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 have two Primary Issues…and several related ones….. with this SKS Microfinance Primary Issue

• Microfinance Industry emerged to alleviate Poverty by providing access of basic financial services like Loans and microinsurance to the poor…..I am frowning at this attempt to commercialise this Industry through an IPO at such a High Premium
• I am not going to contribute to the Profits of Pre IPO Shareholders…especially Sequoia Capital…. who are offering for Sale their Shares in this SKS Microfinance IPO that has opened today !

  16.79 Million Shares are on offer in the price band Rs 850 to Rs 985 !….of which only 7.45 million shares are Fresh Issue with IPO proceeds going to the Company while 9.34 Million Shares are Offer for Sale by Existing Investors…In fact Sequoia Capital,termed as a Promoter, is offloading 3.99 million shares in this IPO of their 9.1 million shares and will bring down their holding from 14.1 % Pre IPO Equity of Rs 64.52 crs to 7.1 % of Post IPO Equity of Rs 71.97 crs….Their average acquisition cost is Rs 61.18 only and they have been allotted shares in 2007 and 2008 in three tranches at Rs 49.77,Rs 70.67 and Rs 103.91….Just Imagine….Sequoia paid just under Rs 56 crs for their 9.1 million shares….If Rs 985 Top end Price is fixed for this IPO,the 3.99 million shares they are offering on sale will fetch them Rs 393 crs !…so they make a whopping near Rs 337 crs over their aggregate cost  for shares held for just  two to three years and yet have 5.1 million shares remaining with them !…reminds me of a similar ploy by Citigroup and Chrys Capital in the Suzlon issue a few years ago ! (Search my blog for this)                                                                                                                   There is something not right in Promoters enriching themselves handsomely by part cashing out in the IPO or pre IPO….In fact the Chief Promoter,Vikram Akula sold 9.45 lakh of his Shares just this year in February 2010 to Tree Line Asia Master Fund (Singapore) for US $ 12.92 million (works out to @ Rs 637)…In fact several top Employees also sold part of their Esop shareholdings to Tree Line for Rs 636.72….Encashing Profits of Crores like this just before the IPO brings into question Promoter and Top Management Committment to the Company….Maybe Legal…but….Feels like they are itching to exit at Rs 985 as they may not get this price again!….and inside a year Shareholders have been allotted Shares even at Rs 300….from here to the Gains are over 200%….Even after the IPO,the Pre IPO Shareholders will hold nearly 77% of the Post IPO Equity….This would entitle them to 77% of the Networth….which would have been substantially built by the Public who are paying Rs 985 per share in the IPO !…Nah !…now why would the Public do this ! ?…they are merely looking at one side of the Equation that they will benefit from the Share Price above Rs 985….they fail to see that their Rs 985 is creating Huge Assets of which they will merely own 23%…..while 77% will be owned by Pre IPO Shareholders who have contributed in the past one to three years just an average acquisition price of  Rs 24.54 to Rs 137.53 (Promoters) and upto just Rs 300 for Non Promoters     

While contending with my emotions on the above two issues, the High,near obscene IPO Price Band of Rs 850 to Rs 985 makes it easier for me to say ‘No’ to this Issue

One pays such high Premiums for a Rs 10 Face Value Share only if excited on massive non linear growth in Profits coming up in the near future and significant scalability of Operations…..but when over half of the Shares on Offer are actually Offer for Sale by existing Shareholders,one needs to be on alert and say “Hey ! Hold On ! Let’s have a better look at this !”

At Top end Rs 985 the IPO Size is Rs 1650 + crs of which only Rs 734 crs will go to the Company…..Market Cap will cross Rs 7200 crs if listing is around these levels

In my humble Opinion,Rs 850 to Rs 985 is simply too high a Price to pay right now for SKS Microfinance,despite the scalability potential…have a look at the past five years selected financials

 Now the Post IPO Equity will be Rs 71.97 crs and at Rs 985 Top end the Net IPO Proceeds that will accrue to the Company will be Rs 734 crs…thus Networth will move from Rs 950 crs at March 31,2010 to Rs 1730  + crs post IPO assuming Q1 Profits of Rs 50 crs…that’s a Book Value of Rs 240….this is a 4 Book Multiple of Top End Price of Rs 985

What SKS Microfinance is attempting to do with such a High Premium IPO is what Reliance Power and even Future Capital Holdings did in the past in 2008 !…Create High Networth through Obscene Premiums and Minimum Equity Dilution ….and both are quoted horribly below IPO Pricing….In fact Biyani’s Future Capital Holdings came at Rs 765 in January 2008…It’s Rs 247 today !…. 

However SKS Microfinance may not quote horribly below IPO Pricing because of scalability potential….in fact Rs 50 is the grey market Premium currently….Optimists can look at it this way…At March 31,2010 it showed  a Networth of Rs 950 crs and a PAT of Rs 175 crs…At March 31,2011 it will surely show a Networth of near Rs 2000 crs and a possible PAT of Rs 250 crs….that’s yet a high 28 multiple on a Possible FY 11 EPS of Rs 35 at Rs 985 IPO Price…now if it’s a straight double networth and double profits that means a PAT of Rs 350 crs,an EPS of Rs 49 and a Earnings Multiple of 20 !

I’m not recommending this Issue…but if you want to contribute to the Profits of Sequoia…be my guest !

An ABBA songs comes to my mind ” Money ! Money ! Money !…it’s a Rich Man’s World !”

Intentions of Promoters and Pre IPO Shareholders may be Noble….but Actions are clearly Profit Motivated and not singularly Selfless

Cheers !

Several Times I had strongly recommended IFCI as a multibagger….. starting at Rs 16 in December 2006….It raced to Rs 130 levels as the Government called for bids to sell a Strategic Stake in it….A Joint Bid by Sterlite and Morgan fell through as the Government was not transparent on Conversion of Institutional Debt to Equity ……this would significantly have affected the Shareholding Break Up and diluted the Winning Bidders Holding…there was also Government reluctance to transfer Management Control

The Finance  Minister at the time,Mr Chidambaram had bravely stated that he will certainly revist IFCI strategic Stake sale at a later time and get even a higher Bid than the Rs 80-Rs 90 that was achieved at the time

IFCI quickly sunk and reached levels of even Rs 20 in the October 2008 and March 2009 Lows…this retracement wiped off Notional Gains build up in the Scrip….It has since moved up past Rs 45 levels and has surged in recent times….and is Rs 58 today….Can easily double from here too in the next six months on positive developments

The Interest in IFCI is now being revived….the key reason is that they are planning to apply to become a Bank once the new guidelines are announced…expected this month….The last to get permission were Yes Bank and Kotak Mahindra in 2002

In fact IFCI had pursued this route to convert to a bank way back in the 1990s along with IDBI,ICICI ,HDFC and UTI (now Axis Bank)….except for IFCI,all others had been given the green signal

IFCI was plagued for years with a high level of Non Performing Assets that had threatened to erode the Networth….In 2005/6 the NPA levels disclosed were Rs 3950 crs…I had even given it the Notorious Acronym of ‘I F….. the Country of India’ !

But in 2006/7 the revival and turnaround became clear…Real Estate,Investments and Recoveries spearheaded this…NPAs were brought down to a level of Rs 1366 crs….that’s why and when I recommended IFCI at Rs 16 as a SS 1 Scriptech Stock Select…It was beginning to turn around fast

Look at the latest Financials…..As at March 31,2010,the Equity (FV Rs 10) stands at Rs 738 crs ….The Networth is Rs 3152 crs giving a Book Value of near Rs 43…Standalone PAT is Rs 671 crs giving an EPS of Rs 9…a Dividend of 10% has been declared…so at Rs 58,it’s at a 6 + Earnings Multiple and a 1.3 Book Multiple…not expensive by any stretch

If it is successful in converting to a Bank…government would hold a soft corner this time around for many reasons…IFCI will easily flare to a 10 + earnings multiple and a 2 Book Multiple….this would mean that from the current Rs 58 the share Price will move to near and possibly over Rs 100 in the coming months…Assuming FY 11 PAT is even maintained at FY 10 levels it should take the Book Value past Rs 50

Aggressive Players can consider playing IFCI in the F & O segment too…The Lot size is 4000 Shares….If you are averse to paying Margins then choose to Buying Call Options rather than going long on Futures….. there is a 5% sunk cost for doing this as a near month July 29,2010 Call Option Premium at Strike Price of Rs 57.50 was last quoted on NSE at Rs 3….that’s a sunk cost of 5% or  Rs 12000 for a position of 4000 shares aggregating Rs 230000…your payoff begins when IFCI crosses Rs 60.50 in this month…this is very likely as Banking Guidelines are expected to be announced this month…..You can always rollover postions

Cheers !   

Fascinating…..The Heritage of New York Stock Exchange (NYSE) and Bombay Stock Exchange (BSE) are linked to Trees !

NYSE is 218 years old and BSE is 135 years old 

For NYSE it was the Sycamore or Buttonwood Tree

On May 17,1792,Twenty Four Stock Brokers of New Your City signed under the Sycamore or Buttonwood Tree at 68 Wall Street, what is called the Buttonwood Agreement that launched NYSE with just five listings !…it was short and sweet with just two sentences….that the Brokers merely trade only with each other and do not charge more than 0.25% Commission….Today NYSE boasts of over 1300 Trading Seats and over 2700 Listings

For BSE it was the Banyan Tree

In the 1850s the Stock Brokers traded under the Banyan Tree in front of the Town Hall ( now known as Horniman Circle)…then as their Numbers increased they spread a few lanes away to Banyan Trees at Meadows Street ( now known as Mahatma Gandhi Road)…finally in 1874 they moved to a lane they appropriately called Dalal Street…known even as this today….in 1875 these Brokers launched ‘The Native Share and Stock Brokers Association’….Today BSE ranks World No 1 in terms of Number of Listings…over 4900 of them   

What a Tradition !… What a Heritage !…From a Tiny Acorn does a Mighty Oak Grow !…..Fascinating when you contemplate the Electronic Era Today…of State of the Art Hi Tech Offices in Concrete Skyscrapers and Impersonal Paperless Trading in Billions and Trillions !