Archive for September, 2009

Confessions of a Rally Misser

12 comments Written on September 18th, 2009 by
Categories: Uncategorized
Today I sat back and read nearly all the stuff I've written for the last few months. It looks incredibly bearish - and I'm starting to feel like that too, a disbelieving bear.

Sometimes markets misbehave. I might still believe that the rally we are seeing is a bear market rally, but that's just a label. It's been big enough to have real money made, and I missed it. Perhaps I couldn't invest, due to restrictions at the job (which I recently found out only apply to F&O - I can still buy stocks, so expect some investing going forward). Perhaps I didn't care enough because my money, other than the few taxsaver funds I have, isn't in the market. Perhaps there's the overwhelming fear that the rally will be short lived because I refuse to believe the tape anymore. Perhaps I had the fear of joining the party too late.

But those are just excuses.

I missed the rally. That's perhaps less than a cardinal sin nowadays, with everyone missing something or the other, but it's a time to take myself to task. If I were trading, I would simply shoot myself; you can't go on with theories when the real world is going somewhere else. Like Jesse Livermore (reportedly) said, "Markets are never wrong. Opinions are.". And my opinion was wrong, even if it were to come about as right later than today. It's judgement time, and the future doesn't count.

A post I wrote two years ago:

My son's taken to ghazals. He only sleeps when I play Jagjit Singh's numbers, so I've been listening to a lot of them lately. So it struck a chord with me when I realised how some investors have completely missed this rally, calling the markets "overpriced" when it was 4500 Nifty/16,000 Sensex. How some stocks which were "hot" were labelled irrational and investors refused to buy them. How some commenters here were actually angry that their stocks had not even moved while the market scaled new highs. Sometimes, you miss things because you're too focussed on "value". In a Jagjit Singh number, quite aptly put:

Hoshwalon ko khabar kya, bekhudi kya cheez hai.

And when this all dies down - the crazy bull run, the madness to buy and sell, the insanity goes away, another number applies:

Tum chale jaaoge to sochenge, Hum ne kya khoya, Hum ne kya paaya.

I feel like the hoshwala : sobriety can be bad sometimes. The madness of this run feels exactly like what people seemed to be feeling then; that they missed the bus, that there's a great story (hey, I believed it too), and that markets deserved to rise and keep rising. In the eye of the tornado it always looks calm, but you fear and cherish the turmoil outside. I believe we are in another tornado right now - except I'm watching this one with a binoculars and shaking my head in disbelief.

There may be a lot of value in stocks now - low p/es abound, even when you see indices reach heady zones. That is a useful longer term game.

Having said I'm wrong, would I change my mind about the rally? Well, momentum is momentum, so if you like roller coasters this is the place for you. Ride it and be ready to jump off when it's over. Given I can invest in stocks, I need to figure out if the short term zone is ok for me (given I have no time to monitor or trade, I have to take a three-four month view) - and if it is, I will jump in too.

That things are good, markets are strong and "recovery" is imminent is no longer a question - it's a foregone conclusion. What I believe is we won't recover much; it's like an American diamond, it looks like one, it feels like one but when you look deeper its not quite the real thing.

With an index P/E of 22, and a past two year growth of zilch, I am still suspicious. But, as I've realized, this has nothing to do with markets - they will do what they want, and I can only try to provide a context. Happy Investing!

Posted in Uncategorized

ICICI double lends against same properties after selling loans to ARCIL [Updated: News Denied]

7 comments Written on September 13th, 2009 by
Categories: ICICI Bank
Updated: ICICI prints a retraction, and ICAI says it denies such allegations.

ICAI Denial:

(Click for larger images)

Funny, ICICI says "The article is grossly inaccurate. The article mentions sale of home loans of Rs. 10,000 crores to ARCIL. The fact is that aggregate sale of home loans by the Bank to ARCIL since inception is less than Rs. 1,500 crores."

That's strange - Arcil (co sponsored by ICICI) bought more than 11,000 cr. of loans from ICICI as of March 2008 (LiveMint). The figure will be more now? Only 1500 of that is home loans? And if ICICI screwed up on some home loans it can't screw up on the other regular loans?

(Original post follows)

ET: ICICI's 10,000 cr. loan sale to Arcil under ICAI lens: (HT Anon reader)

The regulator should re-audit assets sold to ARCIL,” ICAI president Uttam Prakash Agarwal told SundayET, referring to the sale of bad home loan assets worth over Rs 10,000 crore by the bank to the asset reconstruction company.

ICICI Bank is accused of lending money for the purchase of some apartments in a housing project in a Mumbai suburb, and in some cases twice for the same set of apartments.

According to the chartered accountant who spotted irregularities, the bank disbursed home loans for the purchase of 15 apartments in the Ritu Paradise Project developed by S R Developers in Mumbai’s Mira Road. Documents available with ICAI and in SundayET’s possession show that double loans were issued by the Bank on some flats.

These loans were part of the block of bad loans sold to ARCIL, which helps banks to free up capital by buying such loans and seeks to recover them.

Although the loan amount for these 15 flats were only in the region of only Rs 2-3 crore, the accounting regulator is of the view that the bank bears responsibility for selling off these bad loans to ARCIL without verifying it.

A spokesman for ICICI Bank admitted that such an incident had taken place. “When this asset was sold to ARCIL, this was not identified as fraud. The builder fraudulently recreated the entire documentation and sought finance. Such frauds are a challenge to the industry,” he said. On the issue of loans being issued twice for the same property, the ICICI spokesman said: “Since there is no central database, it is almost impossible to track whether any loan has already been given against a specific property.”

But ICAI said this episode exposed holes in the bank’s systems. “In four cases, double loans were issued by ICICI Bank itself. This shows the inability of the bank’s IT set up and its due diligence mechanism,” Mr Agarwal said.

The time sequence seems to be: ICICI sold loans to Arcil. Later, it turned out the bank has issued mortgages again - different loans this time - against the same properties. Two loans issued by the bank against the same property is difficult to understand.

Did the bank officials know that Arcil now owned the loans, and thought they could get away with a second mortgage disbursal on the same property? Then it's fraud. If not it's a gross oversight, and ICAI is right in that ICICI should take the hit.

What this does is brings the entire 10,000 cr. into doubt; so all loans sold to Arcil will be under a scanner. Not just to verify against the underlying properties; they will need to check against all ICICI bank's current other loans as well. Future sales of loans to Arcil will be hit; from now on the due diligence will be tighter and more clauses introduced. And will that hit growth? When you can't get rid of bad loans, they sit and rot your balance sheet until they are written off, keeping NPAs high till then.

Funny, I got rid of this in the SoS due to a stop loss. But will the fundamental story hurt the stock price? Let's see.

Posted in ICICI Bank

SoS: ICICI Bank Stop Lossed, DLF Put added

1 Comment » Written on September 12th, 2009 by
Categories: ShortOnly
I'm getting out of ICICI Bank in the Short Only Strategy. It's crossed the stop loss of 15% I had set.

The rest of the positions are still within the limits, but the performance sucks - a -6.56% return in a year is terrible. And I didn't take advantage of the great fall, not quite as much as I should have. Even now, it's tottering at the edge. There is a lot to learn; cycles can be vicious both on the upside and the downside!

Not giving it up of course; there will be more positions to build. DLF seems weak in the last few days, and there's a chance this down move over the last few days will continue another 20 rupees. So in comes the 390 put at 13.45 - a small quantity on a very short term move (Expiry is 24 Sep).

Disclosure: No positions. Do not follow this strategy, it is not a recommendation. It's an education, and primarily for me.

Posted in ShortOnly

Omaxe Axing Projects, Owners Furious

6 comments Written on September 12th, 2009 by
Categories: RealEstate
Praveen Singh at the Indian Express on property developer Omaxe's Execution Failure:
PM Senthil Kumar, a Delhi-based executive, booked a flat in Omaxe’s project called Galaxy in Sector 112, Noida. Since 2007, he has already paid over Rs 10 lakh to the developer. However, when work on the project did not start even two years after its launch, Kumar applied for a refund. He says he had booked the flat not because he wanted to speculate in property, but because he needed a place to live in.

Kumar says Omaxe has shattered his dream of owning a house. “I have visited their office and requested for refund with interest. They are not agreeing to this. They also say that they will not refund the money before December 2009. And even then they will only refund the principal. It means that my money is stuck with them for more that two-and-a-half years.” He said when he enquired with the developer about the project, he was informed that the New Okhla Industrial Development Authority (Noida) had not given them possession of the land for this project till date because of a compensation-related issue with farmers. “How can a developer book flats without even owning the land? Isn’t this a fraud?” asks Kumar.

...

I'd written earlier about under-construction properties being a royal pain to purchase. The Indian express article highlights nearly all the problems one could face:
  • Making a deal without even owning the land on which the apartment will be built.
  • Untenable delays. In one case of a scrapped project 125 buyers were hoodwinked into buying even before the land was acquired.
  • Delayed refunds and loss of interest
  • Over promise, under deliver - Omaxe promised 10 lakh "affordable" homes and has yet to deliver on one. In other projects, they "handed over" control to residents without completing basic amenities.
  • No "completion certificate" for a project, which is critical for getting other approvals like water/sewage connections.
I have family living in one project mentioned - Omaxe Nile on Sohna Road - where it's true that Omaxe hasn't provided full project reports on the water, electricity etc. Sewerage is handled through trucks which ply in and out every day - the connection to the city system is not done. (Though they have taken a "deposit" for it!) In a recent storm, the 8x8 foot window frames in many houses caved in; they weren't glued properly. Omaxe randomly added square footage to the project before registration - there was just no way to verify. They've not yet handed over the documents to the RWA, contrary to the article's note - and that's because they've not given enough documentation for a handover to take place.

Even where I live, Park View City on Sohna Road, the developer has delayed construction of a gymnasium though we're nearly at 80% occupancy. But things are dramatically improving here now - as they are in the Nile - as the residents take control. In the time we have been here, in both the Nile and PVC, swimming pools have come up, parking has been streamlined, maintenance has been perked up, security procedures set in place etc. ; all the hard work has been done by the residents, even though they have to pay very hefty monthly charges (upwards of 3k a month per apartment) to the builder!

There's little wonder why I will never recommend under-construction properties. You don't want this kind of hassle. At least when you buy a ready property you can bypass the mudslinging between the early adopters and the builder; you get to examine what you will eventually live in; and the early problems will have been sorted out. The prices may not be very different (they've not gone up in the last 12 months) though this will depend on the stage of the market.

Omaxe's share price, at Rs. 123.15, is near a one year high of 130. It's recovered a lot from the lows of Rs. 40, but way below the all time highs of Rs. 600. The builder's just gone through a ratings downgrade from Fitch (which means nothing; Fitch reacted WAY after everyone knew there was a problem, look at the stock price).

(Click for a larger picture)

Profits crashed to 9.78 cr. last quarter from 46.52 in Q1 2008. Their consolidated EPS for FY 2009 was 2.38, and for the trailing 12 months is a negative Rs. 1.02. Does the stock deserve a ridiculous premium? We must ask the God of Land Bank Valuations.

Posted in RealEstate

Sensex EPS is 772

3 comments Written on September 11th, 2009 by
Categories: Uncategorized
A year back, I wrote about the Sensational Sensex EPS Story:
So I read through some past projections of the Sensex EPS as of March 09.
  • Kotak Securities' MD says 975-1000. (Feb 08)
  • Nilesh Shah, ICICI Prudential AMC says 1000. (Mar 08)
  • K.R. Choksey (or so it says) points to 1040. (Feb 08)
  • India Infoline Report: 1000 to 1050 (Feb 08)
Don't diss these people, those were very different days. Now where are we today?

As of July 4, Sensex is at 13454, and P/E as given in the BSE web site is 16.61. This translates to an EPS of Rs. 810.

To get to Rs. 1,000 we need 25% growth over the next 9 months. Annualised, that is 33% growth! [Correction: The Sensex EPS is as of March 08, so we need only 25% growth. But I stand with the rest of the figures - maybe a 10 or 20 buck higher EPS on the sensex in 09. Thanks Ninad for the feedback.] With Inflation, interest rates, global slowdown, this is going to be really tough. If we get to 900 by March 09, that would be good - and 12 P/E there is about 10,800 on the Sensex.

This is just something to have in mind when people tell you that at 12,000 Sensex P/E is 12, and darn cheap and all that.

On Sep 10 2009, the Sensex quoted at 16,216 with a reported P/E of 21. The current Sensex EPS is 772.

From one year ago, we've dropped EPS about 5%, and the Sensex has gone up 20%.

A view is that we are recovering and the world is recovering, so we deserve a higher P/E. The next few quarters will reveal if that is true. But those 1000 EPS predictions for 2008 - they might have to wait till 2011, one thinks?

Posted in Uncategorized

FDs or government bonds better than "Insurance" plans

12 comments Written on September 10th, 2009 by
Categories: Pensions
A twitter discussion led Ganesh Babu into writing about how insurers take you for a ride. An ad at www.simpleinsurance.in from ICICI shows you how, if you invest Rs. 2,000 per month for 20 years, you could get a pension of 15,315 per month after 30 years (at 10% annualized return).
But let's have a closer look. Let us put the Rs.2,000 per month in a bank fixed deposit (FD) at a nominal 8% interest compounded annually. That makes Rs.24,000 annual investment in FD. For the next 30 years, let us assume that the interest rate remains constant at 8%. The Rs.24,000 per annum investment at 8% will accumulate to Rs.29.36 lakhs.

This amount (Rs.29.36 lakhs) if reinvested again in FD at 8% interest will give annual interest of Rs.2.35 lakhs or a monthly interest of Rs.19,575 for life. Now compare with this the Rs.15,315 per month ICICI's Retirement Plan. The FD comprehensively beats the returns of ICICI by a massive Rs.4,260 per month (21.8% more). And don't forget that the FD return is more or less guaranteed where as ICICI's 10% return in risky and market dependent (it could be less, or more). Also, the accumulated Rs.29.36 lakhs is preserved for passing on to the next generation

If you went with ICICI - you would pay 2,000 a month, maybe get your 10% return, and in return get a pension of Rs. 15,315 per month. After you die, they give the money to your spouse. And from first takes it seems after your spouse dies, the corpus is involuntarily donated to ICICI. (Want the money back? Er, we'll pay you around 1.5K less per month, ok?)

If you consider the same 10% return, then the amount you make, annually compounded after 30 years, is 39.47 lakhs. (Ganesh has wisely taken a more sane fixed return of 8%, but I'm illustrating how much you're being robbed). That, invested in an FD or govt. bond at 8% yield, gives you an income of 26,319 a month. Glee. 40% more than the "insurance" option. Not just that, your family gets to see the entire money should you die.

And there's the flexibility - need some extra money for hospitalization, to start a business or anything of that sort? With ICICI's annuity, you have no options to withdraw a big lumpsum. In option 2 - where you manage your own money - you can do what you want.

ICICI's retirement plan - and to be fair, every single insurer's retirement plan - is a waste of time. Simply buy long term FDs, long term government bonds or growth gilt funds; the return is far superior. If you want tax savings, get into a term plan and buy an ELSS mutual fund; anyway they will not last much longer (the tax saving nature of them).

Ganesh's post is eye opening and I will do a post on the crappy annuity plans we have, on another day. That alone is enough to never ever recommend the New Pension Scheme to anyone I know; because it's your money they don't allow you to touch.

Posted in Pensions

Oil India IPO

1 Comment » Written on September 9th, 2009 by
Categories: IPO
A lot of you have requested comments on the Oil India IPO. I'm a sucker for IPOs which give you a P/E or 10 or so, and it seems this one fits. So my first impression is positive. Here's what happens as I go through the DHRP (prospectus).

There's 2.4 cr. shares on offer, at 950 to 1050 per share. That gets them 2400 crores. As I write the issue is already 2.5x oversubscribed, though there's not yet full subscription in the retail category. So getting allotment will be tough.

OIL is an oil company (surprise!) and it looks like a proxy for crude prices. It's worse because it needs to subsidize the Public Sector OMCs against huge price rises - so it doesn't make as much on the upside as it loses when crude goes down.

They'll spend most of the money in exploration and maintenance. Which is good, but I don't really have the time to go through the points in detail. There's a huge dependence on the north-east, but that also reduces pipeline costs and such. They have an about 575 million barrels of crude estimated - to give you context, India uses about 3 million barrels a day, approximately.

Their EPS, in the last three years, was Rs. 71.98, 83.16 and 104.24 respectively. That's a healthy growth and the upper band P/E is thus about 10.5. All else being equal, this is a competitor to ONGC, whose EPS is 92 and price is 1192 - a P/E of about 13.

Taken that way, it's a go; but I won't apply because I don't have ASBA (Application Supported with Blocked Amount) set up yet. If I had ASBA, I'd take a chance and apply in the retail category (the ASBA ensures I don't lose interest in the time that they take to process apps and list).

So yes, for once, a good IPO. A thumbs-up from me, but remember: I'm not an advisor and I haven't even done the deep level of research I usually do. This is an "on-the-face-of-it" analysis.

Posted in IPO

Very Important Items to be Added in the WPI

1 Comment » Written on September 8th, 2009 by
Categories: Humour, Inflation
Business Standard: Mobiles and Digicams to be added to WPI (HT commenter Bingo)
Over 300 new items such as mobile phones and digital cameras would figure in the new wholesale price index (WPI) that would give a better picture of the price situation.

And close to 30 items would be knocked off from the new inflation series expected to be out by December.

...

The base year for the new index will be 2004-05 while the WPI is presently calculated on 1993-94 base.

In the trail index, data for 1,100 items are being collected, which would be eventually consolidated to about 700 articles, the official said.

In the existing series, the weight of primary articles is 22.02 per cent while manufactured products contribute 63.75 per cent. The weight of fuel, power, light and lubricants in the index is about 14 per cent.

Besides, the government is working on an index to measure rise in prices in the services sector, which includes telecom, banking and aviation.

Note that apart from this, there's CPI (Urban) which - the Consumer Price Index - which should reflect prices at the consumer level.

The full technical report is here and isn't final; it's open to suggestions.

Some changes I can see: Food is down from 15.40% to 14.34%, a very minor downgrade. Non-food primary articles aer down from 6.14% to 4.26%; this includes items like raw cotton, soyabean, niger seed (!) etc.

Acknowledging the increase of love in India and perhaps the obscenely expensive material on Valentine's day, there is a new entry for "Rose prices" at 0.15%. Which can only mean that my son is going to have inflation ridden birthdays, having been born on the 14th of Feb.

Crude prices have been introduced as part of the WPI - it was absent. Weightages of Petrol, Diesel and Coke have gone up while electricity had dropped from 5.48% to 3.45%.

Food based manufactured products - Sugar, Maida, Atta etc. - are a mixed bag. Their weight has gone down to about 10% from 11.53%, but we finally see an introduction of refined oils, ice cream (they didn't have that?) and papads in the index, showing us they have had a fun time creating this index. Also included are roasted cashewnuts, pickles and rice bran extraction, which I am sure you sorely missed.

In James Bond style, there is an entry for "Indian Made Foreign Liquor (Malted, but not Blended)". In case you're wondering why that happened, note that the entry for "Blended" was already in there; the Association of Malted (but not Blended) liquors sent their representatives named "GainDa" and "Circuit" who gave the WPI technical committee a very convincing argument, and an offer they couldn't refuse. Also included is Toddy, meaning that Goa's popularity is getting recognised.

Our country tends to spin a lot of yarn, so yarn of all varieties is in. (processed, knitted, not knitted, bleached, unbleached, using-fair-and-lovely-but-not-bleached etc.)

There are ton of more products in every sector; on a more serious note these reflect the greater data collection ability more than anything else. It isn't just the eye-catching headline "mobiles and cameras included" but also the fact that heavy chemicals like propylene (which were absent, but heavily used) are now included. Papers after all want good headlines, so the mobile phone fundas pop right up. Can you even imagine the headline "Guar seed included in WPI"?

To give you an idea of how twisted that headline is: the "handset" or landline telephone was at 0.052%. It is now 0.017%, with the "telephone receiver" added as a new entry at a breathtaking 0.0058%. The allocation to phone equipment has actually gone DOWN. And the digital camera? It takes 0.03%, but air conditioners have a lot more weight at 0.26%. So do solar power systems (0.036%), ball bearings (0.12%), or even what you might describe the headline, the lemon (0.07%). In fact, the whole applicances area seems to have gone from about 6% to 7.2% - nothing significant.

Overally the broad categories are still close by: (Current, New figures)

  • Primary Articles: 22.02% -> 20.12%
  • Fuel: 14.22% -> 14.91%
  • Manufactured Produects: 63.75% -> 64.97%
I like the fact that the index is broader, and while you may find it a tad difficult to believe that Processed Shrimp is given a different allocation from Processed Prawn, the new allocation seems to be indicative of our totally warped lifestyles. There was a time when inflation was about how many goats you could exchange for a loaf of bread. This is certainly not such a time. And by the love of Indian Made Foreign Liquor (Malted, but not Blended), I am thankful for that.

Posted in Humour, Inflation

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