…From 4/2/2010 Zandu Realty ceased to be a Subsidiary and from 31/3/2010 is an Associate Company in the Emami Group….I wonder though,if Emami will continue to consolidate Zandu in their Accounts the way they do for a Subsidiary as they will yet have control over the Board and Operations  

Nathvar Triacam Pvt Ltd…ceased to be a subsidiary from 28/1/2010

Octagon BPO Pvt Ltd…developing an IT Park over 0.64 acres at Rajarhat

80% Holding

Emami Constructions Pvt Ltd…..is developing jointly with Anand Rathi Realty Fund a Residential Complex of 510 Apartments over 4.46 acres in Kukatpally

60% Holding

New Age Realty Pvt Ltd

55% Holding

Delta PV Pvt Ltd…..is developing an IT Park over One Acre at Salt Lake Sector in joint venture with Anant Rathi Realty Fund and CD Equi Finance Pvt Ltd

Land Reserve

The Memorandum states that Wholly Owned Subsidiary of EIL,ERL OWNS a Land Reserve of 103.12 acres…..Projects are not directly in EIL,but in step down subsidiaries…..They are all at early stages of Planning and Revenues from them will not flow till 2013 atleast….This makes EIL merely a Holding Company….it has Strong Net Current Assets of @ Rs 45 crs at March 31,2010…,but while cash is Rs 5.4 crs,Loans and Advances are hefty at Rs 39.93 crs…Of these Loans and Advances,Rs 27.62 crs are made to Parties other than Subsidiaries and Rs 7.4 crs are Recoverables in Value

Reduction of Promoter Shareholding in ZANDU Realty  

Zandu’s market cap today with share price at Rs 3100 levels is Rs 250 crs…it has 806400 shares of FV Rs 100 outstanding and records as of March 31,2010 show that the Emami Group holds 286329 shares or 35.51% of Zandu through just one company, Emami Rainbow Niketan Pvt Ltd….down from the 587055 shares or 72.80 % held by it through group six group companies at September 30,2009

EIL has sold off it’s 555636 shares in Zandu Realty for Rs 210.64 crs.making a Profit of Rs 45.34 crs…it’s cost was Rs 165.3 crs,computing to Rs 2975/share…while sale computes to Rs 3791/share…Current Zandu Price is @ Rs 3100

Now only Emami Rainbow Niketan Pvt Ltd holds 286329 shares or 35.51 % in Zandu Realty….This moots the Question….Did ERNPL pick up these shares from EIL when EIL disposed it’s full holdings in Zandu for Rs 211 crs ?…Assuming it did,then the ERNPL Balance Sheet would show this Investment at a Cost of @ Rs 109 crs…How was this Funded ?…were  Unsecured Loans of similar amount merely transfered by EIL to ERNPL….this means the Profit Entry created in one group company,EIL on Sale of Zandu Shares, is negated by atleast half by mark to market loss in the Books of step down subsidiary, ERNPL…. Was this Profit created merely to provide some Earnings basis of Valuation to EIL to justify a High Price on Listing ?….EIL is unlikely to repeat this Profit unless it sells of Investments in ERL !….also Funding an Investment through an Unsecured Interest bearing loan brings into Focus the Rationality of doing this…as significant Interest is paid out…Rs 23 crs,because of Interest on Unsecured Loans shown at Rs 156 crs at September 30,2009 ,were knocked out from EIL profit…..Juggling Real Estate Assets,Loans,Loss and Profits in Group Entities ? 

Zandu Realty Shareholding Pattern reveals this….

• On September 30,2009,it had 11518 Shareholders,including Six Promoter Group Shareholders led by flagship company,Emami Ltd who held 587055 shares or  72.80 % of the Equity 
• On December 31,2010,it had 25303 Shareholders,including only One New Promoter Group Shareholder ,Emami Infrastructure Ltd who held 425502 shares or 52.77% of the Equity….so EIL has already started selling Zandu Realty Shares
• On March 31,2010,it had 39855 shareholders,including only one and a new one too,Promoter Shareholder,Emami Rainbow Niketan Pvt Ltd,who held 286329 Shares or 35.51 % of the Equity

No Non Promoter Shareholder holds more than 1% of the Equity on all three dates

Why would Promoter Emami Group reduce it’s holding in Zandu Realty from 72.80% to 35.51 % ?….of the 587055 shares it sold,assuming 286329 are now in ERNPL,then who has brought 300726 shares !?…The Jump in Shareholders from 30/9/2010 to 31/3/2010 is 28337…this implies an average Holding of 10 or 11 shares for the incremental shareholders !…SEBI needs to investigate this angle…more so what was the the need for Emami to reduce their stake in Zandu ?….Zandu’s current Price of Rs 3100 gives a market Cap of @ Rs 250 crs..Zandu’s Networth including FMCG Business at March 31,2008 was Rs 78 crs….after FMCG Business has been transfered to Emami,only the 2.4 acres Land remains as an Asset in Zandu Realty and it’s Networth dropped to Rs 23 crs at March 31,2009…..this 2.4 acres would be worth atleast Rs 500 crs in undeveloped state,if one takes this morning’s paper headlines as the benchmark…. NTC had sold their 2.4 acre Poddar Mill Plot at Worli,in Mumbai…a liitle distance from Zandu’s Dadar base…for Rs 474 crs…Indiabulls Real Estate was the winning e-bidder among eight that were contesting…If developed the Value is significantly much more,probably Rs 1000 crs….Emami held 72.80% of this at 30/9/2009….and Zandu was their subsidiary….now they hold just 35.51%…this makes Zandu just an Associate…have the Sold Shares gone to Promoter known Hands who do not form part of the Promoter Group on Paper ?

FIIs and MF Holding in EIL   

HSBC Global Investment Funds held 1265338 shares or 5.21% of EIL…..T Rowe Price International INC (T Rowe Price New Asia Fund) held 1098655 shares or 4.52% of EIl…HDFC Equity Fund held 400000 shares or 1.65% of EIL….these would have resulted under the Scheme of Arrangement because of their Emami Ltd Shareholding…..The Bulk Deals above show that T Rowe commenced disposing of their holding on the First day of Listing itself  

Now T Rowe should be assumed as an Intelligent FII…..

Conclusion

EIL is quoted at Rs 91…it’s Book Value is Rs 16….it is unlikely to repeat Rs 10 crs + FY 10 Profits anytime soon….it’s Real Value lies in the Projects and Land Reserves that are reflected in the books of it’s subsidiaries and step down subsidiaries….how much of it will flow back to EIL in the years ahead is a question mark…..moreover in my view the Promoters Emami Group have raised a Corporate Governance and ‘We could not care less for EIL Minority Shareholders’ Issues in showing full sale of EIL’s Zandu Investment (68.90 % of Zandu Equity) at Rs 211 crs by transfering ostensibly 35.51 %  from now listed EIL to it’s stepdown subsidiary ERNPL (Subsidiary of ERL) and selling of the rest to outside the Promoters Group

EIL shareholders would have benefited directly and substantially more in the years ahead if the Emami Group had retained the full (68.90% of Zandu’s Equity) Zandu Investments in now listed EIL itself and not shown 35.51 % in ERNPL and sold off the rest outside the group….I read it as a Ploy to Privatise Huge Profits that Zandu Realty may throw up in the Future on developing it’s 2.4 acres…..Today’s Winning Bid of Rs 474 crs for a similar acreage in a nearby plot in Mumbai is a clear indication of this….There was no need to reduce the Emami Group Stake in Zandu from 72.80% to 35.51%….because Zandu Realty Shareholders will surely reap the Bonanza in the years ahead from development of Zandu’s 2.4 acres….Zandu Market Cap is @ Rs 250 crs….it’s Property is worth atleast Rs 500 crs undeveloped and in all probability Rs 1000 crs when developed….EIL’s Selling price computes to Rs 3791 per Zandu Share….even at this Price the Market Cap of Zandu would have been just Rs 300+ crs….way below it’s true value

EIL Shareholders seem to have been shorted   

I daresay the Emami Group will not be winning too many friends any soon unless they are part of the gameplan  

Neither my Clients nor me hold shares in any Emami Group companies as of date

Zandu Realty Ltd at Rs 3100 though looks interesting !…apparently Emami Group does not share my view…they’ve reduced their Holding !

Cheers ! 

Expected this… a fabulous Q1 FY 11 for Sesa Goa… It’s best first quarter in history.. a consolidated net Profit of Rs 1302 crs giving an EPS of over Rs 15 on an Equity of Rs 85.97 crs (FV Rs1)… this was achieved due to higher Iron Ore Prices in the Quarter and good offtake by China and consolidation of Dempo Companies acquired in June 2009

So what’s prompted many leading FIIs to call a ‘Sell’ on Sesa Goa ?….. Prices have eased off and China is expected to slowdown offtake…. moreover it is widely expected that the Government will introduce a Special Tax on Windfall Profits just as has been proposed in Australia or may raise royalty rates…. and may even take an extreme step of curtailing or banning exports of iron ore…. Moreover Sesa Group is facing an investigation from the Serious Fraud Investigation Office for mismanagement, malpractices, financial and other irregularities ….. there is also the question of the pending amalgamation from April 1, 2005 of subsidiary Sesa Industries with Sesa Goa.. Sesa Group has moved the Supreme Court after the High Court had overturned an earlier order in it’s favour and the validity of the scheme has been extended to October 31, 2010…. an aggrieved shareholder had filed the case and Sesa suspects that this shareholder too is behind  the SFIO Investigation

In light of all of this the key question is whether  profits can be sustained at these levels in the rest of FY 11 to create a net of over Rs 4500 crs and take FY 11 EPS past Rs 50 or are we going to witness a cramped three quarters remaining in FY 11 where the aggregate profits of Q2 to Q4 would equal Q1 Profits and give a total net of just Rs 2500 crs thereabouts and an EPS of nearer Rs 30 ?

So we have a probable EPS range of Rs 30 to Rs 50 + to contend with in FY 11… At the current Rs 350 Share Price we then get a Forward FY 11 Multiple of 7 to 12 to live within…. taking a fairly conservative multiple of 10  we then get a Share Price range of Rs 300 (EPS 30) and Rs 500 (EPS 50)…. so we can say that there should be a limited downside from here… and there is a strong case for upside given such a strong Q 1 FY 11 and strong Current Consolidated Reserves of over Rs 9136 crs ( Rs 7834 at March 31, 2010 + Q 1 FY 11 PAT Rs 1302 crs) at June 30, 2010 giving a Book Value of Rs 106 that should cross Rs 120 this year as Reserves march past Rs 10000 crs… that’s a Book Multiple of under 3

One FII has just made a positive call with a  target of Rs 440 for Sesa Goa

Profits are real… and Cash Flow is strong… We yet continue our exposure to Sesa Goa…I t has rewarded clients splendidly in the past two years from cum bonus and split levels of Rs 3200 in July 2008… that’s a cost of Rs 160 ex bonus and ex split…. it had scaled near Rs 500 after hitting depths of Rs 60 last year… it ’s retracted on above concerns to current levels of Rs 350

Interesting FY 11 for Sesa Group… Real Windfall Profits and Real Concerns…. Interesting Play

Cheers !

I’m Looking Beyond the Financials here…..at the Standard Chartered Bank (SCB) INDIAN DEPOSITORY RECEIPTS (IDRs) Issue….am not inclined to recommend Investment,although the Pricing looks reasonable and it will not form part of the Overseas Investment Annual Limit of US $ 200k per Indian Citizen….probably a contrarion here as all seem to be recommending the IDR….I’m a bit worried about the Exchange Rate Risk involved…in that the Rupee may appreciate and as the underlying SCB Share is quoted in Pence and HK $ it would impact the Rupee Quote on BSE and NSE….Is my thinking conceptually flawed on this risk ?…do let me know 

I’ll let the IDR List and take a call on it as a Secondary Market Investment

Standard Chartered Bank,that is the sponsor of the Mumbai Marathon since it’s inception a few years ago,has just launched INDIAN DEPOSITORY RECEIPTS (IDRs) in India

The IDR Issue Specifics

The IDRs have been priced in the range of Rs 100 to Rs 115 with 10 IDRs equivalent to one SCB Share of US $ 0.50 Face Value…240 Million IDRs are on offer,with QIB reservation at 50%,Non Institutional at 20% and Retail at 30%…The Issue Opened on May 25,2010 and shall close on May 28,2010

Issue Price Range is at Relatively Reasonable Valuations on both Earnings and Assets basis 

Assets Basis

At December 31,2009,SCB had a Consolidated Networth ,net of Minority Interests of US $ 27340 Million,with Equity at US $ 1013 Million ( FV US $ 0.50) and Reserves at US $ 26327 million…That’s US $ 13.50/share or Rs 635/share (US $=Rs 47)….With 10 IDRs=One Share,it translates to Issue Price of Rs 1050/share,assuming the Pricing is finalised at Rs 105….That’s a Price to BV of just 1.65….The Networth should move towards US  $ 31000 million at December 31,2010 with Profits net of dividend of @ US $ 3000 million and IDR Proceeds of @ US $ 536 million (assuming Rs 105 pricing and Exchange rate of Rs 47 to the Dollar)…Equity will move up marginally to US $ 1025 million.The Book Value/Share would be @ US $ 15/share or Rs 705…The FY 10 P/BV would then drop to 1.5….   This is a shade lower than even the 1.6 projected for FY 11 March ending for  ICICI Bank and State Bank of India…and significantly lower than the over 2 times projected for Axis bank,HDFC Bank and Yes Bank…It’s more on less equal to that projected for overseas Banks like Westpac and National Australian Bank in Australia and even those in Hong Kong ….so the IDR is not priced  high on Assets basis

Earnings Basis

in 2009 SCB earned a consolidated US $ 3892 million  net of minority interest…That translates to Rs 18300 crs and an EPS of US $ 1.92 or Rs 90 based on 2025 million shares at December 31,2009…No of Shares will go up to 2049 million and Projected EPS would be US $ 2.10 or Rs 99…that’s a muiltiple of under 11 times at computed Share Price of Rs 1050,assuming IDR Price assumed Issue Price of Rs 105….This compares well with the higher earnings multiples afforded to the Banks named above

A word of caution…..

• As the IDR is not covered by the Securities Act ,Securities Transactions Tax will not be applicable on Trades….thus one  will not get the benefit of nil tax on Long term gains and lower tax rate on short term gains…Gains will be added to total taxable income and taxed on the applicable…for high earners the rate would cross 30% ….in any case the New Direct Taxes Code that is scheduled to be implemented from next year will provide a level playing field as it does away with STT and also any distinction between short term and long term gains….though there is hope that the Code is modified to revert to existing scenarios  
• As FIIs and Insurance Funds are not allowed to participate in the IDRs,the shareholder base would be missing these two significant categories…therefore interest even on listing could be muted
• There is no reverse fungibility…after a one year lock in, 10 IDRs can be converted to One SCB Share…but such a share can be held for a maximum of 30 days only and must be sold off and cannot be reconverted back to IDRs  
• As the IDR’s underlying is the SCB share,the Rupee quotes on BSE and NSE will reflect the quotes on London Stock Exchange which are in Pence and those on Hong Kong Stock Exchange which are in HK $…therefore Changes in Exchange Rates between the Pound and the HK $ on one side and the Rupee on the other will also impact the Rupee Quotes….and to make this even more complicated,the Face Value of the SCB Ordinary Share is designated in US $ at US $ 0.50 per share….With pan Asia Operations SCB took a US $ 2.8 Billion hit on FX Translations in 2008 and less in 2009…have a Look at the Exchange rate Impact on Indian Quotes….I’m not even considering the impact of Earnings and Multiples  

SENSEX CLOSE IN 2009 : 17465..SENSEX LEVEL NOW AT 11.09 am,MAY 17,2010 : 16628

Down 367 points from Friday Close….but down 5% from 2009 Close   

FII EQUITY FLOWS AND SENSEX MOVEMENTS …A CLEAR DICHOTOMY IN 2010 

Total FII FII Equity Investments : US $ 78.76 Billion

Registered FIIs :1714    Registered Sub accounts : 5369

India remains  a great Investment Destination…But have a look above….whenever we’ve seen huge FII Inflows,the Sensex has simply run away….in 2008 when we witnessed huge outflows,the Sensex sank,only to recover brilliantly when inflows topped US $ 17 billion in 2009

But 2010 has been a revelation…There is a clear dichotomy between FII Inflows and the Sensex…In Four and a half Months yet in 2010 we’ve seen strong FII Inflows of US $ 6.1 Billion…a strong part were in IPOs….one would have expected the Sensex to power ahead…Instead it has buckled 5% till date today from 2009 close

It’s a clear Macro Warning…India remains coupled to World Markets….the disturbing PIIIGS Solvency Scenario in Europe and the Debts and Deficits of USA continue to spook the Global World…It’s a contagion that’s being tackled

Beginning of the Year in January 2010,I had blogged that the Sensex range will remain in the 14000 to 18000 for the first part of 2010…when it touched 18000 a few weeks ago,I had given a  macro warning that we’re at the top end of the range and extreme caution should be exercise when playing the Indices or Trading…the onbly way to beat the Indices benchmark would be specific selections

Don’t get unnerved by this Volatility…it’s part of the Equity Experience….just stay focussed on Long Term Goals and Proper Asset Allocation when playing out your Strategy 

And I continue to reiterate,as I’ve been for a few years now….do consider GOLD strongly….it’s moved from US $ 650/oz to over US $ 1200/oz now….My first target was US $ 1000…it reached this late in 2009…Beginning 2010,I had said that Gold would touch US $ 1200 in 2010…it’s done so in May itself !…..My next big target is US $ 2500 inside a few years…..and then US $ 5000 !……given the huge uncertainties and poor visibilities in global economic recovery in USA,Europe and Japan…and the liquidity tightening in China to reduce fears of any Asset Bubble Formation…any Investment in Equity,anywhere in the World….and even in Debt,I daresay, should be done cautiously and with complete understanding of the Risks involved   

Very Few Believed me on my ‘Against the Trend’ calls for Equity,Gold and even Oil….been called an idiot a few times too in debates and discussion with Experts !…but then Contrarions are called Idiots quite Often !

To conclude…for the Long Term,I’m bullish on all three….Indian Equity,Gold and Oil….for the Short and Medium Term,there is a huge Overhang in Global Equities and Currencies….as I blogged a few days ago…Greece is bigger than Greece…India will feel the coupling effect….don’t be in any hurry to expend your Cash….unless you want to add or increase exposure to  Gold in your Portfolio…..you’ll probably get your scrips cheaper down the line 

As for existing Equity Portfolio…don’t worry as long as your selections are sound and your weightage allocation is sensible and rational based on your risk profile…so even if your Tracker shows realtime,your portfolio losing Value…stop looking at your Tracker ! 

Get into the discipline of thinking ‘Few Years’ and not ‘Few Days’ or ‘Few Months’!

Cheers !

The Listing of Kolkata based Nilesh and Umesh Parekh promoted Gold Jewellery House,Shree Ganesh Jewellery House Ltd on Friday,April 9,2010 has spooked everybody

The IPO was priced at the lower band of Rs 260,but listed lower and crashed to 160 levels pretty fast

……An interesting Bulk Deal caught my eye on this first day of listing itself…Standard Chartered Bank (Mauritius) Limited Emerging India Fund (SCBMLEIF) sold 531484 shares at Rs 169.23 aggregating Rs 8.99 crs

I checked the Prospectus and found that they were not part of the Pre IPO Non Promoter Shareholders…of these there were merely two…Shares were allotted in August 2009 at Rs 300,after conversion of fully convertible debentures to Bennet Coleman who ,after a 1:1 Bonus in September 2009 ,now hold 333334 shares at a cost of Rs 150 aggregating Rs 5 crs Investment and Credit Suisse PE Asia Investments (Mauritius) Limited who had invested Rs 80 crs in a CCP Issue and after conversion at Rs 300 and the bonus held 5333334 shares also at a cost of Rs 150…but now hold 3200000 shares after offering for sale shares in the recent IPO

The March 2010 Book Building IPO was made in the Price range of Rs 260-Rs 270,with Rs 260 finally fixed as the Issue Price….It was for 14269831 shares aggregating Rs 371 crs…of this  the fresh issue component was Rs 316 crs through 12136497 shares and an Offer for Sale by Credit Suisse of 2133334 shares aggregating Rs 55.47 crs

In fact SCBMLEIF also does not feature as an Anchor Investor…Of these there were three…IFCI,India Max Investment Fund and Bank Muscat India Fund who together committed Rs 65 crs for 25 lakh shares at Rs 260

The Issue was oversubscribed 1.96 times…QIB portion 1.38 times…Non Institutional Portion 6.12 times and the Retail Portion 1.39 times

So,I assume SCBMLEIF must be a FII allottee in the IPO at Rs 260….Selling off at Rs 169 levels and at a huge Loss of  nearly Rs 91 per share on the first day of listing begs the question “But Why!?”…the loss is Rs 4.83 crs as the Investment was Rs 13.82 crs

As I blog this,markets have just closed at 3.30 pm on Monday,April 12,2010 and the second day of listing for Shree Ganesh Jewellery House and it’s share price is yet Rs 163

Financials show a post IPO Equity of Rs 60.68 crs (FV Rs 10,Promoters hold 70% +)) and a Post IPO Networth estimated to be around Rs 900 crs ( Rs 481 crs at 30/9/2009 + Rs 100 crs second half profit + Rs 316 crs IPO Proceeds to the Company)…that’s a Book Value of close to Rs 150…Debt was Rs 377 crs at the half year at 30/9/2009….After recording a PAT of Rs 80 crs for the half year,the full year FY 10 PAT should be over Rs 180 crs and close to Rs 200 crs…that’s an EPS of atleast Rs 30…the Earnings Multiple is just over 5 times with the Share Price of Rs 163 and under 9 times at the issue Price of Rs 260 and the Book Multiple is just over 1

So what’s the Problem !?….can Standard Chartered Bank enlighten all of us !? SEBI,perhaps ?…or perhaps Bennet Coleman or Credit Suisse,the Pre-IPO non promoter shareholders !?….25% of the IPO Proceeds of Rs 316 that come to the company have been assigned for General Corporate Purposes….no specifics…that’s a very high component of nearly Rs 80 crs that can be spend at the discretion of the Promoters and the Management,albeit for the Company…the major proceeds will be towards the specifics of expanding the manufacturing and retail base    

IPO Allottees have been sledgehammered on Day 1 itself…..Should they also exit at a significant loss as something is greatly amiss !?…or is Shree Ganesh Jewellery House worth a Buy at Rs 163 !…just over one time it’s Post IPO Book Value ?…if you ask allotees to average,they’re going to kill you !….but one HNWI allottee I spoke to, was very optimistic and has full faith in the company and the promoters…he expects the price to move towards Rs 450…”kai karse!”….he was referring to the Promoters ! 

Clearly there was an IPO Gameplan….what was it exactly and who all are involved,is the key question !?…was SCBMLEIF part of it!?…they surely need to explain this first day sell off at a huge loss !…even Professional Stags don’t behave like this !

Merrill Lynch Capital Markets Espana SA SV picked up 1.6 million shares of Spicejet at Rs 57.02 on February 26,2010 in a Bulk Deal…It has begun March closing at Rs 58.90 today with some heavy volumes of 6.6 million shares on the BSE

Earlier on February 5,2010 in Bulk Deals yet again,we saw Istithmar World PJSC Fund knock off 31.49 Million shares of Spicejet at Rs 52.01 to several Buyers….Reliance Growth Fund picked up 4.5 Million shares,Birla Mutual Fund picked up 10 Million,DWS got 8.85 Million and Damani Estates & Finance Pvt Ltd got 2 million

It’s moved up 10% in a month…and over 30% in Three months and a fabulous 265% in a year….so what’s the Spice?….the company yet has a negative Book Value

Equity is Rs 241 crs (FV Rs 10) with just under 13% held by those who ensure Spicejet remains in the air!…….Though December 2009 Quarter has seen a turnaround with a PAT of Rs 109 crs,the Accumulated Net Loss at December 31,2009 is yet very high at Rs 850 crs….netted of positive reserves of just under Rs 229 crs it yet reflect a negative Reserve of Rs 621 crs…..

However of Interest is the Infusion of US $ 100 Million into the Company by WL Ross & Co and the FCCB Conversion of US $ 80 million at Rs 25/share in 2010.This would increase the Equity to Rs 467 crs and  reduce Debt of @ Rs 500 crs to under Rs 300 crs…but importantly with Profitablity expected to be @ Rs 250 crs in FY 11,the Negative Networth of under Rs 400 crs expected at March 31,2010 will swing back to Positive in FY 11 with the FCCB Conversion and the  Turnaround Profitability….FY 11 EPS should try for Rs 5 levels

So FY 11 is going to be the turnaround Year for Spicejet…Back into the Black…a Positive and climbing Networth…New Strong Institutional Buyers….International Routes…Better Operations with higher occupancies over 80% and higher margins,especially if the Sales Tax on ATF is reduced from the average of 28% to just 4% as begged for by the Aviation Industry…and Valuation-wise,the market is offering competitor,Jet Airways a much higher latitude

Looks Like Spicejet will fly into the Rs 75-Rs 100 Zone this year

I have been increasingly impressed by this RBI Governor,D Subbarao…..his thought process is very inspiring and rational and intellectually stimulating and challenging…..A few days ago,he humbly stated that what happened to the Financial System in 2008 in the USA taught a lot of lessons and challenged traditional assumptions

And today he showed his assertive and no-nonsense decision making ability….In light of the record Food Inflation figures of 17.40% that came in yesterday for the week ending January 16,2010,it was indicative that RBI will surely raise the Cash Reserve Ratio (CRR)….and he raised it by 75 basis points,that’s 0.75%,more than expected.The CRR is being raised in two phases in February 2010 to 5.75%.This will reduce the Liquidity by Rs 36000 crs

…..and Interest rates will firm up strongly in the coming months

The Repo Rate and the Reverse Repo Rate has been left untouched at 4.75% and 3.25% respectively

While GDP Growth Rate Projections have been raised to 7.5% from 6 %,Inflation Rate Projections too have been raised from 6.5% to 8.5%…that would indicate Food Inflation rising yet further to 20%!…I think our Agriculture Minister,Sharad Pawar will continue facing a harrowing time and calls for his resignation will intensify….Anyway,he seems to hold his position as BCCI Cricketing head and President in Waiting of ICC in higher priority…so maybe we should let him concentrate only on Cricket and relieve him of Ministerial Duties!

Credit Growth Offtake and Deposit Mobilisation rates Forecasts have been lowered

RBI is clearly aware of the potential risks of Oil Price Surges,that caused us great agony and high Fiscal Deficit in 2008 and 2009…Search for my earlier blogs on this Impact

Stock Markets initially bounced back briefly…Sensex was down 200 points at 16100 levels before the announcement but recovered…..This may just be a short bounce and Sensex will challenge 16000 shortly…maybe even today

So now the Monetary Policy is behind us…now February 26,2010 will see the Fiscal Policy thrust when Pranab Mukherjee announces the Union Budget

BUT KEEP AN EYE ON THE FII FLOWS…already US $ 2 BILLION sales have been effected in the past few days….Statistics clearly show that when there have been strong Inflows,the Sensex has sought record highs…When US $ 13 Billion reversed out in 2008,the Sensex tanked

It’s going to be a very interesting tussle between FII outflows and Induced Domestic Buying in an attempt to maintain Buoyancy to facilitate PSU Disinvestments

As I had blogged a few Days Back on ABC of Investments…(A)merica,(B)harat and (C)hina….(B) ,that is we, is sandwiched between the East and the West…we are coupled strongly and cannot be insulated from what happens at either end of the Globe…..Recovery in America is years away and there is real fear of double dip recession…..China is strongly arguing that no asset bubbles are forming in light of excessive lending

We,Bharat,despite our exciting Infrastructure and Domestic Consumption Stories and High GDP Growth Rates being intact need to be very cautious

……Monetary Policies like twitching CRR,Repo and Reverse Repo rates can have only a limited impact as India has no control over Pricing of Commodities,be it Oil,Sugar,Gold, Grains or Pulses or Metals….Price Explosion in these have played havoc with our Fiscal Deficit and raised Food Inflation rates to record Levels….search an earlier blog on this  

So don’t be in any hurry to Invest in Equities…..no matter what Experts and Anchors and Brokers scream out at you from the Stock Channels !……Look for strong sub 16000 Sensex levels for better Opportunities to Buy into selective scrips which you have identified as having strong growth potential to leverage into the India Story and have a Long Term View

Cheers !

Imagine you’re aboard a Plane in Flight and hit turbulence…the Plane drops altitude…sometimes very sudden…..Sensex is akin to this situation…dropping 2.1% on Jan 21 and then near 3% today…Suddenly from reaching up for 18000 recently it is now poised to dive below 16000!…It closed at 16290 today…..and those who were proclaiming glory are quickly reversing opinions to predict a sharper fall ahead…some even to 12000 !…Remember the Nursey Rhyme “Ring a Ring a Roses….Pocket full of ……Hush ah Bush ah we all fall Down !…you gonna hold hands with those who are singing this,you will fall down !

Despite continuing World Economic and Political Turbulence, and intense FII selling past few days,Indian Equities remains in the best position to move up…20-X is going to see  a Sensex range that could extend down to 14000,maybe 13000, and up to 20000…so we are at 16000 right now…we are not going to test 8000 again,like we did in March 2009 and October 2008…so macro situations and large caps trends are going to be harder to read in 2010….It’s a bottom up low and mid cap approach that’s going to get you the Winners in 2010….So playing the Sensex or the Nifty or the Large Caps,either in Cash or Derivatives may cause you tense moments…like today

Concentrate and Focus on Specific Stocks in the Low and Mid Cap Range…..Most of Our Clients Portfolios over Rs Ten Lakhs are in 25% Cash at this time….New Clients have been advised to hold Cash and not be in any hurry to invest…..and at any given time we have @ 15 stock selections…..portfolios have from 3 to 10 scrips from this selection……one scrip was on upper circuit this morning and we reckon atleast three of our selections would be clear and minimum money doublers in 2010  

So we enjoy such falls in the Markets….gives us opportunities at lower prices

But if you’re a die hard macro and large cap player because of high volumes and liquidity,then do a simple exercise…Make a list of your Top Ten Sensex Scrips from the 30….Rewind to 2009 when the Sensex was 13000 and 14000 and 15000 and record what were the prices of these Ten scrips at those levels……will give you some sense of where these scrips can yet correct to !…and save you the agony of jumping in impulsively

Cheers !

Among the Bulk Deals that took place last week,two interesting purchases caught my eye…..even though I’m not a great Fan of the Ruias (Essar Oil) or the Kasliwals (S Kumars)…both gravely let down shareholders and other Stakeholders in the 1990s and even into the 21st Century…there were several Corporate Governance Issues too 

• 20 Million Shares of ESSAR OIL (currently Rs 141/142) were picked up by LIC at Rs 140 on January 22,2010 in a Rs 280 crs deal….seller was Matterhorn

and

• 1.375 Million Shares of S KUMARS NATIONWIDE (currently at Rs 45) were picked up by MERRILL LYNCH CAPITAL MARKETS ESPANA at Rs 47.60 on January 20,2010 in a Rs 6.55 crs deal

S Kumars is already one of our second half 2009 SS 2 Recommendations

Essar Oil was spotted by us as a SS 3 Multibagger at Rs 4/5 in 2003/4…Over the past 6 years Essar Oil has reached the following Highs….it taught us a lesson though…If you have caught it early,Do not Sell too Early,even if you see 200% Appreciation in the same year…that would be Rs 5 to Rs 15 ! in 2004………If your’e catching a Train from Mumbai Central to Ahmedabad,do not get off at Borivali !…..Stay with a good scrip which has good to great potential  for the long term over many years and it will give you quantum appreciation…Selling off in 2004/5/6 would have given strong % returns…but not as strong as from 2007 !,even considering the decline in 2008 and 2009 

Year…….High……..Absolute % Appreciation from 2003/4 at Rs 5…..In Number of Years

2004…….33……..560 %……One Year

2005……..48…….860 % ……Two Years

2006……..80……..1500%…..Three Years

2007……..333……6560 %…..Four Years

2008……..380……7500 %…..Five Years

2009……..194……3780%……Six Years

2010 till date….162…..3140%…..Six + Years

Clearly 2007 was a spectacular Year for Essar Oil when from an earlier Year 2006 High of Rs 80 it zoomed 316 % from this High to a New High of Rs 333 in 2007 

Watch out for both these Scrips in 2010

Cheers !