Archive for January, 2007

Birla Sun Life Tax Relief 96 – Rs. 26 dividend declared

No Comments » Written on January 16th, 2007 by
Categories: Commentary, MutualFunds
In continuation with my earlier post about Birla Sun Life Tax Relief 96 - a tax saving mutual fund scheme - announcing big dividends, I saw a newspaper advertisement today that they have announced another dividend of Rs. 26 per unit, with the record date being 19 January 2007. The current NAV is around Rs. 169 per unit, and will fall by Rs. 26 on 19th January.

Also, read a DNA India article about big dividend offers.

Posted in Commentary, MutualFunds

GBN IPO Analysis

7 comments Written on January 16th, 2007 by
Categories: IPO, Stocks
Global Broadcasting Network (GBN) is coming out with a primary issue (IPO):

Total money needed: Rs. 105 cr.
Price band per share: Rs. 230(LB) to Rs. 250 (UB)
Shares offered: 45.65 lakh (LB) or 42 Lakh (UB)
Total shares post IPO: 2.71 cr (LB) or 2.67 cr (UB)
Period: 15th - 18th Jan 2007

LB = Lower Band, UB=Upper Band

What is GBN?
GBN owns and operates CNN-IBN, an English News channel focussed on India. The Promoters of the company are TV-18 and Raghav Bahl, a well known media personality. Other known personnel are Sameer Manchanda, Rajdeep Sardesai and Haresh Chawla, who are part of the top management of the company.

Loss making company
The company has made a 46.5 cr. loss in FY 2005-06 and a 25.8 cr. loss in the first six months of FY 2006-07. They are also cash flow negative meaning there is no current turnaround, so I estimate this full years loss to be around 50 cr. Adding them up they have about a 100 cr. loss, which is around Rs. 40 per share, over two years.

Net worth is very low
Current networth is about 42 cr. Going forward if they have another 25 cr. loss in the last six months, the networth will drop to Rs. 16 cr but with the IPO proceeds of Rs. 105 cr. to Rs. 120 cr. or so. This is about Rs. 45 per share, and

I don't see a turnaround happening very soon, so it may just happen that the networth will be seriously eroded.

What is the new money being used for?
46 cr is to buy a 49% stake in BK Fincap, a holding company that has an interest in Jagran TV, the owner of the IBN-7 Hindi News channel.

Another 25 cr. will be used to retire a loan from ICICI bank.

The remaining money will be used to fund corporate expenditure, and to pay off the expenses for the issue.

Investment in BK Fincap
46 cr. will be invested in BK Fincap, which is an indirect 49% investment into IBN-7, a Hindi news channel. Unfortunately this has also been making losses, at about the same level as CNN-IBN itself - 25 cr. in the first six months of FY 2006-07. Further, IBN-7 is in the same business (TV News) as CNN-IBN, and will have similar turnaround times - so my guess is that this investment will take a very long time to realise any profit, probably greater than 5 years.

Additionally, the investment will be less than 50%, with the actual control being with the Gupta group. So for 46 cr., CNN-IBN will get less than 50% of a company that has more than 66 cr. of accrued losses.

This may be something that may see a return over 5 years or more, and nothing at this point is very visible.

Repayment of loan to ICICI bank
25 cr is to be used to pay back a high interest loan from ICICI Bank. The loan has a 10% interest currently, and the rate can change every year. There may be a pre-closure charge but they haven't mentioned how much. A 3% charge which is common for retail loans will be a further Rs. 75 lakhs spent on pre-closure. But closing the loan is a good thing because it is a 2.5 cr. hit every year, and will reduce losses by around 5%. Additionally interest rates have risen, so keeping debt costs lower is definitely advised.

There are two other big loans - 32 cr. at 9% from ICICI bank, and about 10.2 cr. credit facility from Yes bank at 10.5%.

Remaining money
After the loan repayment, investment in BK Fincap and issue expenses, around 30 Cr. will be left over. This is not enough for much - the company spends that much on production and admin costs in 6 months! Given that the cash flow is so highly negative, and that losses are already high, this 30 cr. provides very little buffer for operating expenses.

What will happen if they need more money to fund costs? I don't think revenues will go up drastically in the near future. They will have to take another loan, perhaps at a higher rate (since interest is already high) or go in for a secondory public issue. Either way investors will suffer.

No upper cap for issue expenses
The IPO offer document has no upper cap for the issue expenses. I would imaging that at the most this should be 5-6 cr. but it has not been mentioned. I don't like the no-upper-cap bit, because it gives the company and the merchant bankers the freedom to take more money as they like it, and in the process, the investors are harmed.

I don't know if SEBI requires an upper cap of expenses as a % of the issue price, but it must be made mandatory. Why should investors not know about such costs beforehand?

High Salaries and remuneration
Sameer Manchanda has been promised Rs. 5 cr. as a one time payment when the company makes an initial offer. That's 5 cr. of the IPO money down. Manchanda and Rajdepe Sardesai draw over Rs. 3 cr. as remunerator (each), while most of the other top brass receives less than 10 lakhs!

It's a little disconcerting to see such high salaries in the face of such bad financial performance. On a different note: Mr. Haresh Chawla, the joint managing director of the company along with Manchanda, and who has similar responsibilities as Sardesai and Manchanda, draws no salary! While a no-salary-until-profitability approach works, it should not be done by one person while the others draw huge sums (3 cr each) as salary - it should be followed by all top management.

Does not own the web site
GBN has earlier transferred the ownership of it's web site (www.ibnlive.com) to a promoter group company, Web 18 Software services limited. GBN retains about 15% equity in that company though. But the transfer of the ownership means that GBN will not get any advertising revenue from the web site, and perhaps not much from any of the other subscription services offered.

The web site transfer is a shame. I think the IBN Live website was one of the best in the industry and could have generated enormous value going forward, both advertising and subscription related. But they've closed that door.

Competition
The offer document says CNN-IBN has done better than its competition in the English news channel category. I'm not sure what to believe here, but I believe the news channel industry is quite hotly contested, between all the different language options - just Hindi and English channels include Star News, NDTV (2 channels), CNN, BBC, Headlines Today, Aaj Tak, Times Now. Then there are tons of regional language channels, most of which provide a local flavour. Plus you can add the business news channels you have NDTV Profit, CNBC TV18 and CNBC Awaaz; the stories tend to overlap.

This is mega competition, and there may be no way to price yourself higher. Further, with CAS and DTH coming up, this channel will have to offer itself free or at a discount to subscribers, in my opinion.

Price of the issue
The issue is priced at Rs. 230 to Rs. 250. This gives it a total valuation of Rs. 675 cr at the upper band, which is quite high considering it makes big losses and has only one channel (One and a half if you consider the half ownership of IBN-7). There is very little networth to talk about, and the return does not look positive in the next two-three years. I think the share should have been priced at around Rs. 60 or so, a slight premium to the forward networth. Rs. 230 to 250 is simply too expensive.

Current bull run
This current market is in a bull run and may provide very high valuations to the company based on sentiment. Fundamentally, this stock isn't worth investing yet, but if you want to take advantage of short term momentum, this may provide an opportunity. However, as shown in the Cairn IPO, such a strategy might backfire. Investors are getting smarter.

Scarcity
Only about 44 lakh shares are being issued. Existing shareholders are locked in for one year to three years, so their shares will not be available for purchase immediately. This means there will be very few shares available, so that may drive up prices. Again, such ideas are not fundamental; they are driven by momentum. Eventually sanity must prevail.

Also note that because the issue is for only Rs. 105 cr. there will probably be oversubscription in the market. That means if you put your money down right now, you will end up getting fewer shares than you bid for; and that will drive lower absolute returns.

My Verdict
Don't buy. If you really like this company, like I do, wait for six more months, till the fiscal 2006-07 results are announced. Based on that, you can take a call. Of course, if you are a momentum investor or want to take advantage of the scarcity of the issue, you can attempt to take a call - my analysis is purely fundamental.

Other Analysers:
Hindu Business Line says Avoid; valuations are higher than NDTV which has more channels, an established base and good advertising revenue when there was no competition.

"K", a blogger, says GBN is not on Tata-Sky, and not free on CAS, which is a negative for shareholders.

Murky Waters Research mentions the IPO, but straddles the fence, giving no real verdict.

Dalalstreet.biz recommends a buy-and-hold for long term, risk taking investors. But the author will personally skip the issue because very low allotment is expected. Plus, he doesn't like the registrar, Intime.

Posted in IPO, Stocks

Don’t believe the headlines

4 comments Written on January 11th, 2007 by
Categories: Uncategorized
Look at the following two headlines: These are headings from the same web site, and it conveys the Q3 2007 results of two companies, Infosys and Sintex.

If you go by this heading you will think that Infosys has had a lacklustre performance but Sintex has done excellently.

But the problem is - each company has been reported differently! Infosys has been reported on a Quarter on Quarter (QoQ) comparison, that is, Q3 2007 results compared to Q2 2007.

Sintex, on the other hand, has been reported on it's Year-on-Year (YoY) performance, i.e. Q3 2007 compared with Q3 2006.

This is not clear when you look at the headings - ALWAYS look inside results to see the true performance.

Comparing apples to apples now, here is the performance of Sintex and Infosys:

QoQ
Infosys: +6%
Sintex: -17.8% (Negative, earlier quarter had higher profits)

YoY
Infosys: +51%
Sintex: 27%

You see how different it is when you have the real picture? Don't trust the headlines; do your own research.

Posted in Uncategorized

Birla Sun Life Tax Relief 96 – beware of dividend pushers!

9 comments Written on January 11th, 2007 by
Categories: MutualFunds, PersonalFinance
A number of mutual fund distributors and advisors are hard-selling Birla Sun Life's Tax Relief 96 scheme, saying that they will give 1000% dividend in the next four months! Check out one blogger who has mentioned it, and innumerable forums in Orkut and Online groups that peddle this information.

Beware of such dividend pushers. Let me tell you what is good and what is bad about this situation.

What are they pushing?
That this mutual fund will pay out Rs. 100 (1000% of the face value of Rs. 10) as dividend. The NAV on December 1 was about Rs. 194, which, after the dividend would come down to Rs. 94 or so. But the dividend was not a one-shot dividend: It would be given over four months. 1st 250% was in december, and then 250% over Jan, Feb and March 2007.

Promptly, Birla Sun Life announced a 250% dividend on December 4, 2006. The record date was December 8, so you could purchase the fund till that date and receive the dividend.

Now why is it supposedly a good buy?
Because if you need to save tax under section 80C, you can lock in Rs. 100,000 in a tax saving mutual fund for three years. To many people, this is a lot of money to keep locked in.

So if you invest Rs. 100,000 at an NAV of Rs. 194, and get back Rs. 100 as dividend, you are technically getting back Rs. 50,000, and enjoying the tax benefits on the full 100,000. That is good stuff, isn't it?

So how does the distributor benefit?
Simply by getting more commissions. Firstly funds offer commissions on the money invested (2.25%) and then they pay the distributor on every year that the money stays with them (minimum three years, usually 0.5% or so each year). Obviously, this is great news for distributors, so they will peddle this fund. The blog I mention even uses wrong mathematics, by assuming at the end that your initial investment stays the same, and you get dividends. The initial investment comes down by the amount of dividend paid, so net-net you are in the same position.

Why would Birla Sun Life do such a thing?
Before this announcement this scheme had only Rs. 59 cr. as assets. Now this is a very small amount, and fund managers get paid as a percentage of assets managed. Therefore the only solution to make more money is to increase the assets managed; So they can tap on the traditional Indian investor mentality of loving dividends regardless of what it means, and can announce such a scheme. In fact it has worked! From 59 Cr. on November 30, the fund size has grown to Rs. 194 cr. on December 31 - an increase of 134 crores!

Remember, making money is not at all a bad thing, and I encourage them to do so. In fact this scheme has certain good things about it which I will mention later. But there are some very bad things too.

Firstly, announcing dividend for four months later is ILLEGAL. SEBI rules state that you can announce a dividend only five days before the record date. Birla Sun Life has never revealed that they will pay such a huge dividend - only their distributors have - so technically, they are absolved of any blame.

Secondly, for you the investor, if you invest in this fund, you can never be sure that they will announce this dividend! If you are depending on the dividend to meet money requirements, you'll have to wait and hope and pray that they do make this announcement. Think about it, it's your own money and you are hoping and praying that they will give it to you. Not a good situation to be in.

Thirdly, dividends in mutual funds are not the same as dividends in stocks. Read my Introduction to mutual funds article to understand how dividends work. So advertising a fund as "great dividend" is no big deal, it's your own money they are giving back. Stocks on the other hand can give you money which is not factored into the price, so for stocks dividends do add value. Not so for funds.

Finally, the concept of 1000% dividend is ridiculous. You may think that this is 1000% of your money. It is not. It is 1000% of the face value, which is Rs. 10. The current price may be hugely different.

What is good about it?
Well, let's assume that they really do declare Rs. 100 as dividend. If you had invested before December 8, you'd get Rs. 100 back out of the Rs. 194 paid for the fund. That means you would have half your money back, but enjoy the full benefit of the 80C deduction. So let us say you have only invested Rs. 50,000 in 80C products, but have only Rs. 25,000 left. If you had invested here, you can borrow another Rs. 25,000 temporarily (from your friends or family), put it in this fund and by March you will get Rs. 25,000 money back and you can return it. But that rests on too much hope that they will surely declare the dividend and so on. Scary.

Also the remaining money is invested in the fund, right? So how is this fund? Is your money safe?

Birla took over this scheme from the erstwhile Alliance Mutual Fund. Therefore fund management has changed (in early 2005). In the last year, the fund has returned 31%, which is far lesser than the Sensex, but much better than most other tax saving funds. In fact, as of today Value Research Online's ranking check shows it as 3rd in the category for 1 year returns. So perhaps the management change has really helped, and I think your money will be in good hands.

So what do I do?
They have not yet announced any dividend for January. Let me ask you to only act when they announce a dividend, not earlier. You will get five days after that announcement (usually), to be able to buy - they will also announce the record date when they announce it.

If they announce a Rs 25 (250%) dividend in January, ignore it - do not buy. Current price is about Rs. 167, which will then fall to around Rs. 143 after the record date. Then in February, if they announce a 250% dividend, ignore again, do not buy. The NAV will go down to about Rs. 120. (Assuming there is no growth in the fund at all, for simplicity's sake)

Later in March, if they announce the last 250% dividend, then go ahead and purchase it. At a price of Rs. 120, you will get back Rs. 25, which means if you put in Rs. 100,000 you will get back Rs. 20,000. This is not as good as the distributors promised, but it is risk free, because you buy only after the last announcement and before the last record date.

But I wish Birla Mutual fund announced one big dividend, rather that four installments. It's stupid to do this four installment business, and very investor unfriendly.

Posted in MutualFunds, PersonalFinance

LinkFest #6: Resolutions, Funds and Buffet

1 Comment » Written on January 5th, 2007 by
Categories: MutualFunds, Readings
Seven Resolutions for mutual fund investors in 2007 (MoneyControl)
Sanjay Matai tells you seven things to remember and follow: Be wary of NFOs, Share prices and NAVs are not the same, don't time the market, don't look at dividends, invest according to needs, balance your portfolio and of course, remember rules 1 to 6 through this year. I like the concept but I disagree with two things: I don't recommend "balancing" your portfolio, and I don't recommend not timing the market. Why?

Balancing portfolios is not a good idea. Stay overweight on equities if you can take the risk, and stay overweight on debt if you have huge loans to take care of. Timing the market may sound insane, but it is not very difficult to know when the market is overbought or oversold to a large extent. Even a strategy as simple as comparing the Sensex PE with the projected sensex earnings growth - if the former is higher, sell, if the former is lower, buy - will work to your advantage. I think we just need to get smarter.

Index funds: Tracking errors galore?(Value Research Online)
Index funds should closely track the index they are linked to. Yet, many Index funds in India don't seem to! Some Index funds have bigger cash reserves than necessary, some others have underperformed the index by 12-13%.

Reverse Mortgages (Economic Times)
Living in an owned property is a liability - and in your old age, you have little use for it as an investment - after all, if you sell it, where do you live? Renting is a choice but every year you have the fear that the landlord might not extend the lease. Solution: Reverse mortgage your own house to a financial institution, and have them pay YOU in installments, every month. If you want it back, you just have to pay them the money they gave you, and if you die, the institution sells your house and distributes the remaining money among your heirs. But read through the rules carefully.

The Warren Buffet Story (Moneycontrol)
Some interesting details about one of the greatest investors of our times. What can I say? Read this article.

Avoiding miskakes and making safe investments (Amar Pandit)
A set of things to do if you want to avoid common mistakes in investing. I agree with Amar in a lot of the things he says, except where he does not recommend timing the market. But the rest of the advise is sound, and I'd like to emphasise one thing: Become a smart investor. And focus on "smart".

Earlier Linkfests: Linkfests: 1, 2, 3, 4, 5.

Posted in MutualFunds, Readings

Value Cost Averaging

15 comments Written on January 4th, 2007 by
Categories: MutualFunds, SIP
Happy New Year everyone!

I'll start this year with an investment concept called Value Cost Averaging (VCA). This is a regular investment strategy which allows you to allocate money to an investment avenue (like a mutual fund) every month. The funda behind value averaging is: You don't put a fixed amount of money every month. You expect a certain return and you put in only as much money that will match that return.

For instance let us say you have a target of 15% return annually, and decide to invest approximately Rs. 5000 a month. That means money should grow like this:

That means after each month you will evaluate how much your investment is worth, and compare that to where you should be in the next month. You will then invest the difference.

Example: If your fund value at the end of month three is Rs. 16,000, and in the fourth month you need to be at Rs. 20,378 - you will invest only Rs. 4,378 (the difference).

VCA is a very interesting concept and is very less used because most mutual funds don't encourage it as much as SIP (Systematic Investment Plan, a fixed amount invested each month). In the last year, VCA seems to have beaten SIP in many funds - I have collated data for one fund, HDFC top 200. This spreadsheet contains all details. Notes:

  • I have accounted for entry loads of 2.25%
  • Any excess cash in the VCA model will be invested in a debt fund at 6%. The "VCA+Cash" model gives you a comparison of returns on the same amount invested as the SIP.
  • The gains are as of 1 January 2007 (not including any investment in Jan 2007).
Results: VCA has done better on all months, and with the Cash model it has beaten SIP by about 1% over the year. It will be interesting to compare other funds based on VCA and SIP returns, but my guess is that VCA model will prevail.

What is this cash thing?
VCA in a growing market involves a lot lesser investment. You'll notice that in pure VCA, you had invested only Rs. 53,741 in the fund, versus Rs. 60,000 in SIP. That means even if you had Rs. 5000 free every month to invest, you had to invest lesser and lesser every month as the market went up!

The remaining money can perhaps be put into a liquid fund or a debt fund because you may need it when the market goes down (because then more money than Rs. 5,000 will be needed). I am assuming that such a cash investment gives you about 6% p.a., and the total returns at the end of the year are noted in "VCA+Cash".

How to do this VCA thing?
No mutual fund allows you to invest in a VCA model. That is largely because the amount invested every month varies; with SIP the amount is constant. I think it's an issue of logistics: Since most people invest using cheques, the funds know it's a logistic problem to get cheques every month for different amounts. (With SIP, the amount is the same so they take the cheques upfront.)

Of course, they can solve that problem by using ECS instructions instead, but funds are not yet doing it. So you have to do VCA yourself, manually.

Most funds take investments in multiples of Rs. 100, so you will need to adjust your strategy a little bit - when you need to invest Rs. 4,568 invest Rs. 4,600 instead. (Round up to the next higher hundred).

Update: If you want to view the spreadsheet, and download it as an excel file or such, click here.

Posted in MutualFunds, SIP

Newer Entries »