Six Concrete Ways India Can Build A Better Future

No Comments » Written on August 28th, 2014 by
Categories: Articles

I write for Quartz India, on how India can build a better future by focussing on doing things better.

We pay too little attention to building things better, so that they last, and they cost less to maintain. So that they stay built, and free us up to focus on building other newer things in the future. We often don’t address the “better” piece in a budget and, in order to protect the incumbent, established and inefficient industries, actually disincentivize newer technology.

Here are a few things that we can change.

Making better roads and bridges with high-density polystyrene

The very material that we call “thermocol” is very rigid and tough, at a higher density. It has been used since 1972 in Norway to construct roads, as a filler that can replace soil or gravel, while we widen or build new roads. It resists compression, but the most important part is that it is very light and easily transportable (and can be cut on site). Also called Expanded PolyStyrene (EPS) or Geofoam, it has been used to build fills for bridges, for stadium seating and even for constructing houses.

EPS is light and so doesn’t load the underlying soil, and its rigidity allows for roads that don’t sink easy. And because it’s easy to cut and place on site, it reduces construction time and labour cost by not involving earth moving machinery, doing area-constrained expansion of existing roads and also for building in any weather.

The cost savings might be substantial in terms of reduced labour requirements (more road per person employed)—a highway in the US saw a cost reduction from $1 million to $160,000.

Read the whole piece. Do let me know what you think!

The VIX Is Close to All Time Lows; But Does That Make Options Worth Buying?

No Comments » Written on August 28th, 2014 by
Categories: Options

The VIX has touched close to an all time low at 13.07, and at this point options aren’t just cheap, they’re the cheapest they’ve ever been.

Since the Vix is really the implied volatility of the oncoming month’s options, if we plot the VIX with the actual one month move after the date, we might see if the “low” VIX is tradable. A VIX of 13 or so probably expects the index to move about 3% in the coming month. To give you an example, today:

  • the index is at 7936,
  • the September 7900 call/put are at 156/74,
  • which implies a range of 7630-8130, if you sold both and got a premium of Rs. 230.
  • which is about 3% in either direction.

So technically a low Vix (15 or below) means that 3-4% moves are probably acceptable, but anything more should give a straddle buyer a profit.

Let’s see the plot:

image

 

I’ve shaded the “non profitable” zone of +4% to -4%. If a one month move lies within that range it’s not all that great for an option buyer.

In the last 1.5 years, we’ve hit the below 15 range four times.

  • In Mar 2013, when we hit the 13 level, the Nifty moved -6% in the month. (Put option buyers would have done well)
  • In end-April 2013, a similar move of the VIX saw the index move about 1% to 3% (Not good)
  • In March 2014, the move was beyond +5% in a month, while the VIX was low. (Call buyers positive)
  • ANd now, since July, the VIX has been falling. We don’t know what the Index will look like a month later.

There are other smaller data points out there, but I think there’s no clear trade this way or that.

But of course these are too few data points, so let’s take a longer term look.

image

Again, here, the VIX shows it was benign in Oct 2012 to March 2013 (mosly under 15) but the one month index move wasnt quite much.

It’s a little too early to say this but we are probably going to see some volatility in September. But will it be enough to cover a 240 move in either direction?

Private Banks Have Most Frauds, But PSU Banks Get Hit For The Largest Amount

1 Comment » Written on August 27th, 2014 by
Categories: General

Data from RBI Deputy Governor, K C Chakrabarty's speech to analyse the numbers behinds Financial Frauds that were committed.

Fraud_03

On a year-on-year basis, we can see that the number of frauds are definitely reducing; 24,791 in 2009-10, to 13,293 for 2012-2013. Seems healthy.

But hang on! Look at the actual rupee value of these frauds over the last couple of years; it has been steadily but surely rising. Up from Rs. 2,037.81 cr. to Rs. 8,646 cr over the same period. That’s a CAGR of 43.52%! So it could be that our supervisory system is becoming really potent at picking out the smaller frauds, but are missing out on the really large ones. Look at it this way:

Fraud_04

Truly staggering to think about it; the defrauders are now 8 times more potent than they were 4 years ago!

Now we might be inclined to dis-regard these numbers thinking, hey that’s just a small number when you’re talking about banks; what is Rs. 65 lakhs or even a crore to them! Remember, these frauds affect any person who avails a bank’s services, that is the common man (Aam Aadmi to echo last year’s flavour of the season). Such numbers make huge difference to a single individual, and as such cannot be taken lightly.

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Let’s dissect these numbers further, to see how individual participants in the banking industry have done (or ‘not done’ depending on how you view frauds):

Fraud_05

 

Fraud_06 

Of the total 1,69,190 cases involving the banking sector:

  1. Nationalised Banks (there are 26 of them incl. SBI and its associates) accounted for 17.53% (29,653 incidents). However, the value of these incidents amounted to 83.01% of the total, i.e. Rs. 24,828 cr. The massive scale of nationalised banks pretty much ensures that frauds typically are of very large sizes; these guys had an average fraud per case of Rs. 83.73 lakhs! Truly behemoths in this criterion as well.
  2. Old Private Sector banks (there are 13 of them) reported 2,271 such cases (1.34%). Again, the average fraud per case was very high at Rs. 75.20 lakhs, resulting in them accounting for a share of 5.71% of the total fraud amount.
  3. New Private Sector Banks (there are 6 of them) had 91,060 incidents; that’s 53.82%! However, the average fraud per case was much smaller (Rs. 2.35 lakhs) and hence these guys contributed just 7.16% to the total fraud amount.
  4. Foreign Banks (there are 43 of them) had 46,206 cases (27.31%). Again, the average fraud per case was lower at Rs. 2.67 lakhs, bringing their contribution to just 4.12% of the total amount.

Fraud_31

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MA20 Update: Short Term Weak Reversal Visible

No Comments » Written on August 26th, 2014 by
Categories: Premium


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Rulings on Cars and Coal Will Take Their Toll, Haunted by the Past

3 comments Written on August 26th, 2014 by
Categories: Commentary

Two rulings have spooked markets yesterday, and the impact continues today.

First the Supreme Court declared that all coal block allotments since 1993 were arbitrary, did not follow due process and therefore are illegal. It will decide what to do with them on 1 September. We don’t really know if they will cancel such allocations totally, reassign them through auctions, impose a penalty, or demand a renegotiation of rights.

The most impacted seem to be Jindal Steel and Power, which lost 10% yesterday and is down about 4% today.The stock has fallen from Rs. 292 to Rs. 242. The company has existing operational coal blocks and also upcoming projects based on new allocations. These are all suspect now.

 Hindalco too lost 10% yesterday but has recovered a bit today. According to a MorningStar analyst, Piyush Jain, the company has a 10%+ increase in costs if it didn’t have a captive coal block for its upcoming smelter.

Tata Steel and many other metal players too have been hit. Power companies like Tata Power, Adani power and Reliance Power are down too (most Indian power generation capacity is coal based). Financiers like PFC and many banks have been hit.

Our view: This is going to unravel on September 1, so we’d wait to see the impact. Right now, there is some bottom fishing going on in stocks like Hindalco, and those may be bets on the Aluminium cycle (prices are starting to go up) which might make up for the margin pressure.

The second was an order by the Competition Commission of India (CCI) fining car companies - nearly all of them - a collective amount of Rs. 2545 cr. They supposedly colluded to deny access to independent repair workshops to their spare parts and diagnostic tools. These were restricted to their own service workshops (or their dealers’) which amounts to a monopolistic practice.

Our view: Auto stocks aren’t down so badly because the CCI order may get challenged. However this is 2% of their turnover, which might anyhow not be a big enough amount to fret about; these companies will challenge the decision but even at the extreme it won’t hurt them enough.

What’s happening, though, is that some of these chickens are coming home to roost. While the situation is addressed - and hopefully we will get free and fair auctions - we will see power plants scampering around to get coal which they thought they owned but no longer do. This might hurt banks much more than it hurts these companies, who at the very least have an excuse that they couldn’t have predicted this.

The banks though will be worried if the cash flow situation at the large companies deteriorates; they already face challenges in infrastructure, real estate and power, and this judgement could create hurdles for what they thought were more sound investments.

It’s also quite worrying to see rulings on stuff as long past as 1993. The coal block piece is effectively a retrospective issue, but then it’s been in the courts for over a decade now. One way to deal with things is to charge heavy penalties but to keep allocations going; this won’t hurt things going forward but they pay for the mistakes of the past. The other way is to charge penalties and at the same time, ask for complete rebidding and auctions of all blocks. Let’s see what the supreme court does.

Nifty EPS and P/E Chart: EPS Growth Dips to 10%

No Comments » Written on August 25th, 2014 by
Categories: Nifty

Nifty EPS Growth drops suddenly to 10% in the last few days. The trailing 12 month P/E (non consolidated) is at 20. This kind of thing happens a lot; but it’s remarkable that for the last seven years, our P/E ratio never went below our EPS growth rate (trailing).

image

Even the five year compounded growth rate on EPS is still at 11.4%, which is quite low considering these are the top companies in the country.

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We’re at all time highs on the index, but EPS growth doesn’t look quite that attractive. One of these days I will do the hard work of getting consolidated EPS numbers and tracking growth over time.

IPO Analysis: Snowman Logistics, a Cold-Chain Player (Premium)

No Comments » Written on August 25th, 2014 by
Categories: Premium

Header

Here's a post from the Capital Mind Site that we thought would be of interest in your mailbox, as the IPO starts tomorrow.

Snowman Logistics is offering shares to the public in an Initial Public Offer (IPO)

• 26th to 28th August 2014

• 4.2 cr. shares on offer, 10% for retail (Up to Rs. 200,000 investment)

• Price: Rs. 44 to Rs. 47

• Total IPO size of Rs. 200 cr. or so.

• Values the company at around Rs. 800 cr. (25% will be in the public offer)


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IPO Analysis: Snowman Logistics, a Cold-Chain Player

6 comments Written on August 25th, 2014 by
Categories: IPO

Snowman Logistics is offering shares to the public in an Initial Public Offer (IPO)

  • 26th to 28th August 2014
  • 4.2 cr. shares on offer, 10% for retail (Up to Rs. 200,000 investment)
  • Price: Rs. 44 to Rs. 47
  • Total IPO size of Rs. 200 cr. or so.
  • Values the company at around Rs. 800 cr. (25% will be in the public offer)

What does it do?

They are largely into cold chain warehouses and distribution. Snowman owns 23 temperature controlled warehouses, in most big cities of India. They store and transport food items, including perishable (which is why they need refrigeration and temp control).

It works with some marquee clients like HUL, McCain and Ferrero (you’ve eaten the Rochers?)

Gateway Distriparks owns 54% of the company. Mitsubishi owns 15%, and Norwest (a PE Fund) owns 14%. The investors seem to be reasonably well informed.

Where will the money go?

They’ll build 6 new temperature controlled warehouses and two ambient warehouses with about Rs. 128 cr. and need 8 cr. for working capital. The rest is general stuff.

Revenues

Revenues have grown nearly 40% to 155 cr. in FY 2014. 

 

Revenues_SnowmanEBIT_Snowman

They have an EPS of Rs. 1.96 in 2014, which values the company at about 24 P/E. Profit growth has been not so great; At Rs. 23.27 cr. in FY 2014, versus Rs. 19.9 cr. in FY 2013 (Growth: 17%)

PBT_SnowmanNetProfit_Snowman

 

Whoa! Net Profit Higher than Profit Before Taxes?

PBT fell from the earlier year largely because of high finance costs since the company took a bridge loan of 76 cr. But then how come profit AFTER tax is higher?

The company gets special tax treatment because it’s into cold chain warehousing. New cold chain warehouses get a 150% deduction on the capital expenses on set up. But they have to pay minimum alternate tax (about 20%) on the profits BEFORE this deduction. On the profit before taxes they pay MAT and add the “deferred tax credit” which means net profits go up.

This complicates the depreciation angle too. If you claim a deduction on the capital expense of something, you don’t get to claim depreciation in the tax statement. But depreciation does apply to the item as it has a life and must be replaced, so you have to calculate the depreciation and put it back as a “deferred liability”.

This can get confusing.

In effect, the net impact is to reduce income and taxes in the initial years (because there is a deduction for the expense on the plant) but in the longer term growth from the investments will drive profits (not a deferred tax asset).

This complicates valuation.

Do you value this company as a multiple of (currently depressed) earnings? Are these tax asset issues sustainable?

And then, there’s debt. The company has Rs. 130 cr. of debt. Some of this will be paid back through the IPO proceeds (it’s been taken to start work on the new stuff). With infrastructure status the company might get lower cost debt, and perhaps longer term debt as well.

There’s not that much in terms of listed competition, but there’s Concor with 20 times trailing earnings or Gati with 30+ P/E. The company is in the middle, but it’s only business is the cold chain.

Our answer is: it depends. Logistics, especially cold chain, is a a good business, as distribution and storage become more and more important to the Indian food supply chain.

Our View

The company valuation is reasonable. It’s not cheap, and it’s not too expensive.

In the longer term (3 years+), assuming the company can push up earnings 40% to 50%, we are likely to see cold chain warehousing become really big. The concept is sound - you want to keep produce fresh, and transport it in refrigerated vehicles (eg. Milk) so you will need the Snowman kind of logistics company. In the medium term, as more and more food gets processed, stored and forwarded, the company should get a great deal of revenue.

The IPO market is just starting up and it looks like nearly everyone advises a buy on the counter. This is dangerous (watch out for the mad crowd) but it’s not yet looking insane. This stock isn’t ludicrously priced, and the industry is actually worth investing in.

The risks are that warehousing costs rise a lot due to, say, increase in diesel prices, or transport costs. Or that the tax policy goes through some major reversal. They are low, in our opinion.

You are unlikely to get a lot of shares applying for the IPO, but it may be prudent to invest a small amount anyhow, since all they will do is block the amount in your bank account for the period even if you don’t get allocation. As the company releases results and progresses we might add more to our allocation as well.