Tuesday, April 29, 2008

Indian infrastructure. Big numbers, high hopes!

Realty sector is getting hot; yet again

While the housing sector experiences a slump with investors vanishing from the market and end users finding rising interest rates a major hurdle to buy their dream homes, the broader realty infrastructure sector remains hot. Leading PE funds such as Blackstone, 3i, ICICI Venture, Axis have all raised major rounds focused on Indian infrastructure sector.

Why this rush towards Indian real estate and infrastructure?

According to estimates from ICICI Securities, the Indian real estate market is worth $57 billion, and is expected to grow at a compounded annual rate of 13% to touch $105 billion by 2012. This would require investments worth $85 billion across the residential, commercial, retail and hospitality sectors. On infrastructure, the Indian government has forecast the need to spend $492 billion over the 11th five-year plan ending 2012.

As such, the investment climate for this sector has been hot, and funds, both domestic and global, have been queuing up for a slice of the action. Did you say liquidity crisis...?

No wonder I am finding myself in a funny kinda’ situation.

Not alone, not at all

I find myself in a funny kind of situation now. Around six months back, I was flooded with queries from owners of landbanks across India for investors in their projects. Valuations were reigning high then and deals were difficult to cut since investors found nothing much left on the table for them.

Now the valuations have declined and I have a slew of big ticket investors (including a couple funds that just closed billion $ rounds) looking for some big ticket deals in the infrastructure / Real Estate sector. But projects are hard in coming since nowadays companies feel they are valued too low and if they could wait a while, the projects would fetch desired valuations.

In either case, I feel stumped. Most of my friends in I-Banking/strategic advisory circle feel the same way. It’s almost an year since they’ve formally closed any deal. When sentiments are extreme, deals are difficult to close. I thought may be it’s difficult because I run on my own and may be with some institutional tailwind behind me, could’ve closed some large deals. But now I learn it’s the same scene everywhere. Only that they’ve larger overheads to bear with transaction support teams needing to be paid even as they have no transactions to support :-)

Buying a shell calls for skill

Heard this on the grapevine a few days back from my deal sourcing network. Mrs.Radhika Saratkumar, Southern Film and TV personality and holding over 51% founding stake in Radaan Mediaworks is desirous of diluting her stake. As usual I began my initial scanning and looked up the company, its business and operational framework. The company has established a formidable reputation as leading southern production house and Ms.Radhika is known to be a very balanced person with whom artists love to work with unlike Ekta Kapoor who is known to be quite domineering.

But then take Ms.Radhika out of the game, the company loses its radiance. She is the creative centre of gravity as far as its operations are concerned, which is production of TV soaps mainly for the southern audience. A couple of media investors whom I had talked to felt it could be a good buy if Ms.Radhika agrees to continue assisting the business. But creativity has to come from heart and after she cashes out, you can’t expect the same level of inspired originality that has been the hallmark of her work so far.

Later I heard, Ramesh Vangal of Katra group with diverse business interests is eying that stake. May be he has an ace up his sleeve.

Monday, April 28, 2008

IIM/IIT to sell only premium fuels; Corporations join in

When Government won’t let them raise prices for fuel despite higher input costs, the PSU oil marketing companies stopped selling low cost fuel at their stations. In many outlets, they sell only premium fuel that’s free from price curbs.

A few days back, the Government wanted reservation for SC/ST/OBC students in IIT/IIM and even wanted private sector to give them reservations. They also were to be charged lower fees by these institutes.

Now will these institutes and companies in the private sector develop a premium product to get around those impositions?

Keep the lights on UMPP

Liquidity crisis, it seems has affected only undeserving projects.
The funding commitments which have been secured for the Rs 17,000 crore ($4.2 billion) "ultra mega" power project (or UMPP) at Mundra in Gujarat should silence the critics of the UMPP policy. When the idea was floated a couple of years ago, there were doubts about the ability and willingness of companies to come forward and build such large (4,000 Mw) projects. And even if there were some brave companies who were to step forth, they were expected to have trouble finding financiers.

Now the skeptics have been shot down. Not only has there has been a long list of bidders for these projects, now the first such project to get off the block — backed by Tata Power — has also managed to secure long-tenor funding of up to 20 years despite the sub-prime crisis.

A host of public sector banks, led by the State Bank of India, have committed Rs 5,550 crore to the project. About half of the non-rupee funding of $1.8 billion has been sourced from the IFC and the ADB for a 20-year period. There is also a funding commitment from the Export-Import Bank of Korea and the Korea Export Insurance Corporation, which can be linked to the fact that a Korean firm, Doosan Heavy Industries, has bagged the order for project equipment (boilers). Then there is the equity contribution of Rs 4,250 crore by the promoters of the project, which is to be based on imported coal.

The BS editorial says there are lessons. First, it helps to think big. The larger the project, the lower is the effort per Mw required to push it through. Secondly, the government needs to work on "pre-cooking" more infrastructure projects, so that some basic work on greenfield projects is done before they are offered to private investors. The UMPPs, for instance, were housed in shell companies floated under the public sector umbrella and they piloted the clearances and supply linkages, and also signed provisional power purchase agreements with the buyers of power.

Not all things Government does warrant criticism.

Sunday, April 27, 2008

"Let go off all controls, Sardarji (and Pawar boy)"

Why do I welcome decontrol of sugar? Because I have a huge position in sugar stocks in my portfolio :)

That aside, here I found a great ally in that argument. The ET editorial goes controls hurt farmers and industry too. It says our sugar sector has to be freed because –

a) Nearly every aspect of the sugar economy is controlled, often on mistaken assumptions.

b) Ill-timed policies – The govt. banned exports of sugar in 2006 when the global prices were high. That led to a local glut and non payment of farmers’ dues. Govt. can’t fix high cane prices (inputs) and seek to keep product prices low (output) as well. How will the mills pay the farmers?

c) Outdated inflation index - Sugar has to figure low in the inflation index because it is no longer an important household expenditure item. Bulk of the sugar consumption is in the industrial sector. Remove it from the list of essential commodities and treat it like any other product.

d) Meaningless restrictions - Remove distance restrictions between mills. It helps competition and results in efficient price discovery.

e) Lifeline for moneylenders - The statutory minimum price (SMP) for sugarcane and the higher state advised price are fine in theory but do not necessarily protect the farmers. If the mills don’t make profits, they can’t pay farmers on time. This tempts them to get the cane receipts discounted in the market, leaving the local moneylender to make the most of the situation.

So, Dr.M.M.Singh and Pawar boy should sit together and let go of all controls. This is one industry where there is no wastage. Bagasse is used in power generation and molasses is used to make alcohol. Then you have ethanol to mix with petrol to lessen the import bill on crude oil that is inching towards $120 a barrel.

So do it quick. I’ve tipped sugar to my readers earlier. Let me feel like a king :-)

Differential CRR? That's financial racism.

Finance Minister Chidambaram has a pet peeve. When inflation goes up by a few ticks and he turns to RBI governor Y.V.Reddy for advise, the guv is equally clueless. He knows nothing more than to hike CRR by 25 bps.

A hike in CRR by two tranches of 25 bps each from 7.5% to 8.0% was announced recently by the RBI to suck out excess liquidity from the banking system. But is that enough? It is this predictability that erodes the significance of RBI moves on the economy itself. But stock market nevertheless looks to RBI for direction.

This morning I found Ashok Khemka arguing for nuanced CRR Policy. His key points –

a) Why impose a flat CRR of 8% on all banks’ deposits that looks like a virtual tax? It’s only the sinning few that is responsible for incremental foreign exchange that adds to liquidity. Deposits in domestic currency do not damage the economy. So why not switch to differential CRR on selective foreign exchange inflows (NRI deposits, FII / PE / Hedge Fund inflows) only?

b) Sterilization (mop up of foreign currency by RBI from open market) initiatives have become expensive as reflected by the rise in T-bill yields from 7.4-7.6% from 6.6-7% as was earlier. This taxes the entire economy for the sins of a few.

c) Levy the higher CRR in the designated currency itself. This obviates RBI having to go in for forex mop up later to maintain the exchange rates. RBI can also make that currency reserve available to the needy to buy assets abroad and negates any adverse effect from currency mismatches in international trades.

Great points. But I see those recommendations calling for containment of liquidity by slapping penalties. It is not equal to identifying a mature mechanism that uses the liquidity inflows which is the need of the hour. It amounts to saying `No’ and that is the easiest part. I would look for ways to use that liquidity into creating better infrastructure before foreign investors find another profitable destination outside India. Money is fungible and investors don’t waste much time if they feel they are not welcome here.

Differential treatment is bad. It will mean financial racism. Never do that. Get smart and keep giving them those incentives. You can make hay only while the sun shines on you. Now it is sunny days for emerging markets, especially us. Don’t get smug. Go build better roads, dams, bridges, airports whatever. Don’t slam the door shut on investors. Remember what made Dr.Manmohan Singh open up reforms gate in 1991? We were almost broke. Now don’t get to that point again!

Saturday, April 26, 2008

"No, thanks Ms.Kochchar"

Chanda Kochchar, JMD and CFO of ICICI Bank put up a brave face while announcing her bank’s Q4 results.

This is how she defended additional provisions (in Q4 accounts) because of her bank’s MTM losses in the US – “"We have no sub-prime assets but only exposure to CDOs and CLNs. We have seen no deterioration of our portfolio. The provisioning is only for the MTM losses due to widening of credit spreads. In fact, post March 31, the credit spreads have tightened and we have made a saving of $16 million (Rs 64 crore)….”

In lay terms that means – We haven’t directly make any loans to risky homeless borrowers in US. But we financed some of their crafty lenders by buying their CDO and CLN. Our losses are already deep, so no scope for further plunging. Still we see only a mild recovery, so we prepare you for the worst now so that our shareholders don’t get mass cardiac arrests later. We never hoped the market will improve, but there is a little blip on the screen which we sincerely pray isn’t a dead cat bounce.

ICICI Bank's total exposure to CLNs and CDOs was estimated at $1.6 billion (Rs 4,240 crore), comprising 70 per cent of Indian corporates. The bank has seen an 8 per cent rise in provisions during the fourth quarter to Rs 948 crore, as against Rs 876 crore during January-March 2007. Most of the other private sector banks, such as Axis Bank and HDFC Bank, have seen significant rise in non-tax provisions and contingencies mainly due to provisions for derivatives. ICICI Bank, however, did not disclose the details of its derivative deals.

The bank's net interest margin (NIM) stood at 2.40 per cent as against 2.28 per cent in the corresponding quarter last year. Its cost of funds (COF) has eased to 7.4 per cent from 7.5 per cent. Net non-performing assets to advances increased to 1.55 per cent from 1.02 per cent. Its capital adequacy ratio stood at 13.97 per cent.

Now wait a minute. That NIM pricks me. If the bank’s COF is 7.4% and NIM is 2.4%, why do they choke my mail box with personal loan offers at 15% + processing charges of 1.5%? That means their overheads are unusually high at 5.2% (15% - 7.4% - 2.4%). I can live with their administrative costs of say 2% more, so it should come to me at a cost of 12% (COF 7.4% + NIM 2.4% + 2% admn. cost) at the most. ICICI marketing should have an enormous resilience to resist its CRM analytics that signals “here’s a good credit risk. Lend to him at 12%”

Poor chaps at ICICI marketing can't do much if their super intelligent bosses decide to screw it all up by financing bad lenders in the US and thought they could pass on the cost of such hits to low risk clients in India. That explains the 3% loadings (offered interest of 15% - optimal interest of 12% at which I would’ve taken the loan) they try to push down my throat.

I say “No Thanks!!!”

"Happy Birthday, Krish" - with love from PMO

Felt really sweet this morning. Here is why. The best birthday gift from the Government of India. Finally they chose to free sugar industry from its clutches of control. Hope it comes through.
The liberalisation will mean mills will be able to sell sugar freely in the market. With no cane area reservation, no price controls, no levy obligations, mills will benefit from a direct link between the prices of cane and sugar. The matter is now under the consideration of Prime Minister Manmohan Singh.
I see sugar stocks gathering momentum. Precisely the moment I've been waiting for ! If you'd listened to my earlier missives, you too should rejoice :) If not, go buy sugar stocks now. My fave is KCP Sugar Industries. Super stock.

Here are my earlier takes. Have loads of fun - if you are well stocked up on sugar stocks as I am :)

Friday, April 25, 2008

SEBI in a hurry. Did PMO ask for "status report"?

SEBI today unveiled the guidelines for real estate mutual funds (REMF). For SEBI it’s another feather in the cap. Or is it another job done?


 Real estate mutual fund schemes can only be close-ended, listed on recognized stock exchanges
 At least 35% investment in ready-to-use projects mandated
 Investment in real estate assets, securities (including mortgage backed securities) capped at 75% of the net assets of a scheme
 Caps to be imposed on investment in a single city, project, securities issued by sponsor or associate companies
 Fund houses need valuation by two valuers every 90 days from date of investment
 Mutual funds cannot transfer real estate assets between schemes
 Have to declare daily NAV

Some doubts still persist.

Does SEBI have the expertise necessary to regulate murky real estate sector? Talk of defective title deeds, dated survey / registry documents, arbitrary valuations, diverse stamp duty assessment norms etc. Investors should do well to approach it with care. I would say “avoid”. It only intends to provide liquidity to developers that have bought land at astronomical prices. Now future cash flow from executed projects depend on affordability of buyers.
Then two valuers declaring valuation every 90 days. Is it possible in a RE fund? The underlying prices may not vary in that frequency at all. What could be the benchmarks? Who will supply data given that most deals are done on part cash, part cheque basis? Now wait a minute. Don't we clearly see seeds of subprime mess being sown here? Creating layers and layers of instruments that eventually masked the real borrower to the bondholder. Will there be a housing loan waiver like a farm loan waiver? Hope someone nips it in the bud before investors - that have little or no way to discover the ture value of the underlying - burn their ass.

Inflation recently crossed 7%. Global liquidity crisis is not yet completely off our back. Has PMO sought status report from SEBI to *save* the beleaguered sector? We live in times when ministers put in a “friendly word” to cabinet colleagues to “save” companies in trouble!

Thursday, April 24, 2008

UTI Ventures' dilemma

"Oooops... I got out! Ok. Let me re-enter..." seems to be the credo surrounding the euphoria around UTI Ventures exit from Excelsoft with 50x returns.

The report says
“Excelsoft posted a net profit of Rs 25 crore on a topline of Rs 50 crore. Sources further indicated that UTI Ventures, in addition to selling its stake to D E Shaw, has invested a further $5 million in this firm at its present valuations.”

Now that’s mysterious if not surprising. Funds exit a venture if their investments fetch valuation far in excess of their internal estimates. In that case, UTI ventures should have just sold its stake and not buy more into the same venture. But here it has done precisely that. What could be the reason?

I think UTI ventures, with the global liquidity crunch and Indian IT vendors giving out cautious guidance, could be a bit unsure of how the company’s fortunes will fluctuate going forward. US Dollar has also been declining much to the dismay of many s/w exporters. So why not lock down the premium that is on offer and still to hold a foot in the door, let’s keep some stake in. The company is operating under 50% gross margins as well.

UTI Ventures’ sell-off pips other big exits in the private equity space like ChrysCapital and Citigroup Venture Capital making 26-30 times their investment in Suzlon Energy, and Baring India selling its 34.73% stake in MphasiS BFL to EDS at about 25 times its initial investment for Rs 1,150 crore. Gaja Capital had monetized its investment in learning major Educomp Solutions by 22.5 times, while ICICI Ventures’ exit from Infoedge (Naukri.com) fetched it 17.5 times higher earnings.

Major players in the education space in India include Educomp Solutions, Everonn Systems and Core Projects & Technologies. The Aditya Birla Group recently picked up about a 5% stake in Core Projects & Technologies for Rs 13.5 crore. Last year, Gaja Capital Partners invested $8.25 million in education support firm Career Launcher. Mauritius-based India-focused fund Helix investments put $12 million in tutorial firm Mahesh Tutorials Educare while SAIF Partners invested $10 million in English training academy Veta.

I look at trailing 12 months P/E of some of its peers listed in Indian exchanges. Educomp solutions (99x), Everonn systems (111x) indicates a strong growth potential for Excelsoft. Why UTI Ventures had been in such a tear? Have some of their limited partners been breathing down Raja Kumar's neck? Quite likely. We haven’t heard any major exit by UTI Venture for a long time now.

Saturday, April 19, 2008

All floaters. No Directors in PE funds.

Private Equity players have been swimming naked. The tide went out and all of them are left clutching their balls. Will the reign of mediocrity in India's PE funds end with this? Or will they still fancy dim witted B-school graduates that acted worse than average Dalal Street operator?

DNA Money analysis shows that, of the 51 PIPE deals in India in 2007, 33 have lost money. That's more than 60 per cent of the transactions. It means two-thirds of PIPE deals are out of money. Check out the big names.

Baring India's stake in JRG Securities is the worst hit, its worth having eroded 71 per cent. Others that have lost more than 50 per cent due to the recent market meltdown are Nalanda Capital in Vaibhav Gems, Al Anwar Holdings in Almondz Global Securities, Fidelity in BAG Films and Media, Orient Global in India Infoline, ADM Capital in Rama Pulp & Papers and Macquarie and Credit Suisse in Sical Logistics.

Deals consummated in 2006 also tell a similar story. Almost 40 per cent of them, or 17 of the 41 PIPEs, have lost money.

Capital International's stake in McLeod Russel India, Carlyle's in Allsec Technologies, Future Capital's and Reliance Capital's in Maxwell Industries, Goldman Sachs Investments' and Voyager Fund's in Spentex Industries, New Vernon's in JB Chemicals and Unichem Laboratories, Clearwater's in Kopran, ICICI Venture's in Geometric Software and Gateway Distriparks and General Atlantic's in Hexaware Technologies, are some of the investments whose values have eroded over 50 per cent from the time the funds invested in them.

It’s time for Indian PE managers to get back to basics. They should shun fancy "Director" designations. They have so far directed nothing. They were all drifters with market sentiment. Should call themselves exactly that or "floaters" as aptly defines their passive roles. Time to unlearn B-School gibberish and start focusing on "uncool" stuff like production, distribution and profitability.

Wednesday, April 16, 2008

Better the land prices sink

The official line of bullshit from Real Estate developers is that slowdown is only in residential segment; commercial properties are still in demand. I said cheese off!

Now hear it from the Future Group CEO Kishor Biyani

“We are about to conclude two deals where we do not have to pay rentals for three years” – No rentals for 3 years? Huh? Hear more. He only expects surplus space to be larger in 2009. Why shouldn’t he?

The man who started off India’s retail revolution can’t be wrong. I don’t want him to be. Real estate in a third world, infrastructure starved, poverty ridden country like India shouldn’t be costing so much. Look at wafer thin retail margins. Can they be housed in expensive real estate? I can understand if India’s IT vendors that once enjoyed a margin of 35% did that. Now dollar has tanked and their margins have also been hit. Uncertainty looms everywhere. Why should real estate be any different?

The land prices/rentals have to sink, otherwise the structures they erect over the land will. You like that?

Tuesday, April 15, 2008

Man up, brokers....

Warren Buffet said “You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight." He was referring to Wall Street I-Bankers pummeled by liquidity crisis.

Closer home, we've got something brewing of the sort... Some of India’s leading brokerages that suffered huge losses in the recent market crash are postponing declaration of Q4 results. Why do they hide behind legally permissible extensions...? Is it not the same tribe that talked down many a stock and businesses that delayed publication of quarterly numbers? Now how ugly they look in the mirror?
It's time the big boys learned to man up!

Here are some of the big names (Motilal Oswal, Edelweiss, Religare and so on…) struggling to cover their asses :)

Here you have some of my takes on their analysts.

Monday, April 14, 2008

Vultures waiting to scavenge big builders

Total chaos in the real estate market; but big builders won’t admit!

According to recent reports, home sales have dropped 20 to 30 per cent since last December in the metros. The higher discounts and more sweeteners (now offered by mid-sized developers) are seen as the first sign of a correction looming. These discounts should bleed them badly if seen with the huge interest cost they have to bear on borrowings for funding the race for high cost land acquisition amongst the big developers that was on till recently.

Now the big builders will tell you the slowdown is only on the housing front. For commercial properties, it is business as usual. They want you to believe that. Weak dollar has broken the back of IT and BPO/KPO businesses – the two huge consumers of bulk commercial real estate. Now they are looking at increasing productivity rather than adding to headcount – needing less and less real estate.

Then there is the incremental supply to deal with. Other businesses like textile mills and manufacturing units are fast closing shop in cities [because of falling revenues and higher operating costs] freeing up priced real estate for development. That augmented supply dents the cost of real estate further down.

The excesses of recent years have sucked out the entire liquidity from real estate players. They stretched their finances too thin to buy high price land and now when there is a global liquidity crisis, they are falling short of funds to execute their mega plans. Sample this -

Earlier in 2006, Unitech outbid India’s largest real estate company DLF to bag the 340-acre city development contract in Noida for Rs 1,583 crore. Other landmark deals include DLF buying prime Swatantra Bharat Mills land in Delhi from DSCL for Rs 1,675 crore in 2007; Unitech bagging 1,750-acre plot in Vishakhapatnam for Rs 3,228 crore in 2007; sale by Mumbai Metropolitan Region Development Authority(MMRDA) of nearly 75,350 sq. m. of land in Bandra-Kurla Complex for a total of Rs 2,798 crore in 2007. City-based developer Wadhwa Builders had paid Rs 5.04 lakh per sq. m. for the 16,500 sq. m. plot auctioned by MMRDA, marking the largest-ever deal on the basis of the value per sq. m. Wadhwa paid Rs 831 crore.

With rising price in steel and cement, construction costs have shot through the roof. The budgets of builders, both big and small, have gone haywire (now it hardly covers 11% lease rental + 8% stamp duty) and they will soon enter the despair zone.
Vulture funds can't wait to feast on...

Saturday, April 12, 2008

Little steps that matter

Forget the big sugar mills. They are busy fixing their forex gaffes with bankers. It’s the rural sugar farmers’ cooperatives that get innovative in their efforts to beat the glut.

Satara-based Veer Kisan Ahir Sugar Cooperative (VKASCL) has signed a MOU with the German bio-fuel company, Biogas-Nord, to set up the country’s first plant to produce CNG from spent-wash, a by-product. It is a semi-solid waste and its disposal is agony for sugar manufacturers. Biogas-Nord, aided by Elephant Equity PE fund plan to set up a Rs.27 crore plant to produce CNG equaling 7,000 liters of diesel per day. VKASCL will make available land, infrastructure and raw material for the project and, in return, Biogas-Nord will give 5 per cent commission to the sugar cooperative on total sales plus royalty on raw material.

Facing massive over-supply, sugar industry globally is in shambles. The only way to stay competitive is to invest in innovation, discover alternative uses for the crop – power generation, ethanol and biogas fuel production. The costly crude oil [$100+ a barrel] is clearly unaffordable, yet continues to power vehicles, run factories and heat up cold homes. With an oil guzzling world desperately searching for alternatives, every little step helps.

Friday, April 11, 2008

Suresh Krishna is a safe bet

Suresh Krishna, Chairman and MD of Sundaram Fasteners Ltd., is a shy industrialist. You hardly hear of him outside the industry circles. Yet he delivers, year after year to all his stakeholders.
Here he is, pulling straws quietly from under his hat.

TVS Logistics Ltd., part of $5 billion TVS group has raised private equity of Rs 100 crore from Goldman Sachs to support its expansion plan. It plans to grow its presence finished goods transportation segment inorganically. TVS Logistics Services is also into commutation solutions for staff transportation and seeks to expand its current fleet strength from 200 buses to 1,000 buses within next two years. Currently TVS Logistics and its joint ventures turnover was around Rs 340 crore. Domestic business contributed Rs 240 crore, while its global business contributed Rs 100 crore.

I’ve been a long term investor in SFL and Suresh Krishna has never let me down. I wish him good luck with his TVS logistics venture as well. My bets are on his scrupulousness and diligence.

Thursday, April 10, 2008

Hangers in don't have it easy

Orchid – Ranbaxy saga has sent chill down the spine of many owners that hang in by the teeth of their skin in drug companies. Dr.Reddy’s Labs, Strides Arcolab among the few.

Promoter group in Strides holds just 18% in the Company and is reportedly stalked by Nicholas Piramal. Recent market crash has knocked down stock prices by over 40% making it easier for raiders to ramp up their stakes. Promoters of DRL hold about 25%.

Market decline exacerbates their vulnerabilities. Shares in Orchid had dropped sharply after Bear Stearns, the troubled Wall Street Investment bank, was forced to quickly sell Orchid stock in the midst of the credit crisis. During the recent crash, stock brokers who held orchid shares on behalf of promoter K.Raghavendra Rao also sold heavily when margin calls got triggered and the stock price hit the rock bottom price of Rs.125. That resulted in a loss of over Rs.75 crore to Rao. Now he also has to find resources to up his stake by warrant conversions to thwart further adventures by raiders.

Life isn’t easy for hangers in! But some are privileged since they belong to the right league!

Wednesday, April 09, 2008

This VIX will give you headache instead

Remember Vicks? The balm that is normally used when we catch cold? Now NSE launches VIX - a volatility index reflecting the market’s implied volatility (IV) 30 days ahead. It captures the IV embedded in options prices of stocks included in the Nifty 50 Index.

Thirty days IV is calculated from the best bid-ask price of Options contracts. Higher the implied volatility, higher the India VIX.

What is arguable here is IV as captured by VIX refers to the “implied Value at Risk” (I-VAR) (maximum possible loss) associated with the stock markets and not the size of the price swings. When the market is range bound or has a mild upside bias, volatility will be typically low.

But what it doesn’t say is that IV and VAR indicators are statistical probabilities and are highly questionable. They are not the outcome itself, they are indicative of likely outcomes. Seasoned market players do look at these indicators, but certainly would not swear by their effectiveness and applicability. Option pricing itself is fraught with several abstractions and infirmities, so you can imagine the level of arbitrariness that will go into its derivative indices like VIX.

One word – Avoid. Reason – even its authors don’t fully understand its ultimate impact – no safety nets yet. Gainer will only be NSE that charges a brokerage, no matter you win or lose.

Tuesday, April 08, 2008

Big names, Bigger frauds on the smallest of people

So I read this report in Business Standard – CBI quizzes Niranjan Hiranandani, CEO of Hiranadani Constructions for alleged fraud for defaulting on its statutory obligations. Apparently, they have not deposited Employees Provident Fund dues with the exchequer. As per the report, one of the group companies had unpaid PF liabilities running to Rs 160 crore for the financial year 2003-04.

The year 2003-04 rang a bell. I fish out another report published by Business Standard on December 11, 2004, in which several wrongdoings by Ashok Advani’s Business India group (including non-payment of employee dues) have been exposed. That report incidentally had a quote from Niranjan Hiranandani that now looks like he has been hurling rocks while being inside the glasshouse. I quote from that report –

“But Advani was succeeded on the Collegiate Board in November last year by Niranjan Hiranandani (of the real estate firm), and soon a case was filed against Advani.

Hiranandani does not mince his words. "This is the largest fraud and embezzlement in the history of education trusts in India. After I filed an FIR which led to his arrest, I received more than 40 phone calls from top industrialists congratulating me, and they said that I should have done this long back."

Stressing the tragic undertones of the development, Hiranandani pointed out: "I have erected statues of his father in my housing complexes, and he as a son has ruined his name."

Not sure whether EPF Commissioner had been authorized to erect statues of Mr.Hiranandani's father in his office premises earlier. Commonality of allegations however, is shocking. So is the state of the victims - poor, hapless and unpaid employees - in both cases!

PE gets a knock, SEBI has remorse

Well, there it is. PE deals decline sequentially. [ $3.3 billion mopped up through 97 deals in the March 2008 quarter were lower than 131 deals totaling $5 billion in the December 2007 quarter]. The report cites weak market conditions for the thaw. But there is another reason that it masks – PE portfolios are beginning to look “sinful” exposing callous fund management. The reversals have been dramatic. Recognizing old fashioned due diligence, PE firms are now all the more wary of churning out “weekly” term sheets. Seems they've realized it is not about blind betting on market sentiments, not just about investing other people’s money (OPM) ; it’s also about delivering superior returns. It’s clearly not about letting limited partners grieve!

SEBI on its part has done some self appraisal and has remorse. That's rare! For mere “custody” of draft documents and posting it on its website, apart from “occasional” (to-plug-its-own-mistakes) release of notifications and guidelines, it has been gouging the market players by way of fees. Most of its charges leveled against alleged scamsters have been annulled by High Courts – so much for its “fact-finding” skills! Way too much CYA type “disclosures” emerging from the woodwork. It had to seek atonement some day. So here comes a catharsis.

New funds emerge on the horizon – Saffron Asset Advisors, is planning to launch Rs 300 crore domestic real estate fund, which will invest in non FDI-compliant projects in the country. It manages the real estate investments of NYSE Euronext-listed Yatra Capital, is now planning to launch a bouquet of funds focusing on India.

Recently, New Delhi-based Red Fort Capital announced the launch of its second offshore fund, with a corpus of Rs 3200 crore, to invest in Indian real estate. Red Fort has also launched a Rs 1,000 crore domestic property fund. South Africa’s Old Mutual and Mumbai-based ICS have floated a Rs 2,000 crore property fund and Triangle India Real Estate Fund.

Sunday, April 06, 2008

Make it 100 "Big" steps, Dr.Rajan !

So, Planning Commission's Committee on Financial Sector Reforms Chaired by Dr.Raghuram Rajan is out with its report for comments. Looks like it suggests a primary shift in focus. Instead of mouthing cliches like Bank privatization, Capital account convertibility and priority sector norms that usually make a lot of noise and end up in a whimper, it gets down to micro issues like easing restrictions to open up bond markets for foreigners, tradeable warehousing receipts to collateralize farm credit, securitization of SME receivables and the like.

I see opposition from traditionalists citing meltdown in the US debt markets. They will argue that India has been pretty much resilient because we never had liberal bond markets. As usual, wrong reading of the situation that misses the point - the crisis have been in high yield mortgage paper or subprime (junk) bonds where regulation was lax ; the US equity, treasury and corporate debt markets, despite being close to the epicentre of the crisis, have remained far more resilient than markets in faraway countries.

Liquidity is the key, there is no denying that. Here India has a lot of ground to cover. NBFCs today pass on the credit/ default risk to Banks and Financial Institutions indirectly because they are not allowed a free play by themselves in certain areas (IPO financing, CLO, factoring, hedging etc.). So why not let these risks be absorbed by investors in NBFCs rather than by their creditors/benefactors? That will be an additional line of credit, a far better way to channelise savings to productive avenues instead of locking them up in time deposits.
The Government and the RBI should quit micro managing investment decisions – exposure norms of Banks, Provident Funds, Superannuation funds and other statutory collections that are now forced to invest in very low yield T-bills or AAA paper. Worse, they manage even PSU bank pay scales! Put in place regulations that ensure a close watch over ROI, encourage “stop loss” culture. Aberrations may occur, but in the long run, focus on optimal returns take the load off the back of government itself, when it’s time to pay back. In that, the government does a great service to itself, in whittling away all that contributes to the escalation of our budget deficits.

Who ever said conservative markets and regulatory caps on participation guarantee protection from risks? In fact, they go to cap rewards than containing risks. Try ceding control and stick with selective yet effective macro regulation for a change. Let RBI target inflation, not exchange rates. It’s an illusion to believe the world can regulate its way out of crises.

I would welcome Dr.Rajan’s 100 small, sorry, Big steps. Indeed in gathering political will and scale of execution, it is bigger still.

Friday, April 04, 2008

Too much for a single day?

Business Standard cites M/o Commerce release and reports FDI equity inflows in the month were more than the entire annual inflows from 1991-92 to 2004-05. Inflows into India in February stood at $5.67 billion, the highest-ever during any month since 1991. On a year-on-year basis, the Feb inflows were 712 per cent higher than the $698 million inflows in February 2007.

So you took it to mean investment outlook in India remains strong since FDI is usually slapped with lock-in terms. With more money pumped into the system, can inflation be far behind?

So I get to read this and this. Both the key stock indices, the BSE Sensex (down 500 points) and the S&P CNX Nifty (down 124 points), lost some ground yesterday as the government announced a record inflation rate of 7 per cent, a three-year high. The latest surge is partly on account of a jump in metallic mineral prices. The primary articles sub-index, which has a weight of 22.02 per cent in the WPI, rose 1.8 per cent over the previous week on account of a steep 38.2 per cent rise in metallic minerals, a 4.9 per cent surge in vegetable prices and a 1 per cent increase in oilseeds.

It means “expect turbulence till you fly out of inflation headwind” – well that could be about 12-18 months till you get the full impact of all clamp down measures?

Burning question – what do we do? Left to myself, I would rather go fishing in style, if I get lucky like this guy, David Sneath !

Thursday, April 03, 2008

Curmudgeons are back in fashion

In his last newsletter to his investors, Warren Buffet had cautioned “Look for wide moats around great economic castles.” Anything that looks too good to be true or an instrument that yields higher than average return is worth doing a double check. He was referring to the phenomenal returns that rode on ridiculously high leverage (33 :1) used by Wall Street bankers that resulted in a global credit crunch as the bubble collapsed.

Now I find the sharp markdown in valuations, the global financial turmoil and the general weak state of the equity markets have put the Indian PE industry on a state of high alert. Here is the full article from Outlook Business.

What comes out clearly from the recent turn of events is that the balance of power between the entrepreneur and the investor has been severely altered. Now term sheets don’t get issued in a week. Due diligence regains flavor. Investors are well entrenched in the driver’s seat for now. It’s time for curmudgeons like me to get back in fashion since we advise clients to dilute stake not because they get better valuations, but for other fundamental reasons like cost of debt far exceeding cost of equity or if the client needs to bankroll long term Cap-Ex. We, as a breed of financial rationalists that rely more on common sense, were clearly out of reckoning then.

I remember a client argued with me hard when I advised him against diluting his stake – when all that he needed was short term working capital assistance (retail expansion) - a couple months back, during those peak times. It was to be structured with a front-end bridge finance assistance (60% of funding sought) that was to be converted into equity on the basis of average of the weekly closing prices during the intervening period. The period was to end yesterday when his valuations have dipped by over 45% - a price at which he would've had to dilute much against his interests. I got a call from him telling me how he feels now –
I owe you a treat, fella' ” he said. I corrected him "You owe me that deal, mate...!"