About Me
- dharma
- I believe in "Baptism by fire" that will transform me from an average joe to a true blue bee's knees in corporate finance and investment banking
Sunday, December 21, 2008
Stay above 8467
Having gone through my charts once again, i can say with reasonable assurance that the bottom of 7697 will not be violated again. We are not yet out of the woods as far as the bear market is concerned but we are sowing the seeds for the next bull market to emerge by next year. The next bottom that we are going to make has to be above 8467 for this theory to hold good that the bear market phase is indeed coming to a close.Im waiting to observe any market corrections that might happen from here on to see if this sacrosanct level gets violated or whether the sensex would be able to hold its chin above the water. We might even consolidate between 8500-10000 for many months in the wake of negative news that might continue to make its way into the markets but the sensex must display resilience to stay above 8467 for long term funds to start buying india again.
Targets reviewed for Sensex
As mentioned in my article in October, the sensex successfully and pretty swiftly breached the 8000 mark and reversed from 7697 to its present level of 10100. A near 30% rally has already come and gone within 2 months. So purely on technical basis where do we stand now?? The sensex has been struggling to close above 10123 for the last two trading sessions. A cursory glance of the futures and options market lends conviction to the thesis that this current bear market rally is not sustainable and its only a matter of time before profits get booked on this wonderful bout of short covering that we have witnessed this december. Throughout the last trading week we have witnessed short covering on rate sensitive stocks with lower volumes and decreasing open interest, which is a clear indicator of fresh long positions not being added at current levels. Investors would be well advised to stay away now if they have missed the 30% rally so far. The markets will give u some more opportunities during their next rendezvous with the bottom in place.
Wednesday, October 15, 2008
Is the SEBI getting populist??
Yes..it does seem so given the almost complete U turn on P notes restrictions just issued an year ago by the erstwhile renaissance man of SEBi Mr.Damodaran. The restrictions were placed in the first place to improve transparency and disclosure norms of FII's, hedge funds and other Overseas institutions wanting to participate in the Indian stock markets. This aim was to prevent re routing of black money/illegal money into India from the so called tax havens, improve tax compliance and to keep a tab on the nature and veracity of the "hot money" flowing in from across the shores. The KYC norms imposed were a blessing in disguise and comforted the regulatory agencies of the country over the fact that terrorist money would henceforth find it difficult to penetrate Indian markets. Though these P note restrictions, when imposed at a time in Oct 07 when equities were close to their peak, were considered draconian (on par with capital controls)by market men, it was a well thought out measure with long term positives for our markets. The aim of the then SEBI chief was to protect the lay retail investor from violent gyrations in the stock market on account of sudden outflows of hot money for reasons best left to the P note holder's conscience.
One year down the line, we are in Oct 08 and those restrictions are no more valid. The whole world has changed in a span of 12 months. Bulls have become violent bears resulting in wealth destruction across the world. Banks have collapsed, the financial system is in systemic crisis.Fund flows into emerging markets have dried out completely given the global liquidty crunch and risk aversion. Outflows to the tune of $12 billion have eloped with the FII's from the Indian shores in a span of 8-9 months. The dollar is reverting back to the US. No more carry trades, currency swaps or exotic derivatives. Deleveraging is the new universal mantra for fund managers.
Given this background, Indian markets have collapsed close to 50% and are back at 2005 valuations. With elections looming large, the politicians and market men alike needed a scapegoat. SEBI became their whipping boy. Though every man worth his salt knew the true reasons for this market collapse driven by the credit crisis, excessive valuations and leverage, no soothsayer foresaw the magnitude of this fall. Obviously the intensity of this fall has not spared anyone's portfolio. Therefore, a conjectured and concocted logic started doing the rounds that it was SEBI's P note measures implemented last year that led to a fall of this magnitude for an economy growing at 8%p.a. The restrictions required sub accounts of FII's to stop issuing fresh P notes and provided for existing P note transactions to be winded up within a timeframe of 18 months. Most FII's were long India in 2007 and therefore gave room to assumptions in certain sections of the market that these series of outflows witnessed now is on account of P note unwinding. This concocted logic maybe true but funds always flee during times of crisis with or without capital controls. All the emerging markets have fallen 40-50% along with India, therefore this logic doesnt hold good. Ironically its been the US that has outperformed other global markets even on the downside. The place that has been the foundation of greed has done well to limit its losses compared to emerging markets. Just goes to show how dependant emerging markets are on foreign fund flows. Clearly the dollar is going back to the US.
SEBI has failed to display regulatory forbearance. It has panicked and played to the gallery sacrificing the long term interests of investors. This act of SEBI is akin to a trader cutting down his positions on account of margin calls. SEBI too has become a momentum player
One year down the line, we are in Oct 08 and those restrictions are no more valid. The whole world has changed in a span of 12 months. Bulls have become violent bears resulting in wealth destruction across the world. Banks have collapsed, the financial system is in systemic crisis.Fund flows into emerging markets have dried out completely given the global liquidty crunch and risk aversion. Outflows to the tune of $12 billion have eloped with the FII's from the Indian shores in a span of 8-9 months. The dollar is reverting back to the US. No more carry trades, currency swaps or exotic derivatives. Deleveraging is the new universal mantra for fund managers.
Given this background, Indian markets have collapsed close to 50% and are back at 2005 valuations. With elections looming large, the politicians and market men alike needed a scapegoat. SEBI became their whipping boy. Though every man worth his salt knew the true reasons for this market collapse driven by the credit crisis, excessive valuations and leverage, no soothsayer foresaw the magnitude of this fall. Obviously the intensity of this fall has not spared anyone's portfolio. Therefore, a conjectured and concocted logic started doing the rounds that it was SEBI's P note measures implemented last year that led to a fall of this magnitude for an economy growing at 8%p.a. The restrictions required sub accounts of FII's to stop issuing fresh P notes and provided for existing P note transactions to be winded up within a timeframe of 18 months. Most FII's were long India in 2007 and therefore gave room to assumptions in certain sections of the market that these series of outflows witnessed now is on account of P note unwinding. This concocted logic maybe true but funds always flee during times of crisis with or without capital controls. All the emerging markets have fallen 40-50% along with India, therefore this logic doesnt hold good. Ironically its been the US that has outperformed other global markets even on the downside. The place that has been the foundation of greed has done well to limit its losses compared to emerging markets. Just goes to show how dependant emerging markets are on foreign fund flows. Clearly the dollar is going back to the US.
SEBI has failed to display regulatory forbearance. It has panicked and played to the gallery sacrificing the long term interests of investors. This act of SEBI is akin to a trader cutting down his positions on account of margin calls. SEBI too has become a momentum player
Tuesday, October 07, 2008
Should Indian investors buy US homes
RBI has relaxed provisions relating to investments abroad by resident individuals under the liberalized remittance scheme. The scheme provides for investments abroad in capital assets like stocks and real estate by Indians upto a limit of $2,00,000 per annum.
There has been a growing demand among Indian HNI’s (High Net Worth individuals) to make investments in overseas markets like US and the UK to take advantage of the low property prices prevailing there consequent to the subprime credit crisis. With prices getting depressed to the levels of $1500 –2000 for properties in certain areas of US, on the face of it, it does sound like an attractive bargain hunting investment opportunity for our fellow investors. But we need to consider the following aspects carefully before making use of the relaxed RBI provisions to buy properties abroad:
Ø Whether the investor is buying the property abroad with the intention to emigrate to a foreign country in future or just purely as a profitable investment opportunity to benefit from price appreciation in the short to medium term. If price appreciation/capital gains is the sole objective of the investor, it makes better sense to invest in our domestic real estate sector as prices have corrected significantly over the last one-year. There is more pain left in the US post the credit crisis and real estate prices can remain depressed for a long periods as the US economy goes through periods of recession. Relatively, India has been fairly insulated from the global crisis and the domestic real estate sector may offer better scope for return in the medium term.
Ø The costs of maintenance of properties abroad, the distance barrier that reduces the scope for frequent surveillance/monitoring of the property by the investor, the local laws and regulations governing property acquisitions by non residents are factors to be considered by the investor before embarking on a decision to buy a property abroad.
Ø Currency risk and tax incidence are important decision making drivers. It would be a good decision to invest abroad when the rupee is appreciating against the dollar. However given the bleak future outlook for dollar as a currency, realizations in rupee from sale of the property abroad might be significantly lower due to continuous dollar depreciation. India has a double taxation avoidance agreement with the US and any taxes paid on foreign property can be claimed as a deduction under Indian tax laws.
Considering all the above factors, it makes better sense to wait for domestic real estate prices to bottom out and make fresh investments in property, as the entire exercise of investing in a foreign property might not be worth the trouble. Those families who want to emigrate or those who have children working or studying in the US (which indeed is a sizeable community) may consider buying these properties abroad as prices have become more affordable now
There has been a growing demand among Indian HNI’s (High Net Worth individuals) to make investments in overseas markets like US and the UK to take advantage of the low property prices prevailing there consequent to the subprime credit crisis. With prices getting depressed to the levels of $1500 –2000 for properties in certain areas of US, on the face of it, it does sound like an attractive bargain hunting investment opportunity for our fellow investors. But we need to consider the following aspects carefully before making use of the relaxed RBI provisions to buy properties abroad:
Ø Whether the investor is buying the property abroad with the intention to emigrate to a foreign country in future or just purely as a profitable investment opportunity to benefit from price appreciation in the short to medium term. If price appreciation/capital gains is the sole objective of the investor, it makes better sense to invest in our domestic real estate sector as prices have corrected significantly over the last one-year. There is more pain left in the US post the credit crisis and real estate prices can remain depressed for a long periods as the US economy goes through periods of recession. Relatively, India has been fairly insulated from the global crisis and the domestic real estate sector may offer better scope for return in the medium term.
Ø The costs of maintenance of properties abroad, the distance barrier that reduces the scope for frequent surveillance/monitoring of the property by the investor, the local laws and regulations governing property acquisitions by non residents are factors to be considered by the investor before embarking on a decision to buy a property abroad.
Ø Currency risk and tax incidence are important decision making drivers. It would be a good decision to invest abroad when the rupee is appreciating against the dollar. However given the bleak future outlook for dollar as a currency, realizations in rupee from sale of the property abroad might be significantly lower due to continuous dollar depreciation. India has a double taxation avoidance agreement with the US and any taxes paid on foreign property can be claimed as a deduction under Indian tax laws.
Considering all the above factors, it makes better sense to wait for domestic real estate prices to bottom out and make fresh investments in property, as the entire exercise of investing in a foreign property might not be worth the trouble. Those families who want to emigrate or those who have children working or studying in the US (which indeed is a sizeable community) may consider buying these properties abroad as prices have become more affordable now
Interesting analysis on the sensex
Please have a look at the table below with details of the sensex performance right from the year 1991. Last evening's closing has been taken for 2008 data temporarily. We have already knocked down 41% from 2007's close.
Year Sensex YoY return
1991 1909
1992 2615 37.01
1993 3346 27.94
1994 3927 17.36
1995 3110 -20.79
1996 3085 -0.81
1997 3659 18.60
1998 3055 -16.50
1999 5006 63.83
2000 3972 -20.65
2001 3263 -17.86
2002 3377 3.51
2003 5839 72.89
2004 6603 13.08
2005 9398 42.33
2006 13787 46.70
2007 20287 47.15
2008 11802 -41.83
If we compute the CAGR for the sensex from 1991 to 2007 spanning 17 years we get a return of 14.91% explained as {(20286.99/1908.85)^(1/17)-1}. We have seen extraordinary/ astronomical returns in certain years namely 1999, 2003 and 2005-07 in the band of 40-70%. This year having slipped into a bear market we need to adjust for the excesses on the downside and fall in line with the CAGR of 14.91% p.a. To maintain this CAGR going ahead into 2009 we need to make a bottom of 8069 or fall 60% from the highs.
Though the above is purely a quantitative analysis based on historical data, Elliot wave theory has already shown us an indicative target close to 9000 for the 4th corrective wave on the sensex and 8096 doesnt seem to be far off. We are at 11800 already and another 25% fall in the bellwether stocks like RIL and LnT will easily take us there. There seems to be excesses still left in capital goods stocks which have not yet witnessed the capitulation seen in metals and real estate counters. Once the poison gets out of the system we can form a nice base for the reemergence of the bull market or the fifth supercycle wave as the elliot wave theorists call it.
But for that to start we need a time wise correction. The value wise correction seems to be happening but time wise we need to travel a bit more. We are nine months into this correction and we have broken important support levels along the downside taking cues from global markets and concentrated FII selling across the cap curve.
Therefore reaching out to these bottoms of 8000-9000 may not happen so soon. We might have violent retracements, sharp rallies that give u a 20-25% pullback in a short span of time. But these pull backs will be short lived lasting for a week or two before we head back to lower lows once again. The confidence in the system, despite belief in long term story of India, has been severely dented at the moment. The patience of the retail investor is slowly fizzling out like a dim candlelight with each passing day, as he wipes his forehead with his already wet handkerchief seeing the sensex drop in hundreds and thousands, watching stock prices collapse under the force of gravity. Every recovery aimed by the indices is being met with selling as highly leveraged investors try to make an exit from their bleeding positions. Three to four pull back attempts from the lows of 3800 were attempted by the nifty, but each time we have seen the index making a lower top which indicates structural weakness and provides evidence of the deeper lows staring at the bottom, which is what has happened today with the index breaking down to a new low of 3581 and the sensex decisively collapsing to levels below Rakesh Jhunjhunwala's psychological "12000". He would, going by his own words, still be drinking like a fish, eating like a pig and smoking out his costly cigars without major worries as he has invested in the market right from levels of 3000 on the sensex. So even at the worst bottom of 8-9K he would still be making 3 times his cost.
Therefore friends, we are headed towards making decisive lows that might happen over a period of time but until then trades will keep happening in a range bound manner. Dont get fooled by smart V shaped recoveries and bet all your money . Typical bear markets end in a saucer bottom formation which means timely consolidation around the support levels before a strong rally emerges.Regular investors should be wise enough to catch the bottom of this range to buy and exit at the top of this range for short term gains. It requires regular tracking of the markets and considerable effort/knowledge. For those who believe in the India story, this is the time to invest and cherrypick with a 3-5 year view, as in the short term you might still see your portfolio heading down 10-15% even from these attractive levels. A new bull market will start only when there is extreme pessismism around, low volumes,analysts on TV predicting total gloom and doom issuing ridiculous targets for the sensex on the downside etc etc From now on, watch out for your neighbours, relatives and people u meet in your day to day life, the ones who were gung ho about new highs for the sensex at 21K.Even my autorickshaw guy was giving me a target of 5000 for reliance 10 months ago. People felt that the bull market was permanent and eternal, an easy gambling paradise to double one's networth in days n weeks, without realising that investing is a tough business. Now is the time to start engaging them in a conversation about the markets. If they disappear from your sight, then thats the time to start investing heavily. Guess we are heading closer to those exciting moments, the so called "once in a lifetime" investing opportunity which intelligent investors capitalise upon to make a lifetime bargain.
The only risk to my estimate of 8-9K on the sensex is the "patience risk" as i would term it whereby long term investors and the domestic institutions in India say "Hey look, we are not selling the India story so easily for an economy growing at 7-8%. We are holding on come what may". This resilience will throw all market theories out of the window and a few months down the line we may be left ruing the fact that we kept our purse strings zipped and tight at these levels.
Markets are indeed supreme!!
Year Sensex YoY return
1991 1909
1992 2615 37.01
1993 3346 27.94
1994 3927 17.36
1995 3110 -20.79
1996 3085 -0.81
1997 3659 18.60
1998 3055 -16.50
1999 5006 63.83
2000 3972 -20.65
2001 3263 -17.86
2002 3377 3.51
2003 5839 72.89
2004 6603 13.08
2005 9398 42.33
2006 13787 46.70
2007 20287 47.15
2008 11802 -41.83
If we compute the CAGR for the sensex from 1991 to 2007 spanning 17 years we get a return of 14.91% explained as {(20286.99/1908.85)^(1/17)-1}. We have seen extraordinary/ astronomical returns in certain years namely 1999, 2003 and 2005-07 in the band of 40-70%. This year having slipped into a bear market we need to adjust for the excesses on the downside and fall in line with the CAGR of 14.91% p.a. To maintain this CAGR going ahead into 2009 we need to make a bottom of 8069 or fall 60% from the highs.
Though the above is purely a quantitative analysis based on historical data, Elliot wave theory has already shown us an indicative target close to 9000 for the 4th corrective wave on the sensex and 8096 doesnt seem to be far off. We are at 11800 already and another 25% fall in the bellwether stocks like RIL and LnT will easily take us there. There seems to be excesses still left in capital goods stocks which have not yet witnessed the capitulation seen in metals and real estate counters. Once the poison gets out of the system we can form a nice base for the reemergence of the bull market or the fifth supercycle wave as the elliot wave theorists call it.
But for that to start we need a time wise correction. The value wise correction seems to be happening but time wise we need to travel a bit more. We are nine months into this correction and we have broken important support levels along the downside taking cues from global markets and concentrated FII selling across the cap curve.
Therefore reaching out to these bottoms of 8000-9000 may not happen so soon. We might have violent retracements, sharp rallies that give u a 20-25% pullback in a short span of time. But these pull backs will be short lived lasting for a week or two before we head back to lower lows once again. The confidence in the system, despite belief in long term story of India, has been severely dented at the moment. The patience of the retail investor is slowly fizzling out like a dim candlelight with each passing day, as he wipes his forehead with his already wet handkerchief seeing the sensex drop in hundreds and thousands, watching stock prices collapse under the force of gravity. Every recovery aimed by the indices is being met with selling as highly leveraged investors try to make an exit from their bleeding positions. Three to four pull back attempts from the lows of 3800 were attempted by the nifty, but each time we have seen the index making a lower top which indicates structural weakness and provides evidence of the deeper lows staring at the bottom, which is what has happened today with the index breaking down to a new low of 3581 and the sensex decisively collapsing to levels below Rakesh Jhunjhunwala's psychological "12000". He would, going by his own words, still be drinking like a fish, eating like a pig and smoking out his costly cigars without major worries as he has invested in the market right from levels of 3000 on the sensex. So even at the worst bottom of 8-9K he would still be making 3 times his cost.
Therefore friends, we are headed towards making decisive lows that might happen over a period of time but until then trades will keep happening in a range bound manner. Dont get fooled by smart V shaped recoveries and bet all your money . Typical bear markets end in a saucer bottom formation which means timely consolidation around the support levels before a strong rally emerges.Regular investors should be wise enough to catch the bottom of this range to buy and exit at the top of this range for short term gains. It requires regular tracking of the markets and considerable effort/knowledge. For those who believe in the India story, this is the time to invest and cherrypick with a 3-5 year view, as in the short term you might still see your portfolio heading down 10-15% even from these attractive levels. A new bull market will start only when there is extreme pessismism around, low volumes,analysts on TV predicting total gloom and doom issuing ridiculous targets for the sensex on the downside etc etc From now on, watch out for your neighbours, relatives and people u meet in your day to day life, the ones who were gung ho about new highs for the sensex at 21K.Even my autorickshaw guy was giving me a target of 5000 for reliance 10 months ago. People felt that the bull market was permanent and eternal, an easy gambling paradise to double one's networth in days n weeks, without realising that investing is a tough business. Now is the time to start engaging them in a conversation about the markets. If they disappear from your sight, then thats the time to start investing heavily. Guess we are heading closer to those exciting moments, the so called "once in a lifetime" investing opportunity which intelligent investors capitalise upon to make a lifetime bargain.
The only risk to my estimate of 8-9K on the sensex is the "patience risk" as i would term it whereby long term investors and the domestic institutions in India say "Hey look, we are not selling the India story so easily for an economy growing at 7-8%. We are holding on come what may". This resilience will throw all market theories out of the window and a few months down the line we may be left ruing the fact that we kept our purse strings zipped and tight at these levels.
Markets are indeed supreme!!
Tuesday, September 30, 2008
Sensex to tank below 9000
Long term investors would be well advised to sit on the sidelines until sensex breaches 9000.Below 9000 its an excellent opportunity to ride the long term story of India
Saturday, September 27, 2008
Hank Henry Paulson at his best
Hank Paulson’s vacillating statements ever since the financial crisis broke out
Treasury secretary Paulson has significantly altered the way he talks about the financial crisis as the year has progressed. These vacillating statements have cost him a lot of credibility amongst lawmakers in the US who are now refusing to approve the bail out package of $700 billion, what has now come to be termed as the “Paulson Plan”
Lets have a look at some of the statements made by the treasury secretary in the last one year:
Dec 2007: The Magic here is that investors and servicers are coming together to ensure that we don’t have a market failure
Feb 27,2008: I don’t think the American taxpayer needs to step in with more taxpayer dollars. We are so far away from a situation that calls for a bailout
May 6,2008: There is no doubt things feel better today than they were in March (post Bear sterns bailout), the worst is likely to be behind us.
July 2, 2008: To address the perception that some institutions are too big to fail, we must improve tools at our disposal for facilitating the orderly failure of a complex financial institution.
July 20, 2008: America’s banking systems are safe. We are a strong and sound banking system. Our regulators are on top of it. This is a very manageable situation.
Sept 18, 2008: If we don’t pass this $700 billion bailout package, then heaven help us all (his statement at the congress)
Treasury secretary Paulson has significantly altered the way he talks about the financial crisis as the year has progressed. These vacillating statements have cost him a lot of credibility amongst lawmakers in the US who are now refusing to approve the bail out package of $700 billion, what has now come to be termed as the “Paulson Plan”
Lets have a look at some of the statements made by the treasury secretary in the last one year:
Dec 2007: The Magic here is that investors and servicers are coming together to ensure that we don’t have a market failure
Feb 27,2008: I don’t think the American taxpayer needs to step in with more taxpayer dollars. We are so far away from a situation that calls for a bailout
May 6,2008: There is no doubt things feel better today than they were in March (post Bear sterns bailout), the worst is likely to be behind us.
July 2, 2008: To address the perception that some institutions are too big to fail, we must improve tools at our disposal for facilitating the orderly failure of a complex financial institution.
July 20, 2008: America’s banking systems are safe. We are a strong and sound banking system. Our regulators are on top of it. This is a very manageable situation.
Sept 18, 2008: If we don’t pass this $700 billion bailout package, then heaven help us all (his statement at the congress)
Thursday, September 25, 2008
Four banks vie for lehman india's assets
Lehman India's assets are valued at Rs.3300 crore and could be taken over by SBI, Barclays, Standard Chartered and BNP paribas. Out of these 3300 crore assets, 700-800crore alone comprise of structured products and capital protection plans.
RBI's reflex action on Lehman
Last week stood out for global knee-jerk regulatory responses to the turmoil in the financial markets. Regulators worldwide introduced measures to outlaw short selling of securities
The United Kingdom’s Financial Services Authority (‘FSA’) announced a four-month ban on short selling in securities of UK-based financial institutions by declaring that any increase in a short position or creation of a new short position in any UK bank or UK insurer, or their parent companies would amount to “market abuse”.
The United States’ Securities Exchange Commission (‘SEC’)announced tougher measures to punish “naked” short sales until October 1. Unlike the FSA, the SEC has not banned short-selling. It has only tightened enforcement against “naked” short sales.
A “naked” short sale is a sale by a person without being covered by an earlier purchase position, or an earlier holding, or a prior borrowing of the stock being sold. All other short sales are termed “covered” short sales and not universally prohibited.
Most jurisdictions treat short sellers on a footing unequal with “long” players. Different jurisdictions have imposed varying levels of prohibitions and regulations in relation to short selling. Many jurisdictions have banned naked short sales while others have introduced measures such as the “uptick rule” (permitting short sales only when the price is rising) or limits on the quantum of aggregate short sale position in any stock (as a percentage of the share capital), or price limits (linking the price in a short sale to the previously traded price).
Under fear of exposure of Australian banks to Wall Street banks that are now in the doldrums, the Australian Securities Exchange has imposed a complete ban on naked short sales until further orders. France, Portugal and Ireland too are reported to have taken similar measures against short-selling.
In December last year, the Securities and Exchange Board of India (‘SEBI’) and the Reserve Bank of India (‘RBI’) had announced their intent to bring in institutional involvement in short-selling by permitting foreign institutional investors and local institutions to sell short. A stock lending and borrowing mechanism was introduced this year to enable covered short selling, but it did not lead to major volumes due to universal opposition to the mandatory seven-day tenure for borrowing stock witin which positions have to be covered, preventing a longer term call on specific stocks in the cash segment.
India too has had a long history of regulating short sales. Each of the newly elected coalition central governments in the recent past has been vindictive with falling stock prices that would follow government formation. Ministers have summoned bankers to threaten them with action, and enforcement agencies have been unleashed on select players (Shankar Sharma of First Global is a prime example). The Indian corporate sector is perceived by market players to be the strongest lobby against short-selling.
Last week, it was not SEBI, but the RBI that contributed to India’s share of knee-jerk regulatory action. In a measure that sent panic signals across India’s money markets, and brought back memories of capital controls, the RBI took the unprecedented step of suspending the operations of Lehman Brothers’ Indian subsidiaries, citing the bankruptcy of the foreign parent.
Lehman Brothers Capital Pvt. Ltd was prohibited from contracting further liability from any “institution in India or outside” and from “making any foreign currency remittance”. Lehman Brothers Fixed Income Securities Pvt. Ltd. was prohibited from making any remittance to its overseas affiliates (including payment of dividend).
While many nationalists felt proud of the RBI for its timely alertness, it may prove to be a bad precedent. How much money could actually have been sent out by the Indian entities, and how such remittance could risk the Indian market system remained undisclosed. The RBI action would lead to an expectation that the central bank could take such measures each time a foreign parent of an Indian subsidiary goes bust.
The signal to the market was one of a panic-stricken RBI, so desperate, that it had to pre-empt outflow at any cost. The market speculated that the undisclosed exposure of the Indian market system to the local Lehman entities could be so huge that the RBI had to strive to protect every dollar from flowing out of India.
Such indistinct case-specific suspension of the law would only lead to foreign investors perceiving a regulatory risk to their investments in India. In times of financial stress their investments could get blocked without any grievance redressal mechanism in place.
The United Kingdom’s Financial Services Authority (‘FSA’) announced a four-month ban on short selling in securities of UK-based financial institutions by declaring that any increase in a short position or creation of a new short position in any UK bank or UK insurer, or their parent companies would amount to “market abuse”.
The United States’ Securities Exchange Commission (‘SEC’)announced tougher measures to punish “naked” short sales until October 1. Unlike the FSA, the SEC has not banned short-selling. It has only tightened enforcement against “naked” short sales.
A “naked” short sale is a sale by a person without being covered by an earlier purchase position, or an earlier holding, or a prior borrowing of the stock being sold. All other short sales are termed “covered” short sales and not universally prohibited.
Most jurisdictions treat short sellers on a footing unequal with “long” players. Different jurisdictions have imposed varying levels of prohibitions and regulations in relation to short selling. Many jurisdictions have banned naked short sales while others have introduced measures such as the “uptick rule” (permitting short sales only when the price is rising) or limits on the quantum of aggregate short sale position in any stock (as a percentage of the share capital), or price limits (linking the price in a short sale to the previously traded price).
Under fear of exposure of Australian banks to Wall Street banks that are now in the doldrums, the Australian Securities Exchange has imposed a complete ban on naked short sales until further orders. France, Portugal and Ireland too are reported to have taken similar measures against short-selling.
In December last year, the Securities and Exchange Board of India (‘SEBI’) and the Reserve Bank of India (‘RBI’) had announced their intent to bring in institutional involvement in short-selling by permitting foreign institutional investors and local institutions to sell short. A stock lending and borrowing mechanism was introduced this year to enable covered short selling, but it did not lead to major volumes due to universal opposition to the mandatory seven-day tenure for borrowing stock witin which positions have to be covered, preventing a longer term call on specific stocks in the cash segment.
India too has had a long history of regulating short sales. Each of the newly elected coalition central governments in the recent past has been vindictive with falling stock prices that would follow government formation. Ministers have summoned bankers to threaten them with action, and enforcement agencies have been unleashed on select players (Shankar Sharma of First Global is a prime example). The Indian corporate sector is perceived by market players to be the strongest lobby against short-selling.
Last week, it was not SEBI, but the RBI that contributed to India’s share of knee-jerk regulatory action. In a measure that sent panic signals across India’s money markets, and brought back memories of capital controls, the RBI took the unprecedented step of suspending the operations of Lehman Brothers’ Indian subsidiaries, citing the bankruptcy of the foreign parent.
Lehman Brothers Capital Pvt. Ltd was prohibited from contracting further liability from any “institution in India or outside” and from “making any foreign currency remittance”. Lehman Brothers Fixed Income Securities Pvt. Ltd. was prohibited from making any remittance to its overseas affiliates (including payment of dividend).
While many nationalists felt proud of the RBI for its timely alertness, it may prove to be a bad precedent. How much money could actually have been sent out by the Indian entities, and how such remittance could risk the Indian market system remained undisclosed. The RBI action would lead to an expectation that the central bank could take such measures each time a foreign parent of an Indian subsidiary goes bust.
The signal to the market was one of a panic-stricken RBI, so desperate, that it had to pre-empt outflow at any cost. The market speculated that the undisclosed exposure of the Indian market system to the local Lehman entities could be so huge that the RBI had to strive to protect every dollar from flowing out of India.
Such indistinct case-specific suspension of the law would only lead to foreign investors perceiving a regulatory risk to their investments in India. In times of financial stress their investments could get blocked without any grievance redressal mechanism in place.
Future of Financial systems
Global financial markets literally rode on a roller-coaster last week, first dropping sharply in response to news about the Lehman Brothers bankruptcy filing and then recovering just as sharply as the US government bailed AIG out and several central banks announced their willingness to pump in large amounts of liquidity to provide markets with a lifeline. At the end of the week, if one were to just go by stock market index values around the world, it might seem like nothing had happened.
However, many people would agree with the view that the events of the week represent a major discontinuity in global finance. The structures and operating boundaries of all the players in the game today, private and public, will be examined and re-examined. Whether this will result in a broadbased co-ordinated set of reforms is too early to assess. At the end of the process, the conclusion might well be that radical solutions that address today's problems actually exacerbate other risks. These are issues to think seriously about over the coming weeks and months. Meanwhile, the immediate concern is with the survival of the existing system. Is it now in irreversible decline or showing signs of resilience?
The “irreversible” decline view undoubtedly has several adherents and events over the next few days may well prove them right. But, let's examine the arguments in support of the “resilience” view. Two sets of factors need to be taken into consideration. One of them is structural, reflecting a long-term trend. The other is cyclical, providing an opportunity for the kind of policy response that we saw last week without provoking fears of a broader macroeconomic fall-out.
The structural trend that has been in evidence over the past few years and whose impact is likely to continue is the globalisation of financial exposures. Emerging economies, as a group, have clearly been significant contributors to global growth over the past decade. However, their increasing openness to international capital has provided greater opportunities to global investors to tap into the returns that the growth offers (as well as expose themselves to the risks).
Diversification as a way to mitigate risks is the first rule of portfolio management. The ability to diversify portfolios globally has provided financial institutions with access to a range of asset classes whose price movements are less and less correlated with each other. For example, investments in China and India, whose returns are predominantly generated from domestic markets, are likely to be able to resist the pressures that investments whose returns are more closely linked to the US and other vulnerable markets are facing.
The cyclical opportunity stems from lower oil prices. Even as recently as a few weeks ago, with prices hovering around the $150/barrel mark, the willingness of central banks to infuse even small doses of liquidity to shore up asset prices would have been in doubt. As much priority that central banks may give to the integrity of their financial systems, managing inflation still remains their primary responsibility and the trade-off between the two was acute in the first half of the year.
That the US Federal Reserve went against the grain in January, sharply lowering rates, highlighted the seriousness of the financial problem. However, given the macroeconomic risks of easing interest rates too early in the cycle, there was clearly an argument to be made in favour of more selective, targeted solutions focused on vulnerable institutions, despite the obvious moral hazard arguments against such solutions. The practical consideration of saving the situation first and worrying about the nuances later will almost always prevail.
However, as the inflationary threat recedes, particularly in countries that had fully passed on the oil price increases to domestic consumers, central banks can shift from targeted bail-outs to more traditional approaches, lowering interest rates and cash reserve requirements to stimulate economic activity as well as asset prices. Virtually all major central banks should be entering this phase over the next few months if the oil price situation remains favourable. Of course, another shock to the system could well materialise, completely disrupting current calculations, but barring that, macroeconomic conditions are becoming increasingly supportive of the “resilience” view.
What implications do these events have for emerging economies? Obviously, the benefits of globalisation from the viewpoint of global investors do look like risks as far as the destination countries are concerned. As we saw, the exchange rate is usually the first casualty of sudden and large portfolio movements. The difference between the Asian crisis of 1997 and today is the huge foreign exchange buffer that emerging economies have built up to protect themselves against just such an eventuality. For the time being, they generally appear to have withstood the shock. Their currencies have depreciated sharply but no panic has set in about their ability to meet all obligations, even in the worst case.
In a sense, their ability to weather this shock vindicates their decision to “buy” insurance in the form of huge reserves, paying the price in terms of domestic monetary and financial distortions. But, as is becoming evident from the debate in India, it is always tempting to justify slow movement on reforms by arguing that a more liberal domestic environment would have made the domestic financial system even more vulnerable to the global turbulence. The reforms agenda should not be held hostage to the current crisis; rather, further reforms should be seen as an opportunity to find a more efficient and sustainable balance between growth, returns and risk.
The one thing that this crisis has brought to the fore is that both mature and emerging economies now face essentially the same set of questions about the future of their financial systems. How are intermediation and investment activities to be structured? How is risk to be measured and provided for? What systemic roles should the government play? And, how best can governments and regulators in increasingly integrated markets co-ordinate to ensure that effective safety nets are in place and shocks can be contained? The answers to these will chart out the future of global and domestic financial systems, however they emerge from the current catastrophe.
However, many people would agree with the view that the events of the week represent a major discontinuity in global finance. The structures and operating boundaries of all the players in the game today, private and public, will be examined and re-examined. Whether this will result in a broadbased co-ordinated set of reforms is too early to assess. At the end of the process, the conclusion might well be that radical solutions that address today's problems actually exacerbate other risks. These are issues to think seriously about over the coming weeks and months. Meanwhile, the immediate concern is with the survival of the existing system. Is it now in irreversible decline or showing signs of resilience?
The “irreversible” decline view undoubtedly has several adherents and events over the next few days may well prove them right. But, let's examine the arguments in support of the “resilience” view. Two sets of factors need to be taken into consideration. One of them is structural, reflecting a long-term trend. The other is cyclical, providing an opportunity for the kind of policy response that we saw last week without provoking fears of a broader macroeconomic fall-out.
The structural trend that has been in evidence over the past few years and whose impact is likely to continue is the globalisation of financial exposures. Emerging economies, as a group, have clearly been significant contributors to global growth over the past decade. However, their increasing openness to international capital has provided greater opportunities to global investors to tap into the returns that the growth offers (as well as expose themselves to the risks).
Diversification as a way to mitigate risks is the first rule of portfolio management. The ability to diversify portfolios globally has provided financial institutions with access to a range of asset classes whose price movements are less and less correlated with each other. For example, investments in China and India, whose returns are predominantly generated from domestic markets, are likely to be able to resist the pressures that investments whose returns are more closely linked to the US and other vulnerable markets are facing.
The cyclical opportunity stems from lower oil prices. Even as recently as a few weeks ago, with prices hovering around the $150/barrel mark, the willingness of central banks to infuse even small doses of liquidity to shore up asset prices would have been in doubt. As much priority that central banks may give to the integrity of their financial systems, managing inflation still remains their primary responsibility and the trade-off between the two was acute in the first half of the year.
That the US Federal Reserve went against the grain in January, sharply lowering rates, highlighted the seriousness of the financial problem. However, given the macroeconomic risks of easing interest rates too early in the cycle, there was clearly an argument to be made in favour of more selective, targeted solutions focused on vulnerable institutions, despite the obvious moral hazard arguments against such solutions. The practical consideration of saving the situation first and worrying about the nuances later will almost always prevail.
However, as the inflationary threat recedes, particularly in countries that had fully passed on the oil price increases to domestic consumers, central banks can shift from targeted bail-outs to more traditional approaches, lowering interest rates and cash reserve requirements to stimulate economic activity as well as asset prices. Virtually all major central banks should be entering this phase over the next few months if the oil price situation remains favourable. Of course, another shock to the system could well materialise, completely disrupting current calculations, but barring that, macroeconomic conditions are becoming increasingly supportive of the “resilience” view.
What implications do these events have for emerging economies? Obviously, the benefits of globalisation from the viewpoint of global investors do look like risks as far as the destination countries are concerned. As we saw, the exchange rate is usually the first casualty of sudden and large portfolio movements. The difference between the Asian crisis of 1997 and today is the huge foreign exchange buffer that emerging economies have built up to protect themselves against just such an eventuality. For the time being, they generally appear to have withstood the shock. Their currencies have depreciated sharply but no panic has set in about their ability to meet all obligations, even in the worst case.
In a sense, their ability to weather this shock vindicates their decision to “buy” insurance in the form of huge reserves, paying the price in terms of domestic monetary and financial distortions. But, as is becoming evident from the debate in India, it is always tempting to justify slow movement on reforms by arguing that a more liberal domestic environment would have made the domestic financial system even more vulnerable to the global turbulence. The reforms agenda should not be held hostage to the current crisis; rather, further reforms should be seen as an opportunity to find a more efficient and sustainable balance between growth, returns and risk.
The one thing that this crisis has brought to the fore is that both mature and emerging economies now face essentially the same set of questions about the future of their financial systems. How are intermediation and investment activities to be structured? How is risk to be measured and provided for? What systemic roles should the government play? And, how best can governments and regulators in increasingly integrated markets co-ordinate to ensure that effective safety nets are in place and shocks can be contained? The answers to these will chart out the future of global and domestic financial systems, however they emerge from the current catastrophe.
Monday, September 15, 2008
Mortgage crisis spigot - The FED's fiscal profligacy
The massive bailouts of Fannie Mae and Freddie Mac show unfortunate trends once again in the U.S. corporate world: failed executives get rewarded while trusting shareholders get bupkis.
Freddie Mac’s CEO Richard Syron could get nearly $15 million, according to news accounts. Over at Fannie Mae, CEO Daniel Mudd could receive an exit package worth $9.2 million, including stocks he already holds.
Big rewards, indeed, for executives who helped cause one of the biggest federal bailouts in history. Sloppy accounting and overstating the firms’ capital on hand precipitated the Sept. 7 bailout plan. In it, the hybrid groups will be under federal conservatorship with the power of the U.S. taxpayer to back them up.
The plan, led by Treasury Secretary Henry Paulson, has generally been hailed as a needed measure to buck up confidence in the U.S. financial system and prevent further deterioration in the mortgage securities business. Fannie and Freddie were deemed too big to fail. The bailout is also intended to reassure all-important foreign borrowers that their loans will somehow be secured.
What about shareholders? So sorry, out of luck. The takeover pretty much erased the value of their holdings
Freddie Mac’s CEO Richard Syron could get nearly $15 million, according to news accounts. Over at Fannie Mae, CEO Daniel Mudd could receive an exit package worth $9.2 million, including stocks he already holds.
Big rewards, indeed, for executives who helped cause one of the biggest federal bailouts in history. Sloppy accounting and overstating the firms’ capital on hand precipitated the Sept. 7 bailout plan. In it, the hybrid groups will be under federal conservatorship with the power of the U.S. taxpayer to back them up.
The plan, led by Treasury Secretary Henry Paulson, has generally been hailed as a needed measure to buck up confidence in the U.S. financial system and prevent further deterioration in the mortgage securities business. Fannie and Freddie were deemed too big to fail. The bailout is also intended to reassure all-important foreign borrowers that their loans will somehow be secured.
What about shareholders? So sorry, out of luck. The takeover pretty much erased the value of their holdings
Lessons from ICICI…
After a 33-year stint at ICICI Bank, Ms. Kalpana Morparia who is now the CEO of JP Morgan India is not letting her learning at ICICI Bank go waste. Having been at the helm of affairs of India’s largest and fastest growing private sector bank, Ms Morparia knows the tricks of the trade and is practicing all caution in her new role. While most foreign banks are targeting large-scale retail expansion, JPMorgan has no immediate plans to chase retail customers. The financial firm will get into retail banking only when credit bureaus are in place. Credit bureaus collate the credit history of individual borrowers and share them with commercial banks. In case of any default, a borrower gets blacklisted and finds it difficult to access fresh loans. Thus having witnessed some retail bad loans pile up at ICICI Bank, Ms Morparia certainly knows better this time
Saturday, September 13, 2008
Poi Solla Porom: Situational comedy with a message
Youngsters rule the roost in this movie and it’s such a refreshing change to feel the freshness and earnest desire of the crew to bring out a quality product to the theatres.
Positives:
ü Novel title introduction, Tight screenplay, Intelligent direction, Seamless
editing, excellent scenario building and rib tickling second half
ü A sort of comeback for yesteryear actor Mouli..What an amazing sense of
comic timing this legend has got.. ..Where was he all these days?? The
Mouli – Nazar combo strikes gold for Poi Solla Porom
ü Finally a plum role for Karthik Kumar.... Something that was long due for
this deserving actor..nice transformation of the character from a nonchalant
son to finally taking up the onus and responsibility to turn the tables on
Nasser. The “poi” game really starts here, with a host of other characters,
just post the interval and takes off on jet speed.
ü Wonderful, apt, able and excellent supporting cast, the movie allows us to
discover a new set of talent for tamil cinema, actress Piya looks cute as
Karthik’s love interest though she can improve upon her lip sync going
forward, Omar as Karthik’s brother and Big FM Balaji as Mouli’s secretary
deserve a special mention..They are the ones we need to support and keep a
watch on
ü Message that gets driven down: Beware of real estate sharks and land grabbers
ü Good background score, situational songs, no item numbers or dream sequences
Negatives:
1. The first half can be pruned by about 10 minutes to maintain the tempo of
the movie
2. How much ever I tried to wear the hat of a critic, I couldn’t find anything
more than Point 1 above… You just can’t find fault with this movie guys…
just let your hair down and have fun.:):)
This movie is sure to bring a smile on your face while u leave the cinema hall.
When we audience can ensure the success of distasteful movies like “kuruvi”, “vaathu”. “Kozhi” etc etc at the box office, why not support and root for clean, good, light hearted cinema.
Go watch PSP with your family and don’t forget to pass on the word:)
Positives:
ü Novel title introduction, Tight screenplay, Intelligent direction, Seamless
editing, excellent scenario building and rib tickling second half
ü A sort of comeback for yesteryear actor Mouli..What an amazing sense of
comic timing this legend has got.. ..Where was he all these days?? The
Mouli – Nazar combo strikes gold for Poi Solla Porom
ü Finally a plum role for Karthik Kumar.... Something that was long due for
this deserving actor..nice transformation of the character from a nonchalant
son to finally taking up the onus and responsibility to turn the tables on
Nasser. The “poi” game really starts here, with a host of other characters,
just post the interval and takes off on jet speed.
ü Wonderful, apt, able and excellent supporting cast, the movie allows us to
discover a new set of talent for tamil cinema, actress Piya looks cute as
Karthik’s love interest though she can improve upon her lip sync going
forward, Omar as Karthik’s brother and Big FM Balaji as Mouli’s secretary
deserve a special mention..They are the ones we need to support and keep a
watch on
ü Message that gets driven down: Beware of real estate sharks and land grabbers
ü Good background score, situational songs, no item numbers or dream sequences
Negatives:
1. The first half can be pruned by about 10 minutes to maintain the tempo of
the movie
2. How much ever I tried to wear the hat of a critic, I couldn’t find anything
more than Point 1 above… You just can’t find fault with this movie guys…
just let your hair down and have fun.:):)
This movie is sure to bring a smile on your face while u leave the cinema hall.
When we audience can ensure the success of distasteful movies like “kuruvi”, “vaathu”. “Kozhi” etc etc at the box office, why not support and root for clean, good, light hearted cinema.
Go watch PSP with your family and don’t forget to pass on the word:)
Saturday, July 26, 2008
Musings on Dasavatharam
Firstly i have to admit, after sivaji ganesan if there's been one actor who has satisfied my appetite for intellectual cinema, its always been our padmashree Kamalhasan. Cinema has always had its huge influence on the life of every tamilian right from the 1960's. If family values, cultural bonding and a liking for the language as such got instilled through sivaji's movies, cinema as a profession found its respect amongst the population through Kamal. The cravings of the masses have always been satisfied by MGR and later rajni and now Vijay to some extent. Its not a distinction im trying to forcefeed here by dividing the population into mass and class. I for one, believe its the same group of people who wear different hats while watching a rajni or a kamal's movie. We watch rajni for the pure fun element, to get some kick ass feel, whereas when we are out to watch a kamal's movie, we prepare ourselves ..dont we??..we build up expectations ..there is an urge to keep ur mind active and rolling to understand what the great actor might have on offer each time. We expect him to take cinema to the next level each time. We keep prodding him, egging him and encouraging him inspite of his repeated "commercial" failures right from "Hey Ram" in 2000, so much so that a new breed of audience has emerged now, whom i would like to term as "Kamal Hascists". They support anything and everything that Kamal has on offer.Yes i was heartsick after watching "Alavandhan".I was in a state of comatose reeling from the movie's impact and also at the fact that i had to spend 300 bucks (black ticket) out of my meagre articleship stipend of Rs.500 those days to catch a 22 crore profligate no hoper of a movie. I had felt kamal's career would go belly up after that movie. It was such a magnum disaster that i never wanted to call myself a kamal fan after that. But the actor known to bounce back frequently, rose like a phoenix from the ashes with "Virumandi". I remember watching this movie in 2004 without any expectations and i was dumbstruck by his performance. I was back in awe and my faith n hope in my idol was temporarily restored but only to be destroyed by this new cock a hoop, self aggrandizing misadventure called "Dasavatharam".
What a "sothappal" movie it was for a budget of its scale and size.All this helium hype ends in a damb squib post the first 15 -20 minutes into the movie. Its too late for you to realise that its a cleverly aimed marketing ploy of the producers to sell a product thats "below par" in every aspect of film making. They have roped in the crowds and who knows, they might have already had their payback in full. Yes, the producers will continue to say "Remember this is a Tamil film. There’s only so much that can be done with the limited technology we have, with the limited money we have. Just think how hard this hero born amidst us has toiled, how hard he’s trying to take us places we’ve never been before." But isn’t this line of thinking a great disservice to the audience as well as Kamal, the writer-actor who refuses to be limited by the narrow confines of Tamil cinema and measures himself against global standards. When celebrities like Jackie chan are invited for the audio release of the movie with all the accompanying hype and hoopla, the least any film goer would expect from Kamal is that the movie atleast matches up to the Chinese films of his revered and venerable international peer. Watch the recent effort of Jackie Chan in "The Forbidden Kingdom"..U can throw ur hat out and say that the Chinese are moving in the right direction since the "Crouching tiger" days, improving budgets and the quality of film making. When Aascar Ravi, the producer of Dasa shares such a great relationship with Jackie Chan (For those unaware, Aascar Films distributes all Jackie Chan movies in India), he could have atleast roped in in the CG guys who work on Jackie's special effects. God knows why he dint do it. They would have definitely made Dasa much more watchable.Yes Kamal still deserves credit for taking special effects to the next level in tamil cinema but by Hollywood standards, Dasa would still be considered a B grade effort as far as CG goes.
The whole premise on which the movie's script has been built is based on "Chaos Theory" whereby one event leads to the other and there's a clear cause and effect relationship for every event that unfolds right from the 12th century priest to the last tsunami scene. This was such a wonderful script and a lifetime opportunity for Kamal to have created a canvass of sorts. He got his thinking right but the execution sadly leaves a lot to be desired. If we take the individual characters or avatars, Kamal scores heavily as Rangarajan nambi, the priest and Vincent Poovaragan, the dalit crusader. This is the only movie where u have Kamal in almost every scene and thats a record by itself for any form of cinema. He stays right there, getting overexposed at times, sometimes funny, sometimes irritating and thought provoking in sequences that are few and far between in this megalomania of sorts. If only Kamal had decided to just stick to the Poovaragan character and had made a movie on his crusade for social reforms, i guess we would have had another classic on the likes of Anbe sivam that would get archived in the annals of tamil cinema. Kamal as Vincent Poovaragan got me involved for a change in an otherwise boring fancy dress competition. His dialect, the make up and everything about the character had some unique appeal to it. Sadly the script doesnt offer enough fodder for this role.
Balram naidu as the RAW officer was just not funny contrary to what most have opined after watching the movie. Kamal has clearly tried to imitate the yesteryear actor Baliah and somehow watching him do it was an irritable experience, similar to the one i had while watching his "Indiran Chandiran" in the late 80's. His interrogation of kaifullah (kamal again as an Afghan Muslim) as to whether he belongs to Alqaeeda or Lashkar e Toiba was so cliched and ridiculous. Kamal as a dialogue writer has failed miserably except for the Dalit character. The dialogues are just not in sync with a story of this kind. The Japanese Zen exponent retaliating to Christian Fletcher's fussilade in the climax fight sequence was taking it to the heights of imbicilty, where fletcher fires a salvo saying "Remember Hiroshima" to which the Zen kamal remarks "Remember Pearl harbor". I squirmed in my seat at this so called "punch" dialogue. Was this the actor i used to idolise, Was he the one who gave us Moondram pirai,Rajaparvai,Sathya, Apoorva Sagotharargal, Mahanadi, Kuruthipunal, Michael Madana kama rajan or even Anbe sivam recently. My thoughts revisiting all these old classics had already started rolling even before this movie ended.
Asin, the less said the better. It was a-sin to even watch her in this movie. He job was to ensure that the movie remains a mediocre effort. She must have managed to push people out of the theatre through her incessant calls to "perumal". Wish the Flecther character had shot her down in the beginning itself along with Mallika Sherawat. For the first time i felt pained to see Asin perform so badly.
Avatar Singh is another comedy character. he gets shot in the throat and "voila" his cancer gets cured. Man... that gun shot was his straight ticket to heaven. Kamal as govinda, the main protagonist in the movie around whom the other 9 characters revolve jumps from high rise buildings in the US, does a free fall from flyovers in Chennai and its suburbs, catches a speeding train that too with Asin and her perumal "barbie doll", escapes unhurt each time. The point is if Kamal wants us to suspend our disbelief, sorry, that can never happen in a movie of this kind. Kamal cant be a rajni just as Rajni cant be a kamal. The action sequences also were an eyesore beyond a point. When a chase of that magnitude from US to India is happening, shouldnt that be shot in a riveting manner?? Not for a moment was i in the edge of the seat, awestruck by the action that unfolded. Kamal has still not learnt his lessons in full from his "Alavandhan" exercise. That's the only conclusion i can arrive at, after watching this "dud" of a movie called Dasavatharam.
We all realise the pain and the efforts he has undertaken to slip into each of these 10 characters with all the prosthetic make up surrounding his body. But at the end of it all, was it just worth the effort???
Kamal..we want u back..back as the actor of the 80's and early 90's..ur experimentations are laudable but they invariably end up getting executed shoddily...Ur career graph has seen an undeniable decline ever since 2000 and there's very little time left..Maybe the ego maniac in you will never allow u to work with the current crop of talented directors in tamil cinema like Bala, Ameer or Cheran who may still be able to make good use of the vast unutilised potential that lies beneath ur visage. Even Sivaji required a "Mudhal Maridhai" in 1985 from Bharathiraja to realise that he had a completele different dimension to his acting skills. So come out of ur self created closet..we need the actor in you..not the director anymore.
What a "sothappal" movie it was for a budget of its scale and size.All this helium hype ends in a damb squib post the first 15 -20 minutes into the movie. Its too late for you to realise that its a cleverly aimed marketing ploy of the producers to sell a product thats "below par" in every aspect of film making. They have roped in the crowds and who knows, they might have already had their payback in full. Yes, the producers will continue to say "Remember this is a Tamil film. There’s only so much that can be done with the limited technology we have, with the limited money we have. Just think how hard this hero born amidst us has toiled, how hard he’s trying to take us places we’ve never been before." But isn’t this line of thinking a great disservice to the audience as well as Kamal, the writer-actor who refuses to be limited by the narrow confines of Tamil cinema and measures himself against global standards. When celebrities like Jackie chan are invited for the audio release of the movie with all the accompanying hype and hoopla, the least any film goer would expect from Kamal is that the movie atleast matches up to the Chinese films of his revered and venerable international peer. Watch the recent effort of Jackie Chan in "The Forbidden Kingdom"..U can throw ur hat out and say that the Chinese are moving in the right direction since the "Crouching tiger" days, improving budgets and the quality of film making. When Aascar Ravi, the producer of Dasa shares such a great relationship with Jackie Chan (For those unaware, Aascar Films distributes all Jackie Chan movies in India), he could have atleast roped in in the CG guys who work on Jackie's special effects. God knows why he dint do it. They would have definitely made Dasa much more watchable.Yes Kamal still deserves credit for taking special effects to the next level in tamil cinema but by Hollywood standards, Dasa would still be considered a B grade effort as far as CG goes.
The whole premise on which the movie's script has been built is based on "Chaos Theory" whereby one event leads to the other and there's a clear cause and effect relationship for every event that unfolds right from the 12th century priest to the last tsunami scene. This was such a wonderful script and a lifetime opportunity for Kamal to have created a canvass of sorts. He got his thinking right but the execution sadly leaves a lot to be desired. If we take the individual characters or avatars, Kamal scores heavily as Rangarajan nambi, the priest and Vincent Poovaragan, the dalit crusader. This is the only movie where u have Kamal in almost every scene and thats a record by itself for any form of cinema. He stays right there, getting overexposed at times, sometimes funny, sometimes irritating and thought provoking in sequences that are few and far between in this megalomania of sorts. If only Kamal had decided to just stick to the Poovaragan character and had made a movie on his crusade for social reforms, i guess we would have had another classic on the likes of Anbe sivam that would get archived in the annals of tamil cinema. Kamal as Vincent Poovaragan got me involved for a change in an otherwise boring fancy dress competition. His dialect, the make up and everything about the character had some unique appeal to it. Sadly the script doesnt offer enough fodder for this role.
Balram naidu as the RAW officer was just not funny contrary to what most have opined after watching the movie. Kamal has clearly tried to imitate the yesteryear actor Baliah and somehow watching him do it was an irritable experience, similar to the one i had while watching his "Indiran Chandiran" in the late 80's. His interrogation of kaifullah (kamal again as an Afghan Muslim) as to whether he belongs to Alqaeeda or Lashkar e Toiba was so cliched and ridiculous. Kamal as a dialogue writer has failed miserably except for the Dalit character. The dialogues are just not in sync with a story of this kind. The Japanese Zen exponent retaliating to Christian Fletcher's fussilade in the climax fight sequence was taking it to the heights of imbicilty, where fletcher fires a salvo saying "Remember Hiroshima" to which the Zen kamal remarks "Remember Pearl harbor". I squirmed in my seat at this so called "punch" dialogue. Was this the actor i used to idolise, Was he the one who gave us Moondram pirai,Rajaparvai,Sathya, Apoorva Sagotharargal, Mahanadi, Kuruthipunal, Michael Madana kama rajan or even Anbe sivam recently. My thoughts revisiting all these old classics had already started rolling even before this movie ended.
Asin, the less said the better. It was a-sin to even watch her in this movie. He job was to ensure that the movie remains a mediocre effort. She must have managed to push people out of the theatre through her incessant calls to "perumal". Wish the Flecther character had shot her down in the beginning itself along with Mallika Sherawat. For the first time i felt pained to see Asin perform so badly.
Avatar Singh is another comedy character. he gets shot in the throat and "voila" his cancer gets cured. Man... that gun shot was his straight ticket to heaven. Kamal as govinda, the main protagonist in the movie around whom the other 9 characters revolve jumps from high rise buildings in the US, does a free fall from flyovers in Chennai and its suburbs, catches a speeding train that too with Asin and her perumal "barbie doll", escapes unhurt each time. The point is if Kamal wants us to suspend our disbelief, sorry, that can never happen in a movie of this kind. Kamal cant be a rajni just as Rajni cant be a kamal. The action sequences also were an eyesore beyond a point. When a chase of that magnitude from US to India is happening, shouldnt that be shot in a riveting manner?? Not for a moment was i in the edge of the seat, awestruck by the action that unfolded. Kamal has still not learnt his lessons in full from his "Alavandhan" exercise. That's the only conclusion i can arrive at, after watching this "dud" of a movie called Dasavatharam.
We all realise the pain and the efforts he has undertaken to slip into each of these 10 characters with all the prosthetic make up surrounding his body. But at the end of it all, was it just worth the effort???
Kamal..we want u back..back as the actor of the 80's and early 90's..ur experimentations are laudable but they invariably end up getting executed shoddily...Ur career graph has seen an undeniable decline ever since 2000 and there's very little time left..Maybe the ego maniac in you will never allow u to work with the current crop of talented directors in tamil cinema like Bala, Ameer or Cheran who may still be able to make good use of the vast unutilised potential that lies beneath ur visage. Even Sivaji required a "Mudhal Maridhai" in 1985 from Bharathiraja to realise that he had a completele different dimension to his acting skills. So come out of ur self created closet..we need the actor in you..not the director anymore.
Friday, June 27, 2008
A panoramic view of eight centuries of crisis
Those wanting a detailed insight into the history of financial crises of the world spanning a period of eight centuries may refer this interesting well written paper
http://www.nber.org/papers/w13882.pdf
It covers the crisis of 14th century in England to the latest subprime financial crisis
http://www.nber.org/papers/w13882.pdf
It covers the crisis of 14th century in England to the latest subprime financial crisis
Interesting Themes in 2008
Certain events of 2008 have fascinated me. Iam exploring all these events or "themes" (as i would like to call them) in detail. I have listed some of them below:
1. The Fall of the US dollar
2. The compounding of the subprime crisis
3. The 60,000 crore write off by the Indian govt on farm loans
4. The printing of paper currencies and excessive inventory at Fort Knox
5. The collapse of Bear Sterns
6. Inflation reaching an all time high in India
7. The forecast for crude oil at $200 per barrel
8. Financial decoupling turning out to be a myth
9. Conspiracy theory of Gold adopted by Central banks of the world
10.Various valuation theories in equity markets shown the door
11.Iam witness to a classical bear market for the first time in my life after a
grade appropriate understanding of stock markets.
12.How difficult it is to be "Ben bernanke" as the central banker of the world
U may feel free to add points that u consider to be "significant drivers" for 2008 in the financial markets.
1. The Fall of the US dollar
2. The compounding of the subprime crisis
3. The 60,000 crore write off by the Indian govt on farm loans
4. The printing of paper currencies and excessive inventory at Fort Knox
5. The collapse of Bear Sterns
6. Inflation reaching an all time high in India
7. The forecast for crude oil at $200 per barrel
8. Financial decoupling turning out to be a myth
9. Conspiracy theory of Gold adopted by Central banks of the world
10.Various valuation theories in equity markets shown the door
11.Iam witness to a classical bear market for the first time in my life after a
grade appropriate understanding of stock markets.
12.How difficult it is to be "Ben bernanke" as the central banker of the world
U may feel free to add points that u consider to be "significant drivers" for 2008 in the financial markets.
A tribute to Field Marshal Sam Manekshaw
I am adding a few quotes of this legendary hero, one will continue to inspire billions of Indians for generations to come.
His Quotes:
Discipline is the code of conduct of decent living.
What is moral courage? It is the ability to distinguish right from wrong and having so distinguished it, be prepared to say so, irrespective of the views held by your superiors or subordinates and of consequence to yourself.
Any one who says he knows no fear, is either lying, or is a Gurkha!
To those of my commanders, who took an inordinately long time to come to a decision -I coined a Manekshawism “If you have to be a bloody fool, be one quickly.”
Officers, you have kept up the great tradition of the Indian Army... [pause] of having beautiful wives.
There are two things no honourable man should forget: His wife's birthday and the first name of the women around him
His Quotes:
Discipline is the code of conduct of decent living.
What is moral courage? It is the ability to distinguish right from wrong and having so distinguished it, be prepared to say so, irrespective of the views held by your superiors or subordinates and of consequence to yourself.
Any one who says he knows no fear, is either lying, or is a Gurkha!
To those of my commanders, who took an inordinately long time to come to a decision -I coined a Manekshawism “If you have to be a bloody fool, be one quickly.”
Officers, you have kept up the great tradition of the Indian Army... [pause] of having beautiful wives.
There are two things no honourable man should forget: His wife's birthday and the first name of the women around him
Thursday, June 12, 2008
New Age in Fertilizers
World over, the issue of global warming has assumed paramount importance. Environmentalists are at loggerheads with industrialists, traffic cops are gunning at soot emitting vehicles, developed nations are in a war of words with developing and underdeveloped countries on the issue of global warming and its ill effects on the world ecosystem.
The increased concern and awareness on global warming has led to adoption of bio fuels as a viable alternative to the burgeoning energy demands of the world. With crude oil at $137 per barrel, bio fuels are slowly emerging as a viable alternative. Bio fuels emit 75% less CO2(Carbon Dioxide) when compared with the fuel variants of crude oil. As a result, the increased demand for bio fuels has over the last few years led to agricultural land being diverted towards ethanol and other bio fuels production. These bio fuels can be produced from corn. So farmers have shifted their harvesting activities from producing foodgrains to producing corn. Corn production requires increased usage of fertilisers and has led to the upshot in fertiliser prices internationally. The resultant fall in supply of foodgrains has resulted in the recent food crisis engulfing the globe with demand spiking unabated in a disproportionate manner. Food prices have hit the roof and have spearheaded the inflationery scenario prevailing all over. The global fall in foodgrain production has brought back renewed focus into agriculture. We all know that land is not a cultivable asset. We cant create more land. Therefore with its limited availability, what can be done is to increase the productivity of land, which in turn requires balanced usage of fertilisers.
In all this melee, the ones laughing all the way to the bank are the corn farmers and global companies engaged in fertiliser business. The price of corn has moved up from $3.05 per bushel to $4.28 per bushel in the space of 12 months, so have the prices of fertilisers like Urea, phosphates, DAP and MOP which have trebled in the last one year. When prices of fertilisers go up, the positive sentiment will also be echoed by fertiliser stocks listed in the capital markets. Even though, Indian fertiliser industry is still highly regulated, fertiliser stocks listed on the NSE and BSE have given returns ranging from anywhere between 60-120% in the last one year from May 2007 to May 2008 whereas the Sensex has yielded only 12%. Some standing examples are Tata chemicals, Chambal fertilisers and GNFC.
Lets analyse the reasons for investor interest in these fertiliser stocks and the issues plaguing the industry in general:
The Indian fertiliser industry has been the government's holy cow for times immemorial. It has suffered from a controlled regime with archaic regulations plaguing its growth and development. Agriculture is expected to grow in India @4% p.a and therefore fertiliser industry can also be expected to grow at a similar rate in the country. The demand -supply dynamics prevailing internationally for fertilisers will not be applicable to India due to the fact that fertiliser as a segment has not yet been decontrolled. Its still subject to government fiat and pricing. Therefore there is no proper price discovery for fertiliser products in the country. The domestic farmers are protected from the vagaries of international fertiliser prices,which to the government is more important than the bleeding fertiliser manufacturers who are forced to sell at below cost,at MRP (Max retail prices) fixed by the the former.The MRP for different categories of fertilisers are determined through a complex formula under the NEW pricing Scheme (NPS)that works proportionately to import parity pricing but ultimately forces fertiliser manufacturers to sell their produce at below cost price. As we all know vote bank politics holds sway over reforms in our democracy. The difference or underrecoveries as they are called is compensated in the form of bonds by the GOI.
Urea, DAP and MOP come under the controlled regime of the government whereas potash and phosphatic fertilisers were decontrolled a few years ago. Due to the government's subsidy schemes for Urea, farmers began deploying it excessively for their crops without regard to the soil texture leading to depletion in quality. The right targetting of subsidies and delivering the same on nutrient based needs would have gone a long way in improving agricultural output in the country. Successive governments have clearly missed the bus here.
There has virtually been no capacity addition in fertiliser production for the last fifteen years due to the unfavourable policies of the government. Export of fertilisers is also banned by the government, inspite of which we face a supply shortage which is assiduosly met through imports by government agencies like STC and FCI.The internal demand for fertilisers has pushed up the global demand and the concomitant rise in international fertiliser prices.
Major industrial players as well as existing corporates in this sector are shying away from fresh investments due to the following reasons:
1. Archaic fertiliser policies of the government
2. Non availability of feedstock for urea and phosphaic inputs
3. Cost plus pricing with huge underrecoveries for fertiliser producers resulting in
losses and thereby lack of investor attention
4. Uncertainity on receipt of government subsidy and lack of adequate compensation
through cash. Almost a significant portion of the government subsidy is granted
through bonds which are not highly liquid and have to be liquidated at a discount
to meet under-recoveries.
So after perusing through all the above points, the immediate question popping up in the reader's mind would be "How is it that the fertiliser stocks are outperforming the Sensex despite the above concerns??" Read further for your answers:
The government's fertiliser subsidy burden has risen from Rs.11,000 crore in 2003-2004 to an estimated Rs.90,000 crore as per the latest figures available. With its fiscal targets going awry, food crisis deepening and food inflation going out of control, the government has finally decided to wake up from its long slumber and has started looking at framing a new fertiliser policy by next month. Even if this gets tabled in the parliament soon, i dont think we would have concrete reforms happening in this sector until elections get over. As a first step to attract investments, this sector has been placed under priority list. The non availability of gas as a feedstock has been hampering the growth of this sector for a long time. However with gas expecting to flow from the KG basin by mid 2009, this problem gets addressed. Moreover, the government has asked all fertiliser plants to convert to gas based plants from existing naphtha based plants to reduce the cost of feedstock and make fertilisers more affordable to one and all. The advantage is that gas is cheaper than naptha by over 2.5 times.
Some of the appealing schemes proposed under the policy are :
1. Change in investment policies for Urea and phosphates, capital subsidy and fiscal
benefits for capacity expansion
2. Revival of sick public sector units engaged in fertiliser production
3. Decontrol of Urea and correcting the nutrient imbalance
4. Subsidy targetting through cash on a monthly basis instead of bonds wherever
required.
The most important issue of "pricing" has however not been touched upon so far. Most of the industry players are asking for an "import parity pricing" until domestic production comes on steam. However the sector as such being a sensitive one for any government, pricing aspects will continue to be controlled to protect the interests of farmers. The government will atmost tinker around with the pricing to the extent of reducing its subsidy burden to manageable levels.
Notwithstanding the above negativities, the fertiliser stocks are fancied upon and will continue to be fancied by investors for one or more of the following reasons:
1. Most fertiliser companies have over the years derisked their business model by
venturing into the chemicals business. Most companies derive only 50% of their
revenues from fertilisers now and the balance from chemicals. Internationally,
prices of soda ash have skyrocketed and firmed up, boosting the bottomline of
these companies.
2. Supply of gas from KG basin by 2009 which will ease out supply concerns.
3. The promising future that beholds agriculture and its allied sectors like
fertilisers
4. Stable cash flows from fertilisers and chemicals, attractive dividend yield even
if the rise in international fertiliser prices have not benefited Indian
companies .
5. Share prices have also run up based on expectations from the government on the
new fertiliser policy and the attractive schemes and measures that it may contain
to attract private investments into this sector.
6. Growth Rates in this industry are expected to outperform growth rates in
agriculture. The fact that even bio fuels would require usage of fertilisers has
almost lead to demand rising by 10% p.a globally.
All in all, fertile times ahead in the horizon for both industry players and investors.
The increased concern and awareness on global warming has led to adoption of bio fuels as a viable alternative to the burgeoning energy demands of the world. With crude oil at $137 per barrel, bio fuels are slowly emerging as a viable alternative. Bio fuels emit 75% less CO2(Carbon Dioxide) when compared with the fuel variants of crude oil. As a result, the increased demand for bio fuels has over the last few years led to agricultural land being diverted towards ethanol and other bio fuels production. These bio fuels can be produced from corn. So farmers have shifted their harvesting activities from producing foodgrains to producing corn. Corn production requires increased usage of fertilisers and has led to the upshot in fertiliser prices internationally. The resultant fall in supply of foodgrains has resulted in the recent food crisis engulfing the globe with demand spiking unabated in a disproportionate manner. Food prices have hit the roof and have spearheaded the inflationery scenario prevailing all over. The global fall in foodgrain production has brought back renewed focus into agriculture. We all know that land is not a cultivable asset. We cant create more land. Therefore with its limited availability, what can be done is to increase the productivity of land, which in turn requires balanced usage of fertilisers.
In all this melee, the ones laughing all the way to the bank are the corn farmers and global companies engaged in fertiliser business. The price of corn has moved up from $3.05 per bushel to $4.28 per bushel in the space of 12 months, so have the prices of fertilisers like Urea, phosphates, DAP and MOP which have trebled in the last one year. When prices of fertilisers go up, the positive sentiment will also be echoed by fertiliser stocks listed in the capital markets. Even though, Indian fertiliser industry is still highly regulated, fertiliser stocks listed on the NSE and BSE have given returns ranging from anywhere between 60-120% in the last one year from May 2007 to May 2008 whereas the Sensex has yielded only 12%. Some standing examples are Tata chemicals, Chambal fertilisers and GNFC.
Lets analyse the reasons for investor interest in these fertiliser stocks and the issues plaguing the industry in general:
The Indian fertiliser industry has been the government's holy cow for times immemorial. It has suffered from a controlled regime with archaic regulations plaguing its growth and development. Agriculture is expected to grow in India @4% p.a and therefore fertiliser industry can also be expected to grow at a similar rate in the country. The demand -supply dynamics prevailing internationally for fertilisers will not be applicable to India due to the fact that fertiliser as a segment has not yet been decontrolled. Its still subject to government fiat and pricing. Therefore there is no proper price discovery for fertiliser products in the country. The domestic farmers are protected from the vagaries of international fertiliser prices,which to the government is more important than the bleeding fertiliser manufacturers who are forced to sell at below cost,at MRP (Max retail prices) fixed by the the former.The MRP for different categories of fertilisers are determined through a complex formula under the NEW pricing Scheme (NPS)that works proportionately to import parity pricing but ultimately forces fertiliser manufacturers to sell their produce at below cost price. As we all know vote bank politics holds sway over reforms in our democracy. The difference or underrecoveries as they are called is compensated in the form of bonds by the GOI.
Urea, DAP and MOP come under the controlled regime of the government whereas potash and phosphatic fertilisers were decontrolled a few years ago. Due to the government's subsidy schemes for Urea, farmers began deploying it excessively for their crops without regard to the soil texture leading to depletion in quality. The right targetting of subsidies and delivering the same on nutrient based needs would have gone a long way in improving agricultural output in the country. Successive governments have clearly missed the bus here.
There has virtually been no capacity addition in fertiliser production for the last fifteen years due to the unfavourable policies of the government. Export of fertilisers is also banned by the government, inspite of which we face a supply shortage which is assiduosly met through imports by government agencies like STC and FCI.The internal demand for fertilisers has pushed up the global demand and the concomitant rise in international fertiliser prices.
Major industrial players as well as existing corporates in this sector are shying away from fresh investments due to the following reasons:
1. Archaic fertiliser policies of the government
2. Non availability of feedstock for urea and phosphaic inputs
3. Cost plus pricing with huge underrecoveries for fertiliser producers resulting in
losses and thereby lack of investor attention
4. Uncertainity on receipt of government subsidy and lack of adequate compensation
through cash. Almost a significant portion of the government subsidy is granted
through bonds which are not highly liquid and have to be liquidated at a discount
to meet under-recoveries.
So after perusing through all the above points, the immediate question popping up in the reader's mind would be "How is it that the fertiliser stocks are outperforming the Sensex despite the above concerns??" Read further for your answers:
The government's fertiliser subsidy burden has risen from Rs.11,000 crore in 2003-2004 to an estimated Rs.90,000 crore as per the latest figures available. With its fiscal targets going awry, food crisis deepening and food inflation going out of control, the government has finally decided to wake up from its long slumber and has started looking at framing a new fertiliser policy by next month. Even if this gets tabled in the parliament soon, i dont think we would have concrete reforms happening in this sector until elections get over. As a first step to attract investments, this sector has been placed under priority list. The non availability of gas as a feedstock has been hampering the growth of this sector for a long time. However with gas expecting to flow from the KG basin by mid 2009, this problem gets addressed. Moreover, the government has asked all fertiliser plants to convert to gas based plants from existing naphtha based plants to reduce the cost of feedstock and make fertilisers more affordable to one and all. The advantage is that gas is cheaper than naptha by over 2.5 times.
Some of the appealing schemes proposed under the policy are :
1. Change in investment policies for Urea and phosphates, capital subsidy and fiscal
benefits for capacity expansion
2. Revival of sick public sector units engaged in fertiliser production
3. Decontrol of Urea and correcting the nutrient imbalance
4. Subsidy targetting through cash on a monthly basis instead of bonds wherever
required.
The most important issue of "pricing" has however not been touched upon so far. Most of the industry players are asking for an "import parity pricing" until domestic production comes on steam. However the sector as such being a sensitive one for any government, pricing aspects will continue to be controlled to protect the interests of farmers. The government will atmost tinker around with the pricing to the extent of reducing its subsidy burden to manageable levels.
Notwithstanding the above negativities, the fertiliser stocks are fancied upon and will continue to be fancied by investors for one or more of the following reasons:
1. Most fertiliser companies have over the years derisked their business model by
venturing into the chemicals business. Most companies derive only 50% of their
revenues from fertilisers now and the balance from chemicals. Internationally,
prices of soda ash have skyrocketed and firmed up, boosting the bottomline of
these companies.
2. Supply of gas from KG basin by 2009 which will ease out supply concerns.
3. The promising future that beholds agriculture and its allied sectors like
fertilisers
4. Stable cash flows from fertilisers and chemicals, attractive dividend yield even
if the rise in international fertiliser prices have not benefited Indian
companies .
5. Share prices have also run up based on expectations from the government on the
new fertiliser policy and the attractive schemes and measures that it may contain
to attract private investments into this sector.
6. Growth Rates in this industry are expected to outperform growth rates in
agriculture. The fact that even bio fuels would require usage of fertilisers has
almost lead to demand rising by 10% p.a globally.
All in all, fertile times ahead in the horizon for both industry players and investors.
Sunday, June 08, 2008
Should our forex reserves be utilised for infrastructure developement
There have been so many vociferations from various classes of the intelligentsia over the last two to three years on utilisation of our burgeoning forex reserves for infrastructure development. Plans were also mooted to set up a government subsidiary with capital drawn from forex reserves to support infrastructure projects in India and abroad. But is it a rationale act to utilise our forex reserves for internal needs. Why is it that the government and RBI are hesitating to do the same. As on date the forex reserves stand at $316.17 billion which is more than 30% of our GDP Lets delve into the thought process of the Central banker Y.V.Reddy who remains non committal on this issue and as to what are the possible concerns he might have on releasing the forex reserves for national development :
1. Forex reserves can arise in three different ways either through FDI(Foreign Direct Investment) or FII (Foreign Institutional Investments) or RBI's currency market operations.FDI inflows are the more sustainable, permanent form of money flows which actually result in development and growth, enhancing the economic prowess of the country. Therefore inflows in the form of FDI are always encouraged by countries world over. FII inflows also known as "portfolio" flows, on the other hand, are perceived to be "hot" money whose main objective is to take advantage of arbitrage opportunities in different markets for short to medium term gains. These inflows are temporal in nature and shall be the first outflows from any country given a global/domestic crisis scenario. We have historical evidence from the 1997 east asian crisis and collapse of south east asian economies to the latest sub prime crisis that has sent stock markets across the globe into a tailspin.The experience with FII flows have never been stable in the past for any country across the globe as they are always directed towards lucrative/ speculative investment opportunities with a profit motive. The third aspect of building our forex reserves has been through the currency market operations of the RBI by purchasing dollars to keep the exchange rate pegged to the world’s largest reserve currency. Over the years the dollar has considerably declined in tune with the slowdown in the US economy and as a result currencies across the world have been appreciating against the greenback. But however since 70% of global trade is priced in dollar, RBI has been buying dollars form the open market to keep the exchange rate steady and stable to protect its exporters from the vagaries of rupee appreciation.
2. Indian economy has been growing at 7-8% p.a over the last 4-5 years and this had attracted investor attention world over. Our FDI as well as FII flows have increased over the last 4 years with our FII inflows touching $15 billion in Fiscal 2007 buttressed by commendable corporate earnings and positive economic outlook. Despite all this, the two major factors hurting the economy are fiscal deficit and trade deficit. India imports more than it exports. We don’t have a trade surplus on the current account. Our balance of payments position is negative and is expected to rise this year with spiking oil prices. India’s energy and power requirements are huge and rising by the day. Domestic capacities in the oil and gas sector are yet to fully come on steam. We are facing a crisis in agriculture with slowdown in foodgrain production. We are not self sufficient in major essential commodities. All these requirements are being met through imports. The export basket of India also needs to undergo a change in its product mix to cater to the competitive global markets. The economic growth of India has been led by the domestic consumption story. But for this growth to be sustainable its not enough if we keep consuming. We need to produce and produce innovative, value adding products for global consumption. We need to become self sufficient to rely less on imports, produce more with judicious usage of our natural resources and export the surplus for global consumption. This is the most effective way to create a trade surplus. Unlike a Singapore or a China, our forex reserves, whatever be the size, have not been created out of trade surplus. That is also one of the reasons why we have been unable to create a sovereign fund on the lines of China’s sovereign fund managed by Blackstone and Temasek of Singapore. These countries with the help of these sovereign funds have been picking up stakes in developmental projects across Africa to increase their global footprint. Both China and Singapore know that the next phase of growth will emanate from Africa. India has been missing out on this story inspite of sizeable forex reserves to the tune of 30% of our GDP for the simple fact that
a. We need to maintain adequate cushion to meet our import bills of which oil
imports form a significant component, especially in the wake of rising oil prices
b. Our external debt is pegged at 17% of GDP, which also needs to be covered for
through forex reserves
c. FII inflows might reverse any moment given the unstable global environment.
d. None of us want a repeat of the 1991 crisis when he had to pledge our gold to
meet our balance of payments deficit.
At the moment though, RBI has been supporting India Inc’s M&A deals by providing enough foreign exchange to make acquisitions abroad and pursue their ever-increasing shopping list abroad. But to provide foreign exchange to meet internal needs of the country would be possible only when we have a trade surplus and deficits get wiped out completely. The portion of forex reserves that get created out of our trade surplus can alone be utilized for infrastructure development.
1. Forex reserves can arise in three different ways either through FDI(Foreign Direct Investment) or FII (Foreign Institutional Investments) or RBI's currency market operations.FDI inflows are the more sustainable, permanent form of money flows which actually result in development and growth, enhancing the economic prowess of the country. Therefore inflows in the form of FDI are always encouraged by countries world over. FII inflows also known as "portfolio" flows, on the other hand, are perceived to be "hot" money whose main objective is to take advantage of arbitrage opportunities in different markets for short to medium term gains. These inflows are temporal in nature and shall be the first outflows from any country given a global/domestic crisis scenario. We have historical evidence from the 1997 east asian crisis and collapse of south east asian economies to the latest sub prime crisis that has sent stock markets across the globe into a tailspin.The experience with FII flows have never been stable in the past for any country across the globe as they are always directed towards lucrative/ speculative investment opportunities with a profit motive. The third aspect of building our forex reserves has been through the currency market operations of the RBI by purchasing dollars to keep the exchange rate pegged to the world’s largest reserve currency. Over the years the dollar has considerably declined in tune with the slowdown in the US economy and as a result currencies across the world have been appreciating against the greenback. But however since 70% of global trade is priced in dollar, RBI has been buying dollars form the open market to keep the exchange rate steady and stable to protect its exporters from the vagaries of rupee appreciation.
2. Indian economy has been growing at 7-8% p.a over the last 4-5 years and this had attracted investor attention world over. Our FDI as well as FII flows have increased over the last 4 years with our FII inflows touching $15 billion in Fiscal 2007 buttressed by commendable corporate earnings and positive economic outlook. Despite all this, the two major factors hurting the economy are fiscal deficit and trade deficit. India imports more than it exports. We don’t have a trade surplus on the current account. Our balance of payments position is negative and is expected to rise this year with spiking oil prices. India’s energy and power requirements are huge and rising by the day. Domestic capacities in the oil and gas sector are yet to fully come on steam. We are facing a crisis in agriculture with slowdown in foodgrain production. We are not self sufficient in major essential commodities. All these requirements are being met through imports. The export basket of India also needs to undergo a change in its product mix to cater to the competitive global markets. The economic growth of India has been led by the domestic consumption story. But for this growth to be sustainable its not enough if we keep consuming. We need to produce and produce innovative, value adding products for global consumption. We need to become self sufficient to rely less on imports, produce more with judicious usage of our natural resources and export the surplus for global consumption. This is the most effective way to create a trade surplus. Unlike a Singapore or a China, our forex reserves, whatever be the size, have not been created out of trade surplus. That is also one of the reasons why we have been unable to create a sovereign fund on the lines of China’s sovereign fund managed by Blackstone and Temasek of Singapore. These countries with the help of these sovereign funds have been picking up stakes in developmental projects across Africa to increase their global footprint. Both China and Singapore know that the next phase of growth will emanate from Africa. India has been missing out on this story inspite of sizeable forex reserves to the tune of 30% of our GDP for the simple fact that
a. We need to maintain adequate cushion to meet our import bills of which oil
imports form a significant component, especially in the wake of rising oil prices
b. Our external debt is pegged at 17% of GDP, which also needs to be covered for
through forex reserves
c. FII inflows might reverse any moment given the unstable global environment.
d. None of us want a repeat of the 1991 crisis when he had to pledge our gold to
meet our balance of payments deficit.
At the moment though, RBI has been supporting India Inc’s M&A deals by providing enough foreign exchange to make acquisitions abroad and pursue their ever-increasing shopping list abroad. But to provide foreign exchange to meet internal needs of the country would be possible only when we have a trade surplus and deficits get wiped out completely. The portion of forex reserves that get created out of our trade surplus can alone be utilized for infrastructure development.
Saturday, June 07, 2008
The Crude Oil Paradox
As far as my knowledge of economics goes, whenever prices of a commodity goes up, the demand for that commodity start falling over a period of time. But unfortunately this economic theory doesnt seem to apply for crude oil. So does that mean all of us should retake lessons in economics. Nope, not at all. If we delve deeper into this burning crude oil problem, one would come to realise that its the faulty policies of the governments across the globe that has resulted in fuelling energy prices over the years. If we take our country as a standing example, all of us have been shielded from the impact of crude oil rise from $35 to $133 per barrel over the past 4 years. Though some amount of speculative positions have definitely found their way into boosting oil prices to the present level, the story doesnt end there. If we analyse the real reasons for the oil shock, we would come to terms with the fact that demand has been rising unabated irrespective of oil price hikes, almost to the level of becoming inelastic. In India, the consumption of diesel is more than that of petrol. Most BPL category citizens and low income groups cannot afford a LPG cylinder till date. Public welfare and social responsibility does demand that the government of a country protect its citizens from the vagaries of global economic shocks.So its pretty obvious that the entire burden cannot be passed on to consumers. Therefore the government has been following the hackneyed policy of not raising fuel prices in tune with import parity pricing of crude and subsidizing the population at large only to result in literal bankruptcy of oil marketing companies.The oil bonds that the government issues as compensation to OMC's for their underrecoveries is only a strain on the fiscal deficit of this economy and is a cost on our resources as well as a burden that is passed on to our future generation. In light of this scenario why is it that petrol prices are still subsidized? Only when petrol prices are raised to reflect international realities, will demand for oil slow down. People would either stop travelling by cars or would resort to car pool system. More and more people will start using public transport systems that run on diesel/CNG. Similar is the case with LPG. Since it is consumed by the relatively creamy layer of the population, their prices should also be increased to the maximum extent possible. The luxurious will either ways continue to pay whatever is the price. So why subsidize them. The effect of these decisions would mean CNG usage would increase in a big way given the fact that its a relatively less polluting, low cost option. Public transport systems will also get efficient with more n more people commuting through it. The teething infrastructure problems can then be handled with ease.When demand for oil from a large country like India slows down, we shall see the downward spiral in oil prices happening almost as an immediate aftermath.
But given the fact that ours is a totally warped democracy with the lack of political will to take major decisions that would be beneficial to the society in the long run, these proposals are fit to lie in my closet for the time being. See you with my next article on this subject when Oil is at $ 200 per barrel.
But given the fact that ours is a totally warped democracy with the lack of political will to take major decisions that would be beneficial to the society in the long run, these proposals are fit to lie in my closet for the time being. See you with my next article on this subject when Oil is at $ 200 per barrel.
Avon Weighing Systems: Have you seen an IPO at face value so far??
Trust me guys, Iam not dreaming. Come June 9Th, Avon Weighing systems which assembles and sells weighing instruments in India is hitting the capital markets with its IPO priced at Rs.10 per share. The company, incorporated in 1999, is the authorised dealer of industrial electronic and digital weighing scale products of "A&D" and "Tanita" (Japan) in India. The company assembles these products after importing spare parts from these companies abroad, customising them to individual customer requirements. The company is also the authorised dealer of Excell Precision Co. Ltd., Taiwan and Ningbo Benui Electric Co. Ltd., China. A&D company is the world's third largest manufacturer of weighing machines.
The company is now venturing into manufacturing of weighing systems to address the competitive scenario and tap into the emerging opportunities in the 1000 crore market. The manufacturing would be done with the technical support of Tanita. The weighing balances distributed by the company are used in industries where precision weighing is critical eg: Gems, jewellery, pharmaceuticals, retail, healthcare, posts & couriers, oil, airports, iron and steel etc.The funds raised through the IPO will part-finance the company’s Rs 17.30 crore expenditure plan for 1. A manufacturing facility at Baddi (Himachal Pradesh) 2. Four showrooms for display and sale of its weighing systems 3. Purchase of additional office premises in Mumbai. The project is proposed to be funded through promoters’ contribution of Rs 4.36 crore, internal accruals of Rs 0.50 crore and a term loan of Rs 2.60 crore in addition to the IPO funding of Rs 9.83 crore. The fact that promoters are also making a contribution to the funding plans alone gives a lot of assurance to the issue. It also shows the confidence the promoters have in the sustainability of the business going forward, considering the fact that the company is a small scale industry (SSI) unit.
The size of the electronic weighing systems industry in India is around Rs.1000 crore and is growing at 25-30% p.a.
The biggest positive from this IPO is that it’s coming out with an IPO at a price of Rs.10 sans any premium. Retail investors can bid for a minimum of 500 shares and in multiples of 500 thereof upto a maximum of 10000 equity shares. The company plans to list its shares on the Bombay Stock Exchange (BSE). The IPO has been rated "Grade 2" by CARE indicating "below average fundamentals". Though this appears a negative from the IPO standpoint, there have been cases in the past where even a company with a moderate business profile can command superior valuations if the pricing is right and it is here where this IPO is right up your alley. Lets examine the pros and cons of this issue:
Strengths:
1. Good track record of the promoters in trading operations, excellent long
standing relationships with A&D and Tanita Corp., growing usage of digital
and electronic weighing machines compared to mechanical weighing
machines used earlier. Even a small transformation or conversion of retail
and trade establishments from mechanical to electronic weighing machines
presents a huge opportunity. Also the preference for precision and accuracy
in weights and measures will convert a significant population into potential
customers.
2. Backward integration into manufacturing will strengthen the weak margins
and lend better pricing power. The company is commencing its
manufacturing operations by November 2008 and this should ensure a
robust growth in topline going forward as well as reflect an improvement in
the PAT margins to 7-8% from the present 4%.
3. The manufacturing plant to be set up at Baddi, Himachal Pradesh is exempt
from taxes and duties. The fiscal incentives will definitely shore up the
margins of the company going forward.
4. Usage of properly serviced second hand dies for manufacturing will result in
saving on capital expenditure going forward.
5. Innovative products, better technology through internally developed
software, industry specific solutions and customised service have made the
company a preferred supplier to a number of its customers.
6. Avon has witnessed impressive growth in its topline and bottomline at a
CAGR of 43.5% and 64% respectively over the last five years. The company
has had a decent track record of paying dividends in the range of 12.5-
13.5% every year. Assuming the trend would continue, one can safely
conclude that this stock would have an excellent dividend yield given the fact
that the issue is priced at par value.
7. Legislations are being passed now by various state governments by banning the usage of
mechanical balances. Karnataka for example has already passed one such legislation.
8. Long standing relationships with companies like Novartis, Lupin, Sudarshan Chemicals lends
earnings visibility.
9. Any rupee appreciation against currencies like YEN and YUAN should result
in handsome gains for the company due to its import policy of spare parts
and raw materials.
Weakness :
1. No prior experience of promoters in the manufacture of electronic weighing
machines. The company has only been trading and distributing weighing
machines so far.
2. Excessive dependence on A&D and Tanita for business continuity. Inherent
business risk lies in highly concentrated business profile and
termination/discontinuation of dealership agreements. Also for the
manufacturing activities to commence, technical support from Tanita is
required for which no formal agreement has been entered into. The
agreement will be entered subject to inspection of the Baddi plant by
Tanita authorities. In case the agreement does not materialize, the company
plans to install an assembly plant at the proposed site.
3. Inadequate geographical reach
4. Limited investment ability of promoters
5. Significant competition from players like Essae- teraoka, Avery India, Sansui,
Phoenix, Atco, Contech and the presence of the unorganised market have
hampered the possibility of a wider geographical reach for the company.
Avery India is the only listed player that has been in existence in the
industry for more than two decades but has witnessed moderate sales growth
compared to Avon. But Avery has its own manufacturing facility in place.
6. The company has reported negative cash flows in the last three years due to
working capital constraints. The company faces a strained working capital
situation due to delay in receivables from government agencies. Government
agencies typically take 90-120 days to settle their dues. The interest burden
is expected to go up in the near to medium term.
Notes on financials:
1. With the commencement of manufacturing operations by Nov.2008, the growth momentum
is expected to continue with overall improvement in margins
2. The company has reported better earnings growth when compared to Avery India. The
margins are lower than Avery India as the former is already into manufacturing activities
that can lead to better economies of scale compared to trading activity alone.
3. At the fixed IPO price of Rs10, Avon commands a better market cap to sales ratio as well as
PEG (Price earning growth) when compared with Avery India, indicating scope for sizeable
listing gains.
4. The Enterprise value per share is also at a significant premium to the issue price
All in all, Avon India can be described as a SSI with a moderate business profile and decent financial strength with ability to deliver stable returns going forward.
Valuation:
The IPO price of Rs.10 discounts FY 08 fully diluted EPS of 1.12 by 8.92x, which is lower than the PE of Avery India, the only comparable listed peer.
The IPO is being recommended to investors for the following reasons:
·The scope for downside is very limited. The pricing of the IPO at par value discounts all the negatives associated with the company
·The company is financially sound with average fundamentals. The impressive dividend yield at the IPO price will alone attract investors to this counter.
· The weighing machines industry is growing at 25-30%p.a and players in the industry should command better valuations going forward.
· Avery India had an open offer from its promoters last year at a price of Rs.80 which indicates the sort of valuations companies in this industry should likely command.
·The market cap to sales ratio is significantly lower compared to Avery India. So valuations for Avon with better earnings growth should definitely catch up over the medium term.
·Assuming that the market conditions will stabilize by the time listing of this issue happens, investors can be reasonably sure that the scrip will get listed with a decent 30-40% premium above issue price.
It is indeed commendable that sanity has prevailed in pricing this issue. The merchant bankers have definitely left something on the table for investors. The proof of the pudding is in the eating. This “weighing balance” definitely tilts in your favour.
The company is now venturing into manufacturing of weighing systems to address the competitive scenario and tap into the emerging opportunities in the 1000 crore market. The manufacturing would be done with the technical support of Tanita. The weighing balances distributed by the company are used in industries where precision weighing is critical eg: Gems, jewellery, pharmaceuticals, retail, healthcare, posts & couriers, oil, airports, iron and steel etc.The funds raised through the IPO will part-finance the company’s Rs 17.30 crore expenditure plan for 1. A manufacturing facility at Baddi (Himachal Pradesh) 2. Four showrooms for display and sale of its weighing systems 3. Purchase of additional office premises in Mumbai. The project is proposed to be funded through promoters’ contribution of Rs 4.36 crore, internal accruals of Rs 0.50 crore and a term loan of Rs 2.60 crore in addition to the IPO funding of Rs 9.83 crore. The fact that promoters are also making a contribution to the funding plans alone gives a lot of assurance to the issue. It also shows the confidence the promoters have in the sustainability of the business going forward, considering the fact that the company is a small scale industry (SSI) unit.
The size of the electronic weighing systems industry in India is around Rs.1000 crore and is growing at 25-30% p.a.
The biggest positive from this IPO is that it’s coming out with an IPO at a price of Rs.10 sans any premium. Retail investors can bid for a minimum of 500 shares and in multiples of 500 thereof upto a maximum of 10000 equity shares. The company plans to list its shares on the Bombay Stock Exchange (BSE). The IPO has been rated "Grade 2" by CARE indicating "below average fundamentals". Though this appears a negative from the IPO standpoint, there have been cases in the past where even a company with a moderate business profile can command superior valuations if the pricing is right and it is here where this IPO is right up your alley. Lets examine the pros and cons of this issue:
Strengths:
1. Good track record of the promoters in trading operations, excellent long
standing relationships with A&D and Tanita Corp., growing usage of digital
and electronic weighing machines compared to mechanical weighing
machines used earlier. Even a small transformation or conversion of retail
and trade establishments from mechanical to electronic weighing machines
presents a huge opportunity. Also the preference for precision and accuracy
in weights and measures will convert a significant population into potential
customers.
2. Backward integration into manufacturing will strengthen the weak margins
and lend better pricing power. The company is commencing its
manufacturing operations by November 2008 and this should ensure a
robust growth in topline going forward as well as reflect an improvement in
the PAT margins to 7-8% from the present 4%.
3. The manufacturing plant to be set up at Baddi, Himachal Pradesh is exempt
from taxes and duties. The fiscal incentives will definitely shore up the
margins of the company going forward.
4. Usage of properly serviced second hand dies for manufacturing will result in
saving on capital expenditure going forward.
5. Innovative products, better technology through internally developed
software, industry specific solutions and customised service have made the
company a preferred supplier to a number of its customers.
6. Avon has witnessed impressive growth in its topline and bottomline at a
CAGR of 43.5% and 64% respectively over the last five years. The company
has had a decent track record of paying dividends in the range of 12.5-
13.5% every year. Assuming the trend would continue, one can safely
conclude that this stock would have an excellent dividend yield given the fact
that the issue is priced at par value.
7. Legislations are being passed now by various state governments by banning the usage of
mechanical balances. Karnataka for example has already passed one such legislation.
8. Long standing relationships with companies like Novartis, Lupin, Sudarshan Chemicals lends
earnings visibility.
9. Any rupee appreciation against currencies like YEN and YUAN should result
in handsome gains for the company due to its import policy of spare parts
and raw materials.
Weakness :
1. No prior experience of promoters in the manufacture of electronic weighing
machines. The company has only been trading and distributing weighing
machines so far.
2. Excessive dependence on A&D and Tanita for business continuity. Inherent
business risk lies in highly concentrated business profile and
termination/discontinuation of dealership agreements. Also for the
manufacturing activities to commence, technical support from Tanita is
required for which no formal agreement has been entered into. The
agreement will be entered subject to inspection of the Baddi plant by
Tanita authorities. In case the agreement does not materialize, the company
plans to install an assembly plant at the proposed site.
3. Inadequate geographical reach
4. Limited investment ability of promoters
5. Significant competition from players like Essae- teraoka, Avery India, Sansui,
Phoenix, Atco, Contech and the presence of the unorganised market have
hampered the possibility of a wider geographical reach for the company.
Avery India is the only listed player that has been in existence in the
industry for more than two decades but has witnessed moderate sales growth
compared to Avon. But Avery has its own manufacturing facility in place.
6. The company has reported negative cash flows in the last three years due to
working capital constraints. The company faces a strained working capital
situation due to delay in receivables from government agencies. Government
agencies typically take 90-120 days to settle their dues. The interest burden
is expected to go up in the near to medium term.
Notes on financials:
1. With the commencement of manufacturing operations by Nov.2008, the growth momentum
is expected to continue with overall improvement in margins
2. The company has reported better earnings growth when compared to Avery India. The
margins are lower than Avery India as the former is already into manufacturing activities
that can lead to better economies of scale compared to trading activity alone.
3. At the fixed IPO price of Rs10, Avon commands a better market cap to sales ratio as well as
PEG (Price earning growth) when compared with Avery India, indicating scope for sizeable
listing gains.
4. The Enterprise value per share is also at a significant premium to the issue price
All in all, Avon India can be described as a SSI with a moderate business profile and decent financial strength with ability to deliver stable returns going forward.
Valuation:
The IPO price of Rs.10 discounts FY 08 fully diluted EPS of 1.12 by 8.92x, which is lower than the PE of Avery India, the only comparable listed peer.
The IPO is being recommended to investors for the following reasons:
·The scope for downside is very limited. The pricing of the IPO at par value discounts all the negatives associated with the company
·The company is financially sound with average fundamentals. The impressive dividend yield at the IPO price will alone attract investors to this counter.
· The weighing machines industry is growing at 25-30%p.a and players in the industry should command better valuations going forward.
· Avery India had an open offer from its promoters last year at a price of Rs.80 which indicates the sort of valuations companies in this industry should likely command.
·The market cap to sales ratio is significantly lower compared to Avery India. So valuations for Avon with better earnings growth should definitely catch up over the medium term.
·Assuming that the market conditions will stabilize by the time listing of this issue happens, investors can be reasonably sure that the scrip will get listed with a decent 30-40% premium above issue price.
It is indeed commendable that sanity has prevailed in pricing this issue. The merchant bankers have definitely left something on the table for investors. The proof of the pudding is in the eating. This “weighing balance” definitely tilts in your favour.
Anti money laundering laws strengthened
The cabinet approved the amendment to the Prevention of Money Laundering Act recently to include even credit cards, casinos, money transfer service providers like Western Union under the purview of the act. It was being noticed that "dirty money" related to crimes were being routed through these channels. So far in the past, only banks and financial institutions were required to report on suspicious transactions to the RBI. These loopholes are getting plugged now as an audit trail can be established by the regulatory authorities now to monitor transactions happening through these channels too.
Friday, June 06, 2008
Laws against Cartelisation
At present, issues concerning “cartelisation” are handled by the MRTP Commission. The MRTP Act is clearly misplaced in a growing economy like India and is anti-reform. Though the Competition Act has been enforced in 2002, to replace the draconian MRTP Act, it is non-functional to a large extent.
In a free market economy like ours, stemming the price rise through Governmental fiat is not the way forward. Having said that, to prove the existence of cartelisation and misconduct at marketplace, any government would need evidence, especially in the case of commodities, where demand exceeds supply.
It is, therefore, of utmost importance to fully empower the Competition Commission set up by the Competition Act 2002 to conduct an economic analysis of pricing patterns, market structure, business practices and consumer behaviour in the industries/sectors alleged to be involved in the practice of cartelisation
In a free market economy like ours, stemming the price rise through Governmental fiat is not the way forward. Having said that, to prove the existence of cartelisation and misconduct at marketplace, any government would need evidence, especially in the case of commodities, where demand exceeds supply.
It is, therefore, of utmost importance to fully empower the Competition Commission set up by the Competition Act 2002 to conduct an economic analysis of pricing patterns, market structure, business practices and consumer behaviour in the industries/sectors alleged to be involved in the practice of cartelisation
Friday, April 25, 2008
Markets may fall below 14000 post results season
The results season will be nearing its end next week with some more important companies due to announce their results in the coming week. So far results have largely been in line with market expectations with no major outperformance from any sector. Corporate earnings have grown in the range of 15% -20% with very few companies churning out a disappointing outlook going forward. Given the stunted growth of the economy with tight fiscal/monetary conditions and the pain from subprime crisis not yet having receded, equities as an asset class will have a muted performance for the rest of 2008. Domestically too, we have our own derivatives exposure which is hurting corporates and banks alike. ICAI has actually helped the investing community by making it mandatory for companies to disclose their derivative exposures well in advance of the stipulated 2011 deadline. However there may be a number of cases where these provisions may not be accounted for in the respective quarterly results as marked to market losses. Companies have the option of disclosing such exposures in their notes to accounts. The problem here for investors is that they will not be able to access the notes to accounts of companies until six months from now. So there will be some clarity emerging on derivatives only in second quarter of FY 09. Already SBI has come out with its estimate of its total client exposure to derivatives at Rs.672 crore. This is quite a large amount for a single bank and considering that a number of small and medium companies have taken speculative trades in these currency swaps, the small and midcap listed universe would be an interesting space to watch out for as to the impact of these MTM losses on their bottomline. A classic recent example is eastern silk industries, a fundamentally strong fabric company that has been reporting decent numbers in the past growing at 25% p.a. The entire bottomline has been wiped out this quarter due to MTM losses on currency derivatives. The market was merciless on this stock which collapsed 30% from its existing lows in the last couple of days. We can expect the impact of MTM losses to subside if the dollar strengthens or rebounds against other currencies.
Its also shocking to see that a company like BHEL has fallen 30% from its highs post its Q4 results. A company with such a huge revenue visibility for over 5-6 yrs, its order book at 80000 crore, with an expected addition of 40000 crore this year alone, getting knocked down inspite of posting a decent 17% growth YoY shows the lack of patience and persistence among the investing diaspora. A stock cannot get kncoked of 25-30% when fundamentals are intact with no slowdown in order book growth. The company does face margin pressure and has postponed the booking of some earnings to the next quarter. Fund managers are acting like day traders looking for the slightest negative news in listed corporates. They are sitting on a cash pile of 20000 crore. Certain mutual funds are even cashed out to the extent of 10%. The point here is when one has invested 90% of his funds at higher levels and seen the markets crash by 30%, whats the point in sitting on the balance 10%. FII flows will follow domestic institutions. These FII's who have taken out close to $5 billion from Indian markets since Jan 2008 will not return until domestic institutions bring sanity back to the markets.
As for the market levels, at the moment we have moved beyond 5100 and managed to close above that level. But this being the first day of the new series, position build up generally tends to happen. Therefore we should not read too much into these rallies. How we proceed from here is very important. The 200 day moving average stands at 5031 and we have bottomed out below these levels thrice so far only to stage intermediate relief rallies. The next level to watch out for will be 5393. Given the lack of major positive triggers from corporates and with growth expected to moderate to 7% in the wake of global and domestic factors, we may fall to lower levels again. Everytime we have had bear markets in the past, we have fallen more than 50% from the previous highs. This time around, we have not yet seen the sensex slipping below 12K and unless global events worsen badly leading to a greater risk aversion, we can strongly believe that we are not in a bear market. The above factors will have to be watched closely. I personally believe that the bull market is set to resume in Q3 2009.
Its also shocking to see that a company like BHEL has fallen 30% from its highs post its Q4 results. A company with such a huge revenue visibility for over 5-6 yrs, its order book at 80000 crore, with an expected addition of 40000 crore this year alone, getting knocked down inspite of posting a decent 17% growth YoY shows the lack of patience and persistence among the investing diaspora. A stock cannot get kncoked of 25-30% when fundamentals are intact with no slowdown in order book growth. The company does face margin pressure and has postponed the booking of some earnings to the next quarter. Fund managers are acting like day traders looking for the slightest negative news in listed corporates. They are sitting on a cash pile of 20000 crore. Certain mutual funds are even cashed out to the extent of 10%. The point here is when one has invested 90% of his funds at higher levels and seen the markets crash by 30%, whats the point in sitting on the balance 10%. FII flows will follow domestic institutions. These FII's who have taken out close to $5 billion from Indian markets since Jan 2008 will not return until domestic institutions bring sanity back to the markets.
As for the market levels, at the moment we have moved beyond 5100 and managed to close above that level. But this being the first day of the new series, position build up generally tends to happen. Therefore we should not read too much into these rallies. How we proceed from here is very important. The 200 day moving average stands at 5031 and we have bottomed out below these levels thrice so far only to stage intermediate relief rallies. The next level to watch out for will be 5393. Given the lack of major positive triggers from corporates and with growth expected to moderate to 7% in the wake of global and domestic factors, we may fall to lower levels again. Everytime we have had bear markets in the past, we have fallen more than 50% from the previous highs. This time around, we have not yet seen the sensex slipping below 12K and unless global events worsen badly leading to a greater risk aversion, we can strongly believe that we are not in a bear market. The above factors will have to be watched closely. I personally believe that the bull market is set to resume in Q3 2009.
Wednesday, April 23, 2008
Impact of Oil at 115
Oil prices have zoomed to $115 per barrel as per the latest reading. Asian economies are still protected from high oil prices by the respective governments through subsidies. Now a $200 per barrel becoming a possible reality, asian economies need to have a rethink on their continued stance of subsidising the common man at large by shielding him through low prices of consumable oil derivatives. As we all know, petrol and diesel are subsidised at large to prevent the pass through of high crude oil prices to the common man. We also have distribution of other derivatives of oil through the PDS (Public distribution system) at minimum support prices. All the effects of these subsidies take a hit on the balance sheets of governments. The fiscal deficits which are understated in most countries excluding off balance sheet items like subsidies will only rise further with oil at $200 per barrel and a policy such as this will only result in interest rates and bond yields rising further in the long run. The need of the hour is to conserve energy, reduce demand for oil and its derivatives, announce huge fiscal incentives for harnessing non renewable sources of energy and fuelling the consumption of the same. For eg : How about setting up a solar grid network similar to a telecom tower to supply power to each area of major cities? how about adopting ethanol and biofuels for transportation instead of relying on petrol, diesel or natural gas. Hydel power is an area yet to see major investments from corporates. These are opportunities for the modern world to reduce its long term dependance on oil as a source of energy. No doubt, it requires proactive measures with long gestation periods to adopt non conventional and renewable sources of energy but considering the perennial benefits that we would leave for our next gen., its worth the effort. The world would no longer have to put up with the black commodity in triple digits.
Friday, April 18, 2008
Subprime Tsunami
The mortgage securities market in US is at 50% of its GDP at $6.5 trillion. The financial stability of Bear Sterns was invariably linked to repayment of loans that it had underwritten. Just a few days prior to the collapse of the investment bank , Carlyle Capital (PE), one of the oldest private equity funds the world had known, went bust after its mortage losses wiped out its entire equity. Carlyle capital was leveraged to the extent of 32 times its book value. Though Carlyle had not taken any exposure to subprime assets and was holding only AAA rated mortgage bonds of Freddie Mac and Fannie Mae, many hedge funds had sold these bonds on the fear of a credit crisis prevailing in these two government guaranteed institutions resulting in excess supply of these bonds in the market. As a consequence, excess supply resulted in bonds prices falling and margins calls getting triggered for more collateral from Carlyle. The fact that most of the lenders of Carlyle were investment banks like Bear Sterns who dint want to extend any lenity was an indication of the problems they themselves faced internally.
Subprime mortgages were sold to homeless borrowers with lax credit standards on the pretext that they could refinance their homes to pay up later. But what was not explained to them was the interest rate clause would be reset every two years. As long as the interest rates were low, there was huge demand for housing and there was a construction boom that was witnessed all across the US which eventually resulted in excess supply of real estate. The situation was almost surreal with houses getting refinanced for a second mortgage just to fund consumption in the US. A consumption boom was also necessary to finance the US war in Afghanistan and Iraq. Government agencies operated in full swing bringing out ads to fuel consumption in US. As inflation spiralled out of control and interest rates began to spike up, these loan reste clauses came into effect. The subprime borrowers began to default unable to meet their liabilities. Most of these subprime borrowers had no source of income whatsover or had falsified the records while submitting the loan applications. Once they started to default, there were only two options, either to sell the house and meet the committment or subject the property to foreclosure. But with property rates having fallen under high interest rates and excess supply of real estate, they could neither refinance their house nor dispose them at falling prices. Most subprime borrowers have foreclosed their accounts by surrendering the plot resulting in the mortgage companies being left with houses whose value/collateral was way below the Loan value. The subprime contagion had begun and had a chain reaction throughout the economy. Today, the monster has resulted in losses close to $ 1 trillion in the US economy, almost the size of the Indian economy.The losses faced by mortgage companies resulted in many of them filing for bankruptcy and all the bonds securitised by them in the form of pass through certificates after a due diligence rating from the S&P's and Moody's of the World were reduced to nullity in terms of value. This resulted in huge write off's in the balance sheet of hedge funds and investment banks who had to mark to market assets held by them.
Similar was the case with Bear Sterns, the second largest underwriter of mortgage bonds in the US. The exposure to exotic derivatives at Bear sterns was almost the size of the US economy at $13 trillion. As has been proved over the last one year, these derivatives have indeed become weapons of mass destruction. The collateralised debt obligations and its liabilities on Credit defualt swaps underwritten had led to the collpase of two hedge funds owned by it. Post Carlyle's collapse and the FED's surprise interest rate cut by 75 basis points, credit spreads began to widen, there was panic among the market participants that there are more skeletons waiting in the closet. Rumours started doing the rounds that Bear Sterns was in trouble. Bear Sterns also handled the largest volume of trading transactions on the bourses and hence had huge deposits of collaterals and margin money from clients. These clients started withdrawing cash from the company and the latter was put into a liquidity crisis. Margin calls coudnt be met on mortgage bonds and CDO's. The firm sold its holdings in equities all across global markets held through its investing arm BSMA triggering off a fire sale of equities in most EM's. Bear Sterns was set for bankruptcy before the FED stepped in and aided JP morgan Chase to buyout Bear Sterns at $2 per share. The share price had collapsed from a high of 170$ before the subprime crisis broke out to $30 when the crisis was as its peak, almost wiping out the lifetime savings of its employee base who had put their hard earned money into Bear Sterns equity.
Subprime mortgages were sold to homeless borrowers with lax credit standards on the pretext that they could refinance their homes to pay up later. But what was not explained to them was the interest rate clause would be reset every two years. As long as the interest rates were low, there was huge demand for housing and there was a construction boom that was witnessed all across the US which eventually resulted in excess supply of real estate. The situation was almost surreal with houses getting refinanced for a second mortgage just to fund consumption in the US. A consumption boom was also necessary to finance the US war in Afghanistan and Iraq. Government agencies operated in full swing bringing out ads to fuel consumption in US. As inflation spiralled out of control and interest rates began to spike up, these loan reste clauses came into effect. The subprime borrowers began to default unable to meet their liabilities. Most of these subprime borrowers had no source of income whatsover or had falsified the records while submitting the loan applications. Once they started to default, there were only two options, either to sell the house and meet the committment or subject the property to foreclosure. But with property rates having fallen under high interest rates and excess supply of real estate, they could neither refinance their house nor dispose them at falling prices. Most subprime borrowers have foreclosed their accounts by surrendering the plot resulting in the mortgage companies being left with houses whose value/collateral was way below the Loan value. The subprime contagion had begun and had a chain reaction throughout the economy. Today, the monster has resulted in losses close to $ 1 trillion in the US economy, almost the size of the Indian economy.The losses faced by mortgage companies resulted in many of them filing for bankruptcy and all the bonds securitised by them in the form of pass through certificates after a due diligence rating from the S&P's and Moody's of the World were reduced to nullity in terms of value. This resulted in huge write off's in the balance sheet of hedge funds and investment banks who had to mark to market assets held by them.
Similar was the case with Bear Sterns, the second largest underwriter of mortgage bonds in the US. The exposure to exotic derivatives at Bear sterns was almost the size of the US economy at $13 trillion. As has been proved over the last one year, these derivatives have indeed become weapons of mass destruction. The collateralised debt obligations and its liabilities on Credit defualt swaps underwritten had led to the collpase of two hedge funds owned by it. Post Carlyle's collapse and the FED's surprise interest rate cut by 75 basis points, credit spreads began to widen, there was panic among the market participants that there are more skeletons waiting in the closet. Rumours started doing the rounds that Bear Sterns was in trouble. Bear Sterns also handled the largest volume of trading transactions on the bourses and hence had huge deposits of collaterals and margin money from clients. These clients started withdrawing cash from the company and the latter was put into a liquidity crisis. Margin calls coudnt be met on mortgage bonds and CDO's. The firm sold its holdings in equities all across global markets held through its investing arm BSMA triggering off a fire sale of equities in most EM's. Bear Sterns was set for bankruptcy before the FED stepped in and aided JP morgan Chase to buyout Bear Sterns at $2 per share. The share price had collapsed from a high of 170$ before the subprime crisis broke out to $30 when the crisis was as its peak, almost wiping out the lifetime savings of its employee base who had put their hard earned money into Bear Sterns equity.
Wednesday, April 16, 2008
Oil prices surged to a record high above $112 last week. The current crude prices are nearly 10 times the levels less than a decade ago. Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. The impact of crude oil prices on growth in developing countries is thought to be significantly higher, because energy-intensive manufacturing generally accounts for a larger share of their GDP.
Since 2002, major oil producing countries have been investing in exploration and development. Furthermore, planned gross capacity additions from new projects in non-OPEC countries (including non-conventional sources) would add to supply.Oil-consuming countries have also started diversifying their fuel-mix by switching to alternative sources of energy like natural gas and renewables. The interplay of these forces can drive down the prices of crude oil from the current levels.
On the demand side, while consumption in the past has been driven by OECD countries, particularly the US, much of the current incremental demand is coming from emerging economies, particularly China and India, which contributed more than 40 per cent of the incremental global consumption during 2000-06. Global oil demand is expected to increase to 100 million barrels per day (mbpd) by 2015 as against 85.7 mbpd currently.While oil demand is projected to increase significantly, supply may struggle to keep pace. The production from the existing fields is declining by 4 per cent per annum which means that new capacity needs to be added every year just to offset the decline in existing production.
The depreciation of the US dollar and the worsening US economy are also held as major culprits for the price rise. The falling dollar coupled with the declining stock and credit markets also increases traders' interest in commodities such as oil,which further fuels price rise.Speculative investment by major hedge funds also seems to play a key role on oil price volatility.They are not liquidating their positions until clarity emerges on the dollar front.
While, one cannot rule out the possibility of the volatile crude prices from receding somewhat in the near future, driven maybe by a dip in global demand as a result of sustained economic downturn in the US, what does appear is that over the last few years, the equilibrium price of oil has shifted upwards and the volatility has increased significantly, leaving prices vulnerable to fluctuations even due to the slightest disruption in supplies (like the recent one of a cracked pipeline at Tennessee which cut supplies of more than 1 million barrels a day to the US) or changes in demand.
Since 2002, major oil producing countries have been investing in exploration and development. Furthermore, planned gross capacity additions from new projects in non-OPEC countries (including non-conventional sources) would add to supply.Oil-consuming countries have also started diversifying their fuel-mix by switching to alternative sources of energy like natural gas and renewables. The interplay of these forces can drive down the prices of crude oil from the current levels.
On the demand side, while consumption in the past has been driven by OECD countries, particularly the US, much of the current incremental demand is coming from emerging economies, particularly China and India, which contributed more than 40 per cent of the incremental global consumption during 2000-06. Global oil demand is expected to increase to 100 million barrels per day (mbpd) by 2015 as against 85.7 mbpd currently.While oil demand is projected to increase significantly, supply may struggle to keep pace. The production from the existing fields is declining by 4 per cent per annum which means that new capacity needs to be added every year just to offset the decline in existing production.
The depreciation of the US dollar and the worsening US economy are also held as major culprits for the price rise. The falling dollar coupled with the declining stock and credit markets also increases traders' interest in commodities such as oil,which further fuels price rise.Speculative investment by major hedge funds also seems to play a key role on oil price volatility.They are not liquidating their positions until clarity emerges on the dollar front.
While, one cannot rule out the possibility of the volatile crude prices from receding somewhat in the near future, driven maybe by a dip in global demand as a result of sustained economic downturn in the US, what does appear is that over the last few years, the equilibrium price of oil has shifted upwards and the volatility has increased significantly, leaving prices vulnerable to fluctuations even due to the slightest disruption in supplies (like the recent one of a cracked pipeline at Tennessee which cut supplies of more than 1 million barrels a day to the US) or changes in demand.
Thursday, April 03, 2008
Random notes on subprime
The sub-prime mortgage crisis is the major financial crisis of the new millennium whose origin is in the United States (US) housing market. Subsequently, this spread to Europe and some other parts of the world. The gradual softening of international interest rates during the last few years, coupled with relatively easy liquidity conditions across the world, provided for increased risk appetite of investors leading to expansion in the sub-prime market. The word ‘sub-prime’ refers to borrowers (who are not rated as ‘prime’) and who do not have a sound track record of repayment of loans. The risks inherent in sub-prime loans were sliced into different components
and packaged into a host of securities, referred to as asset-backed securities and collateralised debt obligations (CDOs). Credit rating agencies had assigned risk ranks (e.g. AAA, BBB) to them to facilitate marketability. Because of the complex nature of such new products, intermediaries such as hedge funds, pension funds and banks, who held them in their portfolio or through SPVs, were not fully aware of the risks involved. When interest rates rose leading to defaults in the housing sector, the value of the underlying loans declined along with the price of these products. Institutions were saddled with illiquid and value-eroded instruments, leading to liquidity crunch; the crisis in the credit market subsequently spread to the money market as well. The policy response in the US and the Euro area has been to address the issue of enhancing liquidity as well as to restore the faith in the financial system. The sub-prime crisis has also impacted the emerging economies, depending on their exposure to the sub-prime and the related assets.
India has remained relatively insulated from this crisis. The banks and financial institutions in India do not have marked exposure to the sub-prime and related assets in matured markets. Further, India’s gradual approach to the financial sector reforms process, with the building of appropriate safe-guards to ensure stability, has played a positive role in keeping India immune from such shocks.
and packaged into a host of securities, referred to as asset-backed securities and collateralised debt obligations (CDOs). Credit rating agencies had assigned risk ranks (e.g. AAA, BBB) to them to facilitate marketability. Because of the complex nature of such new products, intermediaries such as hedge funds, pension funds and banks, who held them in their portfolio or through SPVs, were not fully aware of the risks involved. When interest rates rose leading to defaults in the housing sector, the value of the underlying loans declined along with the price of these products. Institutions were saddled with illiquid and value-eroded instruments, leading to liquidity crunch; the crisis in the credit market subsequently spread to the money market as well. The policy response in the US and the Euro area has been to address the issue of enhancing liquidity as well as to restore the faith in the financial system. The sub-prime crisis has also impacted the emerging economies, depending on their exposure to the sub-prime and the related assets.
India has remained relatively insulated from this crisis. The banks and financial institutions in India do not have marked exposure to the sub-prime and related assets in matured markets. Further, India’s gradual approach to the financial sector reforms process, with the building of appropriate safe-guards to ensure stability, has played a positive role in keeping India immune from such shocks.
Monday, March 31, 2008
RBI helps mitigate subprime
The private sector banking stocks have taken a beating post rumours of sub prime exposure of Indian banks. The issue came to the forefront in the parliament where it was announced that ICICI bank had suffered marked to market losses on credit derivatives.The stock has fallen 40-50% from its all time high and the negative outlook on banking stocks continues to persist among investors and analysts alike. However the situation cannot worsen from here on given the stringent norms RBI had in place for overseas portfolio investments by Indian corporates. RBI's regulatory forbearance in the banking and financial services sector through a cautioned liberalisation process and a calibrated removal of capital controls has really paid rich dividends for the Indian economy in the wake of the ongoing sub prime crisis globally. RBI's stringent norms on issuing fresh licences to open banking branches abroad and its norms on capital controls exercised through the FEMA act has insulated India from the subprime contagion. The mint street giant deserves all the praise from the Indian public at large for its persistence in what were until recently, in the wake of globalisation, termed "retrogade policies" by various economists. Their cat calls have collapsed along with various investment banks and hedge funds in the aftermath of the global credit crisis. Kudos to RBI for its appreciable act of monetary management.
Inflation heats up the economy
The wholesale price index rose 6.68% in the week ended 15 March 2008, surging from the previous week's rise of 5.92%. The rate is highest since 27 January 2007, when inflation was 6.69%.The week-on-week rise in inflation was seen across all major heads of the WPI with primary articles seeing the maximum rise of 233 basis points.Inflation in primary articles have gone up by 376 basis points within a span of just six weeks. Inflation in the fuel group has spiked by 100 basis points in just a week's time taking cues from the global surge in crude oil prices. Inflation in manufactured products has also surged to its 49 week high of 6.27% in the week ended 15th March 2008 and has moved up by 206 basis points in the first two weeks of March.The headline inflation crossed the tolerance level of five per cent set by the RBI for 2007-08 in the week ended 23 February 2008 itself. It is now within striking distance of 7%.
Based on the above data one can decipher the following :
1. There is a need to augment production and productivity in wheat,rice, edible oil and pulses as the rise in prices of these imported products has been a major driver of inflation in India.The country would be able to insulate itself from rise in global commodity prices only if it becomes self sufficient in the respective commodities.
2. Rise in commodities prices and inflation have become global worries. The price rise in commodities is putting pressure on inflation and thereby curbing growth.For growth to happen in India, we need lower interest rates but with the RBI having a hawkish monetary stance and with the government clear in its agenda on curbing inflation even at the cost of growth, it is highly unlikely that interest rates will come down in the near future.
3. Indian voters are known to be merciless when punishing governments unable to deliver on the price front and things are only going to worsen as the Budget and Sixth pay commission recommendations will result in increased disposable income in the hands of the consumer, which may result in higher inflationery pressures.
4. Lower interest rates are necessary to spur investment activities in the country and at current levels,there is a definite slow down in production and capacity addition plans of Corporate India.The IIP date has also not been encouraging.These supply side pressures are also contributing to rise in manufacturing inflation.Though imported inflation has been a major driver as reflected in the surge in prices of primary articles and fuel prices, domestic factors like high interest rates that have been ruling in the economy over the past one year have also resulted in significant supply side pressures along with demand slowdown.
In this scenario, the best bet for the government would be to reduce tariffs further, better supply-demand management, spur investment activities aimed at self sufficiency, cut back on wasteful spending and refrain from fuelling inflationary expectations.
Based on the above data one can decipher the following :
1. There is a need to augment production and productivity in wheat,rice, edible oil and pulses as the rise in prices of these imported products has been a major driver of inflation in India.The country would be able to insulate itself from rise in global commodity prices only if it becomes self sufficient in the respective commodities.
2. Rise in commodities prices and inflation have become global worries. The price rise in commodities is putting pressure on inflation and thereby curbing growth.For growth to happen in India, we need lower interest rates but with the RBI having a hawkish monetary stance and with the government clear in its agenda on curbing inflation even at the cost of growth, it is highly unlikely that interest rates will come down in the near future.
3. Indian voters are known to be merciless when punishing governments unable to deliver on the price front and things are only going to worsen as the Budget and Sixth pay commission recommendations will result in increased disposable income in the hands of the consumer, which may result in higher inflationery pressures.
4. Lower interest rates are necessary to spur investment activities in the country and at current levels,there is a definite slow down in production and capacity addition plans of Corporate India.The IIP date has also not been encouraging.These supply side pressures are also contributing to rise in manufacturing inflation.Though imported inflation has been a major driver as reflected in the surge in prices of primary articles and fuel prices, domestic factors like high interest rates that have been ruling in the economy over the past one year have also resulted in significant supply side pressures along with demand slowdown.
In this scenario, the best bet for the government would be to reduce tariffs further, better supply-demand management, spur investment activities aimed at self sufficiency, cut back on wasteful spending and refrain from fuelling inflationary expectations.
Monday, March 24, 2008
Titagarh Wagons IPO : Dependant on Railways
Titagarh Wagons is a reputed private sector wagon manufacturer. The company is primarily engaged in the manufacture of railway wagons, bailey bridges, heavy earth moving and mining equipment, steel and iron castings. Railway wagons constitute 89% of the order book of the company and therefore the revenues of this company are historically dependant on one segment i.e: manufacturing of rail wagons. Wagon manufacturing business contributes to 79% of the total income of the company. Wagon manufacturing and demand is a need based activity that arises based on traffic volume and replacement of wagons. The company plans to use the IPO proceeds for expansion and modernisation.There are plans to enter into other segments of wagon manufacture, such as EMU and passenger coach manufacture.
Strengths :
* Strong Investment pipeline of Indian Railways to the tune of Rs.375 billion, demand estimated at 20000 wagons for FY 2008-09. Carrying capacity of railways to increase 40% over the next four years which would mean additionla investment in rail tracks and wagons.
* Plans to upgrade to stainless steel coaches from 2010-11 an opportunity for private wagon players
*PPP investments to the tune of Rs.1,00,000 crore in freight corridors, terminals,logistics and infrastructure in the coming fiscal in railways will propel demand for wagons. Dedicated freight corridors coming up in the different parts of the country will entail the need for high capacity and high payload special purpose wagons to handle bulk cargo. The company with its value added services is well positioned to capitalise on these opportunities.
*Wagon leasing scheme implementation by railways will ensure replacement demand for wagon manufacturers
*Total Order book stands at Rs.753 crore which is 2.65x FY 07 sales and indicates good visibility of earnings going forward.
*The company has just begun exporting wagons to Africa.Its still in the process of exploring relationships with customers in foreign markets. This may emerge as a potential revenue stream going forward.
*The special projects division (which concentrates on value added services to railways and supplying defence equipments as well as nuclear power plant equipments )and the heavy engineering division, though forming miniscule portion of revenues as on date have scope to add to the topline and are steadily pursuing orders from DRDO and Nuclear Power Corporation.
*Realisation per wagon has been improving over the last few years with the reduced dependance on railways albeit the company sells to Indian railways at a significant discount compared to private sector customers.Even adjusting for the free raw materials supplied by Indian railways, there exists a huge subsidy incurred by the company on its sales to Indian railways given the highly competitive bidding prices for wagons. The realisation from private players cross subsidises the margin losses on sales to railways.
Weakness:
*Dependant on a single segment namely wagons and also on Indian Railways policies.
* Competition is significant in the industry with the presence of players like Texmaco, BESCO, Hindustan Engineering, Bharat Bhari Udyog Nigam. With the Railway Ministry deciding to approach international companies for wagon design, the possibilities of competition intensifying in the wagon manufacturing segment is quite high.
*Significant Pricing pressure with resultant negative impact on margins buttressed by increase in raw material costs and inability to pass on the same to Railways, the latter being a monopoly player in India.
*Acquisition of Cimco Birla, a loss making wagon manufacturer, though the same auguments the capacity, operational and financial turnaround seem unlikely at the moment. The same factors apply to the acquisition of the loss making heavy engineering division of Hyderbad Industries.
*Indian Railways have a budgeted investment of Rs.750 billion to ramp up their own infrastructure and are also setting up a new wagon manufacturing plant in Kerala
* Change in Indian Railways procurement policy of wagons to favour the public sector undertakings can adversely affect the financials of the company. The company is not the exclusive supplier of wagons to Indian railways. Therefore supply to Indian railways shall vary from year to year.
*As far as orders procured from Indian railways are concerned, the terms and conditions of the order include free supply of raw materials of high value like wheel sets and bearings. This cushion is not available to the company in case of private customers and the company will be exposed to vagaries in the movement of raw material prices to the specified extent. The cost of wheel sets have risen exponentially over the last few years and constitute 30-35% of the selling price of a wagon. The item as a raw material is also in short supply globally and as a result has a profound impact on the operating margins of the company.The impact of raw material prices on the bottomline of the company assumes significance in the wake of the company placing greater emphasis on orders from private players. The share of Indian railways in the revenue of the company has shown a steady decline over the years.
* Production delays in the past on account of delayed procurement of raw materials like wheel sets have resulted in the company paying liquidated damages to both Railways and private customers to the tune of Rs.2.5 crore.
* Titagarh Steels, one of the group companies is also manufacturing certain wagon related components produced by this company resulting in conflict of interest and may result in loss of orders and revenue in future.
Strengths :
* Strong Investment pipeline of Indian Railways to the tune of Rs.375 billion, demand estimated at 20000 wagons for FY 2008-09. Carrying capacity of railways to increase 40% over the next four years which would mean additionla investment in rail tracks and wagons.
* Plans to upgrade to stainless steel coaches from 2010-11 an opportunity for private wagon players
*PPP investments to the tune of Rs.1,00,000 crore in freight corridors, terminals,logistics and infrastructure in the coming fiscal in railways will propel demand for wagons. Dedicated freight corridors coming up in the different parts of the country will entail the need for high capacity and high payload special purpose wagons to handle bulk cargo. The company with its value added services is well positioned to capitalise on these opportunities.
*Wagon leasing scheme implementation by railways will ensure replacement demand for wagon manufacturers
*Total Order book stands at Rs.753 crore which is 2.65x FY 07 sales and indicates good visibility of earnings going forward.
*The company has just begun exporting wagons to Africa.Its still in the process of exploring relationships with customers in foreign markets. This may emerge as a potential revenue stream going forward.
*The special projects division (which concentrates on value added services to railways and supplying defence equipments as well as nuclear power plant equipments )and the heavy engineering division, though forming miniscule portion of revenues as on date have scope to add to the topline and are steadily pursuing orders from DRDO and Nuclear Power Corporation.
*Realisation per wagon has been improving over the last few years with the reduced dependance on railways albeit the company sells to Indian railways at a significant discount compared to private sector customers.Even adjusting for the free raw materials supplied by Indian railways, there exists a huge subsidy incurred by the company on its sales to Indian railways given the highly competitive bidding prices for wagons. The realisation from private players cross subsidises the margin losses on sales to railways.
Weakness:
*Dependant on a single segment namely wagons and also on Indian Railways policies.
* Competition is significant in the industry with the presence of players like Texmaco, BESCO, Hindustan Engineering, Bharat Bhari Udyog Nigam. With the Railway Ministry deciding to approach international companies for wagon design, the possibilities of competition intensifying in the wagon manufacturing segment is quite high.
*Significant Pricing pressure with resultant negative impact on margins buttressed by increase in raw material costs and inability to pass on the same to Railways, the latter being a monopoly player in India.
*Acquisition of Cimco Birla, a loss making wagon manufacturer, though the same auguments the capacity, operational and financial turnaround seem unlikely at the moment. The same factors apply to the acquisition of the loss making heavy engineering division of Hyderbad Industries.
*Indian Railways have a budgeted investment of Rs.750 billion to ramp up their own infrastructure and are also setting up a new wagon manufacturing plant in Kerala
* Change in Indian Railways procurement policy of wagons to favour the public sector undertakings can adversely affect the financials of the company. The company is not the exclusive supplier of wagons to Indian railways. Therefore supply to Indian railways shall vary from year to year.
*As far as orders procured from Indian railways are concerned, the terms and conditions of the order include free supply of raw materials of high value like wheel sets and bearings. This cushion is not available to the company in case of private customers and the company will be exposed to vagaries in the movement of raw material prices to the specified extent. The cost of wheel sets have risen exponentially over the last few years and constitute 30-35% of the selling price of a wagon. The item as a raw material is also in short supply globally and as a result has a profound impact on the operating margins of the company.The impact of raw material prices on the bottomline of the company assumes significance in the wake of the company placing greater emphasis on orders from private players. The share of Indian railways in the revenue of the company has shown a steady decline over the years.
* Production delays in the past on account of delayed procurement of raw materials like wheel sets have resulted in the company paying liquidated damages to both Railways and private customers to the tune of Rs.2.5 crore.
* Titagarh Steels, one of the group companies is also manufacturing certain wagon related components produced by this company resulting in conflict of interest and may result in loss of orders and revenue in future.
Financials :
*Sales of the company have grown at a CAGR of 43% over the last five years and profits have grown at a CAGR of 51% over the same period.
* Raw Material costs constitute 70-75% of the total revenues of the company. The company has maintained its operating margins at 18% over the last couple of years and PAT margins at 9% over the same period. Margins have shown significant improvement from 2005 after the company started assembling wheelsets at its own plant in Uttarpara. The company has also been aided by free supply of raw materials from specific customers including Indian railways.
*Operating margins and PAT margins are higher than its immediate peer company Texmaco but the latter has a much higher market share and a better track record and a much diversified business model. Texmaco is setting up Asia Pacific's biggest wagon hub in West bengal and commands 30% market share in the wagon manufacturer's segment vis a vis Titagarh Wagons at 18%. The order book for Texmaco also stands higher at 2000 crore at more than 3x FY 07 sales.
Valuation :
Titagarh Wagons discounts its trailing 4 quarter FY07 earnings at 38x at the lower end and 43x at the upper end of the price band of Rs.540-610. If we annualise the half yearly earnings for the six month ended Sept 2007, the PE works out to 24x and 27x forward EPS of Rs.22 for FY 2008.
The only listed peer company being Texmaco is trading at 24x FY 08 earnings after the steep correction in the stock markets. Based on the current volatile market conditions, the pricing appears to be stiff and investors would have been more comfortable with a 20% reduction in the price band to leave something in the form of listing gains on the table. Therefore it is advisable to apply for this IPO at the lower end of the price band. Investors would need to moderate their expectations of major listing gains from this counter, however, stocks like these with good fundamentals and earnings visibility are a definite long term hold.
New Initiatives in Railway Budget 2008-09 that shall affect the Wagon Industry
1. Setting up of dedicated freight corridors and privatising the same to container operators shall increase the demand for wagons from private players
2.All coaches of Rajdhani, Shatabdi and Suburban rail coaches to be made from stainless steel. This initiative shall benefit wagon manufacturing companies that upgrade to meet this requirement.
3.Railways has set a target of 20000 new wagons, 250 diesel and 200 electric locomotives to be manufactured internally/ sourced from private manufactureres
4.Wagon leasing scheme to be operative from 2008. This will ensure continued demand for wagons
5.Railway capex plan for Rs 375 billion for wagon procurement, Rs.750 billion for improving internal infrastructure holds a lot of promise for private manufacturers
6.PPP model to be pursued aggressively by railways and out of the total planned investment of railways to the tune of Rs.2,50,000 crore, 40% of the same is to be harnesssed through PPP model and throws up new opportunties for wagon and locomotive manufacturers.
7. Plans to set up a new wagon manufacturing unit in Kerala is a negative for private wagon manufacturers as it indicates the increasing emphasis of railways on internal manufacturing of wagons and locomotives.
Subscribe to:
Posts (Atom)
Posts
