This time is different…

Hola and long time no see on this blog. Apologies for not posting regularly (of course, I doubt anyone in the world noticed). Caught between work, investing and a bull market, things have been quite busy.

All right then. With SEBI rules and all that, I will obviously not even venture into mentioning any stock names, much less recommend them anymore on this blog. And given that I post so infrequently, I again doubt my recommendations (if I had any) would have been taken seriously by anybody.

But I do want to point out some unique things that are happening in this market and especially focus on some tidbits of conversation around this bull market:

1) Everybody wants to quit their job and get into full-time investing: With people making 2x, 3x of their portfolios in the last 1 year, a very common theme has emerged – that of quitting job and doing full time investing. Sounds very sexy. Sounds very carefree. Nobody to report to. No more appraisals. No more HR mails. Pure meritocracy (and no bicker politics) in the sense that Market will reward you if your reasoning is right and punish if the reasoning is wrong. Very liberating. The idea in itself is so magnetic, that it can leave best of the folks high and dry. I am highly tempted to do this too, no doubt. I don’t think it’s a bad step if a) you know that you have enough assets and income to back you even if your portfolio tanks 50% from here b) you have a fair idea of what to do in your spare time as investing in general is very boring and would require only short bursts of massive activity (unlike trading) and c) you are actually passionate about investing and learning its million nuances than just being attracted to the idea of not having to report to anybody/hierarchy.

2) 80% of story in 20% of time: Since our memories weigh the recent events more highly, this quote will be attributed to Basant sir, but I can assure you that many senior and legendary investors have said the same thing. I have massive respect for Basant sir (and the education he provides constantly) along with other legendary investors but this is precisely the wrong time (start or middle of a raging bull market) for such utterances. People remember quotes and not entire interviews and thought process. What is 20% of time? What is 80% of story? How much time should I spend so that the 20% of time is actually useful to learn 80% of story? My read is that legendary investors have sifted through so many stories, so many stocks, been through multiple cycles that they have various heuristics to understand which story may run well and which story may not (and still be only 60% right). Investors who are on the learning curve, in my opinion (and that includes me), need to spend as much time as it takes to know everything about a stock as possible. They need to have an illusion of control, atleast thinking that they know everything about a stock before clicking the ‘Buy’ button. When they have sifted through enough stories, and been through one bull-bear-sideway market cycle is probably when they would know and really understand the meaning of ‘80% of story in 20% of time’. Till then, using such statements to justify a thesis would be a recipe for disaster.

3)  This is a stock picker’s market: This is an all-time favorite. I really don’t know what the statement means as it is used in every type of market (bull/bear/sideways). I had already shot off a warning on twitter for anyone who wants to use such statements. For the sake of brevity, will avoid repeating that threat.

4) Is it 2005 or 2007: This thought has been running through many investors’ heads (including mine, evidenced by my twitter thread). Stocks have been moving up so fast that everybody has started estimating FY17 and FY18 earnings. Portfolios have moved up 2x, 3x or more depending on the stocks and portfolio allocations you have done. People are scared if there would be a massive correction from here and equally excited about another massive run from here to say 35000 on the Sensex. Which one is it then? 2005? or 2007? Or does it matter at all that even in massive bull runs, there are routine corrections of 20% in due course. Or that your CAGR will be quite healthy even if you don’t score big over the next 3 years?

2013 2014 2015 2016 2017 2018 CAGR
100 125 250 275 302.5 332.75 27%

Above is an illustration of any investor who started with Rs.100 in 2013 and ended up with Rs.250 by end of this year. Even if this investor takes this money and puts it in a fixed deposit giving 10% returns (well, take 7% in case you are tax-sensitive), 3 years down the line, with a risk of zero capital loss, he/she is going to end up with a healthy 27% CAGR. Legendary investors will tell you that a 27% CAGR is an absolutely great number to have. What they may not ask you of course, for the risk of sounding rude, is how much of your net worth was in equities before you put it in fixed deposits. We all know the math. We all seem to know the trick. But what do we do?

Bah, who cares about data. Is it like 2005 so that I can buy more? Or is it like 2007 that I need to sell? Tell me that first.

5) The fallacy of selling 20% below the top: Which brings me to my next and favorite topic. Nobody wants to leave the party that is going on. Value investors are very famous and take great pride in laughing at the stupid statement of former executive of Citibank saying “”As long as the music is playing, you’ve got to get up and dance.” We laugh and laugh at that stupidity. We quote Buffett. We quote Munger. Why, these days, we have become more exotic and even quote Daniel Kahneman and his super book ‘Thinking, Fast and Slow’. But almost no-one wants to exit the party. These days, the hypothesis is even better. These days, investors say that ‘let the market reach the top and then correct…we’ll all get out 15%-20% from the top’. Let me explain this fallacy through a famous picture:


That’s the chart of the IT bubble – starting from 1996, all the way till 2001. All those investors who say ‘let the market reach the top and then correct……’, would they want to get out at all the points marked ‘Red’ in color? How would they know in advance? Conversely, in reality, wouldn’t most investors get out at all the points marked ‘Green’ in color? Not really. Every investor worth his salt wants to get out at the point marked in ‘Orange’. How many can do it? I seriously doubt if it would be in high single digits.

Then again, the lure and the logic is too irresistible. Combine fallacious logic with your neighbor (rather, twitter/whatsapp friends) making more money than you everyday – and you have got a dynamite waiting to blow up. We all want to dance till the last minutes, irrespective of how many times we read Buffett pleading ‘the clock has no hands’.

6) Impact of social-investing: Post the 2008 crisis, a new kind of animal took shape in the world and seems to have impacted the markets in a big way. The animal of crowd-sourced investing/social investing/forum investing/whatsapp investing. This has been a massive boon for all investors to connect themselves to superb investors across the country. I have personally benefitted, both monetarily and otherwise by picking brains and discussing stocks and worldly wisdom with some super investors and have learnt quite a lot. If one has already networked in the wave, it would hold him in good stead in the future too. Given recent SEBI rules (to circle back and tie in to the first paragraph of the post), unless clarifications come, there are hardly going to be any stock recommendations in blogs and forums henceforth. Given that most investors have caught onto the mantra of “‘scope of opportunity + management quality’ is enough to understand and invest in a story” (never mind that each parameter in the equation itself is a universe), how would the investors cope with no recommendations would be fascinating to see. In fact, I think that ‘scope of opportunity’ has been defined so widely that maybe sometimes even promoters are shocked and surprised at how wide we have defined ‘scope of opportunity’. The investor seems to say ‘aapko pata nahi aapki company scope ki taaakat’. There might be some Ph.D down the line, maybe in 2025, who would probably write a book on how SEBI rules had far reaching impacts on how investors in the millenial age behaved in the Vision 2020 age.

Prashanth has a wonderful post on investing and social media. Read, if you haven’t already.


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Stock Analysis: Poly Medicure

Poly Medicure is a leading supplier of Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags. Safety IV devices itself is globally a $300-350 Mn annual market size today. (This was a 20 year patent granted to Braun in 1999, so is valid till 2018).

They manufacture around 95 products.

Subsidiaries in China and US. Egypt is a joint venture. China has been a major factor in reduction of raw materials.

Major RM is plastics, which is dependent on crude oil. Custom duty on medical and life saving equipment reduced by the Govt. in Feb’13 budget.

Revenue growth of 25% (approx.) and NPM of 12-13% from the past 3-4 years. See no reason why the revenue increase won’t continue at about 20% and NPMs sustain at 12-13% for the next 2-3 years. Forex derivative contracts expired in Oct 2012. Now, only simple forward hedging.

B Braun, BD, Hospitec, J&J, 3M and Poly Medicure are among the main players in this space. Poly Med won cases against B Braun in India and Germany and Malaysia but lost in Spain. They are planning to tie up with major OEMs and contract manufacture for them. No major plans to foray on its own due to huge costs involved.

Safety IV Cannuale sells at Rs. 18/- while IV Cannuale sells at Rs. 6/- even though it costs only Rs.0.5/- for safety. Currently, Poly Med sells IV Cannuale majorly and Safety IV Cannuale only in some geographies.

Has 3 plants – Faridabad, Jaipur and Haridwar. No expansions possible in the existing Faridabad and Haridwar plants. Jaipur SEZ plant to be operational by March 2014. They have got new land in HSIDC, Faridabad. Capital expenditure of Jaipur SEZ – 38 cr (21 cr loan, 17 cr internal accruals). Investing in Haridwar plant to focus more on domestic market. In FY14, domestic market contributed only 50-60 cr. Rest from exports. Got USFDA approval for its Faridabad plant in Dec 2010.

R&D as a % of sales:

They have increased R&D spend as a % of sales from the past 3 years.












a) Increase in RM costs (crude oil proxy)

b) Exchange rate fluctuations (although, it’s a net exporter)

c) Changing import duty structures (although, off late, govt. has framed favorable policies towards medical and life saving devices)

d) Medical devices heavily regulated (nature of business)

Related Party Transactions and Compensation:

They score pretty high on related party transactions and compensation as a % of sales.

Series of related party transactions with Vitromed healthcare

VitroMed txns






15 cr

11 cr

8 cr

8 cr


21.5 cr

15 cr

13 cr

10 cr

% of PolyMed Sales





MD & ED’s compensation





MD&ED’s comp

3.5 cr

3.1 cr

2.17 cr

1.73 cr

Sales of PolyMed

252 cr

209 cr

170 cr

136 cr

PAT of PolyMed

24 cr

19.2 cr

21.7 cr

16.4 cr

% of Sales





% of PAT





Valuation and Investment theme:

Polymed looks like a 20-25% compounding story with a fairly high probability from these levels. FY13 250 cr sales, 24 cr profit. FY14E 300-310 cr sales, 40 cr profit.

Next 3 years, even if sales double (and assuming NPMs would remain at 12-13% – op. leverage would be set off by increased depreciation of Jaipur SEZ) implies 72 cr profit. Assigning a 20 multiple leads us to 1400 cr marketcap. Current marketcap 750 cr. Implies a 25% CAGR from current levels

Jaipur SEZ spend is about 38 cr and expected sales is about 100-120 cr (2.5-3x asset turnover). If some OEM comes along and if Jaipur SEZ can deliver full demand, sales can double in 2 yrs, and the CAGR would jump to 40%.

Management compensation seems extremely high. Related party txn with Vitromed also needs to be monitored.

However, there is a long ramp for Poly Medicure to grow at 20-25% CAGR. Medical disposable business is an evergreen huge business (unless, there is suddenly a replacement of IV Cannuale with some other tech.) And FY18-19, Poly Med can start selling Safety IV Cannuale anywhere in the world (Braun’s patent expires). Safety IV cannuale is 3-4 times more expensive than IV Cannuale. Think about the impact on revenues and margins.

Disclaimer: This is not a recommendation to buy/sell. This post is only for educational purposes. Please do your own diligence before buying/selling Poly Medicure

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Stock Analysis: Sabero Organics

I had researched on Sabero Organics about a month back but was too lazy to update on the blog. Thought would rectify it in the new year 🙂

I have not yet invested in the stock. Still reading and researching. Right now, the opportunity costs of investing are pretty high.


Sabero Organics – manufactures agro-chemicals – fungicides, herbicides and insecticides. Sabero is a leading manufacturer of generic products in the agro-chemical space.

Investing theme is broadly – i) patents of major patented agro-chemical products will expire in 2014 ii) Due to increasing environmental concerns and consolidation in China (along with appreciation of yuan), there is a significant possibility of lower production from the Chinese along with better price from India iii) Significant operating leverage and synergies that can be achieved by the Coromandel group.

Their major products in each of the segments are:

1) Herbicide – Glyphosate

2) Fungicide – Mancozeb (registered in the first country in Europe (France) recently); potential of Mancozeb worldwide is $500M; current share is 10-11%; aspiration to take to 20%; it contributes 35-40% of Sabero’s sales (while other core products such as Acephate, Monocrotophos, Glyphosate each contribute 15 per cent to the total sales respectively with the balance 15 per cent coming from Chloropyriphos and others intermediates.)

3) Insecticides – Monochrotophos (main competitor: United Phosphorous)

Share of revenue of Fungicide:Insecticide:Herbicide is 40:40:20

They have subsidiaries in Australia, Europe, Brazil and Argentina.

2009 – 10 AR

Customers of Sabero Organics:

a) 30% of business from MNCs

b) 40% of business from domestic and international B2B

c) 30% of business from dealer distribution network

Sabero is setting up a plant in Dahej SEZ at a cost of Rs. 55 cr. Potential sales of 2-3 times investment. Funded from $9M in ECB debt and rest from internal accruals.

Increased capacity of Chloropyriphos by 50% by Sep 2010.

2010 – 11 AR

2 plants shutdown primarily due to project executions and EMS (environmental) objections

Started supplying to Brazil. Got technical registration for Mancozeb (Brazil is the 2nd largest customer after US in agro-chemicals)

Dahej plant will manufacture synthetic pyrethroids, which have a potential market size of $600M-$700M

Main RMs of Sabero – Ethylenediamine (suppliers are Akzo Nobel, Huntsman and BASF) and Phosphorous, Acetic Anhydride (main supplier Celanese)

Mancozeb plant working at 60% capacity

Supply to Europe has not begun as data protection gets over in June 2011 (Update: In 2013 AR, they do indicate they have registered in France)

40% marketshare in Monochrotophos, rest 60% with United Phosphorous (Cheminova exited the business, leading to a duopoly here)

The joint venture to co-venture partner Markan is under arbitration (Update: In 2012 AR, they have resolved it, taking a hit of approx. 2cr)

2011 – 12 AR

Coromandel (and its subsidiary Parry Chemicals) take 74.57% ownership; Sabero will contribute only 5% of Coromandel’s revenue.

There was a PIL (public interest litigation) filed against the company. Considerable investments were done in environmental management systesm and processes. April 2011 – they were manufacturing 0%; Dec 2011 – their capacity was ramped up to 75%

Manufacture of formulations has begun in Dahej in March 2012

Case with Brazilian company settled

Propineb, with a market potential of $150M – commercialization will begin next year

There has been a sharp fall in the number of Glyphosate herbicide manufacturers, and there can be a 30% reduction in capacity due to consolidation in China in the next 3-5 yrs

Power, fuel and utilities costs shot up to 13.6% vs 7% last year

RM costs also rose sharply

Domestic scale up didn’t happen properly because of availability of products (due to constrained capacity) and erratic monsoons

2012 – 13 AR

Many agro-chemicals going off-patent and due to GM seeds, there has been diversion of R&D funds from agrochemicals to GM seeds

Propineb has been launched (worldwide market of $110M)

Current status of registrations: 296 registrations on 16 products in over 54 countries (183 unique proudcts/country combo)

There has been a 40% increase in trade payables and 100% increase in trade receivables, while sales have grown by only 44%. The massive increase in trade receivables vis-à-vis sales is shown up as negative operating cashflow (-19cr) for the first time. (Are they pushing products on lenient terms then?)

There is absolutely no mention of the status of the Dahej plant.

There are planning to do some capital investment in utilities (drawing board stage), and are targeting EBITDA margins from current 10% to 15%. They can potentially do a 1000 cr turnover in FY15.






































Net Fixed Assets






Fixed Asset Turnover



















H1 FY14 PAT is 26 cr. Given H1 and H2 are similar for Sabero, FY14 PAT would be 52 cr. (There would be no tax impact this year because 61 cr is carried forward from FY12. 7.7 cr has been set off. This 52 cr can also be set off against 61 cr). Tax impact would be 30% from FY15 (unless we know further status of Dahej in which case, it may be a bit lower).

PAT 52 cr. Mkt cap – 492 cr. P/E of 9.5 (Even EV/EBIT (since Sabero has debt) is about 9.5). What would be a fair valuation for such a company?

For FY15, assume best case scenario:

1000 cr turnover, 15% EBITDA margins would imply 150 cr EBITDA. 30 cr interest deduction. 120 cr EBT. 30% tax – PAT would be 84 cr. On a similar 10x multiple, we are looking at 70% upsides from here.

On a realistic basis, 1000 cr turnover, 10% EBITDA, would lead to 50-55 cr of PAT. There is no growth between FY14 and FY15 in PAT (due to full taxation in 2015). Beyond that, there are too many variables.

Of course, increased demand for Mancozeb from Europe (if France is done, other countries can’t be far behind) may further provide tailwinds.


The major risk I see here is any PIL would lead to further pullbacks as production might be stopped. Also, GPCB has given time till mid-Feb to clear out some backlogs on environmental concerns. I think getting a clearance would be paramount (although, given Coromandel’s pedigree, don’t see much of a risk here).

Another major risk is obviously steep increase in RM prices. This is a risk on balance – as production of end product from other countries is dwindling, and as is the manufacture of phosphorous from China. We may get into a higher pricing scenario, but so would our RM cost increase. Net-net, I don’t see an asymmetric benefit of China rampdown.

Another risk is inter-party related transactions – say, if the Dahej plant production is being restructured to be a backward integrated supplier for Coromandel-Liberty merger, then the upside is going to be very limited. We need to be careful of the pricing structure here. Of course, delisting is another risk (will lead to re-investment risk)

Disclosure: I have not invested as of yet. This is not a buy/sell recommendation. This post is only for learning and posterity. Please do your own due diligence before investing

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Goodbye 2013!

So, it’s that day of the year where everybody looks at the year gone by – some with happiness, some with wistfulness and some others with a tinge of sadness. Nevertheless, everyone except for the greatest of cynics look forward to the new year with hope, enthusiasm and happiness.

So, here’s wishing all of you a fantastic happy new year 2014!

From an investing standpoint, I wanted to jot down some notes for posterity –

a) Performance: At the beginning of this year, I started deploying most of my capital towards equities. Right now, except for emergency funds (and gold and real estate of the old), most of it is in equities. Maybe it’s a sign that the market top is here and it’s all downhill from here 🙂 My portfolio’s return over the past 5 years is now 30.4% CAGR, helped massively by some decent investments I have made over the last year. 25% of my portfolio has been invested in HDFC Bank and that has returned 0% over the past 1 year. If I remove the best performing stock in my portfolio (which gives a slight indication of whether the portfolio is robust enough, and that you weren’t just ‘lucky’), the returns fall to about 22% CAGR. 8% CAGR difference is massive if you consider a long enough timeline – but for now, the portfolio seems robust enough, although there is a long way to go in terms of a perfect portfolio.

b) HDFC Bank: As I said above, it constitutes 25% of the entire portfolio and has returned 0% over the past 1 year.  I have an idea of what to do with most of the stocks in my portfolio except this one. This is probably the bluest of the blue chips and has been with me for the longest time (esops) and has compounded extremely well. I do understand (and have read) that the stocks don’t know you own them and you need to be un-emotional about stocks etc., but this one is slightly special. Many a time, I have come mighty close to selling a portion (or all of it) to invest in other opportunities, but have held myself back so far. Other good friends of mine have suggested to take the option of LAS (loan against securities) against this. Somehow, I am slightly averse to leverage. Anyway, this stock has been my biggest dilemma of 2013. Behavioral science is that much more tougher to implement when one stock is a runaway success.

c) Friends: To begin with, they were just acquaintances who used to interact regularly on investing forums like valuepickr and whatsapp groups. Slowly, over many conversations, and on everything under the sun, this year has been amazing in terms of getting to-gether with like-minded friends and learning a lot from them. It is my belief that incremental CAGR will come, not just by reading and working on your own but also consulting with like-minded friends who can teach you a lot about investing much faster and point out behavioral flaws in the nicest manner. This easily has been my biggest benefit of 2013 and hope to continue in 2014 and beyond.

d) Mistakes of Omission: Well, I would not call them mistakes because I had consciously avoided them after reading up  on their businesses. These businesses have gone on to becomes doublers in about 6 months or less. One of the changes that I have noticed over the past year is that I no longer feel the need to ‘catch-up’ or ‘missing out’ on a stock. Stocks like PI Industries, Acrysil, MPS etc. have doubled in the last 6 months. I had read about them but didn’t invest in them. The reasons are many – I either didn’t understand the business completely or didn’t like the management or didn’t understand the competitive landscape well and hence didn’t invest in them. I maintain a 7-10 stock portfolio most of the time and I can’t afford not understanding a business/not understanding the triggers for growth/not able to track more details on the company. I am not really too worried about mistakes of omission (and I honestly think nobody should unless their capital is massive).

e) Mistakes of Commission: This one gets my goat. Thankfully, there have not been too many of them this year. However, I did lose 0.5% of my portfolio capital on one single stock – CP labs this year. In fact, I sold the stock at a 20% loss and the stock has promptly moved up 50% from the time I sold – talk about wonderful timing 🙂 This stock had all the wonderful influences of psychology while buying it and also while selling it. A story for another day perhaps. Other than that, lost tiny bits of money on APW President delisting and Cravatex (I kick myself for this investment – as it was on a whim, a bias for action than anything else). The takeaway for me from this year is to not invest on a whim and not get taken by the influences of psychology. Both are of course extremely tough to do, but that’s the challenge, ain’t it?

f) Unsatisfactory Profits: This is a strange case where I made some good profits, but am still unhappy to have take then decision to buy (and then sell). The stock case in point is Avanti Feeds. I saw massive value when the stock declared its Q1 results this year and bought quite a bit in my portfolio (at around Rs.170). The price kept increasing from then on, but I was on tenterhooks all the time – especially because there were so many variables to track. Inspite of all the assurances from various forums, I was really not comfortable holding the stock and tracking the stock on a daily basis (can’t do because of my day job). So, I sold – in the range of Rs.240-Rs.265. Decent profits but not satisfactory. I really want to get into a system of investing in stocks with not too many variables in 2014 and beyond, especially the ones that don’t keep me on tenterhooks every day.

g) Special Situations: As you would have noticed over the past year, I have not written about special situations on this blog (or actually, written on hardly anything at all). I have stopped analyzing them for multitude of reasons – a) I have realized that they are very intellectually stimulating but not very monetarily stimulating, considering effort vs return b) They don’t end up giving me the comfort of compounding and am exposed to reinvestment risks c) Too much competition chasing too few special situations, resulting in hardly any arbitrage. I may invest in special situations in the future, but they are going to be very few in number.

Hope to blog more in 2014. And wish you a very happy and prosperous new year.

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MCX – Undervalued?

Back to blogging after a long long pause.

Anyway, given the hullabaloo around NSEL, FT and MCX, there have been certain conclusions that NSEL is a gone case and so is FT. The only remaining entity of Jignesh Shah’s empire is MCX. And an opportunity to buy an exchange with a significant moat in the commodity trading business for about 2000 cr seems enticing for many.

For those who are new to MCX and want to understand more about MCX, Rudra has got a very comprehensive explanation about its business model, its competitive advantages and risks here. He has covered all angles (the blog is obviously before all the ruckus on NSEL in August).

The price action of MCX below – 1 year back, it was quoting at about Rs.1500/-. Around start of this financial year, it quoted at about Rs.850/- (The budget in Feb’13 proposed and imposed a commodities transaction tax (CTT) on all non-agricultural commodities which led to a drastic fall in volume). Then about August, the NSEL saga struck and the price dropped to a low of Rs. 238/-. It recovered a bit, and HDFC Mutual Fund bought a large quantity at about Rs. 293/-. Yesterday, it quoted at around 410/- and today, it was up by 10% to 455/- (a market cap of Rs.2300 cr).


We are all fascinated by bottom-fishing, but we are always unsure of getting stuck at the bottom. And so it was with MCX. Nobody bought at Rs. 238/- (when cash per share, seemingly on B/S and again confirmed by Sep 2013 B/S was about Rs. 180/- a share). Now, when the price has doubled (seemingly after FMC has ring-fenced and necklace-spiked MCX from the vultures), people have developed an immense interest in MCX’s seemingly unbreakable moat, its multitude of competitive advantages and why it’s a great buy at these levels, given normal profitability.

Given the state of affairs, I decided to see the volume of contracts at MCX (obviously, more the no. of contracts, the more MCX revenues and profits boost up, just like a toll-bridge). The major products traded at MCX are only four – Gold, Silver, Copper and Crude. Rest of the commodities are too small to be even counted (inspite of MCX’s major push towards agricultural commodities – FCRA hasn’t yet come up with regulations for options on commodities, which are crucial for agricultural commodities – and given the NSEL fiasco, they won’t be in a hurry). So, here I plot the contract volume of all 4 products –



As you can see, volumes have plummeted in the initial part of the year due to CTT, and most probably plummeted further after the NSEL fiasco. Of course, not much commodity volatility globally across these 4 commodities is also one of the reasons for this poor performance. On an average, y-o-y since August, Gold’s contracts have gone down by 60%, Silver by 63%, Copper by 63% and Crude by 74%.

For the year ended FY13, MCX ended up with 299 cr of net profit. Analysts who assumed this profit to be the base case, and who assumed that volumes at an exchange will ALWAYS grow are in for a rude shock with MCX. The profit for Q1 FY14 was Rs. 60 cr, Q2 FY14 was 27 cr and given the severe contract volume drop in Q3, I would expect MCX profit to end up somewhere around 18 – 20 cr (if not less). Net-net, if a similar trend continues through to next year, I would expect MCX to end up with profits around Rs. 125 – Rs 130 cr.

In my view, this needs to be the base profit expectation (maybe even lower, given that Gold is about to break $1200 internationally and there might be further lack of interest due to absence of options) to evaluate MCX rather than the elusive Rs.300 cr as the base case. Applying a 20x P/E (it’s at 10 P/E TTM, but exchanges with such moat I think should trade fairly at 20 P/E), we arrive at a market cap of Rs. 2600 cr, a measly 13% above current price levels.

Contra-viewpoint: Of course, all of these fundamental valuations go out of the window if a reputed player like HDFC/Kotak take over 26% of the company (from Jignesh Shah). In that case, the market price can fly anywhere, maybe even double. But I am still not buying.

Long term view: Even considering a HDFC/Kotak buying out the stake, the price may double from here in quick time (< 1-2 years). But am I confident that the volume of commodities traded at MCX would increase 20% year-on-year for the next 10 years? I am really not sure. Hence, I am not taking a bet for now, inspite of a decently high probablity that there are a couple of good triggers for an increased market price in the short term. As and when I learn more about MCX’s business or about FCRA’s view on introducing commodity-related options at MCX, I may change my view. But for now, I am letting this pass, purely based on fundamental valuations than bet my money on any buy-out speculation (which may come true after all).

Disc: Not invested. Still studying the MCX stock (business)

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Special Situation: Jindal Poly De-merger

I had shared this note with a few of my investor friends a few days ago –

The brief summary is as follows –

a) Jindal Poly wants to focus on its polymer business and wants to de-merge its holding/investment arm.

b) For every 4 shares of Jindal Poly (JP), you would get 1 share of Jindal Poly Inv. & finance (JPIF)

c) All investment & holding related stuff moves from Jindal Poly to Jindal Poly Inv. & Finance

The record date is July 18th. And here’s the link to the demerger details (

Behind the 23 page of legalese pdf, the key messages are –

a) Jindal Poly wants to move its investment of equity shares in Power business off to this investment arm (from what I read, its only investment and not debt associated – needs more readings)

b) All MFs and other investments move to this JPIF.

Both JP and JPIF will have the same shareholding structure. JP will continue to be listed, while JPIF will be listed on BSE & NSE.

Here’s the interesting bit. JPIF will have the following –

a) 43.6 cr shares of Jindal India Powertech limited

b) 17.82 cr shares of Jindal Poly Investment limited

c) 4.4L shares of Coal India

d) 11.86L shares of Consolidated Finvest

e) 187 cr worth of mutual funds

Now, with most conservative assumptions, let’s value

a) at Re. 1 per share, b) at Rs. 0 per share c) 4.4* 285 = 12.6 cr d) at Rs. 0/- and e) at 187 cr.

which would give us a total of Rs. 240 cr (approx).

Let’s apply a massive 70% discount (since it’ll be treated as a holding & inv. company) which would give us Rs. 72 cr.

After de-merger, JPIF would have 1.05 cr shares, which would give us the value of JPIF to be 69 bucks per share. The current market price of JP is Rs. 158 bucks per share.

There are a couple of options:

a) We can buy JP before record date and sell after record date and since the shareholding remains the same (no dilution) and the investment timeframe is short and the de-merger not tracked too much and shareholders would be happy to get rid of the power investment, we can expect maybe only a very mild correction (if at all)

b) We can buy JPIF after it’s listed and since institutions hold a fair bit (7%) and they may not wish to hold to a holding company, any listing/selling below 69 bucks a share should be bought quite comfortably.


I had bought into a miniscule position (very tiny) at about Rs. 158/- and sold it today at Rs. 148/-. That is I created a JPIF share at about Rs. 40/- share (4 shares of Jindaly Poly and at Rs.10/- loss for 1 share of JPIF).

Since the position was tiny, the opportunity cost of this Rs.40/- getting stuck for say 6 months (before listing) will not impact my overall portfolio.

Let’s wait and see if JPIF will list above Rs.40/- or below Rs.40/-

Disclosure: I bought and sold my entire position in Jindal Poly to create JPIF shares. This post is not a buy/sell/hold recommendation of any stock mentioned on the blog. Please do your own due diligence before investing

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Numbers don’t lie!

Today was a very humbling experience. I did a mammoth exercise of plugging in all numbers since the time I have been investing (6 years). This included stocks, debt (this is a combo of debt mutual funds+cash – not loans), equity mutual funds, one ULIP (yes, I had one ULIP). I didn’t consider PF. Over the past 6 years, my CAGR is 18.2% as of today’s closing prices. And here I was, thinking that I was doing 30-35%.

A few facts upfront, before I dive into details:

i) My broad portfolio as of today is 39% in Stocks, 23% in Debt and 39% in Real Estate. The real estate consists of my home back in my hometown. Technically, it is an asset (I have already paid off the entire loan) but my parents live there and I don’t think I’d be selling the house ever (unless, a massive black swan strikes).

ii) I have not included Gold in the portfolio calculations. Gold is an asset, inflation hedge etc., but we Indians never sell Gold unless and until it’s an emergency. So, again, technically, it is an asset but not really. If I include Gold in the total assets ratio, it’d be 34:20:34:12 (S:D:R:G).

iii) In general, I have tried investing as carefully as possible (one of the prime reasons being, if I fail, I don’t have a inter-generational wealth to back me and pick me up again). This also included taking max. term insurance to protect my family from black swan.

iv) Although I am invested in stocks since 2007, active investing was only since the last couple of years. Before that, it was a combination of pure luck for gains, and pure speculation for losses. The last couple of years have been pretty good in terms of % gains, but not very high in absolute numbers.

Alright, that story done, let me dive into a few details.

a) Let me put the 18% CAGR in perspective. 18% handily beats all ‘Large&Midcap’ and ‘Midcap&Smallcap’ funds. However, my target has always been atleast 25% (else, not worth the effort). My aim is to hit 25% p.a on average till I hit atleast a 8-figure number on the Stock+Debt portfolio. So, 18% did come as a big bummer. Here I was, thinking I could easily beat the markets, value the business, discuss and argue cogently with hallowed investors and then there was this number that stared me in the face (I double checked the numbers, just to ensure I have not under-performed, willingly).

b) The last 2 years of active investing has been pretty good, but so has the record of the midcap/smallcap market in the past 2 years. If I eliminate the first 4 years of my passive investing, the last 2 years CAGR came to about 40% p.a. This again, is due to a combination of extreme luck (forums like valuepickr/theequitydesk in no small measure), effort (constant lurking on wonderful blogs like I mentioned before) and a bit of reading (which helped me avoid the dumbest mistakes). However, since there were a host of factors like paying off my home loan, wedding expenses (oh my!) etc., the lack of sufficient capital led to not much of absolute capital appreciation. I hope I can sustain this luck and learning for a long time so that my capital grows too.

c) Drilling down to the details. HDFC Bank is a clear winner, not much in % terms (it’s like 5x in 6 years) but I put in a quite a lot of capital. In fact, I would boil this down to luck too. I accrued ESOPs since I worked for HDFC Bank, and I bought all ESOPs that got accrued when I left the Bank (split-adjusted price of Rs.125/-). In fact, I had taken a personal loan to buy all the options. Thankfully, Mr. Puri is carrying the Bank along well. A combination of extreme luck (working for the bank and hence ESOPs) and monstrous stupidity (taking a personal loan to buy stocks) – but it is now an anchor stock and has served me well. Too bad, I didn’t buy this one yet again in the 2009 bear market.

d)  Out of the 38% in stocks, 10% of it is in a venture. When I mean, venture, I mean an unlisted company. There is this very good friend of mine who had an aeronautical spare parts company. He was committed to his company and grew it by leaps and bounds. He then got an opportunity to tie-up with a major company and asked me if I’d invest. I knew this guy to be honest&committed, he was putting in a lot of his personal stake, and the major company also put in 50% of the total capital. I saw a large scope of opportunity and committed management and invested 10% of the stock capital in it last year. Thankfully, it is going well. Of course, if and when the company goes for an IPO, I am committed to write a glowing IPO note to pump the stock :). Let’s see how far this goes. Yet again, outlier event, extreme luck of having him as a friend, and he asking me if I’d be interested in investing.

e) In the last 2 years of active investing, forums, blogs and books galore. Inspite of major undervaluations in very good stocks shared by one and sundry, I had the heart to commit major capital to only two stocks – Mayur Uniquoters and Atul Auto. Of course, I have exposures to Astral Poly, Kaveri Seed, Muthoot Capital, PEL etc., but even if they go 3x, at the current capital allocation level, they are not going to make much of a difference to overall wealth. Inspite of multiple people urging me that ‘Pharma’ was simple, it was simply my laziness and lack of interest that I didn’t dig through the story of Ajanta Pharma/Unichem etc. Ajanta Pharma, in hindsight of course, was a major miss. This 40% p.a return in 2 years, I would admit, involved a lot of effort, apart from luck. Effort in reading up valuepickr/theequitydesk every day and see if I can invest in a stock or not.

f) In essence, if you remove my top 4 stocks – HDFC Bank, Venture investment, Mayur Uniquoters and Atul Auto, my portfolio % returns is okish, but the absolute capital is very meager. It is surprising how Buffett’s rule (top 25% stocks make most returns) is discrimination-less even for an amateur investor like me.

g) Of course, contrary to Buffett’s rule, I have made far more than 20 purchases (20 punch-holes). And in most of them, the returns are less and some are even negative. I should have just stuck to buying more of the success stocks rather than diversifying into many and multiple.

h) As I was doing the analysis all of today afternoon (I had to pull out 6 years worth of reports etc.), the experience was very taxing and liberating at the same time. I understood some of the mistakes I made, some of the portfolio allocation decisions I took, portfolio sizing problems that I encountered and will encounter in the future etc. So to say, it was a meditative experience. Till, I hit the ‘Enter’ button on the XIRR formula. After that, everything came crashing to the ground, which is currently leading me to deep questioning and introspection. I don’t know what will come out of it though.

Not sure if this post helped you in any way. Not sure if 3 facts and 8 ramblings made the post long and/or boring. The key takeaway though is I needed extreme luck and constant lurking on different forums to make any of my gains 🙂

I look forward to interactions with any senior investors reading this – a) Were you in this situation before? b) How do you go about correcting flaws in thinking/approach? and any other tips/tricks to help me survive and grow in the market.   

P.S: If you are a novice/amateur investor, and haven’t done the exercise of pooling in all the stock&debt portfolio at one place (I recommend Google finance, simply for the reason that excel sheets tend to get lost in nested-nested-nested folders with the same names), please do so. I can assure you, even if the XIRR value is not too exciting, the very fact of putting down those numbers is tremendously educative.

DISCLOSURE: The stocks that I mentioned or referred ARE NOT be taken as recommendations for a Buy or a Sell. Please do your own due diligence before investing.


Random thoughts…

It’s been close to 2 years since I started this blog. A 2 year anniversary gives me the permission to distribute some learnings and hence a few random thoughts I’ve learnt over these couple of years –

a) The curse of ‘value investor’: The term ‘value investor’ is a burden. In fact, I think it’s a burden to be categorized into any one particular type of investing theme. Almost everybody in the world is trying to buy stocks cheap in the hope of selling it at a higher price (even a speculator thinks he is buying Rs. 1 worth of stuff for Rs. 0.90 in the hope that the market will eventually correct itself in the next 1 hour; a growth investor thinks a 60x P/E stock is worth it etc). Ben Graham himself called it a ‘mystery’ when he deposed in one of the Congressional sessions when asked what exactly causes an undervalued stock to reach its intrinsic value. Some others call it the Invisible Hand which corrects all prices. The axiom of ‘Markets are voting machines in the short term and weighing machines in the long term’ is said by all and sundry. And so is ‘Heads I win, tails I don’t lose much’. At times, I feel I don’t understand any of this stuff. And in other times, I feel that these axioms are too simple to encapsulate the complexity of investing. However, all the above afflicts almost every type of investor – value, growth, GARP etc. However, only one curse hits the ‘value investor’ very hard. It is the perennial search for the undiscovered stock. Nobody wants to hear the same old stocks anymore; stocks which have been wealth creators and probably will create wealth for a long time to come. ‘Value investors’ want their next kick in some unknown stock (or a stock that is not widely known). We sort of believe, after we have read ‘Intelligent Investor’ again and again (too much for our own good) that we have to discover an undiscovered stock (rather, we presume an undiscovered stock = inefficient market and hence larger chances of mispricing). We are like the addicts who screen for stocks for various parameters and miss gems just because they are widely known and we assume an efficient market in the stocks that are widely known. The faster I get out of this affliction, the better it is for me.

b) Concentration vs Diversification: This is a perennial question asked in many forums – which one is better? The real question underlying this seemingly innocent question is actually ‘which methodology would make me the maximum return in the minimum amount of time, without losing a paisa’? The answer, obviously varies from person to person and is entirely subjective. In my view, I think it is dependent on so many factors. I will just elaborate on what worked for me.

I have realized off late that I don’t have the skill to monitor and keep track of a lot of stocks (Ayush, Safir and a lot others have this skill as an instinct). In fact, I have fallen in the trap of spreading my little time available (outside of my day job) into researching every new stock that is quoted on twitter/other forums. In fact, not only have I spent time on these ideas most of which are outside my circle of competence, but have also made the cardinal mistake of investing in them. Now, given that I have been lucky to find guys like Ayush, Safir, Hitesh, Devesh writing about these different stocks, I haven’t lost money on them, but I haven’t gained much either in absolute terms. Let me explain. To quote a psychological term, I suffered from deprival super reaction syndrome. When these guys tweeted about certain stocks (let’s say pharma for instance, of which I am only learning baby steps now), I had found that over a period of time that these ideas made money (by and large). So, whenever these guys tweeted/wrote about some stock, I invested 1-3% of my portfolio in these ideas (given that these are usually outside my circle of competence, I can’t get myself to invest more) and made money – Nitta gelatine, Unichem, Ajanta, Smartlink being some of them. However given my limited time and resources, I couldn’t keep track of events, tweets, qtrly results etc. of all these stocks (and maybe I couldn’t understand even if I looked at all of these). Although the end result turned out alright, the process is clearly wrong.

On the other hand, stocks which I understood, which I researched and which I put in 10-20% of my money are clearly outperforming and wealth creating. HDFC Bank (my alma mater, and I had put in the greater part of my networth into this stock back in 2007), Cera (which I wrote on this blog long ago), Mayur (valuepickr’s choice, and the undervaluation and the business screamed at me), Astral, Atul Auto (this was a cinch), Oriental Carbon (to Ayush’s credit) are some of the examples.

The experience has taught me that a concentrated portfolio with 6-8 stocks have worked much better for me than spreading my bets across many different stocks. Of course, if I encounter a black swan event in any of these stocks, that’s when the chicken will come to roost, but I think given that I give a very high weightage to management integrity before it becomes a substantial part of my portfolio and I don’t play with F&O, the chances of a wipe-out are low and I hedge it off by not allowing more the 10-20% allocation for any stock.

So, net-net, identify where your strengths are, how your past experience has been, how much time/ability you have to analyze many stocks and then bet accordingly than listening to anybody’s opinion on concentrated vs diversified question.

c) Price anchoring: The fallout, of course, of a concentrated portfolio is that you will be subject to the extreme bias of price anchoring. For example, I saw Mayur at Rs.150/- (adjusted for bonus), bought quite a bit and then it went to Rs.230/- and then bought a little more. Now, given that the market was recognizing the undervaluation, and it was still undervalued at Rs.230/- levels, ideally I should have bought more and more (subject to my limit for the stock). But I didn’t. I fell into the trap of ‘let it come down, and I will buy more’. Today, it is at Rs.460/- and counting and although I don’t see a huge undervaluation from these levels, if it goes to say Rs.700/- in 1 year’s time, I am sure to experience hindsight loss aversion. The same thing got repeated in Astral (bought it first at Rs.130/-, bought some more at Rs.160/- and then stopped buying and now it has doubled) and Cera, and Atul Auto etc. I am slowly coming out of this bias (believe me, it’s been a very difficult process because you encounter a thought of – if the market falls rapidly from the elevated levels that I bought the stock, then what?) and I am slowly buying Atul Auto now (also, when you are trying to get out of this bias, you will keep hearing of the BSE small/midcap index overvalued, QE3 not having much effect, reforms not taking shape leading to a market sell-off etc. which makes this process excruciatingly difficult and you’d just want to hold cash and do nothing). Doing nothing is great, holding cash is great too if and only if your mentality allows you to invest all of this cash when the world is going down rapidly. For example, Charlie Munger held money in Treasuries for about 10 years and when the moment was right, invested 70% of net worth into one stock, Wells Fargo. You just got to decide(within yourself, not as a justification to others/in some forum) if you possess the same mentality.

d) Bailing out vs Doubling down: This has been one question which I loved playing around with. When do you bail out of a stock and when do you double down on a stock (in other terms, average down) when there has been a savage fall in the price. Let me state some recent examples.

SKS Microfinance, initially invested by Narayan Murthy (at Rs.300/- level) as venture capital and then IPOed at Rs.980 levels shot up to Rs.1400/- levels very quickly. Most forums claimed that it would be a great buy at Rs.700/- levels. One forum also claimed that it would be a blind buy at Rs.300/- levels, if and when it came down. And crashing down it did (allegations of fraud). From the highs of Rs.1400/-, it crashed to Rs.60/- levels (CMP: Rs.112/-). Nobody squeaked of buying this stock when it was crashing from Rs.1400/- to Rs.700/- to Rs.300/- and then to Rs.60/-. Everybody wanted the picture to be clear before they invested. Of course, we all forget from time to time that if the picture was clear enough, the market wouldn’t price SKS Micro at Rs.60/- levels.

Manappuram Finance, the premier gold loan provider, touched an all time high of Rs.95/- in Nov 2010. People started buying this as a proxy to multiple things (rising gold loan prices, rural growth proxy, network effects, rising acceptance of gold loans etc). It came crashing down to Rs.20/- levels as recent as June 2012. So, do you bail out or do you average down? In my mind, I have one criteria for further evaluation. Was there a fraud or not? If there was no fraud (or fraud allegation), I am perfectly willing to double down (rather average down). In this case, there was a RBI objection, there was a large investor bailing out, there were promoter pledged shares being sold etc., but there was no allegation of a fraud. A perfect case for further evaluation to average down (as usual, this is just the starting point to check on intrinsic value and buy cheap shares). If it was fraud, then treat as sunk cost and just bail.

In recent examples, IRB Infra was another which fell to Rs.100/- levels, moved up to Rs.150/- quite quickly (and now at Rs.120/- due to another allegation of a crime). Ajanta Pharma which quite a few in the forums that I am part of are invested, is facing some kind of tax evasion problem. Although the prices haven’t crashed yet, it’d be good to monitor and evaluate whether your reasoning tells you to bail or average down.  (When I say ‘double down’, I am not talking of doubling down blindly and get into gambler’s fallacy – that would lead to disaster).

e) Special Situations: I look at my blog search feeds and it delights me that most people land up on this blog because of special situation analysis, although I have hardly put up any actionable special situation which can lead to a profit. Evaluating Special Situations personally is very satisfying compared to let’s say stock analysis since there are so many parameters to consider and secondly, it helps in sharpening the stock analysis scenarios. Some of my friends have suggested that I start a paid special situations newsletter (actionable ideas) for a nominal cost. I am considering it actively, and would like to know your views in the comments section if that is something you’d like.

Disclosure: The stocks mentioned in the post are only for educational purposes and not a recommendation for buy/sell. Please do your own due diligence before investing in any of the stocks mentioned in the post.

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Special Situation – Open Offer Analysis – Brescon Advisors & Holdings

These guys were also known as Brescon Corporate Advisors till a few months ago (just in case you’d like to check on brokerage reports of the past – if there are any).

I will evaluate this special situation combining the principles/questions outlined by the Prof in this post (which, needless to say, is a must read for anyone who wants to do risk arb and the complexity is getting complexier and complexier 🙂 ) along with the analysis I had done for Tata Sponge Iron/Tinplate company in my previous post.

This open offer was brought to my notice by my friend Ashish Kila today morning. Also, at today’s closing CMP, there is no trade that can be done in this open offer on a profitable basis. This post is only for analysis (which reminds me, I need to come up with a mindmap kind of thing for open offers after the Prof’s complete post on the risk arb problem).

Anyway, Nusarwar Merchants Pvt. Ltd. (NMPL) has come up with an open offer to buy 26% of Brescon at a price of Rs. 123/-. Today’s current CMP is Rs. 113/-. The genesis of this offer was a 33.75% buyout from certain sellers (looks like a part of the promoter group, also called ‘persons acting in concert’ in the latest AR) in Brescon on 29/Sep/2012 and hence this open offer is a triggered offer. Here’s the link to the open offer.

Let’s go through the Prof’s questions to analyze this then (and given that all regulatory approvals are through and the chances of any regulatory surprises are close to nil, the relevant template would be template #2).

a) What’s the expected return of this operation?

Ans. The current CMP is Rs. 113/-. The offer price is Rs. 123/-. Payment would be done by Dec 25th, 2012 according to the schedule (2 months from current date). Since 33.75% has been acquired, theoretically, 66.25% can tender. Theoretical acceptance ratio would be 26/66.25 = 39.24% (approx to 39%). Let’s say I buy 100 shares and I expect the price after the open offer closes to be Rs. 100/-.

Investment = Rs. 113 * 100 = Rs,11,300/-

39 shares would be accepted at Rs.123/-. 39*123 = Rs. 4797 (Rs. 390/- would be the gain, on which 30% marginal tax would be applied since STT wouldn’t be applicable while tendering, but I’ll ignore this for now)

Remaining 61 shares would be sold at Rs.100/-. 61*100 = Rs. 6100/-.(a loss of Rs.793/- can be used to offset short term capital gains, if any)

Total return = 6100+4797 = Rs. 10897/-

That is, Investment > Total return, resulting in a loss, assuming a theoretical acceptance ratio.

b) Should you look at fundamentals of the target company? Why or why not?

We should certainly look at the fundamentals of the company since there is a chance that we can acquire shares of a good company at a very low cost. However, in case of Brescon, after looking at the fundamentals over the last 2-3 years and this slump sale arrangement (where they sold Brescon Corporate advisory business to their own subsidiary company on a slump sale basis citing some convoluted logic, read Item No. 3 on Page 6 of that arrangement for starters), I am not too comfortable in acquiring shares of this company for the long term.

c) What is the likely acceptance ratio i.e. how many of your shares are likely to get accepted under the offer (theoretical vs. practical) and what key factors will govern that ratio?

The theoretical acceptance ratio is 39% as stated in a). The practical acceptance ratio might be different. Given that only one part of the promoter group has sold out, the remaining promoter group has approx. 24% of the shareholding. Since this looks like a voluntary sellout by one part of the promoter group, the rest of the promoter group may not participate in the open offer. However, the chances of the promoter participating is non-zero. The retail shareholding is close to 20%. On a historical basis, not all retail investors have tendered for various reasons. Let’s assume 5% brain dead investors then. Let’s look at the two different scenarios then (am assuming the rest will tender)

S.No Scenario Acceptance ratio Possibility Probability
1 Promoter group doesn’t tender; 5% brain dead investors 71% Highly likely 70%
2 Promoter group tenders; 5% brain dead investors 43% Probably not 30%

A few calculations summarized in the table below –

No of shares 100
CMP 113
Offer Price 123
Investment 11300
Price post open offer 100
Gain if  
Acceptance ratio 71% 333
Acceptance ratio 43% -311
Expected value per share based on probabilities above 1.40
Gain% on expected value on an annualized basis 7.50%

Therefore, we’ll have a gain of 7.5% on an annualized basis without considering the effect of taxes, service tax, cess etc. This is poorer than the return if we invest the same money in a liquid plus mutual fund for 2 months. Hence, this opportunity is a pass.

d) How can you use the “inversion” (invert, always invert) trick to estimate market’s assessment of the acceptance ratio?

Ans. Let’s assume that the market cost of capital is 12%. That is, 2% for 2 months of money.

CMP is Rs. 113/-. At the end of 2 months, at the market cost of capital, the money should have been Rs.115.26. We can find the market’s expected acceptance ratio by

Rs. 115.26 = Offer price * Accepted shares + Remaining shares * Resultant share price after open offer.

Plugging in the values,

Rs. 115.26 = 123*x+(1-x)*100 and solving for x, we get an acceptance ratio of 66.34%. That is, the market is pricing to almost close to the best case scenario (refer table above) where the rest of the promoter group doesn’t tender and there are 5% brain dead investors. This is clearly very optimistic and hence the chances of a substantial upside is close to nil.

e) Should you borrow money to do this operation? Should you have done it in Template 1? Why or why not?

Ans. With the expected value of 7.5% p.a, and being a retail investor, I cannot borrow at less than 12%, if not more. This clearly is a losing operation for me. Hence, I wouldn’t borrow for executing this operation.


a) There is certainly a price at which this operation can deliver a lot of value. Between now and 11 December 2012, if the market price of Brescon falls below say Rs. 100/-, this operation will have a quite a bit of value. It is not profitable just right now.

b) I have not considered the scalper syndrome scenario where you buy at Rs. 113/- and say if the market shoots up and if the price goes to Rs.118/- by end of next week, you can make some returns in quick time. However, then I would be speculating than evaluating.

Disclosure: No position in this open offer. This post is only for analysis and not for investment purposes.

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Interesting Corporate Actions – PVR Ltd and TV18

There have been a few interesting corporate actions over the past 2 months. I will elaborate a couple of them here.

a) PVR Ltd – The first one is from PVR Ltd. (of PVR Cinemas fame). I observed this strange set of events way back in August and yesterday’s Devesh’s tweet on the event was the final push required to write this blogpost.

In summary, PVR Ltd. did a buyback in 2011 (in the May-Oct timeframe) and now sold shares (in the Aug-Oct timeframe). You’d wonder if PVR was in the entertainment business or financial engineering business. On the whole, it seems to be value-accretive to PVR, but this buy-sell stuff in the space of 1 year is a little unsettling.

The details.

PVR in June 2011 announced a buyback of shares not exceeding Rs. 26.21 cr representing 9.99% of the company (as an aside, a buyback greater than 10% requires a EGM and hence most companies don’t do it), with the max. share price of Rs. 140/-. 10% of 27,149,372 shares (total equity) represented 2,714,937 as per audited Balance Sheet at March 31, 2011. The Company proposed to buy-back a minimum of 562,000 Equity Shares.

Anyway, cut to the chase, as per this September 2011 notice, PVR had bought back 1,388,328 shares utilizing Rs. 15.82 cr (excluding brokerage and taxes) and that was the end of the buyback (that is approx. 5.1% equity was bought back at an average price of Rs.114/-). As an aside, the book value (net of debt) of PVR Ltd. as of March 2011 was Rs.126.12 cr. That is, 12.55% of book was used to buy approx 5% of equity back – not a great buyback by any standard, but not extremely poor either.

Anyhow, that was history. Cut back to the present. Aug 2012. This news item indicates that a private equity player called L Capital wanted to buy 10% of PVR’s equity at a price of Rs. 200/- (a 7.5% premium on the then market price Rs.186/-). This translated to 28.85 lakh shares (well, there were just 2.595 cr shares after the buyback and then PVR issued a some fresh shares (0.3 cr shares) to L Eco (at Rs.200/-) leading to equity dilution and hence now the equity is actually 2.85 cr shares). With this sale, PVR gets Rs. 57.7 cr for further expansion.  (There is a small bit on further Rs.50 cr investment from L Capital into PVR Leisure, a PVR subsidiary (and PVR will eventually have only a 35-40% stake in this business), but that is not pertinent to this discussion).

So, net-net,

PVR bought back 13.88 lakh shares for Rs. 15.82 cr in Sep 2011.

PVR sold 28.85 lakh shares for Rs. 57.7 cr in Sep 2012.

Is it value-accretive to PVR? Certainly. Even if you consider that the 13.88 lakh shares which were bought back were sold, the firm netted a gain of 75% within one year without considering the extra benefits of the network of a private equity player, the extra investment into the PVR subsidiary etc. Also, the debt has not increased due to the equity sale, so hurrah!

But should PVR indulge in this buying and selling of equity frequently? The jury is still out on that one.

b) TV18 – This Network18 group has always fascinated me. Not like a Page Industries fascinating, but fascinating with their ingenious financial engineering capability.

This time, the Network18 media group decided on the rights issue part of engineering. Of course, all and sundry do know about the Reliance-Raghav Bahl-ETV-Network18-TV18 story and complications, so I will not get into it (please to google, if you are not aware of it – the twists and turns will put the movie ‘Race’ to shame).

I will analyze this TV18 rights issue as an ‘expert’. That is, I will try to exactly explain why the stock moved from the lows of 20 to the highs of 30 today. (Actually, to be fair to ‘experts’, I am cheating. I had done this analysis much before and only blogging about it today). I have had no positions nor will I ever have positions with the Network18 media group. Their skill in shortchanging minority shareholders is unparalleled and since I have a day job, I can’t monitor their schemes daily.

Anyway, here’s the analysis I had done once the rights issue was declared –

The rights issue size of TV18 is Rs. 2700 cr. For every 11 shares held, 41 shares will be issued on a rights basis, each share costing Rs. 20/-. CMP of TV18 Rs. 22/-. If I had 100 shares today (as total equity), post-rights issue, I will have 500 shares for the company. But since the equity is coming through at close to market price, major correction may not happen. In fact, there might be upsides (unless of course, the management dreams up something else). The management of Network18 stock will garner money through its own rights issue and invest in TV18 rights issue. Therefore, the chances of higher allotment are very low (and since the rights price is very close to market price, why would I want to go for a higher allotment?)

The stated intention of the management is that total debt of TV18 would be re-paid and remaining amount would be used to fund the acquisition of ETV channels. The possible increase in revenue due to acquisition of ETV channels aside, this debt repayment has very interesting ramifications on the EPS of TV18.

Consider the P&L statement for the year ending March 31, 2012 (I am looking at standalone results. The consolidated results are much worse, and they are losing money at an operating level). The EBITDA of the company is Rs. 97.42 cr. The interest payment is Rs. 93.48 cr. That is, 96% of the money generated is funding the interest costs. What would happen if the interest costs vanished, since the debt would be extinguished? Let’s do a small financial exercise –

Assume revenue doesn’t increase (which is a pessimistic assumption, since ETV channels are going to earn some revenue). So, EBITDA, say will be around Rs. 97 cr. Now, there are no interest costs to service since the debt has been extinguished, utilizing the funds from the rights issue. Depreciation of Rs. 25 cr. Therefore, PBT is Rs. 72 cr. Due to accumulated losses over the past 6 years (yeah, they have been losing money in all six except the year ending 2012), taxes would be zero. Profit would be Rs. 72 cr.

Now, the equity base currently is 34 cr shares. March 2012 profit is Rs. 9 cr. That is Rs. 0.26 per share. The equity base will increase by 135 cr shares, taking the total equity base to 169 cr shares.

Therefore, technically (forget the interest of June 2012 quarter for a moment), the EPS would be Rs. 72 cr/169 cr =  Rs. 0.42 per share, an increase of 63% in EPS, without any increase in revenue. Of course, now we consider June 2012 interest and Sep 2012 interest (sum approx to Rs. 58 cr). That would bring down the EPS to Rs. 0.09/-, but that’s only in the short term.

If the tailwind of digitization works (Safir Anand’s pet topic) and ETV revenues flow through, at the very least, TV18 is going to earn a decent profit, maybe equivalent to March 2012 profit, but with zero debt. A stronger balance sheet ideally should propel this stock to greater heights. Even considering consolidated results, if the management pays off the entire debt as claimed, I think TV18 will generate a decent profit at the end of FY13. However, I am not buying. Too many ifs and buts.

P.S: If you are on twitter and not following Devesh  (@_devesh_) and Safir (@safiranand), you are missing on interesting conversations. Go, follow!

Disclosure: I have no positions in PVR and TV18 (or Network18). This is not investing advice. This post is only for analysis purposes and not a buy/sell recommendation.

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