Tuesday, July 31, 2007

ACE Refractories gets flipped

ACE is flipped.

I had written earlier that ICICI Venture is on a lookout for a buyer for ACE Refractories that it bought out from ACC for Rs.257 crore. A first for an Indian PE firm to buyout a manufacturing company then, for flipping it later.

ICICI Venture seems to have done it in style. ACE Refractories have been sold to Imerys of France for Rs.550 crore, yielding 100% return over two years.

Good going, Renuka…

Sunday, July 29, 2007

The trouble with more's

Rupee appreciation has cheered many a big corporates that had huge forex loans. But CFOs and auditors are jammed over its presentation to the taxman.

That is, the forex gain has two accounting options.

The gain can be (a) credited to the Profit & Loss Account or (b) represented in the Balance Sheet by crediting the gain to Fixed Asset account (reducing the cost of the asset).

Most big companies are unwilling to take the forex gains to P&L account. The forex gain, as income would increase their Minimum Alternate Tax (MAT) ) liability, which is often kept pushed to the floor. There is some confusion over prescriptions in Accounting Standards (AS-11 by ICAI) and what the law provides (Sch.VI of The Companies Act, 1956)
A windfall doesn't always mean all round cheer, right...?

Thursday, July 26, 2007

Keep it simple, mate

“Use the proprietary Bubble Analysis of the Relative Risk and Return Analysis of Mutual Funds.” Screams the 3 page newsletter from Prudential ICICI MF.

Followed a four chart illustration of “Bubble Analysis” - You just lost me, pal…When you know it’s a bubble, why analyze? Just keep off, you damn fool !

Your B-school modelling sucks, mate. Tell me something new, something I don't know. Just say "buy this stock" and make sure clients make money. Ain't that sweet n' sexy ? You bet.

Get real ! Stop being a stupid jerk wasting time on bubbles and newsletters. Sniff around for better stories and when you have one, come back and ask for my orders

Riding the Jockey

Interesting coverage on Madhusudhan Kela, the star Fund Manager of Reliance Mutual Fund by Bloomberg. I liked his focus on absolute returns and small town wisdom speak –

“You have to identify the jockey. Then the jockey will ride the horse.''

“You get the shade today because someone planted a tree a long ago”.

So far so good… now read this.

We have had three years of learning now and the overall investment philosophy is well-defined. We have detailed spreadsheets and questionnaires for every company that we start covering. We have a checklist of processes and rules on how to invest in large-caps and how to invest in mid-caps, what can qualify and what can't, etc.."

here’s where the smugness creeps in -

I go now that he’s making the mistake most of his tribe make. Over time they tend to relax. Catty instincts blunt and systems and protocols takeover. Market is quite unforgiving on softies. It just strikes. Not many have been able to face up to it.
Be on your toes, Madhu... we love you for that !

Wednesday, July 25, 2007

Can't keep my hands off you, baby...

Déjà vu. Earlier it was the NDA government that fingered India's oil marketing companies IOC, HPCL and BPCL. Then the game was between Ram Naik, Petroleum minister and Arun Shourie, Minister for Disinvestment. Ram Naik opposed privatization of Oil PSUs (needed the fleet of cars, trucks and guest houses for his election campaign, used his power to allot petrol pumps and gas agencies to his cronies) whereas pro-reform Arun Shourie (believed the Government had no business in running businesses) was hell bent on privatizing them. As and when Arun Shourie opened his mouth, the markets loved it and stock prices of Oil PSUs went up ; and they tanked when Ram Naik countered – giving you a clear weekly arbitrage opportunity.

Recently the `idearupt' govt. spooked the market cap of Sugar industry - wanting to smart one up on inflation, it banned exports in an year of record output at the cane fields - by over 70%. Now its guns train cement stocks.
When P.Chidambaram, the Harvard educated, charming Finance Minister of India (FM), spoke to the press after the Budget 2007 presentation in Parliament, he cautioned the Cement companies on profiteering. Cement companies did not heed him and upped the prices citing higher demand and higher input costs. Then came the the May 17 debacle. Hardly had the market recovered in cement stocks from that shock, India’s trade practices regulator MRTPC on Tuesday ordered a probe into the business practices of 14 leading cement manufacturers. These manufacturers colluded to hike prices, alleges a preliminary report by MRTPC’s investigative wing.

Big business is sex and FM is a charmer. Nothing will keep the two away for long…

Tuesday, July 24, 2007

The McKinsey Annuity

Global consulting firm McKinsey advises businesses and usually gets paid. It might as well be its first, having to move the Bombay High Court against two of its big ticket clients [Reliance Industries (RIL) and Reliance Communications (RCom) ] for non-payment of its bill - in this case a fee of Rs. 270 million ($ 6.7 m). As events went, after patriarch and founder Dhirubhai Ambani’s death, the Reliance group had split right down the middle between the two feuding sons' camps in June 2005. Elder son Mukesh Ambani got Reliance Industries (petrochemical, oil and gas businesses), younger Anil settled for the group’s power, telecom and financial services businesses. McKinsey had signed an agreement back in 2001 with RIL before the split, to roll out RCom.

The terms had also offered McKinsey some top ups if RCom revenues were to cross the high watermark of Rs 10,000 crore ($2.46 b) which it did last year. But when McKinsey presented its claim to RCom, it refused payment stating that the deal was between RIL and McKinsey and RCom is not a party to it. Neither would RIL pay up since RCom has since been spun off and now it belongs to the Anil Ambani camp, with which it stands daggers drawn on several issues.

Tricky situation for McKinsey. So it will be for the High Court Judge too, I guess. Further the $ 6.7 m Mckinsey bill also looks more like a milestone based annuity to me…
Won’t be surprised if the Judge refers it to Insurance Regulator for fairness opinion…!

Saturday, July 21, 2007

Heads I win...

Results season throws up a lot of fun. I can’t stop laughing.

Satyam too joined the list of IT majors battered by the rising rupee. The INR surged by nearly 7% against the USD in Q1-08 with every 1% rise shaving off 30 basis points(0.3%) operating margins. Aiming to join the $2 billion league this fiscal, Satyam suffered a sequential slip of 3.88% in net profit for the Q1 ended June 30 to touch INR 3.78 billion ($93.4 m).

Here are some carpings.

Addressing the media, Satyam CFO V Srinivas said, “In dollar terms, we have grown by 10% and rupee terms, the growth is 3%. The 7% difference represents the rupee impact. Revenue would have been higher by Rs 138 crore if the rupee impact was not there.”

Last year when Rupee was declining, has he ever said - “we’ve actually lost market share, but our revenues have been propped up by an appreciating $ against Rupee” – Nah....

Wednesday, July 18, 2007

Kirusa gets it right

When ARPU from mobile users declined, the telcos (carriers) embraced VAS for boosting revenues and profitability. IAMAI-IMRB Survey put Indian VAS market at about $ 700 m initially of which just 24% was shared with content providers. This muscle flexing by telcos had nipped many a VAS service provider in the bud.

Another reason why Mobile VAS do not take off in India is unimaginative and mindless content that nobody needs. Movie downloads, e-mail, web surfing, SMS contests that destroy more value than add, is shunned by the paise-pinching Indian user that likes to roam pre-paid. Watch a movie on a pint-sized screen? Nah... Cast votes by paid SMS on questions posed by news channels ? Forget it. I had lost count of number of VAS startup business plans I had trashed for unimaginative content.

I felt so glad to read Kirusa, a leading mobile VAS provider, announcing the closing of $10 million Series C financing. The funding, led by VCs Nexus and Helion comes after several carrier wins by Kirusa, and the high growth in the Voice SMS space. Now this is what I call being creative - a service millions of users in Asia pacific would love to have – a tribe that abstained from texting since they know only to dial numerals and speak. But Telco ARPUs could be hit further since many calls would now end in 30 seconds flat by voice text.

It leaves money in customer’s pocket and I’d drink to that…keep going Kirusa !

Tuesday, July 17, 2007

Scouring the Valley for deals

Sometimes, if you keep plugging away, you can pull something off — even if it’s daunting during the low points along the way. Yipes, which provides “managed Ethernet services” for corporate customers ran some endless VC funding cycles in the past. Launched in 1998, it had gone through bankruptcy and had raised a whopping $385 million — a seeming impossible amount to generate a profit for its investors. One more symbol of the excess of the Bubble.

Today the company has just been acquired for $300 million by Reliance Communications. Groups like Pramod Haque’s NVP, Focus and Sprout kept investing in the company through the years and probably didn’t make much. In the VC industry, they say any exit is a good exit. The deal works out to about 10 times 2006 revenues. In an earlier interview, CEO John Scanlon told that Yipes was on track to do $70 million in sales this year and is cash flow positive. It had better be.

Reliance also owns FLAG Telecom and this purchase makes them a competitor to Level 3 (LVLT). Yipes extends the reach of FLAG into US metros, especially in the Bay Area and East Coast. The traffic between India and US is on an upswing, and the deal makes perfect sense. Over past couple of years, large corporations have seen their data needs go up exponentially. File transfers, data back-ups, VPNs - all need more bandwidth that what the traditional means can provide. The long-in-the-tooth T-1 doesn’t cut it anymore. Instead an increasing number of corporations are opting for Ethernet-based services.

Yipes is happy to sell exactly that: multi-megabit Ethernet services that were more than a standard 1.54 megabit/second T-1 connection and the expensive DS-3 connections. Reliance will have to keep buying if they want to be competitive in US. It will also be interesting to see how the pros at Yipes handle the meddling family-style management of Reliance, as Om Malik had remarked.

To me, scavenging the Bay area for Bubble leftovers looks to be a good idea. Especially when we have a `fully stuffed’ Reliance ADAG steamroller humming in our backyard, hungry for more….

Saturday, July 14, 2007

India's REIT hand downs

I am not a great supporter of self-regulation because it’ll end up being a free-for-all. The clichéd argument that violators would still abound is no argument for perpetuating lawlessness. But I prefer a quick and crappy regulation anyday to a slow and sturdy one that comes in well after an opportunity has taken flight.

Take India’s regulatory dilemma to let in REITs – similar to SEBI’s dilemma on Hedge Funds. Here the excuse offered is imperfect titles to property, surfeit of black money etc...In the US and UK, they had concerns over these funds too. Nonetheless they were let in with some early guidelines, however skimpy - that quickly helped capture the market opportunity, created jobs and liquidity reigned. But our regulators refuse to read from the same book, let alone from the same page. They are in no hurry to shed the appeal of roadblock contractors and opportunity destroyers. Why do we gladly accept political apathy as the hand we’ve been dealt…?
Andy Mukherjee drives home the point in this interesting article. Excerpts -

“The REIT debate in India is caught in trivialities -

Should the assessment of the value of properties be based on discounted cash flows or some other method? Should net asset values be disclosed once a year, or every quarter?

Perhaps the assessor should seek a legal opinion on each tenancy agreement to see if it is enforceable in a court of law? How about a due diligence on environmental clearances?

This mentality to codify the minutiae, to make no allowances for the seller's reputation risk or the buyer's intelligence, is a big damper. It's also irrelevant because the real, big risks in property investments in India are outside any valuation model. The ``fair value'' of property in India isn't just unknown. In the present state of the physical market, it's unknowable. That is what really needs to be disclosed. After that, it's ``buyer beware.'' That seems to be the pragmatic approach adopted by the Monetary Authority of Singapore.“
Well said, Andy… Hope those who matter hear you.

Renaming greenback

I had recently posted on Chinese surplus ($22.5 billion) and its swelling forex reserves ($1.2 trillion).

Now follows the story of India’s forex groundswell ($214.83 billion) over the weekend. Still we have no trade surplus (as china has) - since our currency exchange rate is integrated well into the global financial system because of which we have an appreciating rupee. Chinese RMB (Yuan) is artificially kept undervalued by about 30% and that accounts for its mighty trade surplus.

Earlier the RBI used to release annual reports on currency reserves. The one linked here is an extract from RBI’s supplement for the week ended 6th July. Talk of changing times….

Chinese had better yield to fervent appeals by U.S Treasury to loosen up RMB. Ben Bernanke gets a stress attack each time he crunches the U.S. trade deficit numbers. Hounded by the treasury, he might as well rename $ as RMB if China doesn't relent....

Thursday, July 12, 2007

Now join the chorus

Just as we thought the sub-prime mortgage woes have abated in the U.S, the after shocks begin.

Going by the news from the Wall Street, two credit-rating agencies stripped away the fragile masks of shaky mortgage securities held by Hedge Funds, exposing their worthless sides. Alarms also were sounded yesterday for the nation's banks when the Federal Deposit Insurance Corp. is looking "very carefully" at how many banks are holding junk mortgage paper, particularly a tainted and repackaged version of the risky junk bonds, known as collateralized debt obligations (CDOs.)

An estimated $1 trillion of CDOs are said to be held by over leveraged funds that could be the first to crack. Ripple effect is sure to be felt across the global economy thanks to the flatness of the financial world.

Infosys Q1-08 results unmasked the first roadkill of a surging rupee. With the stream of bad news that we keep hearing from the U.S, the scope for near-term recovery of the dollar is getting remote.

You chose a flat world…. Now join the chorus – “God bless America !”

Tuesday, July 10, 2007

Cost of regulatory moodswings

Life’s a wave for all – has its highs and lows…SEBI is no exception.
On occasions it’s on a regulatory Viagra and at others just as it has now, it goes flaccid. It’s the same with regulators everywhere.
In the US Sarbanes-Oxley (SOX) is a poster child for a government act whose cures are worse than the disease. Given several ways to dodge its regulations, if one is intent on doing so, efforts to check will almost always fail. To ensure companies comply with the SOX regulations, the four large accounting firms that do almost all public company audits have raised their fees an average of 78 percent to 134 percent in 2004. Professor Ivy Xiying Zhang of the University of Rochester has calculated SOX has resulted in a cumulative loss of $1.4 trillion for the shareholders of public companies – that’s an average loss of about $460 for every US citizen.
In India the regulatory cost will be borne by just about 5% of total population that has any exposure to stock markets. Now do your own math...

Monday, July 09, 2007

You heard me, Mr.Sarin

Has it been a few hours since my last post cautioning Arun Sarin...? It seems he's heard me. Well, I won’t pretend modesty because that’ll be very unlike me. I had timed my hunch very well and might as well take some credit…

Never mind...the message has hit home. Arun Sarin of Vodafone has now come out with a retraction in response to a fuming B.K.Chaturvedi, the then Cabinet Secretary, who denies having been approached by any business house. Chaturvedi said, "India is no Banana Republic that we can give approvals in one day; it takes time and even if there were vested interests trying to scuttle the deal, what is the big issue. It happens everywhere; it is fine as long as we deal with it the right way, which is what we did."

In a subsequent message, Sarin has attempted some damage control by reasoning that his statement was directed not at *regulators* but at *vested interests*. The Anil Ambani Group, the Hindujas, Maxis of Malaysia and Essar had shown interest in the Hutch stake.

It’s o.k, Mr.Sarin… Common sense very often is one of the first casualties for rock star CEOs. And you are way up there…take care…!

Not so soon, Mr.Sarin...

No matter how hard CNBC anchors may try to glorify businessmen, big business everywhere has its murky side. Arun Sarin of Vodafone had this rant at a Global IIT conference in San Francisco. Sarin while calling for more transparency in acquisitions was referring to some of his rival bidders - in $ 11 bn HutchEssar deal which vodafone had won - aiming to scuttle the deal using their political clout.

In May, Vodafone completed the acquisition of controlling stake in India’s Hutch-Essar from Hong Kong-based Hutchison Telecom International Ltd (HTIL). Indian regulations impose a cap of 74% for Foreign Direct Investment (FDI) in Telecom sector. There’s some confusion on the `Indianness' of a 15% slice held by HTIL’s partners and if upheld, would add up the foreign holding for Vodafone and Essar to 89 per cent – that is, violating the FDI cap.
So get less vocal, Mr.Sarin….you aren’t completely out of the woods as yet...rivals could still be out there…

Thursday, July 05, 2007

Rating a crater

The more people working on an M&A transaction, the higher the likelihood the deal is a dog. This is doubly true where one of the Big Four and a Credit Rating agency team is involved.

A Year after US hedge fund DB Zwirn acquired a significant stake in Chennai-based NBFC (non-banking finance company) Dhandapani Finance, it has spotted a crater in the company’s balance sheet. Since the hole is big enough to erode Dhandapani’s capital, Zwirn will now have to look at ways to either recapitalize the balance sheet or plan an exit – as per this report.

When Zwirn had picked up 35% stake, it had appointed the management consultancy firm KPMG to carry out the due-diligence. Apparently KPMG did not find anything materially amiss then. Being a deposit-taking NBFC, Rating agency Crisil had on December rated its fixed deposit at FA+/stable. Fun is, the stake of the hedge fund in the NBFC will go up by an additional 10% when its convertible stock kicks in. All in a company that has a gaping hole for a KPMG diligenced balance sheet....and SEBI lines up rating agencies for IPO grading too - poor souls, retail investors....

Tuesday, July 03, 2007

A finger in every pie

Every bull market bring back some old ghosts. Unrelated diversification - as they came to be known is slowly making a comeback. As a strategy, if you thought it had been restricted to giants such as Bharti, Reliance, the UB Group and ITC, think again. Smaller Indian companies, too, are expanding their portfolios.

But there are arguments for and against.

John Matsusaka’s “Corporate Diversification, Value Maximization, and Organizational Capabilities” (Journal of Business, 2001) develops a model in which firm capabilities are unknown ex ante, must be discovered over time as entrepreneurs experiment with different combinations of business units. Hence in a cross-sectional analysis diversified firms may appear to underperform more focused firms, but the unrelated diversification is a necessary step toward the discovery of future capabilities, and is thus value creating.

My own experience tells me unrelated diversification may occur when firms possess excess capacity in “headquarter services.” The conglomerate’s central office, like a consulting firm, provides specialized support and advising services to its portfolio companies, creating value even when there are no operational synergies among the operating units.

Bet big on luck too…

Sunday, July 01, 2007

Infosys-Capgemini...did we get it right?

Read it recently. But why Capgemini? The next sound I heard was the bam bam bam of my head banging against the wall.

May be the mongers got it wrong. The space getting too crowded, Rupee appreciation that shows no sign of relenting, Visa woes, wage inflation and attrition getting out of hand - for Infosys, there never was a better time for a sellout. Organic scale up plans and revenue growth would depend on faster recruitment of skilled engineers that is in severe short supply. May be an Accenture, IBM, EDS or even CG bid for Infosys makes a better sense…
Infosys management has been assiduous all along and I trust them for their deliberative approach. They wouldn’t load up debt in their balance sheet for acquiring a CG that it cannot discipline. CG is way too big, imbibed a lot of bad habits and is diverse in culture. Founders using the revolving door, rumors of a senseless acquisition….it looks like a dry run to me before a more dramatic something at Infosys…?

Shall we call it a sellout dance…?