Archive for 2009

Extended Trading Hours Aren’t That Bad

4 comments Written on December 27th, 2009 by
Categories: Uncategorized
Brokers oppose the new trading hours starting 9 AM from Jan 4, 2010:
In a statement issued in Mumbai, the BSE Brokers Forum said it opposed the move as there was no clear benefit for traders, stockholders , institutions and retail investors.

The forum said it would submit a memorandum to Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee and seek meetings with the heads of both the BSE and the NSE to air their concerns.

"If the exchanges start operating at 9 a.m., I need to open my office at least by 7.30 a.m.," said Binay Kumar Agarwal, a director of the Calcutta Stock Exchange (CSE).

"The infrastructure is not yet ready for trading to begin at 9 a.m. If I find my broadband connection is not working, I cannot get an engineer to fix it so early. Besides, banks don't operate at 9 a.m."

Added gastro-enterologist Indronil Saha: "This extension of trading hours will add to the stress, which will lead to gastro-enterological problems."

The bank operation note is well taken but honestly, brokers don't need banks to be open when they operate in the morning. For all proper settlements, the last evening should be more than enough.

The commodity futures markets are open till VERY late in the evening; 11:30 pm, and most big brokers keep their offices open for the commodity market times - so that is no great shakes.

Third, and importantly, why do Indian brokers let people buy shares without putting full cash down? I don't mean futures. I mean cash trades - you can put Rs. 10,000 down and buy Rs. 1 lakh worth of shares. The broker allows you to square this off intra-day. This is ridiculous 10X leverage - much higher than what you get in the futures markets, where the margin is determined by the exchange and is about 5x for index and 2-3x for stocks. This is to facilitate intraday trading, basically, squaring off a trade intra-day before the market close; it's not a facility provided by the exchange, but brokers are allowed to give it to their clients, if they can "risk-manage" it.

If you think I'm digressing, think again - this is a major reason why brokers don't want to change timings. When they have to handle margins themselves, they need banks open and all that jazz; but a central clearing agency can do with much lesser times and more clear upfront margin handling processes.

If you make brokers pay up full cash while buying or selling shares, there will be less settlement issues in the cash market. Intraday shorting should also need the full amount upfront. Sure, the speculators will run away, but they belong in the futures markets.

Lastly, extending trade timing is useful. Our brokers were a bunch of thieves. When there was no electronic trading, you would always get the high of the day when buying and the low when selling. What you want is clean, clear trading and the best way to do that is to put the orders in yourself - which for most of us is not possible, because work intervenes. Extending market time to say 9 p.m. will help get more regular people on board.

Some people say it will increase speculation. So what? Let it. People who think of this as a gambling den will lose money and go away, specially if there is no leverage available in the cash markets (futures are expensive enough to not be useful for the dabbler). My point is - keep markets open, and the initial madness will sort itself out. Look at the US futures markets - they trade nearly 23 hours a day, and forex 24 hours a day, but they're okay.

We must improve our banking system, for sure - transactions should be possible electronically at any time of the day. That isn't such a big problem, and the RBI should speed things up, or at least allow collateral based transfers.

The important thing to understand is that investing/trading is a boring process. Keeping markets open longer don't make them exciting. They make them available.

Also read Ajay Shah's "The Trading Hours Controversy".

Posted in Uncategorized

Happy Holidays!

2 comments Written on December 26th, 2009 by
Categories: Uncategorized
Folks, am on a holiday for Christmas/New Year in Bangalore, and December as a whole has been in holiday mood, so I wouldn't expect much on the posting front.

Hope you had a Merry Christmas. Wish you all a Fantastic 2010!

Posted in Uncategorized

Nifty P/E and EPS Growth: Still Insane

16 comments Written on December 21st, 2009 by
Categories: Nifty
I talk about this often - typically, you want your Earnings Per Share (EPS) growth to, somehow, match the Price-to-Earnings ratio you're paying for the stock. This, at an index level, makes even more sense - a single company may be irrationally high priced or have very high P/E, but the index as a whole should demonstrate EPS Growth levels close to the P/E you pay.

Here's where it's continuing to not make sense. Following my April and August posts, the Nifty P/E continues to scale new levels, while EPS stagnates.

(Click for a larger image)

Values as of 18 Dec 2009:
Nifty EPS: 224.57
Nifty EPS one year back: 228.07
EPS Growth: -1.54%
Nifty EPS TWO years ago: 222.48

Remember, the Nifty's gone through a number of changes - stocks like Satyam have been taken out; RPL and RIL have merged; low growth companies that lost market capitalization were replaced by faster growing, more exciting stories. Yet, the index EPS has barely budged in two years!

The P/E is back to very high levels of 22. From here, you can't expect more P/E expansion (ok, we can follow Chinese routes and expect a P/E of 45, in which case you are already a trader and should not read beyond this point). What needs to happen is for EPS to grow. And fast.

People have been talking about the Sensex EPS hitting 1000 for around two years now. (Read: The Sensational Sensex EPS Story, July 2008) Predictions for the Sensex EPS were 1000+ for all this time and what's the Sensex EPS today?

Answer: 780.

Now everyone's got a short memory. Ajit Dayal decides the 2010 EPS - two quarters away - is going to be 960. Kotak Securities, the lowest of the Sensational Sensex Estimates in July 2008, says 2010 EPS will be 913. The 2011 estimates are all above 1000 and there are ridiculously huge figures like 1,400 being bandied about.

I have realized that if you predict sufficiently far away and don't refer to your past failures, people are likely to believe you. So I say that in 2100, the Sensex EPS will be 43,846 (*).

(*) Unless there is a tropical cyclone around Andhra Pradesh, which impacts my 2040 growth story estimates.

The Nifty or Sensex EPS is hardly predictable, but since people's salaries depend on it we are going to see more such predictions. I'd like to see who ends up being right. I am not going to attempt to predict it, because I can't, and am currently incapable of lying with a straight face. That is a fault I must rectify.

But if we don't see some of that 7% GDP growth in the Nifty EPS, things aren't as good as they're made out to be. When I drive my car and it's low on gas, it drives beautifully; this seems like that kind of ride right now, and just like in my car, I don't know when it'll stop. I hope we fill some gas.

Posted in Nifty

Startups: Burrp acquisition by Infomedia18, Low Internet Valuations in India

11 comments Written on December 18th, 2009 by
Categories: Startups
Talking to Nikhil Pahwa on the phone about financial shenanigans and a recent acquisition of Burrp! (a restaurant review site as I know it) and some subsequent research yielded a tidbit that, it seems, was a useful piece of information. Nikhil wrote about it on MediaNama:
According to a filing with the Securities & Exchange Board of India (SEBI), Infomedia18 had paid a total amount of Rs. 4.255 crores for acquiring Burrp. Previously, the amount paid was undisclosed.
(Thanks Nikhil for crediting me)

Now this seems to be an interesting deal. Earlier reports at MediaNama indicate a murmur that Haresh Chawla, the Infomedia 18 Managing Director, had funded Burrp with a loan or a convertible debt of sorts; technically, is that a related party transaction, if Haresh didn't own shares? I guess not, because the SEBI filings haven't mentioned it.

Rajiv Dingra's take on it at WATBlog analyzes the valuation; at 300K unique visitors a month, the valuation of Rs. 150 per user is a miniscule $3 per unique visitor.

That sounds quite reasonable but it's unlikely the founders would've made much if the Haresh Chawla debt story is true. Still, this acquisition is going to be yet another low valuation overall; You want to see huge successes and massive payoffs but the M&A part of Indian business is yet to scale up.

Examples: HT's acquisition of Desimartini was announced as "less than $10 million" but it turns out that figure was overstated - don't know by how much. But a look at the 2007-08 balance sheet of HT Media reveals:

  • Desimartini was acquired by Firefly e-Ventures, a fully owned subsidiary of HT Media
  • Firefly, which was capitalized in the same fin-year, had an equity capital of 10 cr. and another 9.85 cr. loan/payable to HT Media. So 19.85 cr. is about the max they ever had - Firefly's total assets are shown as 17 cr. at the end of the year.
  • Desimartini will be listed as an asset, most likely at cost.
  • Firefly also owned Shine.com in this period, and that's likely to have accounted for around half of what's in there.
So the Desimartini transaction was probably less than 10 cr.

Slightly bigger stories: Jobsahead, a job startup, was acquired by Monster for 40 cr, around $9m at the time. But it had a $5m funding from Chyrscap which would've taken at least 1x liquidation preference (meaning they make at least 1x their investment even if company sells for lower valuation) - but the remaining 4 million would have given the founders/angel investors/employees 16-18 cr. to share. Baazee of course was an incredible $50m, which looks like a fabulous return for the founders.

Update: Manish points me to the TravelGuru sale which was at $9-10m, which after a $25m investment from the Sequoia type VCs, would hardly have left much on the table for founders. The other big players in the travel space - Yatra, MakeMyTrip and Cleartrip - have serious funding, and just-as-serious competition in the form of larger overseas players like Travelocity, or from the Airline web sites directly. (I still use MakeMyTrip/ClearTrip to find the airline/price I want, and then hit the airline web site to see if I can get a better deal.)

This is good money in an absolute way but doesn't make the founders filthy rich (I would say each founder making > 50 cr. is seriously inspiring).

A U.S. example: an acquisition in 1999 - of clearstation.com, a very cool financial site, by E*Trade, was for around $28 million (E*Trade paid with 469K shares, and it was around $60 at the time) Clearstation had 90K registered users - that is $30 per user, though you must remember this was the height of the internet boom.

Still, the difference is incredible. Most Indian web site M&A deals seem to be very low on valuation, and the culture of big payoffs like the US has just not come here. We're at early internet stages in India right now, but given the relatively low payoffs and the high attrition (lemme throw a guess: 80% or more of web startups fail) the "expectancy" of the web startup isn't positive. That's a trading term - basically it means if only 20% of startups succeed then the payoff must be at least 4x of investment, to make up for the losses of the other 80%.

Having said that, it seems like these are great times for online startups - the internet growth is starting to show, and in mobiles, I'm seeing more and more scale. Indian Celebrities are using Twitter. Indians are pretty huge on Facebook now. Maybe this is the right time to start!

Note: One marked difference is in InfoEdge's valuation - the owner of Naukri.com gets a 35 p/e on the market. Maybe the right thing for startups to do is to hope to get listed instead of this M&A thing.

Note 2: The Indian VC community sits at the top end; at the early stage there are few or no angel investors. Read this discussion at Venturewoods for some interesting insights and an angel funding framework; the idea is that if the angel community develops we'll see better startups and perhaps more big payoffs.

Posted in Startups

Bank Credit Growth Ticks Up at 10.5%

5 comments Written on December 17th, 2009 by
Categories: Credit
RBI's latest credit figures show another uptick in credit growth, taking growth to 10.5% year-on-year. Here are the monthly credit growth statistics (average for the month).

(Click for a larger image)

Early days but December seems to be the first uptick month since October 2008. This seems to show in the Reverse Repo data as well. (Reverse repo is when banks put money with RBI because they have no better use for it and will not consider giving to me instead)

Livemint notes:

The amount of money that banks parked with the Reserve Bank of India (RBI) plummeted on Tuesday and Wednesday, to Rs61,090 crore and Rs59,435 crore, respectively, the lowest numbers seen in the current fiscal and far lower than the approximately Rs1 trillion of overnight money that funds-flush banks have been parking with the central bank over this period.

The fact that banks are parking less money with RBI means that they are perhaps using the money they have in deposit accounts for other purposes, such as buying government bonds or lending to companies and consumers. The other possibility is that companies have withdrawn money from banks to pay higher advance taxes.

So, it is too soon to announce a new momentum in bank credit. Annual bank credit growth as of 21 November was a mere 11.5%, compared with 30%-plus growth in the boom years.

Today was a mere 53,990 crore. Interestingly, the 10-year bond yield has gone to 7.64% - though technically that is part of a contango trade, since we're in December; liquidity is moving to the 2020 bond from the 2019 bond, and the 2020 bond is trading at 7.50%. This is wonky because the tenures are around the same - but the earlier maturity bond gives you 0.14% more, which is like a 6 month deposit paying higher than a 1 year one. If this happens consistently across multiple maturities then they will call it the Inverted Yield Curve, but it tends to happen when people move from one kind of bond to another.

(Usually this would result in some arbitrageurs shorting the far bond and buying the near one - remember lower yields mean higher prices, so the far one will quote at a higher rate relative to the near bond. But RBI places restrictions on shorting bonds, and the facility is only available for on "CBLO" (Collateralised Borrowing and Lending Obligation) which is only available for institutions. You can of course short interest rate futures, and the yields are 8.21% - a much lower rate on the future, meaning you can't short it for as much profit or any at all. Worse, you have to rollover every three months - and the rollover spread is negative for shorters. )

If you don't understand the above paragraph, ditch. It's not that important.

What's interesting is: From 100,000 cr. a day to 50,000 cr.; is this because banks are lending again? Or is it that people have pulled out money from banks and put them in other avenues? The former is a sign of growth - and with inflation where it is, there is going to be an interest rate hike in the offing. The latter is an indicator of a bubble or a liquidity problem, or both.

We'll know how credit growth happened this week after two more weeks (Credit growth reports come once every two weeks) That should give us some ideas. We like to refer to ourselves in the plural every once in a while just so we feel a little important. Yes, it's been that kind of day.

Posted in Credit

Dubai Bailed Out

4 comments Written on December 14th, 2009 by
Categories: Dubai
Dubai: Bailed out by Abu Dhabi
Abu Dhabi stepped in to help fellow United Arab Emirates member Dubai with a $10 billion injection, of which $4.1 billion was allocated to troubled state-owned conglomerate Dubai World to pay immediate obligations, Dubai said on Monday.

Dubai has announced a bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future. Mo< "Dubai will announce a comprehensive reorganisation law, a framework that is based upon internationally accepted standards for transparency and creditor protection," Sheikh Ahmed said. "This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations," he added.

The crisis has gone for now - the $4.1 billion payout will be a payout in full; this after the bonds fell to 40. The payout will mean the bonds go to 100 - that's a 150% return in a couple weeks. Not bad at all!

The lesson learnt, although wrong, is that you can always figure on someone or the other to bail you out, even if you are tiny in the whole scale of things. After Lehman, nothing of any consequence will be allowed to fail. This is the best time to borrow your ass off, but they're not lending to you and me; you gotta have overleveraged yourself already. Unfortunately, the only way out is to inflate our collective economies so the debt that sits in there is worthless. Inflation is a tax on the retired and on our children; but who cares, it's not us, right? Right?

I would hate for this plan to work, because I'm debt free. But if it doesn't, a lot of countries will struggle to get themselves out of the rut. Dubai included.

Posted in Dubai

InfoEdge: No EPS Growth, But Great Stock Price!

8 comments Written on December 13th, 2009 by
Categories: InfoEdge, Stocks
Info Edge (NAUKRI) continues to astound me. They're literally flatlining EPS for the last six quarters, and yet, command a P/E of 35!

To talk less and show more, here's a graph of their revenues, stock price and PE/EPS comparison.

(Click for a larger image)

  • Revenues have flattened since Jan 2008, and aren't recovering much at all.
  • "Other Income" forms a substantial part of their profits even today. The most recent quarter had 14.74 cr. of net profit, and they had "other income" of 8.35 cr. The business literally hinges on the other income figure!
  • They have around 320 cr. in the bank, going from their recent financial statements. That is generating most of the other income - at 8% yield you'll get about 6 cr. per quarter of income.
  • Other income is useful, but paying 35 P/E for a company whose biggest contributor to the bottom line has been other income for the past four quarters is, in my opinion, crazy. They might as well return the money to investors if they aren't using it. (The cash comes to Rs. 115 per share)
  • Look at the EPS - it's flat throughout. The last two quarters add up to a measly Rs. 10.27, and the earlier financial year was Rs. 21.87. No serious growth in EPS since last year.
  • But as you see the stock price and went up beyond 800 and a P/E ratio of nearly 40 - it has since dipped to 770 and p/e of 35. But such a high P/E for a stock which has barely grown in the last two years - very surprising.
  • Like in 2007-08, the annual report for 2008-09 also contains a scary piece of information: If option grants were calculated using "fair value" versus "intrinsic value", profit would have been lower by Rs. 10.8 crores and the EPS would have been Rs. 17.91, nearly 1/5th lower than the 21.67 they reported.
  • Insiders have been consistently selling over the last year. Some Info Edge insiders seem to have sold between 5-20% of their holding over the last year, but note that usually insider sells don't mean much to stock prices.
Maybe people expect great things of Info Edge, but it's been a disappointing set of results so far. The stock meanwhile doesn't give a damn; it's near 1 year highs. But at some point all this optimism must translate into numbers, no?

(Related: All Info Edge Posts)

Posted in InfoEdge, Stocks

Readings: Goldman/AIG, Obama’s Sellout, Dubai and China

4 comments Written on December 12th, 2009 by
Categories: Readings
WSJ: Goldman Fuelled AIG Gambles
Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American Insurance Group Inc.

Goldman was one of 16 banks paid off when the U.S. government last year spent billions closing out soured trades that AIG made with the financial firms.

Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions.

In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal's analysis and people familiar with the trades.

The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004 to 2006, according to a person familiar with the matter. But they piled risks onto AIG's books, which later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG's exposure to losses on securities linked to mortgages.

When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets.

Interestingly, the problem here isn't what Goldman did, but that it got the bailout inspite of what it did (they got paid in full for their "insurance" when AIG was bailed out, effectively bailing out Goldman). The outrage is just not there yet, but it feels like it should be if you read Matt Taibbi on Obama's Big Sellout:
What's taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we've been seeing on TV this fall who Obama really is?

Whatever the president's real motives are, the extensive series of loophole-rich financial "reforms" that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street's political power by institutionalizing the taxpayer's role as a welfare provider for the financial-services industry. At one point in the debate, Obama's top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.

The piece is outrageously blunt, and Taibbi is seriously outraged. Most of this might sound ordinary to us in India, where politics and business are designed to go hand in hand; we would hardly be surprised to know that a Satyam's Raju had political connections and used them well, or that the Government has always bailed out anything that it wants with no respect for the taxpayer. Still, a phenomenal read to see how rotten systems all over the world are.

FT: Why Dubai's debacle does matter:

Dubai’s ambitions weren’t merely domestic. Dubai World and its subsidiaries, with their assumed government backing, went on a debt-fuelled global buying binge. Dubai’s economy expanded rapidly in the boom. But much of this growth came from construction projects of dubious economic merit. When the music stopped, property prices crashed. Knight Frank estimates the vacancy rate for Dubai office buildings is 40 per cent. Yet planned new construction is set to double the city’s office space over the next couple of years.

There is a country on the other side of Asia, whose currency is also pegged to the dollar. Although its economy is expanding rapidly, short-term interest rates are below 2 per cent and the money supply has grown by 30 per cent over the past year.

This country is experiencing a real estate boom. Reports tell of a newly constructed ghost city with dwellings for a million people. Speculators are reportedly snapping up luxury developments, which remain unoccupied long after completion. Despite a 20 per cent vacancy rate in the capital city, new skyscrapers are being planned.

This country’s economy is also state-directed. Its rulers are looking for 8 per cent annual GDP growth as they seek to diversify their economy away from exports. State-owned enterprises are borrowing and investing to meet this target. Construction and infrastructure are taking an ever greater share of GDP, even though many projects are likely to prove unremunerative. A mentality of “build and they will come” prevails.

In short, economic conditions in China have much in common with those that prevailed until recently in Dubai. The population of China is roughly a thousand times greater than the tiny emirate’s. For this reason alone, the lessons from Dubai should be heeded.

China will probably take some time to blow up, especially in real estate. India has had it's smallest real estate downturn ever, making builders go nuts about building tiny little apartments costing upwards of a crore. A 4000 sq. ft. house in San Diego lists for 800K (4 cr.) with no takers, and they're trying to sell a 4750 villa in the outer edge of gurgaon for 3.2 crore (Vipul Tatvam Villas - bad road leading up, delayed two years from the Feb 08 completion, and all stuff like parking etc. will be extra. I know only because this place is right behind where I live). The amount of overbuilding in commercial real estate is mind-boggling (in the metro cities); but it seems the markets can remain irrational longer than I can survive! So till then, what problem? Music playing, must dance.

Posted in Readings

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