Union Budget 2013 ~ India is a BLESSsed Economy…

Enjoyed on the Budget Day Evening itself Feb 28,2013 addressing and interacting with a well informed audience of 400 on the Union Budget 2013 ~ on how the Government plans to make Money to tackle deficits and how we can ! ~ plan to host a few thoughts of my presentation on the company website www.jsalphaa.com and on this blog ~ covered how FM has cleverly and conveniently balanced the budget ~ also covered  the Forward Trends in Equities &  Indices & Gold & Exchange Rate & how Debts & Deficits are forcing Disinvestments & how the malaise continues on our exchanges and it will be some time before the retail investor comes back,if at all ~ spoke on Liquidity,Sentiment,Momentum and Valuation

Felt more like a Stand Up Comedian as the audience were in splits on some of the budget and stock market situations I presented…

Union Budget 2013 Review Event

A well known Yoga Guru in Mumbai,whose sessions I attended for a few months some years ago had aggressively argued that the World’s leading Pharmaceutical Companies are all one Huge Cartel ~ he never advocated Allopathy and urged us to stay away from Allopathic Medicines ~ we knew he was right but we were helpless and yet remain so in our dependence on such Drug Formulations

UK’s Glaxo has just agreed to plead guilty and pay up a record US $ 3 billion for the biggest healthcare fraud in US History ~ it relates to offences on the selling of three of their best selling drugs in the period 1997 to 2004 ~ US $ One Billion will be the Fine payable to US Authorities while US $ Two Billion will be paid to State and Federal Governments to settle civil issues

http://www.dailymail.co.uk/news/article-2167742/GlaxoSmithKline-pay-3b-fine-pleading-guilty-healthcare-fraud.html

The Drugs that were prescribed or positioned wrongly were

• Paxil ~ It’s a common anti depressant but was not to be prescribed for depressed children below 18 years of age as studies had showed that it induced suicidal tendencies ~ Glaxo,USA however was found to be prescribing Paxil to even Children through over 5000 Doctors on Glaxo USA’s panel of which over 1700 were exclusively treating just children
• Wellbutrin ~It’s approved for being prescribed for Depression ~ however it was positioned and prescribed for unapproved uses like that as a slimming aid and for  loss of sexual drive ~ For just Two Months of March and April 1999,Glaxo even paid the well known Doctor Drew Pinsky US $ 275000 to promote this Drug in his Speeches and Radio Interviews and prescribe it for loss of libido !  ~ Hundreds and Thousands of other Doctors were induced through high  Speaking Fees and fully sponsored five star trips to exotic locations for spouse too
• Avandia ~ was prescribed for Diabetes but it’s dangers were not revealed to the US watchdogs ~ concerns were not disclosed that it induced heart attacks

In 2009,Pfizer had paid US $ 2.2 Billion for selling four drugs for unapproved uses

For these Pharmaceutical Giants, even such giant fines and settlements are merely just a percentage of their annual profits ~ Glaxo’s US $ 3 billion settlement is just first Quarter Profits in 2012

Glaxo earned Pounds Two Billion (US $ 3.1 Billion) on a Turnover of Pounds 6.4 Billion (US $ 10 Billion) in just the first quarter of 2012

My Question is this :

In Light of the nature of this  huge and incriminating Glaxo USA Settlement why has the Indian Government not immediately raised the Red Flag of Inquiry to Glaxo India through the concerned Ministry or the Drug Regulatory Authorities or even the Stock Exchanges BSE and NSE where it is listed to investigate the Indian Implications for Glaxo’s Indian Operations in context of the Drugs it sells here ?  ~ I’m not talking of Financials here ! ~ or do we,1.2 Billion Indians continue to be guinea pigs to Multinational Pharmaceutical Companies and their Prescribed Drugs

The Company and Doctor Nexus is strong in India too ~ and I believe many Drugs that have been banned in the USA and Europe are yet manufactured and sold and prescribed in India ! ~ and we remain hostage to the high risks let alone the high pricing too of many Drugs

I wish Glaxo India would have come out with a proactive clarification !

One last thought ~ we continue to decry Cigarette and Tobacco Companies for their Products being immensely harmful and injurious to health ! ~ should not this warning be now put even more boldly on Medicine Packaging instead of just labelling it as a Schedule Drug to be sold on doctor’s prescription only ! Most pharmacies will sell even such labelled drugs OTC without any genuine  Doctor Prescription !

And on a Chuckling note on hindsight it was probably safer to be duped by a Fake Medicine of a Popular Brand when that Brand Formulation is finally banned when the  danger of it being consumed are fully known and disclosed !

This also raises a bigger question !

Is it Alright for ‘Ethical Giants’ to commit Crimes once in a while comprising ‘Principles’ for ‘Profits’ and later paying ‘Penalties’ for ‘Penance’ !?

Rohit has inquired ~ Shasun Pharma @ Rs 115 ~ Now in Reverse Gear from a Meteoric Rise inside Months ~ Methinks it’s Prudent to Exit and Book Profits in this Fun Run…Rohit,seeking further exposure ,even for the long term is not advisable 

Shasun Pharma was just Rs 38 ( FV Rs 2) in December 2011 and in just over five months it had gained @ Rs 100 racing to a high of Rs 137 on May 25,2012…then this week it’s  been reversing fast and currently is @ Rs 115 

So what was the excitement all about in the first half of 2012 ? Is the Fun Run over !?…Well,in my humble view,Yes !

http://www.bseindia.com/xml-data/corpfiling/AttachLive/Shasun_Pharmaceuticals_Ltd_250512.pdf

The Consolidated Networth has climbed from Rs 84 crs at March 31,2011 to Rs 222 crs at March 31,2012 for two clear reasons ~ Preferential Placement of Equity Shares as below for Rs 50 crs and a FY 12 PAT that soared past Rs 100 crs from just Rs 27 crs in FY 11...Consolidated Book Value at FY 12 end is @ Rs 40…thats a near 3 multiple…too high in my view  

In the March 2012 Quarter there were two highlights

1. Shasun preferentially allotted  6578947 Equity Shares at Rs 76 to a Mauritius based entity,Caduceus Asia Mauritius Ltd which is registered with SEBI as a Venture Capital Investor…The Equity Capital moved up to Rs 11.03 crs from Rs 9.71 crs ~ RBI has directed the Company to seek Government Approval for this Allotment…Caduceus is the subsidiary of US Healthcare Investment Firm OrbiMed Advisors and will have Director Representation on Shasun Board
2. Shasun booked  a one time Profit of Rs 27 crs on sale of land and building at Velachery,Chennai

Full Year FY 12 Results reveals a Tax Benefit of Rs 21 crs which the Company has attributed to carry forward loss and unabsorbed depreciation arising from earlier years

With the Government showing great leniency in December 2011,allowing companies to capitalise FX losses and therefore not charging them to P & L A/c,Shasun has opted to adopt the new Para 46A in the Accounting Standard 11 …it allows adjustment to depreciable assets  for Fx differences on long term  Fx monetary items so far as they relate to the acquisition of such assets…for the remaining the difference is charged to a new account called the Foreign Currency Monetary Item Translation Difference Account and written off over the balance period of that Monetary Item

In FY 2011 Results it has opted under Accounting Standard 5 to show Option Contract Mark to Market  Losses of Rs 41 crs as a seperate item relating to prior years

Normal Profitability in FY 12 would be more @ Rs 50 crs and not over Rs 100 crs if the Tax benefit and Profit on sale of land are excluded…thats’s an EPS of @ Rs 10 and not Rs 20…and a multiple of 12 and not 6

The Long Term Borrowings are Rs 78 crs….just a  shade higher than in FY 11…..The Fixed Assets have climbed from Rs 260 crs at FY 11 end  to Rs 331 crs at FY 12 end….clearly exercising the AS 11 option kicking in here to warp the true asset picture…what in means is that as long as FX loans remain,the exchange loss on the depreciating rupee will be added on to the cost of the asset that the loan has financed !…this Treatment,though allowed by the Government, is dangerous as it creates misstatement of assets and liabilities 

Clearly Shasun Share Price has been pumped up in a short while to facilitate preferential allotment at Rs 76…supported deftly by a crafty presentation of Accounts and a one time capital gain….. Therefore I’m not reading too much into the jump in Net Sales in FY 12 to over Rs 1000 crs from just under Rs 800 crs in FY 11

Let’s give some credit to the MD,Abhaya Kumar ~he has influenced the Board to raise the Dividend Level to Rs 2.40 per share of Rs 2 => 120 % (100 Interim and 20 Final) …but this has not impressed the Markets as the Drop in Share Price from a High of Rs 137 end of last week to Rs 115 currently has been as Dramatic as the Rise !…My sense is that Shasun’s Share Price will continue to seek lower levels and fall sub Rs 100

So Rohit,this should answer your question whether to take further exposure for the long term…I reiterate….Clearly in my view,No !…and assuming you already hold some exposure,as you have stated ‘further’,It would be prudent to exit and book Profit in this fast run up that is already reversing !

Rohit ,the risks of further exposure cannot be understated even as MD boasts of achieving a Rs 2000 crs turnover by 2015 and a Billion Dollars by 2020 ~ and Capex of Rs 250 crs ~ and great expectations from the UK Subsidiary

http://www.business-standard.com/india/news/shasun-pharma-targets-rs-2000-cr-turnover-in-3-yrs/471789/ 

In my View,Shasun’s  a case of Market running it away ahead of Fundamentals

Cheers ! 

Performance of the BSE Sector Indices in 2011/12  and to date is quite Interesting ….What provoked this post is Sameer’s counter argument in my earlier post…he is bullish in the short term,citing the favourable upmoves in the Pharma,Cement and Auto Sectors…I’m looking at the Bigger Picture and I’m not so excited really as Macros are clearly playing up and this Government is unlikely to push big ticket reforms…we need to await 2014 General Elections,which I fear may yet again through up a fractured verdict…but I hope with a more reform friendly and decisive coalition !

Have a Look at the Performance of the BSE Sector Indices in 2011/12 and to date…Quite Interesting…The Reds & Greens signal fall or rise/holding up from over a year ago  

The Alltime High & Low Columns are quite revealing

• FMCG,Healthcare and Auto Indices  have registered All time Highs this Month…with consistent Wealth Creation in the 21st century in FMCG and Healthcare while a huge surge in the last four years in the Auto Sector
• Quick and huge  wealth destruction in the IT sector in 2000/2001,the Metals and Power Sector inside Ten months in 2008 between January and October and in the Realty Sector between Jan 2008 and March 2009  

PERFORMANCE OF BSE SECTOR INDICES AS ON APRIL 26,2012

• IT  shows a Drop,but TCS has outperformed Infosys ,which has slumped and the latter holds 48% weightage in the Index ! against just 29% by TCS !…this needs to be rectified by BSE rightaway…more so as the Market Cap of TCS is Rs 233301 crs against just Rs 135415 crs of Infosys !….The Index tracks the share price of  10 Companies with 88% weightage of just three …Infosys,TCS and Wipro …Other interesting constituents are Oracle Finance and Financial Technologies 
•   Techk comprises of 30 IT,Telecom,Media and Communication Companies and has mirrored IT fall
• FMCG has been the years Darling with ITC (55% weightage) and HUL (18% weightage) outperforming to allow the Index to hit Alltime Highs…11 Companies constitute this Index…Interesting ones are the two Kingfisher Group Companies,United Spirits and United Breweries…. and Tata Global (spotted this at Rs 80 late in 2011) and the huge 2010/2011 winner Jubilant Foods (Dominoes Pizza)
•  Consumer Durables has heavyweight Titan with 51% weightage in the Index…It’s been a flat year
• Metals has seen a bad year…In fact this Index has slumped the highest @ 35% over last year…75% Index weightage is in Five scrips led by Tata Steel with 22% followed by Coal India,Jindal Steel,Sterlite and Hindalco
• Oil & Gas too has seen a bad year…Reliance with a 54% weightage and ONGC with a 22% weightage aggregate a skewed weightage of 76% in the Index
• Capital Good Giants,India Proxy Larsen and Toubro and BHEL have a weightage of  54% and 16% respectively in the Index that monitors the share price of  17 companies,that also include Siemens,Suzlon,Havells,Thermax,ABB and Punj Lloyd…it’s been a shocking year for both,Larsen and BHEL on the bourses and the steep fall has unnerved even the aggressive Investors
• Healthcare has held up well in 2011/12…19 Healthcare and Pharma Companies comprise the Index with Sun Pharma (18%),Dr Reddys (17%) and Cipla (12%) leading the weightages
• 14 Banks comprise the Bankex with the top three weightages given to HDFC Bank (26%),ICICI Bank (25%) and State Bank of India (16%)…it’s been a very challenging year for the Banks given the slowdown in the Economy and high interest rates affecting credit offtake…the rising level of NPAs remains a threat
•  PSU ~ The Index has 60 PSU Companies in it ! with Coal India and ONGC leading at 14% each in weightages followed by State Bank of India with 9% and NTPC with 8%…Interestingly these 60 Comnpanies have an aggregate  Market Cap of Rs 1561821 crs currently….and this smartly and significantly  constitute nearly 26%,that’s over one fourth of the Total Current Market Cap of BSE of Rs 6108734 crs 
• The Auto Index covers 10 Companies across the sector spectrum of leading four HMV and LMV wheelers & Two Wheelers,Battery (Exide) & Engine (Cummins) Manufacturers and Tyres (Apollo)…Aggregate 86% weightage is given to top Five Vehicle Players led by Tata Motors with a 31% weightage .Interestingly and encouragingly too,this Index has held up well,largely due to outperformance by Tata Motors…However Index aggregate Market Cap is below 5% of total market cap 
• Realty Index tracks the share price of 12 realty companies…DLF lead weightages with 33% followed by Unitech (17%),Oberoi (10%) and HDIL (10%)…Shobha,Godrej Properties,Phoenix,D B Realty are some others in this Index…it’s continued to be a sliding year for this sector that’s been saddled with huge crippling debt,huge inventories and delayed projects….but how much more lower can it go !…search for contrarion winners in this sector over the long term…had spotted Orbit at Rs 20 + late last year and early this year…Price has doubled to @ Rs 48 currently…and even Indiabulls Real Estate at Rs 45 + levels after demerger of Indiabulls Power….it surged to Rs 80 levels before reacting now to Rs 62 …But Both do not form part of this Index 
• Power Sector is battling  Source Feed Supplies of Coal and Gas that’s crippling Operations and resulting in lower output and capacity underutilisation….Implementation of both,Public and Private Mega Projects too has been delayed for a host of reasons …This Index tracks 19 companies in the Sector that cover Generators,Transmitters and Distributors as also others that supply Equipment like BHEL which has the second largest weightage of 15% …NTPC with a 20%  leads the weightages….Incidentally Private Power Players like Reliance Power  and Adani Power have a weightage of 4% and 3%  respectively….Given the Challenges faced,the Year has been quite unkind to this Sector…the Index has slumped @ 27% in the past year…anyone for a Contrarion Bull Play here !? 

Christmas Month of December begins with an Interesting Weekend… some Research on FDI in Retail,Jupiter Bio,OnMobile Global,Jain Irrigation,Sensex Earnings….meeting up with  some really Interesting Business Heads In India…Daughter captaining Maharashtra Football Team at the School Nationals in Port Blair….and winding up with some relaxing social interaction

Some Research….

• to thrash Jupiter Biosciences that has sunk from Rs 75 last December to under par Rs 10 this December…will post it soon on company website under Scrip Tease …. a USA based friend had requested to check this fall as he is a hapless shareholder who  is related to the Promoters and feels awkward  asking them about this decimation…Book Value is Rs 125 ! 
• to put OnMobile Global at Rs 66 on Scrip Watch …Morgan Stanley currently has this as a wealth creator idea
• to figure out Jain Irrigation…will shortly put up view on company site….Both Enam and Morgan Stanley recommend it quite strongly at Rs 120 levels
• Sensex 30 Earnings Trends..report soon to be put up on the company website 
• Government’s recent controversial policy announcement for 51% FDI in Multi Brand Retail…checked out Wal Mart and it’s Chinese Operations….Phew ! …they are huge…will out scale simply any competition…will put up a brief note soon on company website highlighting the Pros and Cons

Interesting Meetings with Business Heads… 

Met some really interesting Business Heads in India ….,

• The CFO of a conservative mutual fund…. has decided to enter Derivatives finally
• The CFO of listed real estate company that’s just had a name makeover…opines that the share prices of real estate companies will move in a narrow range for awhile…nothing exciting happening
• A leading behavioural share broker….”your guess is as good as mine” on how the Stock Market will behave in 2012
• Chinese head of the Indian Operations of a leading Hong Kong Financial Services Giant who has entered India through a JV…”Nice to be in India “
•  Foreign Returned Indian Director of a Bill Gates Foundation aided Indian NGO who needs help on Corporate Governance Issues and going about setting up a New Board and how to deal with Interference from a leading Industrialist 
• A leading Expert on Transfer Pricing who had retired very early in life to seek spiritual self….Is Now entering Share Trading for a livelihood !…busy attending trading courses and reading up books on Trading ! Interesting !  
• A leading ex CA Partner of a Big Four Firm who also headed earlier a leading Diamond Group’s Global Operations…has now just entered the Construction business in New Mumbai,near the new Proposed Airport…says Rs 4500/sq feet is cheap…it is really worth Rs 15000/sq ft !….Keep an Eight Year view he asserts and you will gain multifold !…on my wavelength of a contrarion view on Real Estate for the Long Term    

Daughter Captains the u 19 Maharashtra State Football Team….

The 57th School National Games for u 19 Girls Football Event began in Port Blair on December 1,2011….16 year old daughter was appointed the Maharshtra Team Captain and had the honour of  holding the State Flag while leading her Team in at the Opening Ceremony…They thrashed Gujarat  7-0 on Friday,December 2,2011  and now face a tougher opponent Orissa tomorrow who also beat Gujarat 6-0 yesterday in their group…Both Maharashtra and Orissa qualify for the Quarter Final Knock Out Stage

The Journey to Port Blair was exhausting…The Team left the Kolhapur Camp by Haripriya Express Train on Nov 25 for Renikunta,near Tirupati to catch the connecting Madras Express to Chennai on Nov 26 morning…they missed the connection and had to catch a later train….it was raining in Chennai late night when they reached…left on a 60 hour journey for Port Blair by Ship on evening of November 27,2011 by SCI’s MV Harshavardhana….excitement turned to disgust as they were travelling Bunk Class…sleeping was on steel bunk beds….the food was not edible….they survived on biscuits for three days !…….they had mobile phones and monies stolen…daughter’s phone went….we remain in touch through phones of teammates…”Like you see Jail in the Movies,Dad ! ” …A Pity that a listed PSU like SCI runs such a third rate service on their Passenger Ship to Port Blair…..but Port Blair is better…awesome view from the Ship as they came in…and the Opening Ceremony Parade was lovely….daughter says the Games are being covered on DD Sports…told her to enjoy the Games and shirk off any Captaincy Expectations and Pressures….School Prelims begin this week and she will miss a few papers….She’s in Std X and will be appearing in March 2012 for the ICSE Final Examinations….School is thrilled at her achievement as this is the first time in the history of the School that a Girl has been selected for the State Team for the School Nationals conducted by the School Games Federation of India…her poster announcing this has been put up front as one enters the School….feel warm and proud that she continues to make her School & State and Family & Friends proud….like a Business Leader Friend (not part of above people I met) and Father of her schoolmate remarked to me and a few others in our group last night “She is my hero and my inspiration ! ”….well,she is mine too !          

Relaxing Social Interaction…

• Attended the Annual Celebrations on Friday Night of one of India’s Leading Auditing ,Taxation and Consultancy Groups outside the Big Four
• Wound up last night catching up with over 900 members and spouses and some nostalgic numbers like “My Way” by veteran crooner Gary Lawyer and some Fireworks at the Club’s lovely Annual Day Celebrations ….more relaxing as all was on the House !….Cocktails & a Lavish Buffet Spread with Indian,Surti,Continental,Chinese,Italian,Burmese and Tandoor cuisine with several Live Counters and Gary Lawyer and his Band !….the debate is yet out whether the full house was because of everything being on the House or that Gary Lawyer was in the House !   

Am sure that the rest of December will continue in the same interesting vein…and all meetings and leads will convert into good business too !

A Note of Selfishness…..I want Sensex to break 15000 as I see 2012 as a contrarion Year and such a southward movement provide less riskier buying opportunities

However to end with a Note of Optimism…though I have opined recently, after the Sensex broke 16000 more than once in 2011,that it will seek lower levels and break 15000 also,it has gained strong momentum in just three days to move back towards 17000 with Banking leading the way on an expectation of a CRR Cut by RBI this month…… Here’s hoping this Optimism and Sentiment sustains and the Sensex closes 2011 at 17000 +….Leading FIIs have just predicted a moderately bullish 2012 with the Sensex closing over 18000 by next year end December 2012

First Let’s see how December 2011 really pans out !….Echoing the Behaviourial Broker’s sentiment “Your Guess is as Good as Mine !”  

Cheers !

Controversy laded Innovassynth Investments has listed far lower than expected today with a High of Rs 20 and low of Rs 11….It’s Rs 14 currently  as I blog nearer 2 pm….Volumes are over 250000…Market Cap is low at Rs 33 crs 

Innovassynth Investments has no Employees or Operations…it was formed to take over Futura Polyesters holdings in Pharma Research Company Innovassynth Technologies

Check out my earlier blog on September 14,2010 with added content on February 3,2011 on this

SEBI needs to take Stern action with Promoters like Ghias of Futura Polyester who seem to be enriching themselves in Innovassynth Technologies at the expense of Shareholders of Innovassynth Investments

Tuesday, September 14th, 2010

A Relevant extract from the above blog is reproduced below…The Poor Quote of Innovassynth Investments of Rs 14 on listing today clearly points to the Valuation of Innovassynth Technologies being significantly under assessed at below Rs 200 crs….Has this been deliberate ?…..To distract attention away from cornering of Rights at Par by Promoters !….or indicates a favourable reverse merger ratio for shareholders of Innovasynth Technologies !

Whatever…… I feel Innovasynth Investments at Rs 14 looks a compelling Buy ,more so if it reacts to Rs 10 or below as I reckon that the Real Value of Innovassynth Technologies is between Rs 750 crs to Rs 1000 crs and Innovassynth Investments holds 32.22% of it….so how can it’s Market Cap be a pathetic Rs 33 crs only even after applying a 50% haircut !   

Now everyone wants to know what Innovassynth Investments will list at ?

Assuming you got the Futura Polyesters in the Jan 2008 high at Rs 45/46 before it became ex-entitlement for shares of ISI,then 11 shares would have cost you @ Rs 500….you received 5 shares of ISI free on these 11 shares….The current Price three years later of Futura is Rs 7….thus the 11 shares have a value of Rs 77….but they cost you Rs 500…Therefore theoritically the 5 shares of ISI must fetch you Rs 423  for you to break even…that is @ Rs 85 per share !…but will it !?  

The answer to this lies in the perceived Valuation of Innovassynth Technologies

 

As you know ISI has no employees or any operation.It was set up merely to take over the 2.38 crore shares held by Futura Polymer in IST at par….Therefore it derives it’s value from the value of IST…This investment constitutes 32.22% of the equity of IST

 

The Valuation of IST is the key here…IST had a networth of Rs 89.82 crs at March 31,2010….Add to this the incremental value over Rs 66.11 crs (last 2009 reval) of 330555 sq meters(over 35 million sq ft) land at Khopoli ( my sense is atleast Rs 150 crs )  + Valuation of the 7% stake in Actis Biologics India (Rs 250 crs assuming that recently Actis placed 10% at US $ 80 Million) + Potential worth of the high end R & D work (Rs 500 crs atleast ) 

This would compute to Rs 89.82 crs + Rs 150 crs + Rs 250 crs + Rs 500 crs => @ Rs 1000 crs …..My conservative sense is that the value is in the range of Rs 750 crs to Rs 1000 crs….ISI is entitled to 32.22 % of this…Therefore Rs 250 crs to Rs 350 crs is the value of ISI’s investments in IST….but being a strategic stake a haircut of 50% is in order…Therefore Rs 125 crs to Rs 175 crs should be the value range…ISI has a capital of Rs 23.88 crs (FV Rs 10)…thus per share value of ISI after haircut will be in the range of Rs 50 to Rs 75

Ghias and Rahejas will have us believe that IST is a loss making below par value…they are simply talking bullshit and have cornered additional shares of atleast 79 lakhs of IST at par in rights issues and that should have been subscribed to by ISI actually .These rights came subsequent to the Scheme of Amalgamation order of July 4,2008…IST has an Equity of Rs 74 crs….The Valuation range of Rs 750 crs to Rs 1000 crs gives the per share value range of Rs 100-Rs 135

For lower IST Valuation of Rs 250 crs and Rs 500 crs the ISI Share Price after haircut will be respectively lower at Rs 17 and Rs 34….so as you see the key is the Valuation of IST…and that is controversial to say the least…and this is where I feel 38000 shareholders of Futura Polyesters who became the 38000 + shareholders of ISI too have been short changed significantly when ISI,seemingly as per Promoters gameplan, rejected subscribing to the IST Rights at Rs 10 

Cheers !…or should I say Jeers !

Jeers !

Disclosure

Neither My Family members that includes me too,nor my companies hold any shares in Futura Polyesters or Innovassynth Investmemnts or Innovassynth Technologies……but some of my clients,associates and friends may do so

Where Monies are there there will be Stink !….and SEBI, as the Regulator, needs to wear a Gas Mask at all times !

The Stink is being seen in the Promoters Ghias of Innovassynth Technologies (IST) raising it’s Equity Capital from Rs 55 crs to Rs 74 crs at par of Rs 10….the Value of IST is much more….Moreover shareholders of Innovassynth Investments (ISI) should have also been offered these shares at Rs 10 too…the sad irony it appears is that ISI itself rejected the fresh Investment Proposal in IST at par to facilitate the allotment to others….ISI is awaiting SEBI Clearance for Listing without an IPO,while IST remains unlisted

Know the background first

Ghias were  the Promoters of Indian Organic Chemicals (IOC)….It was rechristened Futura Polyesters (FP) and the Chemicals Division was moved to a new company from August 1,2002 called Innovassynth Technologies (IST)…..FP held 23850070 shares of FV Rs 10 in IST…this was over 40% of the Equity Capital of Rs 55 crs of IST…the rest was held by Rajan Raheja Group,Rakesh Jhunjhunwala and Ghias…they were also on the Board of IST….Rajan Raheja is on the Board of Prism Cement,EIH Hotels (Oberoi Hotel Chain in which Reliance too has a major stake now),Exide,Supreme Petrochem and Sonata Sofware

FP initially decided to transfer their entire shareholding in IST to the shareholders of FP directly under a Scheme of Arrangement…an initial Ratio of 10:23 was recommended and the shareholders of FP would get the shares of IST directly and free in this ratio of their holdings in FP

However a revised Scheme was formulated…and the reasons for this are becoming more apparent now…Under this Scheme FP would first tranfer it’s entire Investment in IST to another Company ISI…In turn ISI would allot free the shareholders of FP the shares of ISI in the ratio of 5:11….Thus FP Shareholders would also own ISI shares which would get listed…and ISI in turn held the Investment of over 40% of the Equity in IST….FP would also follow this with a Rights Issue at par to bring back the Networth after adjusting the IST Investment against Equity Capital and then Specific Reserves   

ISI was to get listed in 2009….BSE apparently even cleared this listing in July 2009 with the condition that SEBI Approval was required as the listing would be without any IPO…ISI applied to SEBI for this permission….till date SEBI has not given it….Why !?…SEBI has been raising queries….ISI claims it has answered all of these and are pursuing this matter with SEBI quite feverishly…what was the nature of these queries is not known…neither the SEBI website has any clues,nor is ISI revealing what these queries were.

So has SEBI delberately delayed issuing the clearance for Listing ?….in order to facilitate the raising of Equity of IST at par from Rs 55 crs to Rs 74 crs ?…SEBI must clarify to clear any such suspicion……ISI Shareholders were not directly offered this fresh Capital for subscription….Why !?…….Who has been offered and been allotted these Rs 19 crs Face Value of Shares in IST !?…..Why were they offered at par ?….ISI claims that IST is loss making and the Private Equity Players had valued it below par and it was not posssible to have an IPO of IST because of this low valuation…and I’m sure that IST will claim it had to raise funds fast to fund losses and for working capital !……However ISI Chairman claims the future is bright for IST !……..Moreover who has done the Valuation of IST !?…..It holds over 70 acres in Khopoli,near Mumbai…it owns 7% of Actis Biologics (subsidiary of US based biopharma Entity) Equity,easily worth over Rs 75 crs…it’s R & D Efforts will bear fruit in the years to come…there is no way that the real Value of IST is just Rs 10 FV or below this !…..the proof will be visible when ISI does list after SEBI Clearance….With the fresh Rs 19 crs raised at par in IST,the Equity Stake of ISI in IST has been diluted from over 40% to just 32%….ISI has stated that it’s Board of Directors had considered the Proposal to invest further in IST at par but felt it was advisable not to do so !….Why did they let go of something that was worth so much more when they were considering getting it at just FV of Rs 10 ! ?…This seems to have been done only to benefit the Promoters,Ghias and other Vested Parties…....Clearly the Board of Directors of ISI have deliberately failed in performing their fiduciary duties to protect their Shareholders interests……instead they have seemingly jeopardised these interests in favour of Promoters Ghias and other Vested Investors who were allotted IST Shares at just Rs 10

This fresh IST Equity of Rs 19 crs is worth probably more than Rs 100 crs…this will become apparent when ISI lists after SEBI Clearance….listing would be based on the Value of IST…and the listing would be over Rs 60….How !?…. Value of IST  will be perceived as close to Rs 1000 crs,based on its Value of 70 + acres of Real estate at Khopoli + 7% of Actis Equity held + Future Fruits of it’s R & D activities….ISI hold 32% of IST…thus it’s holding would be valued at over Rs 300 crs….this translates to over Rs 130/share…with a haircut of 50% to 60%,ISI should list at Rs 60 atleast……It is scandalous,if discovered after further due diligence and investigation, that the Promoters,Ghias and other vested Investors have looted shareholders of ISI by Hundreds of crs by not offering them directly the Fresh Equity of IST at par but cornering the full Rs 19 crs raised for themselves….ISI has deliberately let it’s holding in IST drop from over 40% to 32% by rejecting the Investment Opportunity to favour others to corner the shares 

SEBI,as regulator,is ordained to act without Fear or Favour if it wants to uphold the sanctity and credibility of the markets…..It must do so in this case too……If necessary and indciated,It must cancel this Fresh allotment of Rs 19 crs Equity in IST at par to favoured Investors or ask them to raise the Issue price of this fresh allotment from FV Rs 10 to a Fair Price based on a fair Valuation of IST worked out by a Credible and Reputed Audit Firm         

EXTRACTED FROM FUTURA POLYESTERS ANNUAL REPORT 2009       

 SCHEME OF ARRANGEMENT: 

In pursuance of the order passed by the Honble High Court, Bombay sanctioning the Scheme of Arrangement filed by the Company under Sections 391 to 394 of the Companies Act, 1956, the Company transferred, in accordance with the Scheme, the shares held in Innovassynth Technologies (India) Limited in favour of Innovassynth Investments Limited (IIL). IIL had in turn allotted five (5) equity shares of IIL against every eleven (11) equity shares held in the Company, to those shareholders of the Company whose names appeared in the Register of Members as on the book closure dates. The relevant shares so allotted by IIL had been credited to the beneficiaries account of those holding shares in demat and share certificates have been sent to those holding

physical shares. IIL has since applied to Bombay Stock Exchange Limited for listings its equity shares.

RIGHTS ISSUE OF EQUITY SHARES

The Draft Letter of Offer in respect of the issue of 2,62,10,839 equity shares of Rs. 10/- each at par aggregating to Rs.26,21,08,390 on Rights basis was filed with the Bombay Stock Exchange Limited and Securities & Exchange Board of India (SEBI). The Company has received the comments/observations from SEBI and a final decision on the issue will be taken by the Board at the appropriate time.  

Many are recommending Futura Polyesters,available at below par of Rs 10 as a fast multi bagger…..My sincere plea is to be aware of such  Promoters and vested interests who seemingly care a hang for minority shareholders….you are supporting them by supporting Futura Polyesters…..They and their Circle of Crony investors would have seemingly unfairly  enriched themselves having cornered the New Fresh Equity of Rs 19 crs in IST at par….it’s value as I said will be over Rs 100 crs and probably even over Rs 200 crs if and when ISI lists at over Rs 60

…and don’t be surprised if you see a reverse merger in the future between a listed ISI and an unlisted IST !….it will give an opportunity to the IST shareholders who have been allotted this fresh Equity of Rs 19 crs at par to encash obscene gains of Hundreds of Crs ! 

Is this a Con or a Scam or just short changing the shareholders of ISI who are also those of FP,if they yet hold FP shares…most yet hold them ?….you be the judge…..is there a devious gameplan in operation ?…is there criminality involved ?….that’s for SEBI and other authorities to investigate

I hope Shareholders of ISI realise that they have been short changed and exploited and taken for granted here by their own Board of Directors who by deliberately rejecting to invest more at par in IST have diluted the value of their holding in IST and adversely impacted all of them….I hope Shareholder Activism is strongly activated here….It is high time SEBI ordains Minority Shareholder Representation on the Board of Directors    

What I can observe here is that there is scarcity of a host of critical issues….. Corporate Governance,Transperancy,Accountability,Fiduciary Duties of the Board of Directors,Proper Valuation of IST to state a few

….is it any surprise then that the Number of Equity Investors have fallen over the years in our Stock Markets…..they enter ,or should I daresay are lured,with excited expectations….only to be suckered and butchered by a nexus of unscrupulous promoters and their cronies in the Field of Capital Markets !  

ADDED ON FEBRUARY 3,2011 IN BOLD RED FOR A REASON 

• From the Capital Structure Chronology and Shareholding Details of Top 10 shareholders now and two year earlier in ISI and IST I have figured out the exact number of rights let go by ISI in Innovassyth Technologies Ltd (IST) …79.34 lakh nos….and that Satish Raheja and Ghia promoted company,Bhupati Investments & Finance Pvt Ltd (BIFPL)picked most or all of these at Rs 10
• Rakesh Jhunjhunwala has not subscribed fully to his rights…Why?…. he also resigned as Director of IST and put his rep Utpal Sheth on the Board
• The Boards of ISI and IST have two in common,Ghia and Sami…while ISI Director Dr B Sahu was also earlier a Director of IST but stepped down  is now CEO and President of IST !
• Interestingly BIFPL is also a 12.43 % Equity stake shareholder in ISI while it now is the third largest shareholder in IST with a 9.73% stake….So question arises that why did Ghia who owns BIFPL,as Director of ISI reject the IST Rights issue for ISI and allowed ISI stake in IST to thus drop from 42.94% to 32.22 %….but chose directly for his company BIFPL to not only take up it’s rights in IST as a direct shareholder but also to subscribe to more than that it was entitled by taking up part of what ISI let go !….Did ISI actually renounce their Rights or just did not subscribe ? 
• The Key Question in this whole drama is what is the value of IST ?…..Ghia and Rahejas want us to believe that’s it’s a loss making company below FV Rs 10 !…on the books maybe ! but the reality is quite different….begin with audited networth of Rs 89 crs at March 31,2010+Incremental Value over Rs 66 crs (2009 Reval) of Khopoli Property  + Value of IST’s 7% stake in Actis India + Long Term Contracts with BASF ….192 MT order jumped to 302 MT in 2010….+ Huge Potential that will now be leveraged once facilities have been approved after due diligence by leading pharma and chemical companies…assuming Value of IST is Rs 1000 crs,then the Equity being Rs 74.02 crs (FV Rs 10) the value of each share is Rs 135….thus the rights of 79.34 lakh shares let go at Rs 10 by ISI would be worth Rs 107 crs !….this benefit goes to Satish Raheja(his holding in IST jumped 10% + to 45.44% and he is the top sharehoder) and Ghia’s BIFPL (their holding in IST jumped from just over 2% to now 9.73%) at the expense of 38000+ shareholders of ISI
• I suspect to realise these gains ,after listing ISI on BSE they will merge IST into listed ISI 

The Valuation of IST is the key here…IST had a networth of Rs 89.82 crs at March 31,2010….Add to this the incremental value over Rs 66.11 crs (last 2009 reval) of 330555 sq meters(over 35 million sq ft) land at Khopoli ( my sense is atleast Rs 150 crs )  + Valuation of the 7% stake in Actis Biologics India (Rs 250 crs assuming that recently Actis placed 10% at US $ 80 Million) + Potential worth of the high end R & D work (Rs 500 crs atleast )

A Client had placed a Deposit of Rs 50000 with Morepen Labs years ago…Under a Scheme of Arrangement and Compromise,It got converted into 3313 Shares…he asked me whether he should Hold or Sell….The Price is currently Rs 9 thereabouts…so he should recover nearly Rs 30000

An emotional decision would dictate to Sell…and after reviewing the current financials and potential of Morepen Labs and the repeated realisation of the deliberate and continuous Flawed thinking of the Suris,who have promoted and run the company,I would even say a rational decision would be to Sell

Here’s why

The Company had bet big time on ‘Loratadine’ and had hoped to capitalise in the US Market after this drug went off patent…In 1999 It had secured the USFDA approval for ‘Loratadine’ and had dedicated a seperate Manufacturing Plant for supplying to the US market…it had even entered into an Exclusive Selling Rights agreement for six months once the drug went off patent with Geneva Pharma (part of Novartis) 

It blames the delay to sell in the US Market to Schering Plough,the patent holder,extending the patent by six more months…this,Morepen claims,delayed the launch of Loratadine in USA ….affecting cash inflows and building up inventory costs…it led to working capital being diverted to pay off interest and short term loans

Once Loratadine went off patent,the price of ‘Claritin’ the brand for Loratadine in the US collapsed….From US $ 8000/kg to US $ 1000/kg and then towards US 600/kg…..This was a knockout blow to Morepen….24 tpa was initially planned to  abe produced and then raised to 36 tpa….A US $ 200 Million market crashed to under US $ 20 Million !

This phenomenon of Prices of Patented Drugs crashing significantly once off patent was not uncommon….Morepen must have realised this….but what they did not plan for is that the Price will fall over 90% !

So ‘Loratadine’ collapsed and thus so did Morepen.

After years of deliberation,A CDR was structured for Morepen and 22 Banks took a One Time Settlement,while six others opted for payments over ten Years…Non CDR banks were negotiated on a one to one basis….Unsecured Creditors like the Fixed Deposit Holders were left out of the CDR Settlements….the cashflows are not enough for this

And so a Scheme of Arrangement or Compromise was born….Here’s where I see some flawed thinking by the Suris….They arrived at a Scheme to convert the Debt of Deposits to Equity….nothing wrong in this,as it gives an exit route to Depositholders….but the flawed thinking was that SEBI Guidelines for issuing Shares were used!…this simply meant that Shares were issued at the highest price as per the guidelines….this meant a lower number of shares for the Deposit Holders!…this in turn meant less realisations to them…this is a deliberate ploy

This was the Sequence of Dates

Board Meeting : June 15,2008…set 30/6/2008 as record date

Record Date : June 30,2008

As per the SEBI (Disclosure and Investor Protection) Guidelines 2000, and subsequent amendments,the SEBI Formula for pricing the Issue

13.1.1 Pricing of the Issue

13.1.1.1 The Issue of Shares on a Preferential basis can be made at a Price not less than the higher of the following :

i) the average of the weekly high and low of the closing prices of the related share quoted on a stock exchange during the six months preceding the relevant date

or

ii) the average of the weekly high and low of the closing prices of the related share quoted on a stock exchange during the two weeks preceding the relevant date

For the purpose of this clause the Relevant date is 30 days prior to the date on which meeting of the general body of shareholders is held in terms of Sec 81(1A) of the Companies Act 1956 to consider the Proposed Issue

You are converting Debt to Equity to provide some solace to Deposit Holders…but you don’t Price the Equity as per SEBI,don’t miss the Irony here,Investor Protection Guidelnes!…these Guidelines are not created to cover such situations of providing some comfort to the deposit Holders…they are to protect existing Investors and stakeholders so that any preferential issue is not made at a low price to give the allottees an ‘in the money’ situation on allotment itself

….but here the circumstances are different…the company is issuing shares in lieu of deposits…and that too after writing of 25% of the Outstanding Deposit,after adjusting for some payments made to the deposit holders!…in effect the Outstanding Amount will be even lesser than the Principal Deposit Amount and and the Settlement Amount will be 25% less on this Outstanding Amount…thus the Settlement Amount,in most cases, will be much less than 75% of the Principal Amount ! Tch! Tch!

And would you guess ! what is the Price that the shares have been issued at !…Rs 11.32,much higher than the Rs 7/8/9 it trades at when the shares came into the demat accounts earlier this year!

Clearly unfair to Deposit Holders…they have not only suffered a write off of 25% and much more on the Principal + a waiver of all Interest accrued and not paid + Time delays in years…but have to contend with a higher allotment Share Price of Rs 11.32,resulting in lesser number of shares allotted and resulting therefore in lesser realisation !

The Share Price History from January 2008 till date is also not very Inspiring…Quoted in the Rs 29-Rs 31 range beginning January 2008,Morepen sank to a range of Rs 10-Rs 12 by end June 2008 (record date)…and further to a range of Rs 5-Rs 6 by end 2008…Then it recovered mildly beginning 2009 to a range of Rs 6-Rs 8 and by end 2009 was trading between Rs 9-Rs 12…currently it has again slipped into a Rs 7-Rs 9 range

So Emotionally it clearly is a SELL signal of the Shares allotted to Deposit Holders as they realise that a Leopard,read the Promoters, cannot change it’s Spots !

Rationally too it is a SELL Signal…These are some relevant financial extracts

• For FY 09,Morepen lost Rs 35 crs
• It adjusted an accumulated loss of Rs 442 crs against Securities Premium Reserves
• FY 09 Networth was Rs 317 crs with a Total Debt of Rs 280 crs
• In FY 10,for the nine months at 31/12/2009,Morepen has a consolidated loss of Rs 11 crs,though on a standalone basis it has recorded a profit of Rs 5 crs on sales of Rs 141 crs
• The FY 09 Equity was Rs 71.46 crs (FV Rs 2)…at 31/12/2009 the Equity was Rs 89.96 crs with the Promoters holding 34.54% … There were 162150 shareholders…over 78000 of these would be deposit holders who have received shares in lieu of their deposits…cause at 30/6/2008 there were 81110 shareholders and after the allottment in the Q3 of FY 10,the number doubled past 160000 shareholders
• Total Capital Employed in FY 10 at 31/12/2009 was Rs 564 crs

To cross fundamentally into Two digit quotes of over Rs 10 and sustain there on the Stock Exchange,Morepen has to register an EPS of atleast Rs 1…that’s a PAT of Rs 45 crs…..with the sort of low margins it’s operating with  in all the segments…formulations,diagnostics and fast moving health goods….it needs Revenues of Rs 500 crs + to record an EPS of Rs 1…..unlikely in the short term

A better assessment of the potential and prospects going ahead can be made when it releases it’s FY 10 Annual Report in a few months….it’s margins,debt situation,segment results…all should reveal a better picture  

I’ve told my Client to action his immediate Emotions on Morepen and SELL his holding of 3313 Equity Shares….better cut off,rather than live in Hope….He had married Morepen with a Deposit….Now with the converted Equity,Morepen has given him an opportunity to Divorce…I’ve adviced him to take this Opportunity

MOREPEN could continue to be spelled MOREPAIN !                 

Just perused the Model Equity Portfolio for India that Reliance Equities International has launched.It’s been authored by their Head of Research

Excited to know what’s in it ! ?…more  so after I tell you that the Report is titled ‘Boom and Bust’ with the tagline ‘Resistance is Futile’ !?

Turned out to be a Dampener really…no Originality at all ! …very unReliance like ! if I can say so !

The Portfolio has got 36 scrips chosen with the following criteria

• The benchmark is the Sensex
• No one scrip should weigh more than 10% of the Portfolio
• Those scrips that weigh individually more than 5% of the portfolio should not collectively weigh more than 40% of the Portfolio
• Liquidity in the Scrip must be there and the threshold is an average weekly trading volume of 4 lakh shares in the scrip
• Sector Allocation done on basis of current view which is Overweight on Energy,Materials,Consumer Discretionary and Healthcare and Underweight on Consumer Staples,Telecommunication and Utilities and Marketweight on Industrials,Information Technology and Financials 

These are my views on this Model Portfolio…I find the Investment Approach too Passive and Defensive and this is probably because the Thinking is UnDynamic…and even flawed…unless the objective is to only mirror the benchmark Sensex    

• It’s got 28 Sensex Scrips out of the 30 possible….They do not like Ranbaxy and NTPC…So there are just 8 stocks in this Portfolio that are not part of the Sensex…These 8 stocks constitute 14% of the Portfolio with Cairn having a 4% weightage,three others with 2% each and the rest four with 1% each weightage
• Top 5 Scrips have an aggregate 40 % weightage…Reliance Industries (10%),ICICI Bank (9%),ONGC and Larsen (8% each) and Infosys (5%)…this leaves it no room,as per it’s selection criteria, to buy into or increase weightage to over 5% in any other scrip,unless it reduces weightages in these Top 5 Scrips 
• The Portfolio virtually mirrors the Sensex and thus should have a Beta of 1…It thus will move more or less the same proportion as the Sensex will…..Might as well have brought the Sensex itself !…It’s clearly a Defensive Approach and  the Strategy can be termed as Passive Investment and therefore the Thinking is clearly flawed….This Portfolio will never beat the Sensex !…even if it does,it would not be by any significant percentage as the 8 Non Sensex Scrips in it have just a 14% weightage….. so what’s the point of Benchmarking !
• Even the Portfolio Sectoral Allocation more or less mirrors the Sensex Sectoral Allocation…even for the Overweights of Energy,Materials and Consumer Discretionary,the extra weightage in the Portfolio is insignificant from 1.3% to 3.4%
• This June 12,2009 Report on Portfolio Strategy states the Benchmark is the Sensex but it fails to Show the Sensex level in the Portfolio…so it becomes easy to relate perfromance…I’m assuming they have taken the Closing Sensex of 15238 on Friday,June 12,2009 as the starting benchmark
• The Report is titled ‘Boom and Bust’ with a tagline ‘Resistance is Futile’….I find this a bit too dramatic a Title with little corelation to this Model Portfolio launch,even after considering that they are positive about India’s Prospects  

Reliance Equities International sees an upside of 15%-30% upside from here in the next six months…18000 Sensex by December 2009…in the range of 16500-19000 definitely…ofcourse the risks have been spelt out

This target is based on FY 11 EPS growth of 17%-22% and a PE Multiple range of 17-19…that’s a Trailing PE of 22 on FY 09 EPS

The Current Sensex Level of 15238 (12/6/2009 closing) is 15.5 times of Projected FY 11 EPS 

So if this upside does happen,the Model Portfolio too will surge proportionately…the problem is that it will be a perfect proportion…so you will not be able to beat the benchmark…so as I stated earlier too, and I reiterate,might as well have just observed a Passive Investment Strategy and Invested in Units of the any Sensex  based Fund….because you’re not really going to be rewarded for any specific equity premium more than the market…. you’ll get what the market gets !…because the beta is One for this model portfolio

Building up your Portfolio on a specific scrip and bottoms up approach with more weightage of Non Sensex Scrips would have given the Portfolio a better thrust,without any significant compromise on Risk Taken…I’m not suggesting you chase Alphas…but atleast give your Portfolio a Chance to beat the Benchmark !

Cheers !