Archive for June, 2007

Taking a week off; posting will be slow

4 comments Written on June 29th, 2007 by
Categories: Uncategorized
I'm taking a week of vacation and I may not quite post all that much. Life has been taking very interesting turns, and when I'm back I will surely have a lot to say. Meanwhile I will post something about the BEML IPO before I leave.

Posted in Uncategorized

Recovery agents will go to extremes!

4 comments Written on June 27th, 2007 by
Categories: Commentary
Yesterday, certain recovery agents of ICICI bank allegedly killed a person who had not paid up his loan. Another defaulter quoted a horrifying experience too.
"They took off my shirt, shaved off my moustache, cut my hair and gave electric shocks on my chest. They even spit on my face. It was very humiliating and traumatic,'' said CLN Murthy, Loan defaulter.

It is strong-arm tactics like this that allegedly caused the death of 42-year-old Yadaiah, a government employee who was allegedly picked up from his office on Friday by a recovery agency of ICICI Bank. A couple of hours later his wife got a call that Yadaiah was dead.

Was the bank aware of the recovery agency using such tactics? I don't know but the agency gets a lot of money to recover the loan, and from certain sources, upto 40% of the amount recovered. Plus, ICICI bank has already paid Rs. 15 lakh to the family, even if it wasn't directly its fault.

But that does not condone the murder. If word spreads, people will refuse to take loans from ICICI bank and quite rightfully so. But I'm sure this is not a problem of ICICI bank alone...isn't it a problem of the whole industry?

Yet, our people are so strapped for credit that it is probably better to work with a bank than to get credit from, heaven forbid, a moneylender.

Posted in Commentary

A Contrarian view

5 comments Written on June 21st, 2007 by
Categories: Commentary
I've said bad things about the market earlier - that the dollar will drop, that the interest rates are high, and that too much money is in the market. Let me now take a contrarian view and see how things can be very different.

How much does the rupee affect the Nifty?
Around 30% of the Nifty index is concentrated on the IT/Pharma/Export oriented sector. But that's only 30%! A falling dollar helps certain companies like:

  • Oil companies (HPCL, BPCL)
  • Net Importers (Capital goods companies, power & infrastructure companies etc.)
  • Companies that have borrowed in dollars (ECBs) - Reliance Communications, Reliance Industries, Ashok Leyland etc. - a falling dollar means they have to use less rupees to buy back the dollars they need to return.
These companies have more weightage in the Nifty index than the exporters. So a falling dollar may actually boost the earnings of the Nifty, but the perception on the street is: If Infosys earnings are bad, the Nifty has to crash. If so, that provides you a good buying opportunity to buy the non-exporters in the index.

Interest rates: High enough?
Inflation seems to be down to below 5% and will probably stay there till October, if the interest rates continue to stay this way. But are they high?

In 2002-03, we saw interest rates around today's levels of 11-12%. That did not stymie growth. Yes, a higher interest rate will curb speculation in certain areas like real estate or others, but will it really kill a business which is growing at 30-40% or more? Probably not.

Cheaper loans are available through External borrowings (ECBs) for capital expenditure (like buying equipment, planes, etc.) Even big capital purchases like Tata Steel's acquisition of Corus is being funded through external debt rather than funds taken from Indian banks. The only high cost funds are working capital loans - but again, most of your index companies don't have that in a high proportion.

What high interest rates do is affect the retail industry a lot - meaning, small shops that have lines of credit with their bank, you and I in terms of personal and housing loans etc, and banks because you and I and the retailers will hesitate to take more loans. These three kinds of companies (Cement, Banks and FMCG) form a reasonably high part of the index but other than Banks the other industries are already showing lower prices. For Banks, a higher interest income will perhaps offset the lack of new business growth, at least for the next quarter.

Lastly, of course, some of the biggest companies in the index, the debt-equity ratios have steadily decreased and are below 1. In fact many have zero debt! So the high interest rates are a concern, but perhaps not as much as we might think.

Economy overheating?
Foreign magazines such as the economist have always been negative on India's growth, citing reasons from the silly to the mundane. Surjit Bhalla refutes their arguments saying their view is short sighted and ignorant of the wests own past practices. The U.S. went through a story similar to ours, from the 50s to the 80s. Yes, the stock market did go through up and down phases, partly because of their ridiculous policy of getting involved in wars they did not really need to. If we stay shy of such stupidity and focus on growth we can reach where China is today within 10 years perhaps.

We can complain a lot about our infrastructure, about the lack of potable water and pluggable electricity, but the basic funda is: This stuff takes time and money. We have the time. And we are making the money. In the long term, India is going to be big - way bigger than many in the west want to give it credit for, because it is easier to be myopic.

In all, what this means is: The short term influence of the rupee and interest rates may be negative, but does it really matter much? The longer term outlook is still positive, and any serious dips today provide more reasons to buy.

But will there be a big dip? Given the propensity of retail investors to panic at falls, there is enough reason for the market to have regular 10-20% dips. Very healthy stuff for the markets, like spinach. It may not taste very good, but it makes you stronger.

Posted in Commentary

ICICI IPO Oversubscribed; Dollar may drop; Buy yourself some portfolio insurance

15 comments Written on June 19th, 2007 by
Categories: Commentary, Futures, IPO, Options
ICICI Bank's mega issue is fully subscribed on its opening day. According to NSE's web site here are the stats (19/6/07):
  • Institutions have already oversubscribed their part of the issue, by over 5.47 times. Both domestic and foreign institutions have bid for massive amounts of shares.
  • Corporates and HNIs have nearly oversubscribed their bit. Of 1.4 cr. shares reserved for them, they've already bid for 1.36 cr. shares. Most of this has come from corporates.
  • Retail and Existing shareholders have applied for less than 1% of their reserved quota. There are three more days and I expect this part of the issue to get more interest by the last day.
Overall this has huge implications - firstly, that there is a heck of a lot of money in the markets - it just absorbed two issues worth Rs. 18,000 cr. without so much as a sneeze.

Secondly, a large part of the bidding has come from FIIs, which I guess will eventually mean about 10,000 cr. coming into the markets just from DLF and ICICI's local issue. Add about 10,000 cr. for ICICI's U.S. issue, Sterlite's $2 billion means another 8,000 cr. About 28,000 cr. just in these three companies, and there are more IPOs, regular investment etc.

What does that mean for the dollar/rupee? The RBI has allocated about 110,000 cr. for the "Market Stabilisation Scheme", money taken against bonds and used to buy dollars and pay rupees instead. This is to counter inflation (if they didn't give bonds they would have to print more rupees, which adds to inflation). Now as of the latest annual report the RBI has already allocated 78,000 cr. They can't mop up this money and stay within limits for the rest of the year, and they won't print more rupees because of inflationary concerns. So in all likelihood the rupee will rise. That means exporters - IT sector, Pharma and many others - will see a pullback.

Lastly, with so much money going to IPOs, will FIIs pull back on market investments? A good part of money flow comes from FII money and the lack of it is going to affect prices, and negatively so.

Add to this the concerns on high interest rates. The next quarter's results are going to be out starting the first week of July; and they will perhaps show the trend. But all this is temporary - the dollar will stabilise at some point, the interest rates will turn back and the juggernaut of our economy will move on. There may be one or two quarters of slowing growth, but that should not be a huge problem for you - think of the amount of time left for your retirement!

Now if you think you want to protect yourself against a temporary blip, why not buy "insurance" instead? Let's say the stock market could fall 10% but you want to cover yourself at 5-6% instead. Buy put options on the nifty for 4000 (the Nifty is at 4200 today) of the 26 July expiry date. Each option is worth Rs. 64 right now, so you will have covered yourself for a Nifty below 3936. You can buy Nifty options only in piles of 50 each (a "contract"), so you will pay Rs. 3200 (plus commissions, depends on your broker) per contract. How many contracts should you buy? Buy enough to cover your portfolio - each contract covers around 2 lakhs (4000x50) so if you have a portfolio of 10 lakhs you should not buy more than 5 contracts. (You can buy less to get less insurance)

But insurance comes at a cost - nearly 1.6% of your portfolio has to be paid to cover the cost of the put. Plus, the put deteriorates in value for every day that the Nifty stays above 4000. And if it expires useless (i.e. Nifty at 26 July is above 4000), you've lost Rs. 3200 per contract. Still, this is a useful thing if you think the market will lose its sheen temporarily.

The other thing you can do is to sell futures - sell the July future contract at 4200, and if it goes down, you are covered. Yet, the futures contract involves higher margin money for each contract: about Rs. 20,000. Also, if the Nifty rises, you must pay out the difference between your purchase price and the price at expiry; if the Nifty reaches 4300, you'll pay out Rs. 100 per share (x50 = Rs. 5000 per contract).

Finally, of course, you can also sell out your shares and sit in cash. Not advisable for a) transaction costs and b) taxes that may apply. Still, it's better than buying insurance, because the best insurance is cash.

Posted in Commentary, Futures, IPO, Options

DLF Goes with 525; ICICI Bank between 885-950

2 comments Written on June 18th, 2007 by
Categories: IPO
DLF has priced its IPO at Rs. 525, which is Rs. 25 short of the higher end of the book building band. This issue is likely to list in July, and will see sure shot allotments to all retail investors, employees and most HNIs. Turns out Merrill Lynch, Deutsche Securities and Lehman brothers (all FIIs) bid for nearly 10,000 cr. together; the FII part was oversubscribed over five times in total (bids for more than 26,000 cr. were in)

Joe Leahy states that the DLF IPO has major issues beyond what I mentioned; it lists risks that DLF is threatened by earthquakes, that 60% of its land is agricultural, that 90% majority owners (the Singhs) can arm-twist the minority (everyone else) . Interestingly that it has, in it's 60 year history only developed 224 million sq. ft. of land, and in the next two years alone, it plans to 669 m.sq.ft. Possible? Perhaps. Can it sell all of them? We'll see.

ICICI Bank has a mega IPO coming, and has notified the price band as Rs. 885 to 950. I haven't fully analysed the issue, but here are some details:

  • About 8750 cr. expected in the Indian market. Same amount in the US market at the same time. Total issue size, along with a green shoe option, is a little more than 20,000 cr.
  • That means around 210 cr. more shares will be issued.
  • As a retail subscriber you'll get a Rs. 50 discount on the share price discovered. So if it's 950, you only pay Rs. 900 per share. (Retail = less than 1 lakh paid in the IPO)
  • Retail subscribers can choose to pay in tranches: Rs. 250 per share now, and the rest will be requested in a demand note. Needless to say you can't sell the shares unless you pay up fully, and you'll forfeit the shares if you don't fork up the money within six months.
I don't know much about where they will use the money, is it worthwhile etc. but on the face of it the valuations look tight. For a dilution of this amount, you can expect massive amounts of liquidity in the market (meaning more shares available to trade) and given that this is an index stock (both Nifty and Sensex) the movement is not going to be huge. Don't buy for listing gains - you won't get much.

I'm not a great fan of their business because of the umpteen complaints the bank has seen, including a personal experience. Other bad news is that today they announced the slowdown in home loan growth - which forms nearly 50% of their retail portfolio. They're priced higher than SBI (on a p/e basis) which may also see an IPO of sorts this year. And lastly, I feel they are in the peak of investor sentiment; in the face of rising interest rates, higher CRR/Repo rates, lending restrictions to real estate etc. it is probably not the best future to have. For them of course, this is the best time to get money - when people are blinded by the lure of even higher levels.

Be careful, folks. This is not the peak yet, and we still have to see the buildup of massive exuberance. But it seems to be coming. Be wary, and keep your stop losses handy.

Posted in IPO

Investor or Trader? The tax department doesn’t really want to tell you.

4 comments Written on June 18th, 2007 by
Categories: IncomeTax
The Income Tax department has released a circular which supposedly deals with the "distinction between shares held as investment versus for trading".

This is to distinguish whether profits from sales of such transactions are treated as capital gains (short term: 10% tax, long term: 0% tax) or as business income (34% tax).

Now you would expect that by such a circular, the I.T. department would have clarified what the conditions are for treating share sales as investments or for trading.

That would be a dream, it seems, because all the tax department has clarified is NOTHING! They have simply stated some court rulings and have maintained that the distinction between the two is entirely subjective and in the complete discretion of tax assessing officers. This is criminally wrong; we should be putting clear cut guidelines on what is trading and what is investment!

So what have they really said? That:

  • You can have two separate accounts - one for "trading" and one for "investment".
  • How do you distinguish the two? The I.T. department's answer: We are not going to tell you.
  • They (not you, but the IT dept) can choose any criteria to decide what is what; for instance, if you do "substantial" transactions it may be a trading account. But what is "substantial"? They won't tell you.
  • If you hold stocks for dividend they might think of it as investment. But with yields of 2-3% are they expecting us to invest for dividend?
  • The circular says that "the magnitude of purchases and sales and the ratio between purchases and sales and the holding" can determine the difference. Yet, they give you no indicative ratios or magnitudes and offer you no relevant data about how this was done in the past.
I am convinced that the department has muddied the waters some more. It's ridiculous that we are going back to a discretionary system instead of simply designating such profits as one or the other based on objective, understandable criteria.

What would I be more happy with? Something that says: If you hold a share for less than three months, this is trading income. If you borrow money on "margin" with a stock broker, this is trading income. If you turn over more than 400% of your capital, this is trading income. (Meaning that if you have 10 lakhs invested, and your buy and sell transactions add up to more than 40 lakhs, you are a trader) And a humble request is to keep it simple.

Will the tax department lose a lot of revenue? Not really - with clarity, more people will invest (or trade) and therefore the net revenue they recover will be higher. Add to that the fact that clarity means lesser number of expensive arbitration and court rulings, computer identifiable trade vs. investor situations and less scope for corruption. Even if it means some people will suffer (will be called "traders" versus "investors") it's a way for all of us to rest easy because we know how much tax we have to pay!

Currently, even FIIs are confused:

According to Punit Shah, leader-financial services of PwC, “The uncertainty over the FII tax regime could grow. Our experience is that many FIIs are filing returns as capital gains, paying a 10% tax. The circular has reproduced certain principles laid down by judicial pronouncements which seem to hint FIIs are earning business income rather than capital gains.”

Questions that still remain unanswered:

  • What happens to futures/options transactions? They are obviously not long term but there is a specific section in the income tax act allowing such gains to be treated as capital gains.
  • What happens to PMS customers, whose transactions can be huge in number? While I would say such people are bound to be treated as "traders"; but it would be far easier for them if they knew now rather than one year later.
  • Traders need to maintain full books of accounts as their income is business income; and doing this retrospectively is a waste of effort. It's better to classify someone as a trader right up so they can maintain correct paperwork through the year.
  • Real estate, which is not in ambit of the circular, is almost exclusively held [in India] for capital appreciation rather than [rental] income; given that is a criteria for stocks now, will all real estate transactions get quagmired in tax later?
I hope that further circulars will be more informative.

Posted in IncomeTax

DLF IPO Details

14 comments Written on June 14th, 2007 by
Categories: IPO
The big fat DLF IPO is now over. Subscription details:
  • Institutional buyers oversubscribed 5.12 times - they bid for 53.54 cr. shares of a total requirement of 10.44 cr. shares. Considering they have to put only 10% of the bid amount down, even at Rs. 550 per share, this is an IPO collection of 2,944 cr. of course once alloted the institutions must pay the rest of the amount bid.
  • Out of the institutions, FIIs bid for 48.55 cr shares. Banks and domestic financial institutions bid for only 3.5 cr. shares.
  • Mutual funds bid for only 3.52 cr. shares, despite only having to put up 10% of the money upfront. This means they only put up Rs. 175 cr. for one of India's largest IPOs - and equity mutual funds have a base of at least Rs. 100,000 cr. That is alarmingly low as a percentage, when you consider that DLF will be one of the largest cap companies.
  • HNIs including corporates bid for 1.9 cr shares of an allowable 1.7 cr. That means that part of the issue is subscribed 1.1 times.
  • The retail part of the IPO has seen 5.09 cr. shares bid for, of a total available 5.22 cr. shares. That's a 97% subscription - quite surprising to me! Most bids came in at cut-off.
  • Of the 10 lakh shares allocated for employees, 78% has been subscribed.

What this means is that issue as a whole is fully subscribed, and in all likelihood, both HNIs and retail are going to see full allotment since there is undersubscription in those areas.

Institutions will get partial allotment of their bids, with most going to FIIs.

Now, the FII demand signifies that this stock will most likely get picked up at listing; and retail demand is robust enough for people to pick the stock up as well - Like me, many retail and HNI investors have started to avoid IPOs because of the regular massive oversubscription and locking of money. Also the cost of IPO funding is a deterrent.

I did not cover this IPO during its time because I wasn't interested in it. But looking at media reports, everyone and their uncle was negative on the IPO. But say what you will, you cannot ignore DLF. They are bigger than the other listed real estate players combined together. Sure, their management has been labelled wonky, and the Singhs have been called all sorts of names. The IPO itself has been postponed a number of times for different reasons, including market tanking, minority shareholder issues, and such.

But the resounding FII response and the massive retail subscription prompts me to think - is it going to be a big listing? My answer is: No. Firstly, in all probability, many (retail) people applied to make minor listing gains because they were sure to get allocation. But that very fact will ensure they don't have a big listing.

Second, the real estate market, as we know, is largely "black" - at least in Delhi where DLF is king. Now this "black" money routinely flows out of India through the hawala route, and comes back through FIIs as "participatory notes" - something SEBI and the finance ministry know but cannot curb without allowing a huge crash to happen. The black money of Indian bigwigs has perhaps flowed back into the DLF issue, and some of it could even be the black money in the real estate market.

Third, the stock is way to big to be operated. This share, which will likely have futures and options on it as well, will not be able to be manipulated that easily. Many companies rig up with operators to attempt to keep up their stock price - even big companies like Reliance have also supposedly done this at some point - and the Singhs of DLF have the unsavoury reputation for doing such things. Yet, I believe they will not be able to move it up - all they may do is to keep it from going down too much.

The market cap of this company at Rs. 550 will be about 93000 cr. That'll make it one of the largest companies in India - about seventh or eighth in terms of market cap. This will mean that the stock will soon get added to both the Nifty and the Sensex.

Given all this I don't believe there will be a huge listing gain, but I don't think there is much downside either. Perhaps the share will list between 400 and 600 and hang around there until Q1 results of DLF are out.

Why am I not interested in this share?

  • Real estate is going to get downgraded. Even in Gurgaon and Dwarka, supply is high and demand is stagnating with extremely high interest rates and lack of investor interest.
  • No ECBs and land purchase issues will have problems in the near term. This is an extremely capital intensive business; I'm not sure how much of a difference the IPO money is going to make - but it surely won't help more than 10-20% margin increases on the business.
  • Their "other income" is 1400 cr. which is about 70% of their net profit (1941 cr). I don't like that. Turns out it has come from "disposal of fixed assets and long term investments" - this is a one time thing.
  • Their hotel and commercial business is well planned for the commonwealth games in 2010. But that is a one time event and after that there will be a severe dip in demand...everyone seems to think that the Commonwealth games will do it great, but remember the Asian games in 1982? I lived in Delhi post 1982 - for years, the accomodation created for the games was empty and desolate; my father's bank bought houses at throwaway prices to provide accomodation to their managers.
  • If you remove the one-time other income, the earnings are about 500 cr. which means the company is getting a P/E of 190. I'm not happy to pay such ridiculous valuations in the age of high interest rates, low borrowing capabilities and oversupply.
  • Land valuations are something I do not understand. How they can value land they do not own is beyond me.
If you're invested, I don't think you should worry - there are good reasons why this stock will not do too badly. But there are a number of better opportunities out there, in the heavyweights - like L&T and BHEL, which, while not being real estate plays, are fundamentally better poised than a DLF.

Overall, the IPO is an eye-opener in terms of the amount of money in the Indian market. Let's see how it performs. And lets see how ICICI's mega issue turns out.

Posted in IPO

Filling out IT Return Forms: A consolidated post

5 comments Written on June 14th, 2007 by
Categories: IncomeTax
This is a consolidation of all my posts about filling out IT return forms for income earned in 2006-07.
Download the ITR-1 Excel file here.
Note: the sheet is "protected" in Excel, so you can only select fields which I believe you should use to enter data. If you really need to change other cells, use Tools menu | Protection | Unprotect sheet and make your changes.
External Links

Posted in IncomeTax

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