Heads I win, Tails you lose theory of Mutual Funds

"..India's top asset management companies (AMCs) have continued to remain profitable, nomatter whether mutual fund investors made money or not in the tough market conditions. Rather, top players have posted growth in their profitability during financial year 2011-12..." 

I was suspecting this all along and exactly the reason why I hardly ever invest in mutual funds.  To those who solicited my custom (especially the executives at ICICI and HDFC Mutual Funds whom I had to sadly turn down each time they cold call me) I pop the question "will you charge me even if  my portfolio created by you wilts under water...?"  Their reply has always been in the affirmative and that was something that I could never digest. This spurred me on to quit my job and start my own investment management business  with a spunky slogan "...We wouldn't charge you unless we help make enough for yourself..."   I can proudly claim that I'd been keeping up that promise.

All my clients will swear by that, something that helps me effortlessly wean away clients that got creamed by portfolio managers and mutual funds and sincerely hope they keep going down that one way street so that my business is in tact, ethically miles ahead of them...!!!

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 ;-)

.

Lay the decoy, draw the blinds, go goose hunting

The wild see-saws in the market has leveled many a prophets of boom and doom. Where have they all gone? Now all of them seem to have gone into hibernation. The clients have deserted them. While some muster the energy to come and talk about clients asking them “is it time to get in?” Yeah, they ask. But get in they won’t in a hurry.

I see companies losing money by the ton with Rupee reversing its run up. Despite upward revision in retail fuel prices, govt subsidies and oil bonds, the Oil marketing companies are busy making new losses. Politics is another big spectacle with everyday new numbers of supporters and turncoats for the impending trust vote.

Enough uncertainty, huh? The waters are troubled and murky. Good time to go fishing? Or should we settle for some goose hunting?

.

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.

.

The DLF dilemma

To invest or not to ?

DLF IPO never ceases to surprise by contrasts. The moment I finish reading a news that says overwhelming response by Institutional investors to its mega IPO, there’s another article which elaborates why the IPO should be dumped by investors.

The issue opened on Monday 11 June. On the second day, the issue was subscribed by 1.28 times. However, the retail investors have not given warm response to the country's biggest IPO, as the retail portion was subscribed merely 0.101 times.

Valued at the higher end of the price band, the company would be the eighth largest by market capitalisation, post-listing. With negative cash flows and current earnings abysmally low compared with future projections, the company is demanding its price relying solely on its vast land holdings, the value of which is not clear.

.