India Equity Analysis, Reports, Recommendations, Stock Tips and more!
Search Now
Recommendations
Sunday, July 17, 2005
Hindu Businessline Recommendations
Buy >> Infosys, Macmillan, Aegis Logistics
Hold >> NDTV, Centurion Bank, Bank of Punjab,
Thomas Cook
Thursday, July 14, 2005
Show me the money - Economist
Mysterious happenings in America's international financial accounts
AT THE start of this year, when the American dollar stood at $1.36 to the euro, most economists expected it to stay weak or to become still more feeble. Instead it has since risen by 14% against Europe's single currency, hitting a 14-month high of $1.19 this week. Another puzzle: contrary to dire predictions that America's vast current-account deficit would plunge the country ever deeper into debt to foreigners, recent figures show that foreign debt has actually fallen, relative to GDP, in the past few years. Does this mean that the current-account deficit isn't a problem after all, and that the dollar will keep on climbing? No, it doesn't.
Last year, America had a current-account deficit of $668 billion. In effect, it had to borrow this amount from the rest of the world. However, the new numbers, published last week by the government's Bureau of Economic Analysis, show that America's net external liabilities rose by only $170 billion in 2004, to $2.5 trillion. The mystery goes deeper. Since the end of 2001, America's cumulative current-account deficit has amounted to $1.7 trillion, yet America's net external liabilities have increased by only $200 billion, and have fallen as a percentage of GDP (see chart). What's going on?
The explanation is that the value of foreign assets and liabilities changes with exchange rates and share prices. The rally in global stockmarkets in 2004 boosted the value of America's external assets by more than the value of its liabilities because Americans own more shares abroad than foreigners own in the United States. In addition, foreign stockmarkets outperformed Wall Street last year.
Even more important over the past three years has been the impact of a cheaper dollar. About 70% of America's assets abroad are denominated in foreign currencies, so when the greenback falls, their dollar value rises. Meanwhile, as the home of the world's main reserve currency, America has the advantage that virtually all of its foreign liabilities are in dollars, so that the currency's depreciation does not increase their value. Thus a fall in the dollar boosts America's net wealth.
It may be tempting to conclude that America can comfortably continue to run huge deficits and let a falling dollar erode the real value of its external debt. But foreign investors are not stupid: if they expected a persistent decline in the dollar, they would demand a higher yield on American assets to compensate them for their expected loss. This would increase the current-account deficit.
If the dollar hangs on to its gains, then the end-2005 figures for America's net foreign indebtedness could prove truly shocking. Brad Setser, of Roubini Global Economics, a research firm, estimates that at current exchange rates the capital loss on America's foreign assets could amount to $350 billion this year. Add that to his forecast for the current-account deficit of $820 billion, and it seems that America's net foreign liabilities could leap by $1.2 trillion, to $3.7 trillion by the end of 2005. Of course, a further drop in the dollar and a fall in American share prices could trim those liabilities again in 2006. But that is hardly a reason to buy dollars.
Wednesday, July 13, 2005
Tuesday, July 12, 2005
Sunday, July 10, 2005
Hindu Businessline Recommendations
Buy >> Rallis India
Sell >> IL&FS Investment Managers
Hold >> Titan Industries, Cranes Software,
Chemfab Alkalis
Saturday, July 09, 2005
Friday, July 08, 2005
Duncans Industries - Motilal Oswal
STRONG BUY
Duncan is story without merits. Its fertilizer plant has already started operations.
G P Goenka likely to call press conference shortly to announce the restructuring plans. As per all analyst, G P is likely to sell assets worth Rs 240 crs to meet up the debt of the company in a phased manner.
It has been also projected the fertilizer unit will do business of over Rs 800 crs in the current fiscal and tea around Rs 200 crs and EBITA on the same shall be not less than Rs 90 crs on an Equity of Rs 53 crs. Another Rs 60 crs is projected on account of interest saving on debt restructuring.
Before the closure of the plant, Duncan did business of Rs 1797 crs in 2001. It has got installed capacity of 6.75 lac tons of fertilizers and worked above installed capacity in 2001. It tea production is on an average of 17 mn kgs in last 4 years.
Promoter's stake is as high as 79% and free float as low as 8%. The Networth of the company is Rs 700 crs whereas its debt is Rs 1000 crs. G P is set to reduce the debt substantially by debt restructuring and also be repaying out of the sell of assets of Rs 240 crs.
In short, Duncan is set to return to its lost glory in next 12 to 18 months. It is a repeat of Triveni Sheet glass. Govt has frozen Rs 400 crs subsidy of Duncan which had brought the downfall of Duncan. With GP's fortune changing in right spirit, who knows he will get back his Rs 400 crs from Govt which could a real bonanza.
From tomorrow, almost all the analysts will start tracking this fertilizer cum tea stock which is riding high at the moment.
Mergers and machismo — Are takeover chiefs acting rationally?
Interesting Read from Hindu Business Line
WHY are some corporate heads so gung-ho about mergers and acquisitions (M&A) when the empirical evidence available strongly suggests that the value created by these exercises accrues almost completely to shareholders of the target company rather than to those of the acquiring firm?
If the popular assumption that corporate chiefs act rationally isvalid, why do so many mergers and acquisitions nevertheless take place? Does this mean that the assumption about the rationality of all corporate heads may, not be entirely valid?
These are some of the questions addressed in a recent study titled Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction, by Ulrike M. Malmendier, assistant professor of finance at the Graduate School of Business, Stanford University, and Geoffrey A. Tate, assistant professor of finance at the Wharton School of the University of Pennsylvania.
In their study, which has been in circulation in the US as a National Bureau of Economic Research working paper, the authors argue that "overconfidence among acquiring CEOs is an important explanation of merger activity", which they describe as "among the most significant and disruptive activities undertaken by large corporations."
"The staggering economic magnitude of these deals has inspired a myriad of research on their causes and consequences. Most theories focus on the efficiency gains that motivate takeover activity, often for specific epochs. The empirical results on returns to mergers, however, are mixed, suggesting that mergers may not create value on average.
Moreover, even if there are gains from mergers, they do not appear to accrue to the shareholders of the acquiring company.
There is a significant positive gain in target value upon the announcement of a bid, and a significant loss to the acquirer. These findings suggest that mergers are often not in the interest of the shareholders of the acquiring company."
But how do we spot overconfidence in a CEO?
Overconfident CEOs, according to Malmendier and Tate, "over-estimate their ability to generate returns." Thus, on the margin, they undertake mergers that destroy value. They also perceive outside finance to be over-priced. "We classify CEOs as overconfident when, despite their under-diversification, they hold options on company stock until expiration (emphasis added). We find that these CEOs are more acquisitive on an average, particularly via diversifying deals." The effects are largest in firms with abundant cash and untapped debt capacity.
Using press coverage as "confident" or "optimistic" to measure overconfidence, confirms these results. We also find that the market reacts more negatively to takeover bids by overconfident managers.
The authors tested their thesis empirically on a sample of Forbes 500 firms from 1980 to 1994.
Their main empirical measure of overconfidence made use of time series data on the CEOs' holdings of company stock options in their private portfolios. "Previous literature in corporate finance shows that risk averse CEOs should exercise stock options well before expiration due to the sub-optimal concentration of their portfolio in company-specific risk.
As in Malmendier and Tate (2003), we classify CEOs as overconfident when they display the opposite behaviour, that is, if they hold company stock options until the last year before expiration.
This behaviour suggests that the CEO is persistently bullish about his company's future prospects. We find that overconfident CEOs are more likely to conduct mergers than rational CEOs at any point in time. The higher acquisitiveness of overconfident CEOs — even "on average" — suggests that overconfidence is an important determinant of merger activity."
"Moreover, the effect of overconfidence on merger activity comes primarily from an increased likelihood of conducting diversifying acquisitions. Previous literature suggests that diversifying mergers are unlikely to create value in the acquiring firm. Thus, it is consistent with our theory that overconfident managers are particularly likely to undertake them.
Second, we find that the relationship between overconfidence and the likelihood of doing a merger is strongest when CEOs can avoid equity-financing, that is, least equity dependent firms. Overconfident CEOs strongly prefer cash-or debt-financed mergers to stock deals, unless their firm appears to be overvalued by the market."
"Additional empirical tests corroborate our results. We show that the observed differences in option exercises and merger decisions are not due to inside information. Instead, the hypothetical returns, CEOs could have obtained by exercising their options earlier are positive on average. In addition, the acquisitions of overconfident managers are distributed uniformly over their tenures suggesting that the effect of overconfidence is a true managerial fixed effect."
To bolster their portfolio measure of overconfidence, Malmendier and Tate constructed an alternative measure based on how a CEO was characterised in the press. They analysed the difference in merger activity between CEOs who were portrayed in the business press as "confident" and "optimistic" and CEOs who were portrayed as "reliable," "cautious," "conservative," "practical," "frugal," or "steady."
Controlling the total number of press mentions, they performed the same empirical analysis as with the portfolio overconfidence measure. The results replicated. Furthermore, the two measures turned out to be "highly correlated."
Finally, they looked directly at the market's perception of the merger decisions made by overconfident CEOs. Using standard event study methodology, they demonstrated that outside investors reacted more negatively to the announcement of a bid if the CEO was overconfident.
This result also held for controlling relatedness of the target and acquirer, ownership stake of the acquiring CEO, corporate governance of the acquirer, and method of financing the merger. Their results suggested that, even if overconfident, CEOs created firm value along some dimensions — and mergers and acquisitions were not among them.
"Our theory of managerial overconfidence provides a natural complement to standard agency theory." Both "empire-building preferences" and overconfidence predict heightened managerial acquisitiveness — as given abundant internal resources — and, as shown in Malmendier and Tate (2003), a heightened sensitivity of corporate investment to cash flow.
Unlike empire-builders, overconfident CEOs believe that they are acting in the interest of the shareholders. Thus, overconfidence, cast as an agency problem, challenges the effectiveness of stock and option grants to top executives as an incentive mechanism. On the other hand, it provides additional underpinning for models of debt overhang.
High leverage may effectively counterbalance an overconfident CEO's eagerness to invest and acquire, given his reluctance to issue equity he perceives as undervalued. In addition, the failure of traditional incentives to mitigate overconfidence underscores the importance of an independent board of directors.
Subscribe to:
Posts (Atom)