Archive for July, 2006

GMR Infrastructure IPO: Not worth buying

6 comments Written on July 28th, 2006 by
Categories: IPO
GMR Infrastructure is coming out with an Initial Public Offering (IPO). The price band is Rs. 210 to Rs. 250. Retail investors will get a 5% discount on the discovered price, and have an option to pay only Rs. 125 per share on bidding with the balance, if payable, upto 12 days after listing. But is the IPO worth it?

Business
The company is in the infrastructure business. GMR Infrastructure itself is simply a holding company for all the other companies as vehicles. For instance, the Delhi International Airport contract is bagged by a subsediary company ("Delhi International Airport Private Limited") in which GMR holds 50.1%.

There are a number of projects that the company does - very large infrastructure projects. GMR builds roads, power plants, airports and the like. 85% of current revenue comes from the power sector. Two of its road projects are currently operational with revenues of around 150 cr. The remaining projects (four in number) will be operational only mid 2008.

GMR is currently help build two international airports: Delhi and Hyderabad. These will finish only after 2008, with visible revenues after 2009.

Financials
Net profit for 2006, 2005 and 2004 was Rs. 70.5 cr, 69 cr and 68 cr respectively. This is an average increase of around 2% per annum.

Earning per share (EPS) is Rs. 2.5 for 2006.

Revenues for the last three years grew at about 4% p.a. with 2006 generating 10,900 cr.

Debt stands at around Rs. 2500 cr. This is approximately Rs. 80 per share.

Verdict: Do not buy
I do not recommend this as a buy for a number of reasons:
1) P/E is too high at 98: For a company that has grown only 2% in the past three years, the price is way too high.

2) Debt is too high: Only Rs. 55 cr. of the total debt of Rs. 2500 cr is being retired from IPO funds. The interest burden, in the light of increasing interest rates, is likely to hurt bottomline growth.

3) Growth is too far away. All the road and airport projects, where the IPO funds will be deployed, are going to start generating revenue only in 2008. This means they will be visible on the FY 2009 statements, so the accuracy will only be known then. This is too far away for a 98 P/E stock!

4) Government risk: Nearly all their revenues can be blocked by government inaction or interference. Imagine the government changes and dilly dallies on some projects - in the past this has happened many times, so chances are that this will continue. Increasing communist influences in the government will also try to block private participation and limit GMRs profits.

5) Limited growth: From what I see, their net profits in 2009 will be around Rs. 240 cr. This gives us an EPS of Rs. 7.5 per share in 2009. Even that means a three year forward P/E of 33 - way too high!

If you really want this stock, please choose to purchase it between 3 to 6 months after the IPO - low visibility stocks (like Reliance Petroleum) tend to come down to their expected values. I would recommend a buy only if the price is between Rs. 35 to Rs. 50 today. Anything above that is overpriced.

My recommendation: Do not buy into the GMR IPO.

Posted in IPO

ICICI Bank Experiences

3 comments Written on July 24th, 2006 by
Categories: Commentary
Arjun Prabhu's post on bad experiences with ICICI Bank seems to have resulted in a barrage of opinions, flames and "me-too" comments on ICICI Bank's apparently glaring lack of customer service fundamentals. There are 242 comments as of now, and this post is #1 on a google search on "ICICI Bank experience".

I'm not surprised. In their quest to become the top bank in India, organic growth is potentially fraught with over promising and under delivering. Complaints in that post range from NRI money transfer hold ups to Indian customer accounts tacked with arbitrary fees and refused refunds. The modus-operandi seems to be "Confuse your customer".

A customer center service answered by uninformed, clueless agents.

Tough posturing on money they expect to receive: Thugs to repossess vehicles, threatening letters without supporting documents, requesting money before raising bills.

Raising up their hands when they screw up. They seem to do that with endless procrastination, playing the blame game and passing the buck. This is ridiculous but of course, works for them like a charm.

This is not "Hum hain na".

This is "Hum Hain?" "Na."

Note: To those that have complained:

  1. Always make your complaint in writing. Lots of people write on this blog, and call up etc. but that is no way to register a complaint. Write in, FAX it and get an acknowledgement.
  2. Never sign unfilled forms; Someone complained that an agent had ticked a "Premium" account instead of the account they needed, but admitted to having signed a blank form.
  3. Loan complaints and others: visit the Banking Ombudsman site to register a complaint if you think the bank is being unfair.
  4. Don't complain that you are "forced to have an ICICI account" because your company remits salary there. Jeez. You can get another bank account, and transfer money using a cheque every month. Nobody forces you to use the bank's other services, for heaven's sake.
  5. Stay away from oral promises and get EVERYTHING in a written form before you sign anything.
My personal experience: I opened a "three in one" account with ICICI bank four years ago, paying Rs. 750. A year later, I had not used either of the three - Savings, Demat or Trading accounts - and therefore, after a year, asked them to shut down the account (written and oral). They asked me to pay another year's fees instead; which I promptly refused. They've been sending me bills ever since, and I've relegated them to the waste paper basket. One day they'll come for me, I guess - and you'll see a big blog post that day.

Posted in Commentary

Should you rent or buy?

14 comments Written on July 16th, 2006 by
Categories: RealEstate
The question one often asks when one gets to a comfortable state of personal affairs is: Should I rent a house or buy one?

All your friends are buying houses, or at least have "booked" them. There are good sentimental reasons to do so - owning a house ensures a tiny element of piece of mind - you can change things you don't like, like the drawers in your kitchen cabinet, or the paint on the walls, or add wooden flooring or a bathtub and such. But does it make financial sense to do this?

There are some advantages of each, but I shall take the Indian perspective. Here's where we are with Renting:

  • Renting in India typically costs less than 3% of a house value. Meaning, if a house's market value is Rs. 50 lakhs, the rental will be around Rs. 15,000 per month.
  • Tax breaks are available: Around 40% of your basic salary (or the rent, whichever is lower) is deductible from your taxable income.
But there are tax advantages for buying too. Here's where we are:
  • Payments on Interest upto Rs. 150,000 per year is tax deductible.
  • Principal repayments are tax free upto Rs. 100,000 per year. (Section 80C)
Let's see the comparison for a Rs. 50 Lakh house. I'm assuming that if you were to buy this house you will have a certain amount as "down payment" and pay a much higher EMI per month than the corresponding rent (Rs. 41,000 EMI, vs. Rs. 15,000 rent). If you rented, the extra money goes into the bank as a saving, and so does the down payment.

The return analysis on this, is in an excel sheet I have built, but here's the summary:

Key points to note:

  • Cash flow wise, Renting is better for the first 8 years.
  • After 8 years, buying is better, and after twenty years, the bought house is better by Rs. 1.4 crores!
  • The equation is skewed to some extent because of the limits on the tax saving. The limit of Rs. 150,000 on the interest is too low - for the first 15 years, you pay more than 150,000 interest per year.
  • Even the principal paid is more than 100,000 per year, so the tax saving there is limited too.
(Download the real estate calculator excel sheet)

If you're in for the long term you should buy, but remember this: If you think the prices will stabilize or come down in the next eight years, delay your decision to buy. After all, renting is far more cheaper and you will have much more money saved up in the longer term.

Also, be more aggressive in your investments to give you a better return, and therefore a better down payment.

Finally, remember that owning your house is important for sentimental and personal reasons too. The happiness you can derive from having an own house perhaps outweighs financial reasons.

Posted in RealEstate