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Sunday, February 17, 2008

Warren Buffet - Rules of Investing

  • "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."
  • "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
  • "You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else."
  • "Our favourite holding period is forever." Letter to Berkshire Hathaway shareholders, 1988
  • "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."
  • "Risk comes from not knowing what you're doing."
  • "If you don't know jewellery, know the jeweller."
  • "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes."
  • "There seems to be some perverse human characteristic that likes to make easy things difficult."
  • "One’s objective should be to get it right, get it quick, get it out, and get it over... your problem won’t improve with age."
  • "A public-opinion poll is no substitute for thought."
  • "In the insurance business, there is no statute of limitation on stupidity."
  • "If a business does well, the stock eventually follows."
  • "The most important quality for an investor is temperament, not intellect... You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."
  • "The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values."
  • "We will only do with your money what we would do with our own."
  • "Occasionally, a man must rise above principles."
  • "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."
  • "Of one thing be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked."
  • When asked how he became so successful in investing, Buffett answered: "we read hundreds and hundreds of annual reports every year."
  • "I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that. “I’m paying $32 billion today for the Coca Cola Company because...” If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money."
  • "You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it."
  • "I really like my life. I've arranged my life so that I can do what I want."
  • "Someone's sitting in the shade today because someone planted a tree a long time ago."

Many hurdles for Sensex

The Sensex snapped its four-week losing streak on the back of a sharp three-day rally. The index, which gained over 1,500 points in the last three trading days, ended the week with a gain of 650 points (3.7 per cent) at 18,115. Earlier in the week, the index had dropped to a low of 16,458.

BHEL, ICICI Bank and Hindalco were the major gainers among the index stocks, with gains in excess of 11 per cent each. Reliance Energy - down almost 13 per cent - was the major loser for the week ended February 15.

It is difficult to say whether the market has bottomed out. The current upmove, however, is likely to continue and the index may rally up to the 19,000 level.

There are multiple resistances around the 19,000 mark. The weekly and monthly charts show resistance at 18,900-18,950, while the quarterly chart indicates resistance at the 19,000 level. The index may face resistance around 18,750-18,950-19,150 this week, while it is likely to find support around 17,470-17,270-17,070.

The Nifty moved in a range of 512 points. From a low of 4,804, the index rallied to a high of 5,315 and finally settled with a gain of 3.6 per cent (183 points) at 5,303.

The index dipped below its 200-day daily moving average (DMA) last week, but has bounced back sharply and is now above its long-term (200-day) and short-term (20-day) DMA. The long-term DMA is 4,998 and the short-term DMA is 5,178. The medium-term (50-day) DMA is 5,700.

If the Nifty crosses the 5,400-mark (quarterly resistance), it may rally up to the 5,600-5,700 resistance zone. This week, the index is likely to find support around 5,105-5,050-4,985. On the upside, the index may face resistance around 5,500-5,560-5,620

Reliance Power Bonus !

In an unprecedented move, Anil Ambani Group company Reliance Power will give free bonus shares to all its shareholders to compensate the losses they suffered when the company was listed a week ago.

"Reliance Power board will consider issuing free bonus shares to all shareholders excluding the promoters," a group spokesperson said.

On the day of its listing at Rs 547.8 a share, Reliance Power performed miserably at the stock exchanges and closed the day nearly 32 per cent lower.

The IPO had attracted a total demand of about Rs 7,50,000 crore and the company had issued the shares at Rs 450 while giving a discount Rs 20 a share to retail investors.

Via ET

Weekend Grey Market Premium

Rural Electrification 90 to 105 24 to 26

GSS America InfoTech 400 to 440 Discount

KNR Construction 170 Discount

On Mobile Global 440 20 to 25

Bang Overseas 207 7 to 10

Shri Ram EPC 300 Discount

IRB Infra 185 12 to 15

Manjushree Extrusion 45 5 to 7

Tulsi Extrusions 85 10 to 15

V. Guard Ind. 80 to 85 8 to 10

Poll Results -Holding Reliance Power from IPO ?

Hail Ambani, Have confidence! 73 (34%)

Yikes! Escaped early 54 (25%)

Same story as Rel Petro! 86 (40%)

Congrats to the 25% ! For the other 75%, there is always hope to rest on

Blue Star

Blue Star has strengthened its position in the domestic central air-conditioning (CAC) market and is poised to tap opportunities in the cold storage segment. Steady growth, expanding profit margins and healthy cash position are factors that lend visibility to the earnings growth of the company. Investors can consider exposure in the stock with a two-three year perspective. At the current market price, the stock trades at 19 times its expected earnings for FY 2009.

Both Blue Star and Voltas have undergone significant re-rating in their PE multiples in the past year. Investors may, therefore, have to temper expectations as returns may not be of the same order as the past one year. Buy in lots to gain advantage from any volatility linked to broad markets.
CAC to drive growth

Blue Star’s central air-conditioning segment continues to be the key growth driver, with contribution of over 70 per cent to FY 2007 sales. Among the major user industries, IT and IT-enabled services and retail segments have accounted for the bulk of the revenues. Blue Star’s strength in the CAC segment arises from its well-rounded capabilities in mechanical, electrical and installation services and after-sales service.

In a move to further equip itself in the Mechanical, Electrical and Plumbing (MEP) area, Blue Star recently acquired Naseer Electricals, an electrical contracting firm. This move is likely to improve the company’s ability to win orders in the infrastructure and commercial segments that require supplementary engineering capabilities. Its success in bagging orders from Delhi Metro Rail Corporation and Nuclear Power Corporation indicate that it has already made progress in tapping infrastructure players.

Blue Star has also quickly made a mark in its telecom segment where it provides air-conditioning for cell sites. With a 185-per cent growth in FY 2007 segment revenue, Blue Star has a market share of 50 per cent in this business. With every cell site requiring air-conditioning, customers such as Bharti Airtel among its clients, and the significant expansion likely in tower infrastructure, we expect Blue Star to enjoy strong growth in this segment.

Blue Star is the preferred supplier for companies such as Infosys and Wipro and enjoys strong order flows from retail and real-estate players such as Pantaloon Retail, DLF and PVR. We expect the present activity in real-estate and expanding demand for space by IT/ITES to convert into order flow for Blue Star, given its entrenched status with corporates. In the super-market refrigeration segment, the company may benefit from its tie-up for equipment with Italy-based ISA on the back of an increase in super/hyper market formats in India.
Robust volumes from split air-conditioners

Blue Star’s room air-conditioner sales have also been clocking strong volumes. While competition in this segment is intense, the company has higher revenue contribution from commercial users, thus reducing competition to some extent. This strategy provides twin benefits of superior profit margins and repeat orders from corporate clients.

Within the home segment, Blue Star has capitalised from the increasing market preference for split air-conditioners compared to window ACs. In 2007, the company’s split AC volumes grew by over 75 per cent as against industry average growth of 47 per cent.

Higher volumes, combined with lower costs arising from its plant in Himachal Pradesh (which enjoys tax exemption for five years), has resulted in increased profitability for this segment. Split AC sales could continue to drive growth in the cooling products business.

For the quarter ended December 2007, Blue Star’s operating profit margins jumped over 4 percentage points to 10.8 per cent, while net profit margin also rose over 3 percentage points.

A better product mix, higher volumes and gains on imported raw material due to a depreciating dollar led to improved margins.

While price re-negotiations by suppliers due to a weakening dollar could mute some gains in future, volume growth and the company’s plan to maximise production at its Himachal Pradesh plant could help profits grow at a healthy pace.

Rural Electrification IPO Analysis

Investors can subscribe to the initial public offering of shares by Rural Electrification Corporation (REC) at the cut-off price. REC’s business is sharply focussed and the company has a robust financial profile despite difficult clients such as State electricity boards (SEB) and other power utilities.

Importantly, at Rs 90-105, the offer is priced attractively and leaves enough on the table for investors in the medium term. Investors should not subscribe in anticipation of listing returns.
Funding electrification

REC’s original mandate was to enable electrification of Rural India through financing of transmission and distribution (T&D) projects and the energisation of agricultural pumpsets.

However, the company has now evolved to finance all segments of the power sector throughout the country, including generation projects.

The company’s clients are predominantly SEBs and state power utilities. Loan sanctions and disbursements have been growing at a good clip; in the last five years, they grew at a compounded annual rate of 28.37 and 13.51 per cent respectively.

The government has set an objective of ‘power for all’ by 2012 which will require massive investment in generation and T&D infrastructure. The company has a tremendous opportunity given its long experience in funding the sector and its position as a prime intermediary for development schemes.

REC is the nodal agency for the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) whose objective is to electrify all villages in the country. Under RGGVY, the government provides 90 per cent funding for projects in the form of grants that are channelled through REC; the latter funds the balance 10 per cent in the form of long-term loans. Such loans typically account for less than 5 per cent of REC’s total sanctions and disbursements in any financial year.

REC is also the nodal agency for two “build, own and operate” transmission projects that have been allotted for tariff-based competitive bidding.

The company will be required to take all preliminary steps for these two projects and administer them till they are handed over to the winning bidders. This is similar to the role of Power Finance Corporation in the case of ultra mega power projects.
Robust financial profile

Though it services clients who are known to delay or even default on their loan obligations, REC has managed to keep its finances insulated and healthy.

The company has a well-structured model to protect itself from defaults ranging from State government guarantees to escrow accounts in addition to the normal charge on assets.

Gross non-performing assets are well under control at 2.39 per cent of outstanding loan assets but the point to note here is that the company is not subject to RBI’s prudential norms for income recognition and classification of assets.

REC has devised its own prudential norms, much like its peer, Power Finance Corporation (PFC), which is also not governed by RBI norms. There is some ambiguity on the subject nevertheless with RBI asking REC (and PFC) to prepare a “road map” for compliance and the issue is still under discussion between the regulator and the government.

REC boasts of a healthy net interest margin of 3.30 per cent (2006-07) which compares with the best in banking and financial services. This is almost on a par with PFC’s net interest margin of 3.52 per cent in the same period. REC has mainly the government to thank for this.

Just under half of its funding comes from cheap sources such as capital gains bonds issued under the Income Tax Act. Given the tax benefit that subscribers to these bonds enjoy, the interest payable is very low.

For instance, the average cost of such bonds issued by REC was 5.48 per cent only as of September 30, 2007.

Besides this, REC also issues taxable bonds which had a weighted average cost of 7.56 per cent as of the same date. The company has also been able to secure long-term loans from banks and financial institutions at an average rate of 7.58 per cent only.

The point is that given its character of a government company promoting rural development, REC enjoys access to cheap funds. Its average cost of funds was just 6.55 per cent in the first half of this fiscal when interest rates were on the boil.
Attractive valuation

REC’s offer is attractively valued when compared to its peer PFC. The profiles of the two companies are similar with REC’s business having a rural tilt given its history. REC is smaller compared to PFC in terms of the size of its business but it appears to be more profitable. Its return on net worth of 21 per cent in 2006-07 is almost double that of PFC’s in the same period.

REC had outstanding loan assets of Rs 31,974 crore as of March 31, 2007 compared to PFC’s Rs 43,902 crore.

At the offer price band of Rs 90-105, REC is valued 9-11 times based on its 2006-07 earnings. In comparison, PFC, at the current price of Rs 184, is valued around 19 times its 2006-07 earnings.

If the annualised first half 2007-08 earnings is considered, the picture is even more favourable for REC which is valued between 7-8 times on its price band compared to PFC’s multiple of 18 times.

REC will have equity of Rs 858.66 crore, post-offer, which is significantly lower than PFC’s Rs 1,147.76 crore and the public float of the former at 18.18 per cent of outstanding shares will also be higher than that of the latter at 10.22 per cent.

The higher public float will enable better price discovery of REC’s shares in the market.
What to watch out for

There are three main risks to our recommendation. First, continued access to cheap funds through the tax-free capital gains bonds scheme. This is important as it enables REC to price its loan products competitively.

The government annually reviews the tax exemption on these bonds and any change in its policy will have an adverse effect on REC’s cost of capital.

Besides, the high reliance on this mode of finance could lead to asset-liability mismatches; while these bonds are typically three-year instruments, REC on-lends such funds for terms of up to 20 years. The company may be forced to cover up a possible term mismatch by borrowing higher cost funds which will affect its net interest margin.

Second, REC lends to some troubled borrowers such as SEBs and rural electricity cooperatives. Though it takes adequate protection, a delay in payments can affect the company’s cash flows, leading to a mismatch in funds.

Finally, the ambiguity over whether RBI’s prudential norms apply to REC is a nagging risk.

Assuming that the regulator’s norms become applicable, it is unclear as to how the complexion of REC’s financial statements will change.

Issue details: REC is offering 15.61 crore shares in the price band of Rs 90-105, half of which is an offer for sale from the government and the balance fresh issue of equity.

The total issue size is Rs 1,405-1,639 crore and the company will have a market cap of Rs 9,015 crore at the upper end of the price band. The issue is lead-managed by ILFS Investsmart and ICICI Securities.