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Sunday, June 26, 2005
Hindu Businessline Recommendations
BUY >> Sesa Goa
HOLD >> Century Textiles, Balrampur Chini,
Geometric Software, Reliance Capital
Are you benchmarking the Sensex?
The 'Sensitive' index as it is very rightly called is currently at its palpable best. The economic buoyancy, growth potentials and positive upsides have all been emancipated to the hilt and the index is racing northwards at a scorching pace.
When we asked our investors whether they considered the Sensex as the lead indicator of their investment decisions a majority 50% opined in the positive, while the number of those who negated were a close 46%. While we do not deny the significance of strength in the indices as indicators of the rejuvenating India Inc, mishappenings like the Black Monday (11th May 2004) and tech bubble burst continue to linger in the memory.
More here
Saturday, June 25, 2005
Rakesh Jhunjhunwala - The sage of Mumbai
Source : Asiamoney
India's answer to Warren Buffett is catching the eye of some of the region's biggest investor. Meet the renowned Indian investor Rakesh Jhunjhunwala.
Renowned Indian investor Rakesh Jhunjhunwala has been credited with single-handedly turning the fortunes of a company simply by buying its stock. Likened to Warren Buffett, the canny stock-picker with an eye on macroeconomics has profited handsomely in the country's market upswing. Only time will tell if his style is sustainable. Yassir A. Pitalwalla reports.
Rakesh Jhunjhunwala, stockbroker, punter, long-term investor and the latest darling of India's investing classes, is a reluctant hero. For any large foreign institutional investor making an exploratory trip to India, Jhunjhunwala is the man to see. Rumour has it that regional heavyweights such as the Government of Singapore Investment Corporation call him for his views on where the market is headed. "Rakesh's major strength in the last 15 years has been his ability to identify the turning point of the markets," says one hedge fund manager. "By leveraging his own capital he has made a packet of money. Correctly calling the major trends in the market enables him to reduce leverage as the market moves in his favour, rather than assume leverage once a move has begun."
For the son of a tax commissioner who claims to have started 20 years ago with just Rs6,000 (US$138) in borrowed money, Jhunjhunwala has done well for himself. According to data sourced from the Centre for Monitoring of the Indian Economy, his investment portfolio includes as many as 25 companies with an estimated value of Rs6.3 billion.
His friends describe him as a man who dreams big and turned bullish at the right time, making the right calls. "Everything that he has bought since the time that he has come into the limelight has doubled," says Abhay Aima, country head of equities and private banking at HDFC Bank.
Sitting at his desk on the top floor of a swanky building in Mumbai's prime commercial district in Nariman Point, the betelnut-chewing, cigarette-smoking Jhunjhunwala is focused on a slew of trading screens. He constantly calls his traders to direct them to buy index futures or stock futures in big Indian names such as Reliance Industries. While his style may seem that of a day trader, he says he only derives value from his investments over time, rather than overnight. And, typically, only 10% of his wealth is deployed in trading operations. "I want to ensure that if something like September 11 happens I will not lose more than 2-3% of my wealth," he claims.
Small beginnings
Jhunjhunwala's first investment, in Tata Tea, the world's largest producer of branded tea, tripled in just four months. Such immediate success explains why he has never worked for anyone—except during a compulsory period of articleship while studying chartered accounting.
"I wanted to make a career in stocks, which I have found fascinating since childhood, but everybody was apprehensive that I wouldn't make it," he says. That probably explains why his investing commandments include: 'Absolute returns – a passion; safety of capital – a religion; and never forget risk, the four-letter word.'
His strategy of taking large stakes in mid-cap stocks has paid off. A pick such as Bharat Earth Movers, which he first purchased at Rs20 a share, is now worth Rs602 a share; while software outsourcer KPIT, purchased at Rs60 per share, is now worth Rs323.95. Other investments include a stake of 1.4 million shares in medical packaging supplier Bilcare, first acquired at Rs108 apiece and now worth Rs380.6 each. Similarly his stake in Nagarjuna Construction, purchased at around Rs134 apiece, is worth almost Rs729 per share now. Hindustan Oil Exploration has almost doubled in the past two months, while the stock market index has fallen by almost 200 points "Rakesh is a hard worker who knows everything about a company he invests in," says the former head of a domestic mutual fund. "Combine that with the huge pile-on effect of others buying after his name gets associated with a company, and you can understand why his picks are doing quite well on the bourses." Analysts say that with his track record of identifying fundamental stories, Jhunjhunwala has developed a huge following of fans, who emulate his buying and selling habits in the hopes of riding his calls. Thanks to this bandwagon effect, Jhunjhunwala's picks soon begin to look overvalued, says one head of portfolio management at a leading domestic brokerage.
A close look at his investment style reveals a concentration of interest amongst mid-cap stocks that are typically under-researched and, usually, where there is the likelihood of some sort of a corporate action, such as a trade sale, a buy-out or a major turnaround in fortunes. "Rakesh is very good at identifying value stocks that have major event-driven possibilities like Standard & Poor's acquisition of a majority stake in India's leading credit rating firm, Crisil," says the head of a leading investment bank.
By catching companies early, Jhunjhunwala is not deterred by low liquidity. "We are very clear that liquidity follows quality; quality does not follow liquidity," he says. "When I bought into Bharat Earth Movers, the daily traded volume was 25,000 shares. Now it's 15 lakh ( 1.5 million) shares."
Jhunjhunwala's simple investment philosophies are based mainly around the beliefs of successful investors John Bogle and Warren Buffett—to buy stocks that afford a significant margin of safety. The difference is that he also looks to buy the stocks before the market discovers them—companies that are sitting at the cusp of a major opportunity. " India, with its under-penetrated markets for goods and services, is a good place to start most new businesses," says the head of a value investing fund manager in India. "Thus the chance of getting mid-cap companies which will do well is itself quite high. Now, if you can compare the business model of such companies with the performance of companies and sectors globally, you can increase your chances of success."
Another of Jhunjhunwala's quirks is that few of his stocks are institutional favourites. "Most of his stock picks are not investible for us to start with," says a leading mutual fund manager in India. "You need a private equity fund that doesn't have to proactively manage liquidity, rather than an open-end mutual fund, to invest in the kind of stocks he picks." Most of Jhunjhunwala's picks tend to have extremely low trading volumes and he acquires a stake. To ensure he doesn't get stuck with a dog, his team maintains close contact with the company concerned.
While he has earned the majority of his wealth from his investments, it's Jhunjhunwala's ability to make trading profits that provided the seed capital in the first place. "I look at trends and try to play them. I track micro and macro trends and follow corporate performance," he says. "My positions are built in consonance with market liquidity, in liquid stocks and derivatives, so that my transactions have the least effect on the market."
Midas touch or just plain lucky?
His exit strategy is earnings-based, rather than price-based. "We sell our investments dispassionately if we have made a wrong call. Otherwise we exit if we find a better opportunity elsewhere; or [if] earnings have peaked, markets' expectation of earnings from that stock peak or [if there is] a frenzy where valuations peak resulting in unsustainable price-earnings ratios," says Jhunjhunwala. That means instead of setting a price target for the company, Jhunjhunwala sells if earnings are lower than expectations or if the market valuation implies earnings that are far higher than what he expects the company to deliver. "We invest in the realm of possibilities and we have to be prepared to accept that, at times, an anticipated event or growth may not materialize," he says. " Opportunity cost of capital becomes a paramount consideration then."
Not everyone agrees that Jhunjhunwala can be compared with Warren Buffett. Chetan Sehgal, senior vice-president at Templeton Emerging Markets Group, says: "In 2001, 90% of Indian stocks were almost 90% from their all-time highs. So, in a sense, the tough game starts now."
This could explain the change in Jhunjhunwala's investment style, moving from passive investor to a more active investment role. For example, he acquired a 6% stake in Provogue India Ltd before it went public. The company is seeking to create an Indian fashion retail brand and retails through a combination of chain stores, multi-brand dealer outlets and its own exclusive studios. That move marked a clear change in his strategy from listed companies to investing in unlisted ones as well. While the underlying theme of a company poised for exponential growth is there in Provogue's case too, Jhunjhunwala has also been active as an investor influencing the company's strategic direction.
But his detractors say he lacks a cogent investment thesis; and the link between his macroeconomic outlook and how it feeds into his investment operations is tenuous. There are also suggestions that some of the stockbroking firms in which he has large stakes market his picks and sectors to fund managers and investment advisers looking for good ideas. Jhunjhunwala dismisses such claims. "Time will tell," is the curt reply he gives.
In the end, Jhunjhunwala's continued success may come from his ability to focus on one stock at a time, helping him to identify when the up-move has ended. Or it may be a function of the environment, which has seen a period of unprecedented change with commodity prices going from all-time lows to all-time highs. "My luck has changed," says Jhunjhunwala. He has also learned the hard way to not be easily lured by business plans and to challenge businesses' scalability. "I have learned the importance of size," he says. If he can sustain his success, Jhunjhunwala will have single-handedly broken the love-hate relationship cycle that the Indian stock market has habitually had with its heroes.
Wednesday, June 22, 2005
Expect some volatility
The Nifty continued its upmove. On the upside the index could test the 2200-2220 range, which is the upper end of its channel. Intra-day profit taking could be expected around the 2200-2220 range. On the downside the Nifty has a support at 2175. Intra-day volatility could take place on a break below 2175. Below 2175 the index has a support at 2140. Intra-day the Nifty has a crucial support at 2175 and the intra-day bias is up above 2175. TCS has a support at Rs1,300 and on the upside the stock could test Rs1,360. Union Bank has a support at Rs100 and on the upside the stock has a resistance at Rs112. IPCL has a support at Rs163 and on any intraday dips the stock should find support around Rs163. Satyam has a support at Rs500 and on the upside the stock could test Rs525.
Sharekhan
Tuesday, June 21, 2005
Motilal Oswal - Reliance Industries - BUY
Motilal Oswal recommends BUY On Reliance Industries @ 630
Target >> 713
Motilal Oswal - Matrix Laboratories
Motilal Oswal recommends BUY on Matrix Laboratories.
Target >> 250
Sharekhan Stock Update
Tube Investments of India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs480
Current market price: Rs334
TII to unlock value in CIFCL
Tube Investments of India (TII), which holds 48.81% in Cholamandalam Investment & Finance Company Ltd (CIFCL), has approved the sale of a 15.1% stake in favour of DBS Bank Ltd, Singapore at a negotiated price of Rs150 per share. Singapore-based DBS Bank is looking to acquire a total of 37.5% stake in the Murugappa group-controlled CIFCL.
Deepak Fertilisers and Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs126
Current market price: Rs64
Alteration of AOA
Deepak Fertilisers and Petrochemicals Corporation (DFPCL) has informed the stock exchanges regarding the resolutions to be passed at its annual general meeting (AGM) on July 19, 2005. The resolutions to be passed at the AGM also include a special resolution to alter the object clause in the articles of association (AoA) of DFPCL. The object clause defines the businesses that can be carried out by DFP.
Sunday, June 19, 2005
IVRCL - Interview - Businessline
THE stock of IVRCL Infrastructures & Projects has been one of the star performers in the bull market of the past two years as construction sector stocks started to attract investor fancy on a scale never seen in the past. The Hyderabad-based IVRCL offers engineering, procurement and construction services as well as lump-sum turnkey construction projects. Its focus area has been water solution. It has diversified its operations and won major contracts for road projects from the National Highways Authority of India over the past year. IVRCL has been one of the prime beneficiaries from the Government's commitment to boost infrastructure spending. Mr. R. Balarami Reddy, Director of Finance, shared his views on the prospects for the industry and IVRCL in a wide- ranging interview with Business Line.
Excerpts from the interview.
What are the factors that have led to the sharp re-rating of the construction sector stocks, which have risen manifold over the past couple of years?
The construction business has been traditionally looked upon as a cash business. The outlook has now changed. We have become more transparent in its transactions and the government has recognised it as an industry; banks are viewing the sector as a good business to support.
I believe IVRCL has also contributed to this re-rating. The process started after IVRCL announced that two FIIs — ChrysCapital and Citicorp — were investing in the company. The recognition of this sector by foreign investors bolstered positive sentiment. The realisation by the government and others that the country's development rests on the growth of this sector has also contributed to re-rating of stocks from this sector.
How does the acquisition of Hindustan Dorr Oliver fit into IVRCL's growth strategy?
Sixty-five per cent of our turnover is from water-related projects. Hind Dorr Oliver possesses high technical capability in designing water projects and also manufacturing capability for equipment required for these projects.
These were not our strengths. Hind Dorr Oliver was, however not in a position to grow due to lack of execution capability in engineering, procurement and construction and lump sum turnkey projects. We have expertise in these areas. he acquisition would help bring the skill-sets together.
Is the company looking for acquisitions in overseas markets or comfortable with strategic alliances?
We are not desperate to tap overseas immediately. We are comfortable here at present with each construction company having about Rs 3,000 crore worth of orders in hand.
We are familiar with the rules and regulations here. Hind Dorr Oliver and its associate firms, however, have a presence in about 15 countries. This will help us in our foray into other markets.
What is the size of your order book now?
It is Rs 3,400 crore as on date.
Would call the current phase a boom for the infrastructure sector in India? What additional incentives would further boost the infrastructure sector?
The industry has been in a boom phase for the last five years and the same trend can be expected for at least another five years. After that it will be maintenance and revisiting. The industry will not be cyclical and will continue to grow in a steady manner. Several incentives have been put in place. The Government has recognised construction as an industry. But the definition for this industry is still not clear in the Income Tax Act.
Similarly, some government organisations do not accept guarantees from scheduled banks and insist on securing them from PSU banks. These aspects need a re-look.
Do you think the government's budget allocation for infrastructure will help ease the funding situation in the sector?
Definitely, for example, the requirement in Andhra Pradesh for the next 5 years is Rs 46,000 crore and orders have already been issued for Rs 27,000 crore to be completed in the next 2.5-3 years.
For the balance Rs 19,000 crore, some commitments are on from London EXIM Bank and World Bank.
What has been IVRCL's experience in the public-private sector partnership with models such as Build Operate Transfer (BOT), Build Own Operate Transfer (BOOT).
Are these models potential revenue boosters?
These new models have been successful in roads and power sector. However it has not taken off in sewerage/effluent treatment projects. Several aspects still lack clarity.
Toll roads are normally used by high net worth individuals (the rest pay indirectly through buses that they use) who analyse the net benefit derived in terms of time and fuel saved and lesser wear and tear and are prepared to pay the toll. In areas where toll collections are low, Government now supports infrastructure companies with grants (a subsidy-based model), which was not earlier built into these models.
These models are definitely revenue boosters as a regular cash contract has an effective return of 15 per cent; a premium of about 5 per cent is built into such projects to compensate for the higher risk.
What is your geographical spread?
We have covered the southern and western regions and a few areas in the north and east such as Uttar Pradesh, Bihar and Assam. We have no hesitation in taking up projects in any region.
Some projects require you to bid jointly with another entity to qualify. Is the company comfortable with sharing profits in an industry that operates on small margins?
We view joint bids as the cost of qualification. Depending on the requirements of the client we go for joint bids in areas that are not our forte.
What is your view on the trends in steel prices? How are you trying to protect your profitability levels even as material costs continue to be at high levels?
I believe a plus or minus 10 per cent variation in steel prices will continue. Most of our orders, barring a few dated ones for about Rs 250-300 crore, are covered by price escalation contracts. Going forward, there will be no contracts without this clause.
Do price escalation clauses augur well in a competitive bidding environment?
As all companies in case of long-term contracts adopt this rule, no individual company is affected in the bidding process.
Does the company have plans to further increase its equity base?
Not unless we have big BOT projects. Our present debt-equity ratio is a comfortable 0.45 and we have several options to raise funds.
Hindu Businessline Recommendations
BUY >> Reliance Industries, GIC Housing, Satyam Computers
SELL >> Tata Coffee
HOLD >> Gujarat Ambuja
Saturday, June 18, 2005
YES Bank - Capital Markets
Lacks track record
Related Tables
4YES Bank : Issue Highlights
YES Bank (YB) is tapping the primary market to increase its paid-up capital base, meet its long-term capital requirement for growth and diversify the equity-holding structure. Knowledge banking is the bank's USP. The bank will focus on, develop and leverage knowledge in specific, high-growth sectors to win and expand client relationships in them.
The bank has already commenced knowledge banking with respect to food and agri-business, life sciences, TMT, and infrastructure. It is also in the process of instituting the knowledge banking in sectors like textiles, select engineering and retailing. It intends to be a significant player in agri-business sector. Already this sector accounts for 18.1% of its advance portfolio.
YB has two operational branches in Mumbai and Delhi, the financial hubs of the country. It plans to open another 30 branches by the end of FY 2006 in major cities, which would lay the foundation for business expansion and brand building.
Strengths
Experienced promoters are the YB's main strength. Its two promoters, Rana Kapoor (MD and CEO) and Ashok Kapur (non-executive chairman) are two highly experienced bankers who have held leadership positions in some of the world's prominent banks in India. In addition, the two promoters have a proven track record as professional entrepreneurs in establishing and managing Rabo India Finance Private Limited (RIFL), a joint venture with Rabobank, Moreover, the three private equity investors (CVC of Citigroup, Chrys Capital and AIF Capital) have prior successful ventures in India.
YB enjoys potential cost and time advantages due to its technology outsourcing arrangement with Wipro, which allows it to arrange just-in-time hardware facilities and human resource for starting branch operations.
Weaknesses
YB will initially focus on corporate and institutional business, which yields lower margin.
Almost 100% of the deposit portfolio consist of term deposits, which raises the cost of deposits and lowers the spread. It will take some time for the bank to significantly lower its cost of deposit.
The focus on emerging sectors can increase its risk profile as failure rates and scope for shakeouts are high in these sectors.
The Indian banking industry is very competitive and established foreign and private banks with equally efficient business plans are bound to give YB a good run for its money.
Valuation
YB has a limited operational history with two fully completed operational quarters and only two branches. For the FY 2005, it has reported an operating loss of Rs 3.64 crore and a net loss of Rs 3.76 crore. Pre-issue book value is Rs 10.6. However, the bank is offering its shares in the price band of Rs 38 to Rs 45. The logic given is that the post-issue book value will be around Rs 20, based on the upper limit of the price band, giving a price-to-book-value ratio of 2.25, which is considered to be in line with the industry standards keeping in mind the growth prospects of the bank. Some smart begging the question, indeed. Price the shares even higher and the post-issue book value will look even more attractive!
Holdings of promoters and certain foreign investors are above the prescribed limit for ownership in private banks specified by the Reserve Bank of India. However, 49% of the shareholding, held by the promoter group and Rabo International Holding (RIH), has a five-year lock-in (of which four years still remain) and the three private equity investors have a three-year lock-in period (of which two years are still to go). During the lock-in period, there will not be any impact of these guidelines. Hence, no offloading of shares by these groups in this period is expected
RIH has shown considerable intent in maintaining its holding in YB at 20%, which will come down to 14.81% on post-issue equity based on current RIH holding of 4 crore equity shares. RBI has given RIH the required approval to maintain 20% post-issue holding. YB has allocated 3.5 crore, equity shares (50% of current IPO) to qualified institutional buyers (QIB) segment and RIH needs to buy further 1.4 crore shares by subscribing to the issue and subsequently through open- market purchases to maintain its post-issue stake at 20%. This could provide post-issue support to the scrip, provided RIH does not get hefty allotment in IPO.
YB offers a good business plan and financial strength of some major global investors to back it up. But that's the only thing it can offer at this point of time. When dealing with a bank for any purpose, track record is one of the very important criteria, which YB cannot offer.
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