Tuesday, December 30, 2008

Should they junk SATYAM management?

The (A)SATYAM saga is getting messier by the day.

The issue has meandered around a lot of flaky bends. First it was the bid to diversify into real estate defying all norms of corporate governance by disregarding the need for shareholder approval before making a strategic business shift. Then came the relevance of independent directors on its Board, that remained passive to promoter Ramalinga Raju’s initiative to buy grossly overvalued family concerns. Almost all of them have since resigned. What followed was yet another rant on Raju’s wiliness – how could he pull off all this while his stake has dwindled close to nothing (all of his 8.6 % in SATYAM was pledged to institutions to raise funds to finance MAYTAS venture that lost almost 80% of its value in the recent real estate meltdown – the institutions have recalled the loans that Raju could not meet and they sold his entire stake in the open market last week as the story broke).

And the latest is, HP training its guns on SATYAM. Gartner studies say IBM leads the global IT services market with around 7.2% of the market, followed by HP-EDS with around 5.3% of the market. HP overtook second-placed Accenture after it acquired EDS earlier this year. The global market for computer services is estimated to be around $748 billion. Even after the EDS acquisition, through which HP gained over 20,000 employees of MphasiS, it trails both IBM and Accenture in terms of offshore strength. IBM has over 73,000 professionals in India and Accenture some 37,000.

And now a fresh debate. Should the existing management be allowed to continue given their track record of delivering consistent business growth? I too believe that a change could be harmful and are willing to give the existing operational team a chance. Had the management clearly realized its mistake and makes amends on the governance front, it’s better to run with the same bunch that ensures customer comfort and affirms durable relationships. It’s not easy to let go off clients GE, Qantas and regain their confidence in the short term for any new management.

Wednesday, December 24, 2008

SATYAM is up for grabs, pal

Ok. Enough is said about SATYAM COMPUTERS in the last one week. I come straight to the point. Dice begins to roll on who gets to buy SATYAM now that it is a sitting duck for a strategic investor / a PE raider. Want proof? Check out the huge volume of 90 million shares changing hands in the Indian stock exchanges (NSE and BSE) even as we still have a good 2 hours of trading left!!

I stuck my neck out and wanted a piece of action. Bought some SATYAM stock today. Here is some perspective on the India Offshoring scenario that I checked out before buying it. Feels good, buddy... the stock is already up by 5% from the price I bought...

So....I am already in-the-money :-) on my SATYAM buy of this morning. Aren't you too?

Monday, December 22, 2008

Art of getting independent directors to act

Why do independent directors discard independence? Protecting minority investors yield them nothing. That’s why.

If they dance with the founders/incumbent management, they get generous sitting fees, commissions, occasional foreign junkets, vacation homes and transport free for them and family. For ex-B School faculty and bureaucrats that deck up as independent directors (just to check the columns in the compliance sheets) these freeloads are incentive enough not to disturb the peace and quiet at Board Meetings.

Few have the courage to transcend political correctness (at Board level, read "Promoter Correctness") and strive for human righteousness. Character is doing the right thing when nobody's looking. There are too many people who think that the only thing that's right is to get by, and the only thing that's wrong is to get caught – like the independent directors in (A)SATYAM COMPUTERS recently realized. In the end, if you have integrity nothing else matters and if you don’t have it, nothing else matters as well. So why load up excess baggage?

To the regulators, I would say please don’t slap more laws. We have enough. Laws control the lesser man. Right conduct controls the greater one. Have the courage to blacklist independent directors when they fail. Deprive them of all their Board seats and disqualify them straightaway. Companies Act has provisions for disqualification of directors already. Go enforce them.
Or better still, let the minority shareholders pool in and give them freebies :-)

Wednesday, December 17, 2008

It's time SIEMENS relocate to India

Poor SIEMENS. It just got unlucky.

Too much is made out of a bribery scandal. What did it do after all? It ran a cash desk for its managers to draw money at will and offer kickbacks to get deals. Over time, they say it added up to $800 million or so. So what? Didn’t late Dhirubhai Ambani (and now his sons) build the Reliance empire by bribes? The Ministers do its bidding in the Parliament. They fight its war. Even as RIL (led by Mukesh Ambani) backtracks on its earlier agreement to sell gas to RNRL (led by feuding brother Anil Ambani) at concessional rates, Murli Deora, the Minister for Petroleum and Natural gas will force his bureaucrats to file an affidavit to help beef up the RIL case. The bureaucrats in the government where Reliance had something to do get two pay checks every month. A smaller one from the government and another one much larger from Ambani’s cronies. In return, they let Reliance import capital equipments at `NIL’ rate of duty by accepting its classification as `gift’ – yes, gift of an entire plant by an overseas supplier and more.

But that’s in India. In Europe and America they look down upon corruption. They won’t let companies get away with bribed deals. They are grilling SIEMENS and imposing massive penalties. But a Bernard Madoff type $50 billion ponzi schemes are allowed. Their investment banks are allowed to issue junk bonds that have little or no underlying asset that have the power to bring down their economies. [Hell the serial collapse of Wall Street banks looked like some Communist government issuing a “shutdown-or-else” diktat to free up pricey real estate – like they do in China pushing the poor people into hinterlands to make room for Olymipic stadium and other urban infrastructure. They let their auditors, credit rating agencies and regulators get away scot-free. Even Governors can sell senate seats and the courts don’t allow their removal.
Hypocrisy? Well, ok for lack of a better word.
I have some advice for beleaguered SIEMENS management – Relocate to India. You have all the right qualifications :-)

Tuesday, December 16, 2008


“Satyam” in Sanskrit and a host of Hindu Dravidian languages like (Tamil, Telugu, Kannada and Malayalam) means Truth / Honesty.

Asatyam” means just the opposite.

With the investor backlash over the attempted skullduggery by its management (with just 8% stake) to bailout the slumping Raju family group (Satyam founders) concerns MAYTAS Infrastructure and MAYTAS Properties (MAYTAS incidentally is SATYAM spelt reverse) for $1.6 billion (that's all the cash in its balance sheet!) and the subsequent calling off, there seems to be a good case for renaming the company as ASATYAM Computers. It’s not its first attempt by the minority management to oppress other minority shareholders. The group is known for its several dubious pursuits committed with impunity earlier.

Monday, December 15, 2008

Mortgage crisis, Madoff madness - so what comes next?

Agreed. Mortgage crisis was because of a complex web of sliced and diced mortgages that escaped instant scrutiny. But how about a ponzi scheme run by an ex-Nasdaq broker dealer?

As a broker-dealer, Mr. Madoff's firm was already heavily regulated, and news reports say the Securities and Exchange Commission investigated him in 1992 without finding anything wrong. The SEC said in a statement Friday that its New York staff also conducted inquiries into Mr. Madoff's firm in 2005 and 2007. Mr. Madoff's separate investment company registered with the SEC in 2006, which is all that hedge funds would have had to do under the SEC's proposed (but failed) hedge-fund rule of a few years back.

The recent spate of scams from the US has made this once famous financial innovation powerhouse a den of con artists and shoddy regulators. Alright how about foreigners that invested so much money?

Without this flow of easy money into the U.S., globalization in its current form would not have been possible. The U.S. was the consumer of last resort, absorbing cars from Germany and Japan, electronics from Taiwan and Korea, and clothes and furniture from China. The earth was flat, and why not? Pluck a laptop from Taiwan and pay for it with a home equity loan, which—if you trace back the connections—was at least partly funded with foreign money, too.

The big unanswered question, for years, was why this money flow persisted. Why the heck were foreign investors willing to lend the U.S. such large amounts of money on such good terms? Economists and journalists spun out hypothesis after hypothesis (we'll see more below), but there was no agreement on why.

What comes next? The fallacy is punctured. Globalization will be seen as what it is—a game with risks that can't be wished away. And U.S. prosperity will depend on the success or failure of its ability to innovate—not its ability to tell an implausible story to foreign investors.

Thursday, December 11, 2008

Breaking the back of Indian Realty

Readers of this blog may be wondering why there is a sudden slowdown in posts. Well the truth is there is not much worthy of finding a place here and I don’t post something that I don’t feel seriously about. Moreover, volatility in the stock market has given me little time to waste and make use of every available opportunity to make a quick buck. After all, it’s time we make some money now that the market has occasional rallies – bear market or not.

Now I find this. Realty prices in India could correct by over 30% - now this is it. This is when reality dawns on realty. How long could they hold back? Stock markets have given a thumb down to the sector, there is a credit crunch and bankers are loath to lend to real estate players. But these scums wouldn’t budge. Now it seems their back is breaking.

I am normally not a saddist. But as far as unreasonable realty sector is concerned, I’d gladly be one.

Saturday, December 06, 2008

Farewell Mr.Kamath and Welcome Ms.Kochhar

ICICI Bank finally nails down its succession plan. Outgoing CEO K.V.Kamath (who will now be its non-executive Chairman) is to be replaced by Ms.Chanda Kochhar, currently Joint MD & CFO.

Kamath has been instrumental in turning ICICI, the erstwhile public sector project finance outfit into a private sector full service commercial bank and then in hoisting it as India’s second largest bank (balance sheet size) until recently, when the impact of the bank’s overseas bond portfolio facing massive erosion triggered a run on the bank. Depositors panicked and pulled out deposits that almost eroded the bank’s substantial deposit base. Among Indian banks, ICICI Bank had one of the largest exposures to overseas assets. According to statements tabled in Parliament, ICICI Bank suffered mark-to-market losses of $264 million in the credit derivatives segment. The bank had about $2.2 billion worth of exposure to credit derivatives while the largest bank in the country, State Bank of India (SBI), has an exposure of about $1.1 billion. Though the bank has not directly invested in the US market, it has taken a beating due to the depreciation in value of securities witnessed in the global markets.

In comes Ms.Kochhar at a time when a collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies is having a ripple effect around the world. She is going to have a tough time ahead because she has to lift a troubled bank out of a mess created not just by itself, but the global financial world.

But if she is lucky enough to have the bailout and economic stimulus tailwind propelled by central banks and governments around the world, she has the caliber to see the bank through its crisis.

Let’s welcome her to the hotseat. And farewell Mr.Kamath !

Wednesday, December 03, 2008

See how they squeal

I was at the Reuters India Investment Summit last week. The usual suspects were in full attendance – Akhil Gupta of Blackstone, K.V.Kamat, ICICI Bank, Manisha Girotra of UBS besides some irregulars like Arun Shourie of BJP, Arvind Virmani the chief economic adviser to MoF, Suresh Senapati of Wipro, G.V.Prasad of Dr.Reddy’s etc.

Here is the report from ET. I tuned my ears to Akhil Gupta of Blackstone who wanted more policy freedom as it was facilitating “crooks” and not strategists. He found support from the investment fraternity as well. "The flow price rule is a stumbling block," said Vedika Bhandarkar, of JPMorgan. "In a falling market like India, if you have a six month rule you can't do a deal. That rule, we expect to be relaxed soon."

I allowed myself a smirk. Aren’t these the same guys that clamored for the rule to stay when prices were soaring? They enjoyed the flow price rule and were valuing on the basis of last 6 months average price and forcing company management to accept it because the regulations said so. Now when the prices have caved in, it hurts them. Now Akhil Gupta worries the rules favor a crook, while he goofed up on his choice of investment in Gokaldas exports and (Ushodaya enterprises that went see-saw) the like. Blackstone, Gupta’s employer is famous for big time goofing up. Remember their $36 billion acquisition of Equity Office Properties Trust from Sam Zell way back in Nov.2006 when mortgage prices were peaking? In less than a year, they realized their blunder and started stripping it off its priced assets. But its CEO Stephen Schwarzman smartly went public and cashed out before the serial guffaw took its toll on his personal holdings. And Gupta is squealing about crooks outside!

Saturday, November 29, 2008

PE funds need to talk straight

Private Equity can do with some straight talking.

“One of [PE’s] defining characteristics is never, ever, to admit to a mistake in public. By convention, most buy-out bosses maintain that they anticipated a recession and acted cautiously. In reality, the buy-out industry had its biggest-ever binge just before the bust began. Most big firms paid silly prices for companies using sillier levels of debt.”

I have solid data on PE investments in Indian companies at obscene valuations. Some of them were mandates that I had turned down because the asking price was too high. But there were ambitious investment bankers / fee hungry brokers that went ahead and goaded their PE clients to invest in. Result - every company in PE portfolio has its valuations deep underwater. Recognizing their liberty to keep it locked down for several years, the PE fund managers get away without marking their investments to market. But the pension funds and other investors in the Funds, have regulatory mandates advising them to mark down their investments and disclose the level of erosion.

Now I have mandates from three funds that badly need to reshuffle their portfolio. Tell you what? There are no takers even at this down to earth valuations, not even the owners and majority shareholders!


Tuesday, November 25, 2008

NTMA - asking for bankruptcy

India’s bond market is nowhere near the maturity level of its equity markets. Reasons are not so hard to seek since equity offers ownership while debt carries an obligation to repay. When a debt paper is issued and if it is held till maturity, the obligation to repay rests with the issuer. But if it is allowed to be traded, the issuer gets back in the picture only if the instrument allows recourse. Naturally, when it comes to soverign (or Public Debt raised by Government) debt, our policy makers played safe and entrusted RBI to be the custodian, issuer, manager and Regulator of its financial needs. It suited just fine.

Earlier in the 2007-08 Budget, the monetary and debt management aspects of RBI is sought to be separated. On Friday, the government released a draft Bill to create a statutory corporate body called the National Treasury Management Agency (NTMA) to carry out debt management, cash management and management of contingent and other liabilities of the Centre and states – in the process stripping RBI of this responsibility. Former Finance Secretary S.Narayanan blows the whistle in his Livemint column.

Primarily Mr.Narayanan’s concerns are –

(a) Moral hazard – Minus the regulatory oversight by RBI, that it has ably executed for the last 60 years, NTMA functioning under the budget division of the ministry could become a carte blanche for Finance Ministers to raise funds at will. The propensity for excessive borrowings by the Governments are well documented in the past. Our budget deficits are a direct result of that profligacy.

(b) Mortgage of sovereignty - The draft Bill envisages that government bonds will be available for sale in India and abroad. It means that for the first time since independence, we will be offering sovereign bonds to overseas investors. Earlier, finance ministers and governments have shied away from this, for committing a sovereign to a debt that can be called outside the country has been a very sensitive and emotional issue. It has been a principle so far that the sovereign, the state, would not issue debt overseas.

(c) Fiscal discipline – It will in effect, empower immature policy makers to design debt instruments that they hardly understand. The recent mortgage crisis in the US that is still playing out, breaking banks after banks in the process, stands ample testimony to all likely outcomes.

As the citizen of this country, we’re already exposed to the recursive cycles of inflation and deflation. As a nation of savers, we are already parking most of our savings with the Governments (Post Office savings, PF, PPF, NSS, NSC, RBI bonds, Sr.Citizen bonds etc.) A tradeable bond market will only enable some dubious corporates to stick their trash debt paper to some unsuspecting and gullible public. We know the allegiances of Finance Minister Chidambaram, Petroleum Minister Murli Deora, Telecom Minister A.Raja et al. Now we don’t want self-imposed bankruptcy added to that. Do we?

Not just because Mobius said so

Mark Mobius is an omen. I remember him saying the market is overheated back in 2000 that marked the beginning of market collapse. Now he says India looks attractive and he is serious. He is somebody if he is heading $24 billion in AUM of Templeton. His words carry the weight.

So sleeping tigers, pick up your loose change (if that's all what is left :-) and go for broke. Anyway when you’re down by 60%, you ain't got much choice, have you?
Not just because Mobius said so...

Monday, November 24, 2008

Turnaround strategy for airlines - "shut down"

Vijay Mallya is flamboyant even in the face of absolute ruin. Here he says "This long-awaited initiative will stabilise the aviation industry and provide much needed financial stability to airlines. In response to the initiative from the government, Kingfisher will immediately reduce air fare across the board as soon as the declared goods classification is approved."

But has he got a choice? He knows he is in deep trouble after having lost 60% of his passengers ever since he cannibalized Air Deccan (the LCC) and hiked the fares. The whole of aviation industry is bleeding as former air travelers flock to not so badly run Indian railways. I used to fly Bombay-Delhi often earlier but after my recent journey by Rajdhani Express (overnight, complete with A/C sleeper, dinner, breakfast, beverages and water), I am a card carrying member of the Rajdhani user club. Soon I’ll be a fan of Indian railways.

I save a lot too in time and money. The airport is an hour’s drive from home, will have to check in at least an hour before and then at the destination, I’ve to pay for the cab for another hour’s drive. The total cost of one way travel between Bombay – Delhi will be about Rs.8500/-. By train, it costs me just one-fourth of that. Given that there is a recession around and the stock markets are scraping at the bottom, the savings don’t hurt at all!

As I see it, there’s one sure way how airlines can get back into black – “shut down”!

Thursday, November 20, 2008

"Never even try"

Dr.Jaimini Bhagwati calls for public sector (government controlled) Credit Rating Agencies (CRA) to deliver objective evaluation of security instruments in the interest of investors.

His concern is genuine since there is just the three globally recognized CRA – S&P, Moody’s and Fitch that run the show. (In India we have CRISIL, ICRA and CARE and that’s it.) He explains how the flawed rating processes of S&P helped rate sovereign rating of GOI bonds lower than that of ICICI bank at one time, an year or so ago. His case – CRAs are paid by issuers and hence there are limitations to the level of objectivity an investor can expect out of them. Need of the hour, therefore is establishment of an Indian public sector CRA to increase competition and provide benchmark standards.

I take off from there. Then what happens? Like PSU oil companies, populist interest will upend commercial imperatives. Our politicians will call the shots. Will RIL bonds get a bad rating if Murli Deora is the Minister in charge? Look how he made GOI intervene in the ongoing dispute between RIL and RNRL in the matter of KG gas distribution. Now imagine Amar Singh at helm – ADAG group companies could be awarded ratings equal or better than sovereign ratings of GOI bonds. Reliance Capital will run M/o Finance, SEBI and Company Affairs. Every shift in incumbency will influenze the rating outlook. Are investor interests protected or are they imperiled as the saga of ambivalence plays out?

Today CRAs have authority but no responsibility. I suggest a participative method – make them what I call `backstop underwriters’ by entrusting a portion of underwriting obligations to CRAs, making them own up to their ratings. This is how it works. If the rating awarded is downgraded within say, a year of issuance or if the issuer defaults in its commitment to the retail investors within that period, then CRA will have to step in and bailout the investor. Investors will be glad to pay a small nominal premium for that reassurance. That way, CRAs can augment their income (fee for backstop underwriting besides rating fee) and ensure the objectivity of their processes as well. Investors get a toe in the door and Issuers save on the retail portion underwriting fee as well. Win win?

Bringing a politician have only complicated issues everywhere. Look what’s happening in appointments of PSU / Nationalised Bank Chairmen, Central and State Police Administration and frequent transfers among Income-Tax bigwigs. Think of Shibu Soren at the helm and imagine what would Anil Agarwal of Sterlite get away with? I go “Never even try”.


"Vaccum before you dream again"

“The stock and commodity markets seem to go just one way and that’s down. Hundreds of millions of market cap eroded, value destroyed. The recession is here to stay and no policy measures, interest rate cuts, liquidity infusion seem to work. OMG, it’s pushing us back to where we started out – point zero.

Not that I am scared. But it’s a daunting task to claw your way back from such depths. I’d managed it with little resource and a lot of will. But I was a lot younger then. Now after a couple decades, if I’ve to repeat that trek, I might have to reinvent. Then I was alone; now I’ve got a family too!”

This was the kinda’ talk that did rounds when a bunch of us old pals met recently. There were software pros, engineers, finance pros and even one professor of economics in the gang. This concern about the future and the hard times that we’re forced to go thro was the common thread.

They say if we are facing in the right direction, all we have to do is keep on walking. But who knows? Suddenly we feel like a bundle of beginnings. In front of us lay a stone with a hole in it. Who could’ve bothered to drill it? Nature. The drops of rain make a hole in the stone not by violence but by oft falling. That meant something. It really did. You can't go through life quitting everything. If you're going to achieve anything, you've got to stick with something. Consider the postage stamp: its usefulness consists in the ability to stick to one thing till it gets there. The race of life is not always to the swift, but to the one that keeps running. Fall seven times, up eighth.

Coming to think of it, this recession is like a mountain. Nobody trips over mountains. It is the small pebble that causes you to stumble. Pass all the pebbles in your path and you will find you have crossed the mountain. So why despair? It's often the last key in the bunch that opens the lock. You may not be there yet, but you're closer than you were yesterday.

And what if your dreams turn to dust? Simple. Just vacuum before you dream again ;-)

Thursday, November 13, 2008

The serial bailout ?

Following Wall Street rescue, the opportunistic bug seems to have bitten battered Indian businesses. Politicians, the chief patrons of Indian business turn willing side kicks. Recently Praful Patel wanted Airlines to be bailed out until Chidambaram refused to play ball. He just stopped short of restricting it to friend Vijay Mallya (Kingfisher Airlines) and by extension Naresh Goel (Jet Airways) to limit tax payer burden. Air India, the government run airline never mattered to him as much even as it was notching up losses for several years now and making do with ageing airplanes. It suited his friends better to let the country’s premier Airline to bleed. But it just worked out the other way round – the private airlines began to bleed.

So what to do now? Ha, we take a leaf off Wall Street rescue staged by Hank Paulson, ex Goldman Sachs dealmaker. Bail the airlines out too.

Last week, the stock of Las Vegas Sands Corporation collapsed. Bankruptcy seems a real possibility. Indeed, the whole casino gambling industry in Nevada is facing the worst crisis in at least a generation, maybe ever. Casino gambling directly employs more people than the domestic automobile industry. Add in the supply chain for both industries, and casinos still employ almost half as many people as the automobile sector.

So what about a bailout for the casino industry? Ridiculous! Right? What next? Bailout Matka, then drug dealers, Mafia…? [Dr.Vijay Mallya is a liquour baron!]

Monday, November 10, 2008

Mr.Bernard Shaw has been perceptive

"If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience" – George Bernard Shaw

So I read Sandeep Singhal, MD, Nexus India Capital ( PE fund) and Pankaj Dhandaria, Director, Transaction Advisory of E&Y, reaffirming India as an attractive Investment destination for PE funds as it has robust financial, legal and regulatory framework, mature markets and although moderated, still being reckoned as a growth economy. The long-term perspects of funds, with 7-10 year lock-ins, is aligned with India’s medium- to long-term growth potential. So isn't it time for all the old rhetoric to make a comeback? You bet -on india’s long term prospects, an aspirational young population, the entrepreneurial spirit, resilience, perseverance and innovativeness of Indian promoters that promises great returns to patient PE investors or so it begins to go.

So I ask, why did they run away…? Have something changed in between…?

Pankaj argues Indian infrastructure and Industrials offer great opportunity since there are several projects now reasonably valued, yet to achieve financial closure. They all need capital.

So it’s been always… They found it so and that’s why they came here… What made them dump it all and run…?
According to Bain & Co, a consultancy, private equity funds invested a total of $1.4bn in 2006, and $3.6bn last year. However, in the year to date aggregate, Pipe investments have totalled $1.4bn.
They had better recognize the problem is with the PE investor mindset. Especially the foreign ones. They chased projects madly when valuations were ridiculously high, deals I thought should never happen, happened. But they haggle for downside protection and guaranteed returns now when demand has slumped and a recession looms. I hear them say as FT quotes it “Private equity firms will no longer invest in straight public equity. If we do these investments, we want some kind of structured protection.” Here’s another from Sri Rajan, Head - PE practice, Bain & Co, India: “Given the current investment climate, the existing Pipe model has lost favor among private equity funds operating in India. Understandably, firms are now looking to invest in ways that offer them downside protection.”
O.k, some late wisdom that. It dawns only when PE investments go deep under water (Blackstone’s $165 M in Gokaldas Exports now down by 51%, it's $150 M exposure in Nagarjuna Construction is down by 69%). So is PIPE investments made by Warburg Pincus, Apax Partners and General Atlantic. Recently one of my clients in infrastructure space sought a valuation of 15x multiple (it used to be valued at 35x earlier which it felt was too low), the PE fund didn’t budge. They insisted the project be valued at 5x. But when market had been at its peak and PE multiples of 50x were offered for companies yet to find as much as a name, they hardly batted an eyelid and emptied their coffers.
So it’s a strange kind of logic, PE investors follow. [Mr. Bernard Shaw has been perceptive, ain’t he?]. Blame it on their B-Schools and chill out...

Saturday, November 08, 2008

"Hire, but sterilize"

Ok. So the global financial meltdown offers a very good opportunity for Indian Investment Banks and Brokerages to poach back talent from global peers.

As the hirers seem to reason, the investment bankers with global experience could win some bulk institutional clients for their masters and will be adept at selling exotic derivative instruments etc. as they have a better understanding of such products.

But hey, wait a minute… Is it not the same tribe that brought their clients (and Masters) down by inventing toxic `Yen Carry’, `MBS’, `CDO’ and `CLO’s that finally did them in? Who will want a re-run...?
So I mangle the old signature phrase Ron Reagan used while warming upto Soviet Union - "Trust, but verify"..... I go "hire, but sterilize"

Wednesday, November 05, 2008

Welcome the SME exchange

I can’t wait for the SME exchange to arrive. I have at least 20 mandates from SMEs that form majority of my client list to raise capital in the region of Rs.5 crores - Rs.50 crores. During the crunch times like this, Banks are too cagey and they just act up. Local financiers are hawkish and money doesn’t flow exactly at remunerative costs.

SME exchanges can bridge the gap since it could bring together savvy public looking for portfolio diversification. SEBI has rightly set the minimum lot for investment at Rs.1 lakh so that investors with requisite savvy and having the optimal risk appetite only participates. I welcome it for yet another reason – it would give significantly higher visibility to future large cap contenders as could be multi-baggers as well in the short to medium term…

Who is calling the money shots?

Who is India’s monetary authority? Is it RBI or Ministry of Finance? Traditionally RBI it is but of late the center of gravity is shifting more towards North Block. The pattern is too obvious not to be noticed—the real decision-makers are now in the central secretariat in New Delhi. Ideological divide, perhaps? RBI remains the statutory authority, but it is an open secret that the man in charge is P Chidambaram. A peskily independent RBI governor has retired, and a strong-willed finance minister has made sure that he will not be faced with another situation where his views are either ignored or not acted upon.

First, a new governor of Reserve Bank of India was appointed and, in a symbolic departure from past practice, the new incumbent went across directly from the finance ministry. Then, a new ‘liquidity committee’ was set up, chaired by the finance secretary. Now, a new economic advisor with a strong background in finance has been appointed in the Prime Minister’s office. A day later, the finance minister calls the heads of the state-owned banks with the intention announced in advance that he wants bank lending rates to drop. On cue, immediately after the meeting, one bank chief after the other announces interest rate cuts.

Critics of Dr.G.V.Reddy (Raghuram Rajan and Percy S Mistry) often argued the western orthodoxy that RBI should focus on a single objective of achieving a target rate of inflation. They usually oppose central bank interventions in the currency market, want quicker movement towards capital account convertibility, greater integration with global financial markets and the introduction of sophisticated financial instruments. But traditionalists supported Dr.Reddy with the counter-view that the financial crisis that has gripped the western world is not an advertisement for financial integration, that India can do without the periodic financial crisis that has consumed other developing countries with open capital accounts.
I like a hybrid. Coming from a business family and community, one can understand why Chidambaram is hawkish on stock markets (except in matters of FDI ceilings where he surprisingly shoots down CCEA and DIPP moves seeking to allow FII to breach them). While RBI should indeed be the strategic authority, constructive suggestions from Ministry of Finance and other regulatory authorities can be heeded if not obliged. Controlling inflation is indeed the primary responsibility of RBI, but inflation is not the outcome of monetary logistics – it is rooted in market demand and supply imperatives. RBI can at best control money supply, hike or cut CRR, SLR or Repo rates but it can’t stop you from paying a higher price or ask you not to buy stuff. It could not even bring down the inter-bank call rates that hover around 11-12% as opposed to the normal 2-3%, despite the recent rate cuts. That can only be possible if the economy has multiple sources for fund flows. It can infuse or squeeze out liquidity to an extent, but it can never replace a generous flow of funds coming from a buoyant global sentiment. Over-indulgence by either would lead to catastrophic outcomes.


Welcome to mezzanine... but will it work...?

Hard times call for novel solutions. Real estate sector took it in the chin and is deep in trouble. Bankers don’t lend, properties don’t sell, investors shun the asset class and even Private Equity that once was its messiah wouldn’t take to it kindly.

In comes Mezzanine financing. It is a debt-like instrument consisting of cash income and an equity-linked component, sandwiched between debt and equity on a company’s balance sheet. Here usually a strategic investor (say a PE firm) funds a company through debt and equity. The net cost of investments is 20-25%. Of this, 15-20% is paid as interest on debt and the remaining 5-10% is offered to the private equity investor as warrants at zero cost.

Now my question. The real estate sector lost its sheen when land prices rose to obscene levels and construction inputs like steel, cement, equipment and consumables became unremunerative. The final product, a house or commercial unit could not be sold at a reasonable cost. When liquidity dried up, the highly capital intensive real estate sector lost its only lifeline for working capital – Bank / PE funding. That was the death knell.

So how is mezzanine structure going to solve the problem of absent cash flows? When you expect the payback in the form of part interest and part stake, cash flows matter all the more. How will the borrower meet the interest obligations? Equity may come cheap, but if the sector takes longer to recover and people continue to give priority to survival than property acquisition, how do they expect valuations to improve? Even if valuations improve, with equity markets in a downward trend, how long will they stay put with value erosion and no interest income?

Clearly more than a missing link here. May be the structure envisages high margin collateral to cushion the downside. But most real estate companies are already highly leveraged, no cushion will offer complete comfort ;-)

Saturday, November 01, 2008

No more band-aid; Need bold fixes

Just got back after a vacation to Mussoorie hills for over a week. Had a great time driving around the hills and eating choicest Punjabi, Tibetan, Chinese and South Indian food. It had been more of a `getaway’ - unless someone truly wanted to witness the market mayhem.

Now back to work. The first thing that strikes me in the morning is the now almost daily paean from Mint Street. They have done it several times in the recent past. Tell me – does it really matter?

If RBI is serious about liquidity reinfusion, it should by now have realized that the cuts of 50 basis points or 100 bps are loose change in these times of massive financial drought. Cash flows of businesses are fast drying up; the ones that have cash to spend are fearful of counter party risk. No one is trusting the other. There is no real economic exchange.

So I have a one line agenda for this crucial Monday meet, if it is meant to be that – facilitate Economic Exchange. Let's call it EE.

If the meet were ever to yield a positive outcome, it has to be by way of drastic measures. I for one think post cut repo rate at 7.5% is still a bomb. It has to be around 5% levels so that banks that borrow can make some meaningful credit forward. Why do I say this? I am glad my bank deposits earn me 11% if I park it in my mother’s (a senior citizen) name, but I am equally wary that the bank has fewer avenues to deploy that high cost money. How many takers will lift credit at rates higher than 14% (assuming that bank will have an administrative cost of 2% leaving it a margin of just 1%)? If ever they do, what business will earn still higher return so that they are able to pay it back to the bank? So I worry about the sustainability of that higher return that I get before moving on to worry about the probability of retrieving my capital.

So this is what I suggest to D.Subbarao, RBI guv. He shouldn’t just stop at cutting rates, he should inspire the banks to lower their lending rates and deliver EE. Money flow has to resume. Liquidity is the current that can drive the economy forward. We’ve all experienced it during the bull years April 2003 – Sept 2007 and we know the difference now. I would even go FM and SEBI should be infected by RBI’s bold moves. It should leave the doors open for every serious investor to walk in with his money and do business on our markets. That's EE for you. Short term measures and band-aid type fits and starts don’t mean much in these hellish times.
How about tax exemptions for equity investments for the next two years? Cut Dividend distribution tax? Lower income tax rates leaving more money in the hands of the investors? Think on these lines and surprise us on Tuesday morning bozzos... and see the markets giving a thumps up to that ;-)

Sunday, October 12, 2008

The analyst and his forecasts

The analysts are a shameless lot.

Their forecasts have been proved wrong time and again, still they don’t hold back. Wonder who pays them to dish out muck!

Goldman Sachs? Its analysts earlier predicted crude will touch $200 a barrel. It slid to $80 levels. Thank the consumers that lowered their demands. Now they guess it to touch $50 a barrel. Should we be scared it will climb back to $100 plus…?

The crooks beat me by a wide margin

It takes a lot to build a reputation. To ruin it, takes not more than a few split seconds or just some fast spreading SMS rumors. ICICI bank realized it lately when some small town sub-broker (bent on shorting ICICI stock) viralled mass SMS saying the bank is in trouble.

Result – stock price plummeted (Friday it fell by 27%) and depositors withdrew their funds. What began as a trickle in some remote Tamilnadu town soon spread across the country catching the bank unawares.

The bank management did everything possible – it’s CEO gave repeated assurances, got even FM and RBI / SEBI to make public statements in support of its inherent strength, stuck notices on ATM counters - to arrest the damage. But it seems the drain of deposits and goodwill has been massive, or so it seems after the seriousness of purpose with which it is going after the offenders – that includes a Tirupur sub-broker of Motilal Oswal and a mass SMS portal and a free research site (with disabled stock tip links)!

Talk of Web 2.0 empowerment! Like guns, the crooks use it first… Email? Spammers run amok. Bulk SMS? It’s the fiefdom of hole-in-the-wall operators and pranksters. Now a small town sub-broker giving India’s second largest bank a run for its money - quite literally! Wish I could do something positive – say, build my business – by unleashing its power. But that I’ve found is not as easy. The crooks beat me by a wide margin! All that I could manage was to reduce my exposure to ICICI bank. May be silly. But, they say only the paranoid survive. Who is not afraid…?

Friday, October 10, 2008

A bailout for everyone?

Bailout – seems to be the latest trend. After Wall Street banks lined up before the US Fed, it’s the turn of India’s private carriers before the Ministry of Finance.

They want the government to bail them out by -
- Offering Interest-free loan with a “bullet” (one-time) repayment after three years
- Bringing ATF under ‘declared goods’ for uniform sales tax
- Reduction or withdrawal of duty on spare parts for aircraft maintenance
- Scrapping customs and central excise on ATF
- 50% reduction in airport landing, route and terminal navigation charges for 24 months
- Freeze on further increases in airport service charges
Vijay Mallya (Kingfisher Airlines) has an interesting aside “The government has not moved at all. It seems it wants everybody in this country to travel by train because the airlines are bleeding heavily”.

Imagine Vijay Mallya in Punjab mail…!!!

Sunday, October 05, 2008

Heading into anti-bubble?

I think we are getting into some kind of an anti-bubble.

In a bubble, prices become disconnected from values because purchasers believe that, whatever the fundamentals, they will soon be able to sell what they have bought at a higher price. The bubble must burst eventually because the supply of new people willing to buy at ever higher prices will be exhausted, and generally bursts sooner than that because people come to realize this.

In the opposite of a bubble, prices become disconnected from values because sellers believe that, whatever the fundamentals, they will soon be able to buy what they have sold at a lower price. The anti-bubble must also eventually collapse because the supply of new people willing to sell at ever lower prices will be exhausted.

And then there are some that chooses to live in denial. And there are others that believe otherwise. Where do you think we’re headed?

Saturday, October 04, 2008

Bailout bill passed; now comes the hardest part

Yes. Getting the $700 billion mother of all bailout up and running.

From what it seems like Hank Paulson and his crack team (filled with ex-investment bankers, attorneys and accountants) has its priorities cut out. It will have to decide which assets to go after first, and who to buy them from. Congress has given Treasury wide discretion to decide what assets to target. Although most of the funding is likely to go toward buying up mortgage-backed securities and whole home loans still held on the books of the lenders who originated them, Treasury can also buy up construction loans, home equity loans, or even credit-card debt or car loans if it decides that is necessary.

Does that mean Treasury is likely to start out buying from banks, in an effort to shake the credit markets back into shape – biggest banks first, in that order? If so, whether to go after widely held MBS or exotic one-of-the-kind stuff…? Whoever Treasury buys from initially, the biggest issue is one of pricing the assets since market for these securities has dried up, making it hard to figure out what any of them are worth amid fears that the underlying mortgages have gone sour faster than expected. If they price it too low, banks won’t attend the auctions. If they price it too high, the government will be taking too much load. The task will be somewhat simpler when Treasury buys assets from firms that have already marked down the value of their assets to current fire-sale prices. Anyways, the initial success of the plan should have a multiplier effect in helping bolster other banks, even if they don't take part in the auctions. By purchasing assets similar to those that other institutions hold, Treasury would essentially establish a new market price, which the nonparticipating banks could use to improve their balance sheets. That might also reassure other investors enough that they start buying as well.

The irony is, Paulson will not be able to find asset managers to run this that don't already have distressed assets on their own books; there's no one else to do it. Hiring people to fix the very problem they helped create will be an issue. For that matter even Hank Paulson is an ex-Goldman Sachs alumnus – a part of the problem in a way. Conflict of interest or not, success of the program could hoist Hank Paulson a big hero, may be win him a candidature for next Presidency. Failure would mean a return to economic dark ages - not just for America, if the downward drift of global markets (post passage of the bailout bill) is anything to go by!

Friday, October 03, 2008

Parsing the crisis

T.T.Rammohan squeals in Business Standard

On risk management and quality of leveraged assets

“The top investment banks have vanished as a class [not] because they were highly leveraged: In financial institutions, leverage or the ratio of debt to total assets, can be misleading as a measure of financial risk. The management of asset risks is equally important. A financial institution can be highly leveraged but if its assets are of high quality or are highly diversified, the institution is not exposed to high risk….

Investment banks may have had a leverage of more than 20:1 but some high-profile banks in Europe today have even higher leverage. What counts is leverage after adjusting for the risks of various assets. The European banks in question would not be allowed to operate if their leverage was not in conformity with regulatory norms. ….The trouble with the investment banks was not so much leverage as poor asset quality and heavy dependence on short-term funds.”

On short selling

“Short-sellers were right on Lehman, so short-selling should not be banned: Yes, short-sellers were right in sensing that Lehman had more problems than it had disclosed. But, in times of crises, it makes sense to ban short-selling because a fall in share prices sets off a vicious spiral that pushes an institution quickly into bankruptcy. A fall in the value of equity causes leverage to rise, which causes the debt rating to fall. This, in turn, prompts demands for higher collateral, which forces distress sale of assets, which erodes equity value. Before you could say ‘Hank Paulson’, the firm is gone. In financial crises, as in times of war, the normal rules of information must stand suspended and this applies to price discovery [enabled] by short-sellers.”

Splendid. Wonder how well K.V.Kamath’s defense goes down with people!

Foreclosure of FCCBs?

Remember FCCB frenzy of 2003-07 period? Almost every public listed company went ahead and borrowed in foreign currency egged on by the cheap (Yen carry) debt available then. When mixed with the rising stock markets back in India, the convertible bond was simply irresistible as a funding option for financing acquisitions and new ambitious projects. The option looked so alluring given the bubble valuations that most companies got. Let me put this in perspective with one example.

Take for instance Subex Ltd. This was known as Subex systems before, a micro cap company that was into developing software for telecom fraud management / revenue assurance (billing) solutions. The company was doing fairly well when the market frenzy drove its stock price up from Rs.150 to Rs.850 levels. But then the inevitable happened and it was bitten by the M&A bug. Acquisitions by Subex include the fraud management assets and technology of Mantas in March 2006, Lightbridge in August 2004 and Alcatel in July 2004. Along came street smart merchant bankers that peddled GDR / FCCB routes and Subex never looked back. Then it bought out UK based Azure solutions in April 2006 at a phenomenal price of over $140 million and its balance sheet was by now stretched way too thin.

The promoters recognized the fortune and smartly began to cash out. Now they hold just 9% of the company. Majority shares are with FII, GDR custodians and general public including body corporates. Now the FCCB is coming home to roost. FCCB outstandings are currently about Rs.846 crore and conversion hurdle is far away at Rs.897 per share, whereas its stock is currently languishing at Rs.82. So the investors are certain to press redemption in which case the company’s net debt will rise to Rs.1057 crore. Peg that against revenues of about Rs.178 crores and a net loss of Rs.78 crores for trailing four quarters. [EPS is –Rs.22]

Can this company with a negative earnings Rs.22 per share repay a debt of Rs.1057 crore? Of course, we know worst cases have turned around. I can think of ESSAR STEEL that defaulted in its FRN obligations back in the 90’s. The first of its kind to get that ignominy. But that was a steel company that collapsed under the weight of industry downturn. Not because of overstretching its balance sheet for adventurous acquisitions. So when the industry turned around and its realizations got better, the company came back into black and with a few calculated forays into Oil, Shipping and Telecom – it became a trailblazer in the Indian stock market history.

Subex is not alone. The list is long – Aurobindo Pharma, Hotel Leela, HCC, Bajaj Hindustan, Ranbaxy… so it goes. Never forget the fundamentals. Go for a forex loan only if your earnings in the same or a stronger currency is enough to cover the projected outgo in constant currency terms. Better still, have the proceeds deployed in tangible assets that can be liquidated without jeopardizing the solvency status of the company. Acquisitions can wait.


Tuesday, September 30, 2008

The symptom is worse than the disease

So, DLF goes about the mock play – sorry buyback.

Earlier I had concluded that such false bravado is a symptom of DLF management being new to the listed public market. That explains why they try to zig and zag with the price action in the markets. Markets dance to a non-rhythmic rhapsody, not a synchronized symphony. Company managements can't keep pace with it without breaking down. Stock prices may go up or down in public markets, but management’s priority should be effective supervision of operations. By announcing a Rs.1,100 crore buyback when stock prices sag while having plans to raise QIP of Rs.10,000 crore in hardly six months down the line, they betray impulsive overreaction. As I said before, DLF may be a large enterprise; but they lack the maturity required to stay put in that bracket.

Sunday, September 28, 2008

Get your act together, IT vendors...!

Readers of this blogstream should be wary of my screams for innovation in India’s IT vending space.

Now here is an analysis that explains why overwhelming focus on one sector – Financial Services – is extremely vulnerable. With the Wall Street turmoil, some of India’s big IT outsourcing vendors face a frosty weather.

I shall repeat. Go beyond BPO, ADM and easily replicable services. Differentiate. Make meaningful dents in diverse high-end fields like system integration, data center management, remote architecture support, process automation coupled with product innovations that stun the markets with their utilities and features.

And…And…And… Focus on domestic market. You’ll be in far better control. See Bharti has awarded its $1 billion IT infrastructure maintenance contract to IBM, not to any of our famed vendors ;-)

Tuesday, September 23, 2008

When balls choke up your lungs, hardly can you talk

Candid admission by KKR. Given that the buyout firm has not yet gone public, that frankness is quite refreshing. Yet unusual by Indian PE fund manager standards, huh?
Yet it is. More to follow.

”The lack of credit has materially hindered the initiation of new, large-sized transactions for our private equity segment and, together with declines in valuations of equity and debt securities, has adversely impacted our recent operating results,” KKR said in its SEC filing.
The firm’s total investment loss for the first half of 2008 compared with a total investment profit of $3.4m in the first half of 2007. Its net loss for the 1st half 08 totals $1.1m, compared with a profit of $667.4m for the same period 2007.
KKR, which has made investments in numerous household names such as Toys R Us, mattress maker Sealy and asset manager Legg Mason Inc, said its fee income in the first half of the year was $135.3m, compared with $115.4m a year ago.
Imagine the fate of India investments of PE funds. There is far less swagger in their gait and I hear them talking a lot less these days. When balls choke their lungs, they just can’t talk; let alone getting candid ;-)

Monday, September 22, 2008

Killing I-banks is stifling innovation in structured finance

In a watershed moment, Goldman Sachs and Morgan Stanley last night abandoned their status as independent investment banks (and morphed into larger Universal Banks) in a move marking the end of an era on Wall Street. While the change appears to be a technicality, it means that both banks have equal and permanent rights to access emergency funds from the US central bank, the Federal Reserve – their only lifeline to stay alive. They will also be far more tightly regulated.

Well, in a way the Fed has ruled, though in this late hour of credit crisis, enough is enough. Suddenly I hear all Wall Street honchos, analysts and even erstwhile CEOs of these investment banks publicly admitting that it is the way to go. The era of independent investment banks had to end – as it has, now.

I look back a bit. Is it so simple? Isn’t it a bit ironic that the time-tested business models of the independent I-banks have suddenly become unviable? Were they inherently weak or has it been the lack of prudence that did them in? Or is it the lack of oversight and the unfettered, excessive leverage in ratios of 33:1 to blame?
Specialists are specialists. They will have to stay that way. Can someone bring cardiology, a specialized domain under general practitioners because a few recent heart surgeries performed by cardiologists have failed?

I have a feeling they are prescribing the wrong medicine for the illness. What do they want, United Socialist States of America?
The USSR brand of socialism failed because it was founded on anarchist theory – everybody’s property became nobody’s responsibility. Amercian free market economy is based on greed that is just human instinct like lust, envy or anger. They implore one to beat competition and excel. They are creative spurs, not unsystematic or anarchist self-serving socialist wet blankets.
Get local. A Tata Steel ranked 65th in the global steel industry could acquire a Corus (ranked 5th) because of the liquidity provided by those enabling models. Now it’s going to be a slog all the way for the ambitious. This is like turning off the tap on growth when all that was needed was enforcing stricter compliance by a bunch of alert regulators. There is a strong case for these I-Banks to remain independent for the global economic engine to keep purring. The leverage that provided liquidity to help the poor afford homes is not entirely a bad idea. The level of social benefits that it entailed is not to be easily forgotten. The fault lay in promotion of fallacies like the house prices will always rise. Blame it on running poor credit checks on borrowers and allowing reckless leverage models. At best, are they not simple process lacunae? More importantly, haven't they been emitting strong enough signals for the Fed and SEC to reign them in, which they chose not to? Isn't it something that can happen even now, under Universal Banking? You agree?

I-banking as a division of another commercial bank will sure lose focus, its innovative drive and finesse. It can never be as nimble if it is burdened with the yoke of reserve requirements and Credit-Deposit ratios. It will lead to sub-optimal performance and deals won't get done in the same pace, at least. It will certainly fail to attract the best brains that can thrive only in a liberal, innovative ecosystem that spurs creativity and ingenuity. Can we make do with Levi Strauss type archaic regimes devoid of dynamic innovative spirit? Can we honestly say we never need structured finance innovations (imagine the convenience of a `sale and lease back’ and other factoring mechanisms) with changing times and dynamic business needs? That would be pure tactlessness wearing the masks of precautionary excesses. Just not up.

Wednesday, September 17, 2008

We're easily the most resilient amongst BRIC

Are we the best amongst BRIC?

Here is the update on the stock markets of Brazil, Russia and China. I think comparatively India is far better.

In Brazil, yield spreads of Brazil's government overseas bonds over comparable U.S. Treasuries, as measured by JPMorgan's EMBI+ index, widened sharply, reflecting an increase in investors' risk aversion toward Brazilian assets. The index 11EMJ showed the country's bond spread widened by 39 points to 349, the highest since November 2005.

In Russia, Government and central bank officials were locked in talks with the chief executives of Russia’s biggest investment banks throughout most of the day on ways to halt the market collapse, which has wiped nearly $800bn off the country’s stock exchanges in a matter of months and sent stocks spinning down to levels last seen in 2005. The two main bourses, the MICEX and RTS, had suspended stock trading until further notice from the state’s main financial regulator.

China? Please don’t ask. Here is a report from Epoch Times I had linked above -

“The truth about China’s stock market is actually not a secret, and most investors probably already knew it. That is, China’s stock market is a tool used by the government to re-distribute and re-organize social wealth on a grand scale, which means that it is a tool to clean out Chinese people’s savings accounts. The biggest winners in this process are, of course, government officials and their relatives who are the most well-informed about the actual value and re-organizing plans of those that control state wealth; as well as institutional investors who collaborate with them and who rely on insider tips to control the stock market. Those people have already made huge fortunes in the process. This is the truth about China’s stock market….

Actually, the goal of China’s stock market was not purely an economic one when it as originally established. When former Premier Zhu Rongji set up stock market in Shenzhen, he said that China’s stock market was meant to get money--to get money in the market and give it to companies that were unable to get money, and because these companies were unable to make money, they needed monetary support.

China’s stock market has been established to operate like an ATM for the listed companies. For the majority of the listed companies, economic reform is nothing but a mechanism to trap money. Many heavily indebted State-owned companies have been listed in the stock market after re-packaging. All of a sudden, they become the new stars in the market with easy loans and finance. The foundation of a stock market is the listed companies. With a weak foundation, how can any high stock price be affordable? The deflation in stock prices is therefore predictable.”

So, India - is far better any day. We just have 12% plus inflation and some high interest rates. There is no sham in the system, the companies are real and investors are long term. Stay invested if it is your personal savings and not borrowed funds. We're in for some not so quick turnaround - to allow the dust to settle around the world. As for savvy global investors, it seems to be their only emerging market bastion that's left...


Doctors failed to diagnose own symptoms

A.V.Rajawade makes some intuitive statements on the Wall Street fiasco. The best I quote
“…With total assets of $640 billion, [Lehmann Brothers] would be the largest ever bankruptcy filing in history. Those who charged millions of dollars as fees for advice on restructuring or selling others’ businesses could not manage to save their own…”
I concur. I have been way too immersed in the I-Banking sector to refute that. I know their mediocre and credentialist ways. In the PE world, mediocrity just rules the roost.


Wednesday, September 10, 2008

Dreamworks - high on ideas, low on fuel

The much hyped deal between Steven Spielberg’s Dreamworks and ADAG’s Reliance Big Entertainment now rests at the mercy of JP Morgan Chase.

Although Reliance is poised to invest $500 million in the venture for a 50% ownership stake, that deal hinges on the group getting a firm guarantee from lead bank JPMorgan Chase to raise up to $700 million in debt financing to satisfy the business plan to make four to six movies a year. JPMorgan, which will not underwrite the entire portion of the loan as DreamWorks had hoped, will now attempt to syndicate it -- and that could take months.

Did you say months? That soon? Given the turbulence in the wall street, Spielberg will not have many options that are not already underwater.

Crude breaches $100; So what?

Quoting at $98.49 a barrel, crude violates the $100 psychological level. Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27 percent. Still, prices remain close to 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

Now hang on, don’t rush to the gas stations. The dollar has breached Rs.45/- level, so you pay almost the same in dollar terms, pal ! Mukesh Ambani’s mole in cabinet has already sounded you out ;-)

Way to go, Guv

Is it upstart flamboyance or anticipatory bail application? I am not too sure as I read into RBI guv D.Subbarao’s statements barely three days into office.

While sticking to 8% growth peg (bravo!), he uses terms like “mathematical inevitability” – now what does that mean? Does he believe the economy could outwit slowdown advocates or does he swear by the efficacy of statisticians at his disposal to bring up that magic number or does he put the onus on the fickleness of number games?

Early days anyway. But he did mention “shared responsibility of RBI and all other regulators” – now that’s an inclusive statement. Even if his faith in the economy (or his statisticians) holds out or not, he will not take it in his chin, alone.

Can’t think of a better way to begin the innings ;-)

Monday, September 08, 2008

Wait until they mop up

More on DLF buyback.

Realty and infrastructure is a capital intensive industry that is badly mauled by the global liquidity crunch. With demand for high end luxury homes and commercial complexes waning, the focus is on low margin budget buildouts. Even as realty companies conserve every rupee they can to meet the resources crunch, DLF worried about the falling share price (down by more than 50% from its peak of Rs.1225 in Jan 08) and announced a Rs.11 billion buyback (at price not exceeding Rs.600/- a share) to reassure itself and its minority investors.

Now is that a wise decision at this crunch time? As a long term shareholder I can’t care less. Know why? This whole buyback exercise is a temporary prop. Remember what happened to Ranbaxy stock recently? Even institutional shareholders like LIC and GIC tendered their entire holdings in the offer and the stock fell to Rs.450 levels from Rs.580 post buyback. So if you are a long term investor and want to pick up asset rich DLF cheaply, just wait for the mop up exercise to be over. Even after a recent downgrade, Deutsch Global values DLF NAV at Rs.532 a share.

Not bad. The news is that after the statutory cooling period of six months (for fresh capital issues) is over, DLF has plans to raise Rs.10,000 crore by way of private placements. When the market knows this, the buyback offer is just false bravado... The problem is DLF may be a sizeable enterprise; but its management is new to public markets behavior. So when the stock price falls because of market's general indifference towards the realty sector, DLF management is overreacting.
They too will learn...!

Sunday, September 07, 2008

"Follow the money"

When you have almost three-fourth of the world economies reeling under trade deficits and hyper inflation, companies like Nokia issuing profit warnings, it’s time to explore alternative destinations to do business. After all, the dictum is – follow the money :-)

I was recently part of the team that did some early due diligence for a Korean firm interested in issuing Islamic bonds in the Persian Gulf and far east. Yes, Islamic bonds. But why should a Korean major drool over religion tainted security? The question was not for us to ask, they were paying us. But as we delved deep into the task, a few facts got cleared.

Sharia-compliant mortgages are typically structured so that the lender itself buys the property and then leases it out to the borrower at a price that combines a rental charge and a capital payment. At the end of the mortgage term, when the price of the property has been fully repaid, the house is transferred to the borrower. That additional complexity does not just add to the direct costs of the transaction, but can also fall foul of legal hurdles. Since the property changes hands twice in the transaction, an Islamic mortgage is theoretically liable to double stamp duty. So how do we structure it?

Confidence is one thing, hyperbole another. Most of all, the industry’s expansion is tempered by its need to address the tensions between its two purposes: to serve God and to make as much money as it can. We faced difficulties in design and structuring an instrument that has to comply with Sharia – that needed to be communicated to the client, a non-muslim. Hell, it needs to be certified not by a professional rating agency, but by Islamic scholars that are terribly in short supply! So we struck a deal with some American financiers that recycle documentation rather than drawing it up from scratch. But to our amazement, we found something pretty weird. The contracts they now use for sharia-compliant mortgages in America draw on templates originally drafted at great cost for, hmmm… no, you would never guess it - aircraft leases!

And we thought we have to refine our systems and processes to adapt to a changing financial world order. But there are imperfections and mediocrity galore even in the most credentialistic circles. That knowledge allows us enough headroom for creative neglect and recreation. We could even be setting trends with what we seek to build. Now we are all charged up. Someone is paying us too.

Why do you think I love this business? I am on my way, getting to be a Sharia specialist ;-)

Thursday, September 04, 2008

Rip the control freaks; they ran out of arguments

Nice argument in Business Standard editorial seeking sugar decontrol.
Why should the cabinet put on hold the proposal to free up sugar supplies by the food and consumer affairs ministry? What are its concerns?

Do they fear rise in sugar prices fueling inflation that is already high? Think again. The 11 million ton carry over from last year’s record production covers 55% of our annual consumption of 20 million tons. Even if the acreage under cultivation drops, it’s absurd to assume that it would drop over 45% - especially at a time when sugar is turning a multi-use crop needed for production of ethanol and even power generation beyond just sugar and alcohol. Decontrol in fact, allows sugar mills to press more supplies from the buffer stock into the market that will help push the prices further down, not up.

Will decontrol make PDS sugar costlier because state governments will have to buy from open market when levy is abolished? Not at all - since the proposal recommends central government to compensate the state governments by subsidies that was so far being borne unjustly by the sugar producers instead of the government. It will also eliminate the arbitrary price determination by central /state governments that often doesn’t consider market realities and result in expensive litigation.

I add one more point. How long can governments mask economic realities? Prices crash during times of over production and will creep back up when there is a shortage. It happens with Gold, Steel, Cement, Paper and all commodities. Any attempt to artificially control prices will only lead to manipulation and corruption. Why have the illusion of control and not just let go? We had controlled petrol, diesel, fertilizers and sugar and still we got a double digit inflation. So why harp on to something that is fast running out of arguments?


Wednesday, September 03, 2008

SIP for Land acquisition...?

And you thought small investors learn from big investors. Well for major corporates in Real Estate it seems to be the other way round.

DLF is setting up a Land Acquisition Fund – by transferring 15% from its annual revenues to its corpus to avail of any good buying opportunity – akin to Systematic Investment Plan (SIP) often recommended to small investors for buying mutual fund units every month. The advantage being, a small investor need not time the market and can take advantage of market at every level by investing fixed sums of money every year.

Good idea? What do you think? Next what? Pay STT and gain LT capital gains exemption?

Tight rope walk

Bolstered by the initial success of its bid to acquire UK-based Imperial Energy, state-owned Oil and Natural Gas Corporation Ltd (ONGC) is planning to list its wholly-owned overseas exploration subsidiary ONGC Videsh Ltd (OVL) sometime in 2009. Well, the aims are clear – to get a premium valuation from international markets, build up its net worth (share premium stands credited to General Reserves can be capitalized through bonus issues to existing shareholders later - helps expand paid up capital) besides gaining acquisition currency.

But being registered in India, regulations require a domestic float before an overseas one.

Except that there is one hitch. The Indian government will be itching to use its revenues to subsidize the loss suffered by state owned oil marketing companies (like it does with ONGC) that sell petro products at a steep loss – to keep it affordable for the masses. No government ever had the guts to say `No' to subsidies so far. Now if OVL is listed abroad, will those foreign shareholders like their company to subsidize oil guzzling Indian masses? Will they understand APL – BPL divide? Looks like a tightrope walk. OVL will have a tough time convincing Indian government why it can’t subsidize India’s oil marketing companies and conversely will have it stiff explaining why it should support Indian government’s efforts in controlling oil price parity while on roadshows that precede the IPO.

Tuesday, September 02, 2008

Resurgere surge - stock in play?

Resurgere mines (RESU.BO: Quote, Profile, Research) IPO debut took my breath away.

Coming at a time when bearish overtones rule, the miniscule 4-4.5 million shares offered in this IPO received bids of about 1.2 times. A very lukewarm response. In normal conditions one would call it a “scrape through”. Debut listing price was also at a very marginal premium of Rs.2/- (i.e. Rs 272.05) on the BSE, over its issue price of Rs 270. No marked bidding frenzy was observed when the book was open. QIB had bid for 1.3 times and HNI about 2.4 times. Retail turned their back on it with just 0.4 times. CRISIL had assigned a '1/5' grade to the offering, citing the management's limited track record in the iron ore business and the fact that the company's financial returns are vulnerable to spot price movements of iron ore.

Normally such dubious issues begin to slide post listing or just maintain price levels. But this was not to be. What happened later was astounding.

Within minutes of listing yesterday, the scrip touched a high of Rs 299 and over 3 lakh shares exchanged hands. The share price surge in a weak market at record volumes - 33 million shares on the BSE - raised eyebrows given the low rating and cautious brokerage. It closed at a whopping Rs.524, a premium of about 100% on day 1. Today the scrip rose by another 20% and hit the upper circuit to close at Rs.625.

Clear signs of something-wrong-somewhere. But not enough for SEBI to sit up and take notice. May be, we should wait for a couple years for CBI to ferret out the rot, well after the smarts have pasted it on unsuspecting investors that might get caught in the wild dance...

Monday, September 01, 2008

The leftist misfit

In Buddhadeb Bhattacharjee, the progressive Chief Minister of WB, we get to see a helpless reformist that doesn’t enjoy the support of his party colleagues.

After Mamata Banerjee, the Trinamool Congress leader managed to stop work on Tata Nano project at Singur, now it’s the turn of real estate major DLF to push the CM with “act-fast-or-else-we-move-out” language. DLF has plans to develop 4840 acres at Dankuni, 20 kilometres from Kolkata at a cost of Rs.330 billion. It has paid Rs.2.7 billion to the state government as advance, but only 20 acres have been acquired so far.

Recently while meeting corporate leaders in WB, to a question on “government-sponsored bandhs” and “Opposition-sponsored bandhs,” the Chief Minister replies: “I do not support any bandh. I agree it is not helping anyone...But unfortunately as I belong to one party and they call a strike, I keep mum.”

Then he added, to loud applause: “But I have finally decided that next time I will open my mouth.” Woof! This is spunk.

Could this be the man the WB can afford to disgruntle? It’s difficult to make up our minds who has erred in this whole drama. Have the govt. acted in haste in allowing these industries to acquire farm lands of poor farmers? Have they not been offered the right prices? Have the jobs offered in these projects adequately compensated for the loss of farm income for those land owners? And finally, what else does Mamata want?

Buddha is too right to remain a leftist misfit. Mamata didi looks more left than right. She should join the Left and Buddha should leave WB and head for Gujarat, Maharashtra or other industry friendly states if he wishes to feel welcomed (Read “CPI(M) distances itself from Buddhadeb's remarks “ topic)

That is commitment

43 years with L&T, 33 years in the same house and 15 in his first boss' room - constance defines the man A.M.Naik, Chairman and MD of L&T, who's building much of India's infrastructure.

“L&T is my hobby, the rest is work,” he says in this interview.

His post retirement plans include moving to an apartment near L&T’s Powai factory so that “when I die, I’ll be facing L&T”.

That is some commitment quite!!! Remember Naik is a professional CEO, L&T not being his family business…

Smart Cricket

Rajasthan Royals won the DLF IPL cricket tournament is old story. Now the champions are going public – not with their fame, with private placement and further on the stock markets with an IPO!

In January this year, Rajasthan Royals, the only foreign-owned team (investors include Lachlan Murdoch, son of Rupert Murdoch) among the eight IPL franchisees, made a bid for $67 million for the team, the lowest among all the DLF IPL teams. Led by Shane Warne, the Royals won the tournament. Reportedly the only team that is in the black — first-year expenses were estimated at $20 million and revenues are in the same range.

Wonder what other franchisees that are still licking wounds feel as they read this…

Saturday, August 30, 2008

"Remember, nobody got hurt between 2003-07"

Manjula Chawla and Srinivasa Rao debate `treaty shopping’ and `round tripping’.

"Treaty shopping" occurs when a third-country resident derives benefits from a tax treaty intended to serve only the interests of residents of specific bilateral treaty nations. "Round tripping" refers to the practice of local investors that take money out of the country and bring it back in under the guise of a non-resident to escape the tax net.

I say subjecting capital to excessive regulation is dumb because it encourages smart people to lock up capital in unproductive boxes. Say No to drug money or terror funds by all means. But capital that takes a trip just because of excessive tax rates should be viewed through a different prism. Keeping in mind our infrstructure needs, it should be winked at.
I would rate it as enterprise. It is smart money anyway. If you don't let it flow, it will head elsewhere. Isn't it downright stupid to let go ?
Why spoil the party? Let the good times roll. Remember nobody got hurt between 2003-07 bull run ;-)

What say you, reader?

Thursday, August 28, 2008

For some, a bubble is forever

This one looks like a googly. What to make of this?

An Indian company [Great Easter Energy Corporation (GEEC) promoted by Y.K.Modi – that is into CNG exploration and production] listed in AIM of LSE in London is now seeking to issue shares in the Indian market. Reportedly a Rs.10 billion issue, 50% of which is an offer for sale by existing GDR holders (they call it `sponsored’ issue quite funnily - even as the GDR holders are seeking to exit the venture!). About Rs.5 billion will accrue to the company out of the issue proceeds (and remaining Rs.5 billion to exiting shareholders). GEEC currently has accumulated losses of Rs.216.37 million in its balance sheet.

Net increase in paid up capital will be just Rs.50 million or so. That means a fat premium of close to Rs.199/- per Re.1/- share in a down market even as the company is barely into revenues (Rs.49.39 million for FY 2007-08). The company has initially raised $20 million in December 2005 (1$=Rs.44 then) – that means the investors are in a hurry to recoup 5.68x their initial investment. Begs the question - why the hurry?

It will be fun to watch how this rip-off IPO is rated by the agencies and how it gets palmed off to investors – both suspecting and unsuspecting. But the real fun will be to watch its outcome, that will be an indicator of the level of investor gullibility ;-)

Wednesday, August 27, 2008

Issuers should take Merchant Bankers to task

Talk of clumsy merchant banker allowing semantic distortions and when hauled up by SEBI, refuses to yield. Outcome? Botched business plans of issuers!

SVPCL, a Hyderabad based manufacturer of computer stationery floated its IPO in October last year, and raised Rs 34.5 crore. Though the issue was fully subscribed, BSE denied permission for the shares to be listed on the exchange because of an apparent misstatement in DRHP. This was because UTI Securities, the lead merchant banker responsible for post-issue compliances, had expressed its inability to give an undertaking as required by BSE under Section 73 of the Companies Act, 1956.

The IPO, which got subscribed little over one time, was stalled after BSE refused listing permission as the company had inadvertently mentioned on the cover page of its red-herring prospectus that at least 50% of the net issue to the public shall be allocated on proportionate basis to QIB. The legally appropriate term to be used was ‘up to’, and not ‘at least’.

Why not the merchant banker be hauled up for errant drafting that they do? Should they not make it up to the issuers? Who is responsible for semantic distortions creeping into DRHP?

What else the issuer pays fee to the merchant bankers for? If they were to draft it, why would they hire a merchant banker? The CFO and Company Secretary can sit together with lawyers and bring about even an IPO, except that SEBI mandates appointment of Merchant Bankers. Now that it has lost the case against the exchange, SVPCL must file proceedings against UTI securities for refund of fees and for damages...

Tuesday, August 26, 2008

Economy? Go to hell !

“The battle against inflation will likely come at the expense of economic growth, which looks set to decelerate in the second half of 2008 amid cooling domestic demand and persistent external weakness,” says Sherman Chan, an economist with Moody's. The recent decline in global oil prices will not lower India's rate of inflation, which will remain "stubbornly strong" in the coming days despite monetary tightening by the central bank. Until next June, energy prices will also remain notably higher on a year-ago basis because of the cut in subsidies two months ago. The rise in global commodity and food prices is still a major driver of inflation in India. The retreat of oil will only help ease the pressure on the government to further raise domestic energy prices, according to Ms.Chan.

Makes sense. Now read what the Deputy Chairman of Planning commission Montek Singh Ahluwalia has to say. The fiscal deficit target set at 2.5% of GDP for 2008-09 is set to be higher by a significant margin. It is estimated the deficit will be breached by almost twice the budgeted target due to high oil prices and a whopping fertiliser subsidy bill. There had been a substantial increase in off-budget numbers and there were good reasons for this. He said the fiscal deficit is not a long-term problem as, next year, some of the increases would not be repeated and a significant revenue buoyancy would help ease the situation.

All hopes. On the ground inflation remains the growth killer. RBI can raise interest rates, mop up dollars to arrest a falling Rupee (that inflates oil bill) and introduce monetary measures like hiking CRR and Repo rates. Now the key element is augmenting commodity supplies. Who controls that? Commerce and Industry Ministry? It’s just a toothless caricature of its once powerful self (when quotas prevailed and licence raj was full on). Now I conjure up its icon Kamal Nath only as our emissary at WTO to make sure the talks fail!

Enough drama. Getting back to reality. Raw material costs are up 26% while interest charges are substantially higher at 34%. But instead of passing on these higher costs through price hikes, companies have retained them on their accounts so that growth is not compromised. Is this compromise sustainable at such low net margin growth? But then, there are more important issues to resolve!