Cheers Son !…on your turning 21 in 2 0 1 0  

Cut out the 0’s and live the Positives as auspiciously Glorious Sunshine salutes you after Mumbai has experienced three continous Wet days….It’s got to be a promising sign !…..the Sun’s Rays are God’s Blessings being showered down on you

And you are my sure shot Investing Theme with record Multibagger Potential !….measurable  not just by Wealth of Money……

Remember that the Purpose of Life is to Live a Life of Purpose….and Live Fearlessly…all the Power to Achieve is within you…..Playing out Life and Blackjack 21 can be very entertaining and addicting…but Blackjack is Pure Gambling while Life should not be so,although you must roll the dice to get a  six and sail your ship on the Ocean rather than be sheltered always in the harbour ! 

Love you Lots….you are my vitamin..am always there for you….but if you ever message me ” Can’t afford a Girlfriend…No Mon,No Fun,Your Son !”….you know my reply ” Too Bad,How Sad,Your Dad !”

Cheers Son !….you can now get legally married without my consent !

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 !

How should one now view and play Sesa Goa and Cairns India ?

Markets have been excited for a few days by the Vedanta Group buying out the controlling stake in Cairns India from a subsidiary of Cairns Energy….. Cairns India had raced away to a new High of Rs 368 yesterday morning….. then came the press release by the Vedanta Group announcing this takeover in detail

My initial reaction was one of anger and worry that, as feared, Anil Agarwal of Vedanta was using Sesa Goa Cash for the Group

The Markets reacted sharply and Sesa Goa dropped over 8% to Rs 321 while Cairns India dropped over 6% to Rs 333

The takeover is by the Vedanta Group in this manner

• Vedanta Resources plc will acquire 51% Equity Stake in Cairns India from a subsidiary of Cairns Energy at Rs 355/share + Rs 50/share as Non Compete Fee for Three Years
• Sesa Goa, a Vedanta Group Company will tender for 20 % Equity Stake from the remaining Cairns India Shareholders at Rs 355/share… this is the mandatory Open Offer
• In case Sesa Goa receives less than 20% then Vedanta will make up the difference at cost… that’s Rs 405/share

My immediate concern is what will be the Impact on Sesa Goa as it has been my pet recommendation for several years now and recently very strongly from July 2008 cum bonus and cum split at Rs 3200 (that’s Rs 160 ex)…. On April 8, 2010, Sesa Goa zoomed to an all time high of Rs 494 for a FV Rs 1 Share as Iron Ore Prices crossed US $ 140/t

This acqusition will cost over US $ 9 Billion of which Sesa Goa will be investing from it’s cash resources US $ 3 Billion for a 20% stake…. it does not even have this on it’s Balance Sheet currently !….. The Drop in Share Prices of both Sesa Goa and Cairn India reflect the concerns that Investors have on Vedanta’s Corporate Governance and Credibility

Let’s have a quick look at whether such a reaction is a precursor to a further drop in the share prices of both

This is not an overnight acqusition….. negotiations must have commenced months ago with Cairns Group…. connect this with the uptick in Cairns India’s Share Price…. it moved from a range of Rs 150-Rs 200 a year ago, to Rs 200-250 and then from Rs 250-Rs 300 and yesterday zoomed to a High of Rs 368 before reacting to close at Rs 333

So what is Sesa Goa’s role in this Acquisition

Vedanta simply wants US $ 3 Billion from Sesa Goa….it would have created a ruckus to simply borrow all of this inter group…so part of the acquisition of Cairns India to the extent of 20% of the Equity Capital of Cairns India that,’coincidentally’ amounts to US $ 3 billion is to be shown as an Investment in the Books of Sesa Goa

Cairns India has a Share Capital (FV Rs 10)of Rs 1897.34 crs…. 20% of this is Rs 379.5 crs thats 37.95 crs number of Shares… to be exact 379496447 shares…. at Rs 355 that’s Rs 13471 crs…. at the agreed Exchange rate of US $ 1=Rs 46.765 that’s US $ 2.88 Billion…. This is expected to come in from the mandatory open offer of 20% that needs to be made to remaining shareholders….. any shortfall will be purchased from Vedanta’s 51% acquisition… but at a higher price of Rs 405, that’s Vedanta’s cost

So Sesa Goa’s Balance Sheet will merely reflect a movement on the Assets side from Cash to Investments after cashing out on existing Investments to fund this Stake

But the standalone Balance Sheet of Sesa Goa at March 31, 2010 does not support US $ 3 Billion!

Here’s how Sesa Goa looks at March 31,2010

Networth : Rs 7209 crs = Equity Rs 83 crs + Reserves Rs 7126 crs

Represented by : Rs 580 crs Fixed Assets + Rs 5479 crs Investments + Rs 3076 crs Net Current Assets - Rs 1926 crs Loans = Rs 7209 crs

Where is the US $ 3 Billion Cash or @ Rs 13500 crs on the Books of Sesa Goa ! ?….. It’s Balance Sheet Size for total Capital employed is Rs 9135 crs ! (Networth + Loans) !

The Deal is expected to be done by early Fy 2011

So it’s clear that even FY 11 Cash accruals will be used for the Investment and maybe Sesa Goa may raise fresh debt… in 2009/10 it already has issued 5000 5% Coupon Rate FCCBs and raised US $ 500 M… at March 31, 2010, 755 FCCBs had been converted at the prescribed Rs 346.88 per share at a fixed rate of Rs 48 to One US Dollar…. Funds received from the FCCBs are reflected in Fixed Deposits of Rs 2350 crs reflected in Current Assets

So I extrapolated Sesa Goa Balance Sheet at March 31, 2011… To fund the Investment of Rs 13500 crs in Cairns from Cash Reserves, Sesa Goa’s Networth has to climb from Rs 7209 crs to atleast Rs 15000 crs…. This would be through a combination of FCCB Conversion of @ Rs 1900 crs (Unsecured Loans) and Profits near Rs 6000 crs in the year…. The Assets Side would reflect Fixed Assets of Rs 600 crs + Investments of Rs 13500 crs atleast + Net Current Assets of Rs 1000 crs

And the MD of Sesa Goa, P K Muherjee claims that Sesa Goa Capex will not be affected ! and that the Board of Sesa Goa feels this Investment in Cairns India will be beneficial to Sesa Goa Shareholders and will be immediately EPS accretive !

One Interesting way of Looking at this is that if we assume that Sesa Goa will continue to generate atleast US $ 1 Billion ever year in Cash Profits, this Investment in Cairns India is Three Years of Cash Profits.

The Moot evaluation here is to see how this Investment of US $ 3 Billion will bear fruit for Sesa Goa….. This Evaluation is Interesting as I studied the Potential Earnings Capabilities of Cairns India and it’s Dividend Policy and Potential in the future….. The actual cash inflow as returns to Sesa Goa will be through Dividends from Cairns India… as this being a strategic long term Investment it is unlikely to be sold for Gains in the near future

Cairns India has a current production of @ 45000 barrels of Oil per day (boepd)… it plans to raise this to 125000  boepd and then  to 240000 boepd…. at this level of 240000 it will be 25% of India’s Oil Production…. Now One barrel is @ 42 gallons or 159 litres…. thus this would mean 72 Million barrels a year, assuming 300 days of Production… In Q 1 FY 11,the realisation by Cairns was US $ 67/barrel…. taking this realistion, the Annual Revenues for 72 Million Barrels would be US $ 4.8 billion or Rs 23000 crs…. with low production and operating costs Cairns India can be expected to show a Bottomline exceeding US $ One Billion, or near Rs 5000 crs in a few years time…. That’s an EPS Level of over Rs 25…. Dividend Payout should be atleast 20% of this if not more… that’s Rs 5 /share atleast in a few years time

Sesa Goa will hold 37.95 crs shares being 20% of Cairns India’s Equity…. thus it will receive Rs 190 crs as Dividend assuming Rs 5/share Dividend by Cairns…. It has Invested atleast @ Rs 13500 crs ( more if it buys Cairns India shares at Rs 405 from Vedanta)… so the return on Investment is a paltry 1.40% being the Dividend Yeild!…. Of course it will benefit if Cairns India Share Price moves up strongly from the Rs 355 Cost to Sesa Goa…. but this would merely remain a notional gain and cannot reflect in the books….. But will Cairns India move up strongly ?….. If EPS is Rs 25 a few years down the line then on a 15 multiple the Share Price would be Rs 375… and Rs 500 on a 20 multiple

Alternatively Sesa Goa could have used it’s Cash Reserves to generate higher ROI to benefit Shareholders and reward it’s Shareholders with a High Dividend and a higher Valuation for the Company and therefore a Higher Share Price

These Options are now no longer open in the short to medium term as all Monies are to be used for Investment in Cairns India

So how will this affect the Share Price of Sesa Goa !…. I would think in the short term there would be an adverse impact and the share Price could drop below Rs 300

But just hold this thought… even if Other Income figures would not be significant,the PAT from Operations itself could cross Rs 4000 crs atleast…. that’s an EPS of near Rs 45 on Equity of Rs 90 crs (once FCCB’s convert)… Sesa Goa has reacted to Rs 320…. this is just Seven times  FY 11 Projected EPS of Rs 45…. and even a lower multiple if the PAT crosses Rs 6000 crs !….. so the downside in Sesa Goa may be limited as long as the profitability levels from Iron Ore Mining and Exports is sustained… albeit on higher volumes and lower margins

So one can hold on to Sesa Goa at current levels of Rs 320 and Cairns India at Rs 333, but keep monitoring developments and Company Performance

Cheers !

INDIA……We Love You MOTHER…..”Sare Jahan Se Achchha Hindustan Hamara”

Wishing 1.2 Billion Indians in India and all over the Globe a very Happy Independence Day….We are inspired by  and salute our waving ‘Tiranga’ that exudes the great confidence , the vibrancy and the positive energy of our great democracy….Peace and Prosperity for all

Let’s all stand up to attention and sing with fervour and feeling and patriotism,pride and passion our National Anthem

Jana gaṇa mana adhināyaka jaya he
Bhārata bhāgya vidhātā
Punjāba Sind Gujarāṭa Marāṭhā
Drāviḍa Utkala Banga
Vindhya Himāchala Yamunā Gangā
Ucchala jaladhi taranga
Tava śubha nāme jāge
Tava śubha āśiṣa māge
Gāhe tava jaya gāthā
Jana gaṇa mangala dāyaka jaya he
Bhārata bhāgya vidhāta
Jaya he jaya he jaya he
Jaya jaya jaya jaya he!

Thou art the ruler of the minds of all people,
Dispenser of India’s destiny.
Thy name rouses the hearts of Punjab, Sind,
Gujarat and Maratha,
Of the Dravida and Orissa and Bengal;
It echoes in the hills of the Vindhyas and Himalayas,
mingles in the music of Jamuna and Ganges and is
chanted by the waves of the Indian Ocean.
They pray for thy blessings and sing thy praise.
The saving of all people waits in thy hand,
Thou dispenser of India’s destiny.
Victory, victory, victory, Victory to thee.

Two Power Stocks to watch out for and that may Lighten up for a Brighter Diwali this year…Both also begin F & O Trading from Today

Adani Power at Rs 128…..Private Sector Power Player…..IPO was a year ago at Rs 100 in July/August 2009…so we see a 28% gain already…Permitted Lot in F & O is 2000 shares and the August 2010 Call Option for Strike Price of Rs 130 is quoted @ Rs 3

NHPC at Rs 32…..PSU….IPO was a year ago at Rs 36 in August 2009…..so we see a drop of over 10%….Permitted Lot Size in F & O is 8000 shares and the August 2010 Call Option for Strike Price of Rs 32.50 is being quoted below Rs 1…so one can take a 8000 shares position for Rs 260000 for a Premium of Rs 8000…..by end August if NHPC climbs past Rs 33.50 you start making a Profit…or else you stand to lose just Rs 8000…..If you buy 8000 shares of NHPC in the Spot you would have to pay @ Rs 260000….Instead for one month you get a similar leverage by paying just Rs 8000 !….and Government is planning a Mega IPO for PSU Giant Coal India around Diwali this year…..will not look good if another listed last year PSU like NHPC is below it’s IPO Price of Rs 36!

Think about it….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 !

Piggery : A Farm or Enclosure where Pigs are Kept

…so if you ride Piggy Back on RJ,GS,JP,CLSA,CG etc,the Movers & Shakers in our Stock Markets,does that make our Stock Exchanges Piggeries ! ?….Enclosures for Thousands of Stocks that Stink ! 

Cheers to a Chuckle !….Oink ! Oink !

In December 2009 I had recommended Gati at Rs 58 as a SS 2 Scriptech Stock Select with a target of Rs 80 inside Twelve Months…..Gati closed today at Rs 86 + achieving  near 50% absolute returns inside eight months…what now?…….Significantly above average volumes indicate there is steam yet ahead and a price of Rs 100 is possible in the short term 

However selling,even partially, can be considered in two situations

• Need to reduce Equity Component in a Portfolio Rebalancing Exercise
• Need to be Prudent and realise Profits

So you can get a sense and feel of Gati and why we had recommended it and draw your own inferences on the path ahead for it,I have reproduced below a comprehensive extraction from our Gati Recommendation Template emailed to Clients in December 2009….we yet continue to have exposure in Gati

China and USA…different political idealogies that makes for strange bedfellows….China deliberately keeps it’s Yuan low to benefit from exports to USA…get’s paid in US Dollars which it reinvests substantially in US Government Treasuries !..nearly US $ 900 billion of the US $ 2.3 Trillion Fx Reserves of China are invested in these Treasuries

USA was threatening to declare China manipulator of Currency…China agreed to revalue it’s Yuan upward a wee bit recently and also has just declared their continuing faith in the US Dollar and US Treasuries !

That’s some Consolation between the two on the surface….but the undercurrents run deep

Here are two Alerts….you can put it this way….one by China for USA and the other by USA for China! 

• Is China facing a Housing Bubble ?…the Western Countries seem to think so
• A Chinese Credit Rating Agency has just downgraded USA from  ‘AAA’ to  ’AA’ Country Rating

Is China facing a Housing Bubble ?

Have a Look at the above Graph that matches the Value of Residential Housing against the Country’s GDP for USA,Japan,Hong Kong and China

In 1989,Japan shows a peak level of 3.8  and since shrunk to 2….Japan has been facing Economic Woes for the past two decades now…..China has reached an alerting level of 3.5 and if historic precedent is to be believed for this parameter,the Fall is inevitable….China is heading for a Real Estate Bubble soon

A Chinese Credit Rating Agency has just downgraded USA from  ‘AAA’ to  ’AA’ Country Rating

Two months ago in May 2010 ago I had blogged on how the top Credit Rating Agency S & P yet continued USA’s Rating at ‘AAA’ 

S & P’s Sovereign Rating of USA remains at Top ‘AAA’….Amusing!

Friday, May 21st, 2010

Now China’s leading Credit Rating Company,Dagong Global Credit Rating Co has downgraded USA from ‘AAA’ to ‘AA’

The World’s Top Three Credit Rating Agencies…all based in the West….S & P,Moodys and Fitch….. have come in for  some scathing attacks…and justifiably too…they have lost considerable credibility in the past few years for their failures to spot and alert proactively  and, even more stupidly, reactively on Lehman’s Collapse,the Sub Prime Dangers,the Greece Problem among others….seems these rating agencies are a cartel with vested interests and agenda….when a Problem is so apparent even to a Commoner,it becomes difficult to believe that these Top Agencies run by Top People out of Top Colleges and Institutions and with Top Pedigree Degrees and Positions are really Dumb,Stupid and Incompetent or even Complacent!…..so the conclusion is that the ‘High Ratings’ maintained for Corporates and Countries by these Western Agencies is a deliberate Game plan not to break the Hand that’s feeding you…combined probably with a Political agenda too !…..Bloody Shame !

Though Dagong may not wield much global Influence,it’s action last week to downgrade USA will be seen as an unbiased and Non Western View of USA….a Pioneering and courageous forward step to call a Spade a Spade….despite the fact that China itself has a near US $ 900 Billion Investments in US Treasuries….and it may lead to a weakening Dollar and an increased Risk Premium for Dollar Investments and a fall in the Value of Dollar Investments….a True and Tough Call made by Dagong for USA, a Country whose massive Deficits will lead to Massive Debts that will soon eclipse it’s own GDP 

Where will our Sensex head now in the second half of 2010 ?

So while both USA and China continue to hope that Stimulus packages will bale their Economies out and GDP Growth rates would gradually move up or at least the decline will be stemmed,where does this leave India……Our Country is not decoupled enough yet not to feel the adverse Impact in case USA and China shrink….Fed Governor has finally removed the Gloves and warned Congress last week that the Labour,Housing and Credit Situation in USA yet remains dangerously worrisome

Our Sensex has crossed 18000 and Nifty 5400 while the Dow is struggling to stay above 10000….What if the Dow seeks lower 8000 levels by 2010 year end ! ? where would our Sensex head then !?….the way I see it on a macro level is like this…..when 2010 began I called that the first half of 2010 would see a Sensex range of 14000 to 18000…this was on the mark…..the second half has now commenced…I see our Sensex range in this half to be 16000 to 20000….the upmove range is considering that India will benefit from Good Monsoons,strong FII Inflows,Higher GDP Growth rate of 9.5% forecast for FY 11,Infrastructure and Consumption India Story being intact and strengthening of Corporate Earnings…my contention is that these positive drivers will net out the negatives of continuing High Inflation,increasing Interest rates and a possible Downtrend in USA and China Economies, Stock and Real Estate Markets….16000 on the Downside would me more by default if the Dow or China shrinks 

However on the Cautious Side,the Short Term does not strongly indicate a One Way Upward Movement for the Sensex…therefore you will have to contend with Volatility…..Therefore A Bottoms Up Approach with Specific Stock Selection would probably fetch you better returns than a Top Down or Index Strategy in the Short Term

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 !