BUY >> Timken India, Emco, Grasim, Kajaria Ceramics
HOLD >> Glenmark, Jindal Saw, Tanfac Industries
HOLD >> Glenmark, Jindal Saw, Tanfac Industries
Sunday, September 11, 2005
Saturday, September 10, 2005
Narmada Gelatines
Up for grabs
Two strong contenders to acquire Narmada Gelatines are Bharti Healthcare and Sterling Biotech. If the deal with Bharti Healthcare takes place then Narmada's production advantage will be difficult to evaluate due to part captive usage. Although Bharti Healthcare has expertise in gelatine capsules manufacture, yet the gelatine manufacturing business will be a whole new ball game for it. Compared to this Sterling Biotech has over a decade's experience in the gelatine manufacturing industry and has been able to maintain a high operating margin of 47% against that of 10% for Narmada Gelatines
Thursday, September 08, 2005
Irrational Exuberance
It was Alan Greenspan who is reputed to have used these words in 1995 when the Dow was around 7500. Later the phrase passed into everyday lexicon when Robert Shiller produced his seminal book on the ongoing subsequent irrationality. And now Mr Chidambaram may have set the cat among the pigeons by saying something (in hushed tones) to the same effect and at the same Sensex value.
Coincidence? Sure. We see unfolding before us almost the same story here in India making you realise how "history does not repeat itself but it sure rhymes".
Mr Greenspan of course wasn't quite right. The Irrational Exuberance did not stop at 7500. US Markets rose nearly 60per cent before falling off the biggest asset bubble in the history of mankind.
Five years and a number of other bubbles later, India seems to be headed the same way. With bubbles blowing all over the world in housing, in commodities and even in precious metals, we are seeing unprecedented international financial flows.
There is talk in the media about the Japanese rebalancing their Asia portfolio, pulling out from China and pumping unbelievable cash into a much smaller market like India.
The logic being that the Japanese have zero cost of capital and find Indian P-Es low enough to invest. After all, what are their options? To buy T-Bills denominated in a heavily depreciating dollar, or to invest in the heavily over valued Euro?
It makes far more sense to invest in the world's only domestic-led growth story, probably the only part of the world which is not part of the US-China current account deficit imbroglio. When this structural imbalance unravels, any large investor like the Japanese banks will be left with massive portfolio losses. India, therefore, is a safe haven - this is the logic of the Japanese flows.
But look at it from India's point of view. You have an excess of cash that is flooding in, funding bubbles across all sectors. This cash will seep into other markets funding bubbles in real estate (e.g. Gurgaon and even Delhi are already running at more than 7 years income and a rental yield of 2per cent).
So what does poor Mr Chidambaram do? His small voice of sanity is hopelessly drowned in the chorus of protest from bullish investors who cannot see this party spoilt. He is like the arrack-shop owner who knows that you need a bouncer to stop a person after his 12th peg. The bullish consensus and the need for liquidity-fuelled overvaluation is now so strong that there are simply too many vested interests involved. The mutual fund industry, the FIIs, promoters of companies who need to make placements, and of course the public-at-large. There is almost no one who does not have a vested interest in bullishness.
But what is the objective of the regulator? He is supposed to aid price discovery and is supposed to cool any excessive distortions. Is anybody in India other than poor Mr Chidambaram concerned about the long-term damage this excess liquidity will do first to the stock market, and then after the asset bubble collapse, to the economy at large?
Let us go back to Mr Greenspan. After the 2000 asset price collapse, he did say that it was only possible for a regulator "to see a bubble after the fact (ie, after it has burst)". There have been few comments by central bankers as hilarious as this one. With this Pontius Pilate-like comment, Mr Greenspan washed his hands of any responsibility for what happened subsequently to the American economy. History will not judge him lightly.
No Indian politician can routinely be courageous (or he will not be a politician for long). But Mr Chidambaram is at the crossroads. Is he mustering up the courage to come down hard on almost every participant in the market and soak up liquidity through a sharp hike in interest rates or other stratagems? Or does he let the party continue? This may be just the start of a bubble that can take on unimaginable proportions.
When going into the details, company by company, I can just point to a few examples of the frenzy evident in the markets:
A) Interest rates, oil prices and auto stocks went up on the same day.
B) Companies which have never delivered an ROCE above 11 per cent are today quoted at 25 times forward earnings.
C) Temporary spikes in earnings and cash flows are discounted into forward earnings as if they are forever. In fact a growth rate is imbued into them. This is similar to the IT boom of 2000, when valuations were based on extrapolating current growth rates to infinity.
India is not a mature economy, Indians are not mature economic players and our country simply does not have the institutional infrastructure (or even the international standing) to soften an asset-price collapse in the manner that Mr Greenspan has done. There will be no bonds we can issue which will be picked up by willing foreigners who have a vested interest in the stability of our currency. The consequences would be closer to East Asia (crisis) than to America. If this trend is not arrested, I see a 1992-like situation with major bankruptcy spreading out into the retail segment followed by a fracturing of the ongoing housing bubble.
The top of every bull market is marked by scams, small and big. You can see them sprouting all over the place, simply too numerous to recount. They can come from mis-stated earnings, over-hyped news, multiple announcements of old-hat news, co-ordinated trading between institutions and operators….all of these simply impossible to "prove" except by anecdotal evidence. Recently, we saw bears getting squeezed out of a number of fundamentally weak stocks, that should be dropping in value.
This is a rare situation when the regulator needs to take an intelligent, broader view of markets. Just like the RBI intervenes in forex markets, or like in 1996, when Mr Manmohan Singh squeezed out excess liquidity to slow down a capex boom; we need a move to slow down this liquidity-driven rally.
If left unchecked, the market would move into territory where sentiment becomes a self-fulfilling prophecy. "Stock prices go up because stocks prices are going up". Such uni-directional sentiment cannot be healthy for the markets, or later the economy.
If the same phenomenon had been observed on the opposite side, ie, excessive and rampant bearishness, the government would have looked for scapegoats. Rather like it went after some brokers, merely because they had short-sold stock at the end of the IT boom. Somehow, it is virtuous to defend "bullishness", but it is okay to let bears be killed. This logic is flawed. Contrarians are the anti-bodies who keep the system healthy…killing them cannot be good for the markets.
The regulator should engineer a slowdown in hot FII inflows, or make them "sticky" (maybe with an "exit tax"). This will keep hot money out, and ensure relatively longer-term investments.
(Sanjeev Pandiya is a contrarian who invests, teaches at XIM and works in the auto ancilliary sector. He can be contacted at spandiya@hotmail.com)
Wednesday, September 07, 2005
How to make a killing in IPOs - CapitalMarket
| Investing in a primary offer is often touted to be less risky than buyingshares in the secondary markets. That is because invariably companies comeout with public offers to fund their growth plans. Since the cost ofraising loans is higher for younger companies, they opt for equity. From an investor's viewpoint, the idea is really to invest in a companywhen it is still at the nascent stage and holds promise for growth. Andprimary offers are also meant to leave some money on the table as a rewardfor investors who keep faith in the stock even before the company hasproved its worth. But most investors today subscribe to initial public offers (IPO) not tohold the stocks for a life-time, or even for a couple of years or months.Instead, they look to make a quick buck by selling their shares as soon asthe stock hits the bourses. As more and more individual and institutionalinvestors try to exit the counter on the very first day of listing, thestock goes through wild price swings. The volatility at the HT Mediacounter which made its debut on the bourses on Thursday last week is aclear indication of this trend. The stock which was issued at a price of Rs530, opened at Rs 685 and surged to an intra-day high of Rs 731 beforeclosing at Rs 557. A total of 199 lakh shares were traded, significantlymore than the 76.9 lakh shares issued in the public issue. How does one maximise gains from an IPO if the idea is to make some quickbucks? Here are a few things you should keep track of. Investors would do well to remember that stocks which are overpriced tobegin with may attract short sellers on listing. Conventional measures suchas the price-earnings multiple - something one looks at while decidingwhether or not to buy a share - should be an indication of whether thestock price is sustainable. But then, it is not just the valuation. Like any other commodity, stockprices are also influenced by the forces of demand and supply which may inthe short run deviate from the intrinsic worth of the stock. If there is ahuge demand for stocks - you can gauge the demand from the oversubscriptionnumbers - investors who got lesser allocations than desired may go on abuying spree in the secondary markets the moment the stock lists. Earlier,subscription numbers were exaggerated because of unscrupulous bids put inby institutional bidders. However, with the Securities and Exchange Boardof India (Sebi) recently introducing upfront margin payment while placingbids, the subscription figures should be a decent indicator of genuinedemand. The third point is the level of leveraged positions. This is a significantfactor that influences the stock price movement on Day 1. In other words,leveraged positions indicate proportion of investors who subscribed to theissue with borrowed money. Since the interest meter keeps running, leveraged investors usually look toexit the stock and take home whatever they can in double quick time. Thereis no way of finding out what portion of an issue is funded throughborrowed capital. All you need to do is to follow news papers and talk toyour stock broker. This is how it works. Assume that an investor avails of 100 per centborrowing to apply for share of ABC company priced at Rs 500. At aninterest rate of 12 per cent, if the investor borrows for one and a halfmonth, which is the case usually, the interest cost would be Rs 750. Now ifthe issue is oversubscribed 10 times, it would mean that every investorwould get only one-tenth of what he applied for. So instead of 100 shares,the investor is allotted only 10 shares. Dividing the interest cost of Rs750 by the number of shares allotted, the cost that has to be recovered pershare is Rs 75. The investor would make money only when the share prices goes beyond Rs575. So Rs 575 is an important threshold level beyond which leveragedinvestors would look to sell. Usually shares open high and head higher as leveraged investors try toartificially push up demand in an attempt to get "decent" exits, and thestock finds its level based on genuine buying interest. If the stockbreaches this threshold level, the fall can be precipitous. |
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Monday, September 05, 2005
Sunday, September 04, 2005
Wind Energy - Sharekhan Special
Wind energy: it is windy
Wind energy has registered a robust year-on-year growth of 44% in FY2005. The current installations in the country are approximately 3,595 megawatt (MW). The ministry of non-conventional energy has estimated that by 2012, 10% of the projected 240,000MW of the new capacity will come from renewables-mainly wind power. We are very positive on the sector since the wind power industry is on a high growth trajectory. The beneficiaries will be major suppliers of wind turbines like Suzlon, Enercon and NEPC and auxiliary service providers like Sanghvi Movers and Kemrock Industries.
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Hindu Businessline Recommendations
BUY >> Sanghvi Motors, GE Shipping, Satnam Overseas
HOLD >> Essar Steel, Aurobhindo Pharma, Clariant, Color Chem, Vanavil Dyes
Friday, September 02, 2005
Small-world effect
CONSIDER this. You receive private information that a certain stock is likely to move up. You share this information with your friend. Two days later, you find that the volumes have increased five-fold and the stock has hit the upper circuit! You wonder how the market knew about the stock. Such phenomenon can be explained by the small-world effect.
At a birthday party, you meet a person for the first time. After a couple of minutes, you find that you are related to that person, or that both of you come from the same hometown. You conclude that the world is indeed small!
In the mid-1960s, Stanley Milgram, then at the Harvard University, performed an experiment to test the small-world effect.
Suppose you give an unaddressed letter to your neighbour, asking him to give it to someone he thinks may know your friend in the US. Based on the experiments conducted by Milgram and others, chances are that your friend will receive the letter by the time it changes six hands. This came to be famously called as the six degrees of separation.
Academicians have applied these experiments to study networks. What if we want to connect various towns across the State?
The small-world effect shows that you need not build roads linking each town to every other town. Paul Erdos, the famous Hungarian mathematician, computed the minimum number required to link any network. Interestingly, the minimum number gets smaller, larger the network.
Now, we know that the investors' network is large. Your friend may have told his friend who, in turn, may have told some others. Soon, the message may have passed on to the entire market. That is, perhaps, why no market information remains private for a long time.
Hindu Business Line
Thursday, September 01, 2005
Talbros - FPO
Talbros Automotive Components
Diversifying into forgings
After establishing itself in the field of gaskets, the company is venturing into manufacture of forgings to meet group company's requirement
Talbros Automotive Components (Talbros) is a market leader in the manufacture of gaskets in India, with a market share of around 50%, and supplies to almost all leading vehicle and engine manufacturers. In the year ended March 2005, about 70% of the sales revenue came from the original equipment manufacturer (OEM) segment and about 16% from the replacement market. The remaining, about 14%, came from exports.
Long-term technical assistance agreements executed with Federal Mogul Sealing Systems (Slough) Ltd., U.K; Nippon Leakless Corporation, Japan; and Ishikawa Gaskets Company Ltd, Japan; have provided the company with contemporary technologies to cater to the demand of all kinds of gaskets to almost all OEMs in the country.
Talbros's issue is to raise funds for setting up a Rs 31.82-crore forging unit to cater to the existing demand within the group, make investment of Rs 4.80 crore in the joint venture with Nippon Leakless Corporation, Japan, for catering mainly to the Honda group of companies in India, and expansion of the current gasket manufacturing facility at the Faridabad and Pune plants at a cost of Rs 9.46 crore.
Strengths
Talbros is well positioned to benefit from the growth in the automobile industry in India. Though the growth rate of the auto industry may come down from the heady days of the last few years, it still will be decent, specially in view of the good monsoon, the continued expansion of road network and the low interest-rate regime.
Weaknesses
Talbros has increased its operating profit margin (OPM) significantly over the past year, which is unlikely to be sustained given the dynamics of the auto ancillary industry. There is a risk of lower OPM in future due to pricing pressures from OEMs, depressing the profit going forward.
Presently, Talbros derives 27% (Rs. 22.35 crore) of its revenue from sales to Honda and its associates in the domestic market. It has recently entered into a joint venture with Nippon Leakless Corporation, Japan (NLK) for catering to the Honda group's requirement, with a 40% share and NLK 60% . As per the terms of the joint venture agreement, the sales to Honda and its associates in India would be phased out of the company into the joint venture over three years. Consequently, there will be a loss of revenue to the extent of the sales transferred to the joint venture company.
Talbros is a new entrant in the forging industry and is yet to establish on quality and price parameters. Inability to meet the required quality standards and supply at competitive price will significantly affect the contribution from the project.
The forging project is being set up primarily cater to the requirement of an unlisted group company, which is engaged in the production of steerings and steering components. This gives rise to quesitons of transparency.
Valuation
The Talbros scrip currently trades around Rs 138, discounting the trailing 12-month earnings on pre-IPO equity by around 14 times, which is reasonable. However, after the current IPO, equity will almost double. The rise in OPM has been a major driver of its earnings growth, but the risk of a fall in OPM in future cannot be wished away due to the normal industry practice of OEM-led pricing pressure. The present offer is being made at a price of Rs 90 to Rs 102, which discounts the fully diluted FY 2005 EPS by 22 to 23 times. Benefits of the new projects are likely to be available mainly from FY 2007. Till then, the earnings growth will not be enough to sustain P/E of more than 20 times.
| Talbros Automotive Components :Issue Highlights | |
| Sector | Auto Ancillary |
| Sector P/E Ratio | 18.4 |
| Price | 90—102 |
| Issue Size | Rs 50 crore |
| Pre issue promoter holding | Rs 2.57 crore |
| Post issue promoter holding | Rs 2.82 crore to Rs 2.85 crore |
| Pre issue paid up capital | Rs 5.75 crore |
| Post issue paid up capital | Rs 10.65 crore to Rs 11.30 crore |
| Listing | BSE & DSE |
| Rating: 43/100 | |
Wednesday, August 31, 2005
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