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About the Author:
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at

Chipkaofication: When You Thulp Stocks On To Greedy Investors At Magnified Prices…

10 comments Written on September 8th, 2014 by
Categories: Humour

We have a new word for:

Chipkaofication (noun): The act of making certain investors buy at inflated prices after which the stock price falls big time.

“Chipkao” is a hindi word that means “to paste something with glue”.

But in colloquial terms, this concept is to give something to someone that isn’t necessarily nice, and then they’re “stuck” with it.

The JP Associates Saga

Now consider a stock called JP Associates. They are a big company. At end Jun 2014, they had about 220 cr. shares outstanding. The stock was at Rs. 80 then so the company’s market cap was nearly 20,000 cr.

Then they had a Qualified Institutional Placement (QIP) for Rs. 1500 cr. at Rs. 70.27 per share. This added 21.33 cr. shares (effectively a 10% dilution). Supposedly, those who bought were qualified institutions.

At the same time promoters sold shares in the open market. And then, after the QIP, the stock started to fall, and continued its downward trend.


Even September, promoters sold on three consecutive days before the stock just went to hell.

Here are the promoter sales, revealed to the stock exchanges:


Promoters of course are saying that they sold insignificant quantities (only about Rs. 180 cr. after all, which is next to nothing). This will meet their requirement of funds including for “social cause”.

Who are the QIP Investors?

All fairly big names it turns out. (Source: BSE)


Is this Chipkaofication?

It’s obvious that some of these large investors with very trustworthy names are holding stock that has fallen tremendously in value.

The rise in the stock to the Rs. 90 level, a QIP and a sudden retreat to the 34 level sounds a little difficult to believe as “fundamental”. It’s almost as if the stock magically went up, the QIP investors bought at the high values, and then the stock went back to being in the doldrums. It wouldn’t be out of line to believe that these QIP investors were “chipkaoed” with these shares.

Of course, in the meantime, the company has sold a lot of assets to pare its large debt. But still, the fall has been quick and during a time when market indexes have hit new highs - can you imagine a large stock falling 50% while the index went up 10%?

And if, meanwhile, promoters sell part of their holding, you kinda start looking for the word “loser” written on your forehead.

There’s nothing illegal about this concept - of course you want to sell stocks at high levels, and if your stock is at a high enough level, you might as well get investors to buy at those prices. But when these things happen you wonder if QIP investors will ever believe Indian promoters any longer.

And Another One: C Mahendra Exports


Turns out Bennett got in at the worst time possible, after the share had run up nearly 3x over the previous year. And then, boom. Looks like Chipkaofication, no?

Any others you know about?

Forex Reserves Go To $318 bn, But RBI Sells Govt Bonds to Keep Money Supply Impact Flat

No Comments » Written on September 8th, 2014 by
Categories: RBI

As Forex Reserves Rise to $318 billion, we note that the reserve build-up has flattened a bit.


However in the longer term, the current dip could be just noise - the trend is up since August last year.


This much forex reserve increase should have led to inflation. Because to buy dollars, RBI has to print rupees. But Rajan’s RBI is different, and has been reducing the holding of Government securities to see that overall money supply is not impacted much.

(RBI’s balance sheet consists of assets and liabilities. The liabilities are largely the money they print. The assets are things like government bonds and forex reserves. If they increase forex reserves, the balance sheet size goes up, which can stoke monetary inflation since the total money supply in the country goes up)

Here’s a chart of the two big assets: Forex reserves (in rupees) and government bond holdings (effectively RBI’s claims on the government). Let’s look at how they have changed RBI’s balance sheet in FY 2014-15 (After April 1, 2014)


As you can see, Government bond holdings went up through April and May but after mid-May, Forex Reserves were bumped up big time, but since then Government bond holdings too have been reduced to make the net impact zero.

Also Read what we wrote in July 2014: RBI Sells 150,000 cr. of Government Bonds and that’s a Good Thing.

What’s also good is that RBI has cleaned up the forex reserve forward situation. It had obligations of selling back dollars in 2016 (due to the FCNR Swap in 2013). This forward obligation reduced the forex reserves (effectively) by about 10%, or $30 billion. But they have now set up other positions to offset this forward sale (probably a shorter term forward purchase) which means forex reserves are actually up and not just a financial shenanigan.


What we must watch for:

  • ECB has cut rates and promised a round of QE by buying assets. What happens to incoming dollars (or Euros) then?
  • The taper in the US will probably end in a few months. Does that impact the rupee-dollar equation? (And thus, when RBI intervenes, the reserves?)
  • The situation in Japan and China look increasingly worse, and it might just be that a continued drop in these countries takes India down as well.

PMIs Take A Breather in August 2014, Show Growth is Slowing

No Comments » Written on September 6th, 2014 by
Categories: PMI

India’s Purchasing Managers’ Index (PMI) released by HSBC/Markit, for August 2014, shows a small dip in growth to 51.6 from the 53 in July.


However it does remain above 50 (which means it’s expanding) so there’s less to worry about.

The Manufacturing part the PMI went from 53 in July to 52.4, a modest decline. The other component, the Service part of the PMI went from 52.2 down to 50.6. While this continues to expand the expansion is at a lower rate.

The best news is that inflation does seem to be moderating, says HSBC/Markit.

Macronomics: Gold Hurts the Current Account Again, and a BoP Primer

No Comments » Written on September 5th, 2014 by
Categories: Premium

RBI Released data on the Current Account and  shows us some elements that worry us.

We’ve gone “negative” net of Gold, again

One of the common complaints we have said is that because we import so much Gold, the current account is deeply negative. Last quarter when we analyzed the Current Account, we said that things have changed dramatically, that we are Positive, if you remove the influence of Gold Imports. Well, that has gone back to negative territory.

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The Fraud by Divya Book Company, Sending Books by VPP

No Comments » Written on September 5th, 2014 by
Categories: Suckered

We just registered a Private Limited Company and were warned by our service providers, VakilSearch, that we might receive parcels requiring us to pay to receive books, and we should not do so.

And in a couple of days, a parcel from “Divya Book Company” based in Ambedkar Nagar, Delhi lands up, with the postman asking for Rs. 2300 before we can accept the parcel. Since we weren’t born yesterday (only our company was!) we asked him to take it back.

Here’s a warning: Don’t pay for books you haven’t ordered.Here’s what the parcel will look like (click to enlarge).


On a search on the net, it turns out this is a persistent fraud. (In fact the image is borrowed from there)

Their mode of operation is:

  • Find new companies registered (MCA releases a list)
  • Send these books by VPP.
  • The books probably cost less than 100 rupees to print, and if people return the books, they probably pay another Rs. 100 or so as a charge. Their cost per sending is Rs. 200 or so.
  • Since they charge Rs. 2000+, all they have to do is sucker 1 out of 10 people, and the fraud works.

Note: The books “look” useful, but are probably a complete waste of time. They probably aren’t worth even a fraction of the Rs. 2300 you are expected to pay.

I’m posting this as a note on Capital Mind because it’s that kind of a scam. I’m even going to call it “Suckered”.

There are forms of “invoice scams” - where (mostly in the west) businesses receive fake invoices, having the name of some kind of magazine or such. Many accountants just pay up because they believe someone in the company must have ordered it.

What Divya Book Company is probably something they will defend saying they received orders for it. However, the best way to bankrupt them is to actively refuse all offers. I don’t know if writing about it helps, but it’s better than keeping quiet!

What is the “Balance of Payments”?

3 comments Written on September 4th, 2014 by
Categories: Concepts

You’ve heard of the current account deficit and all that. But what, really, is the concept?

Here’s a primer.

Every country has to deal with other countries.

  • It will trade in physical goods where things are transported from one country to the other. This typically happens through ports (sea, air) or over land.
  • It will trade in services when people in one country provide services to people in the other, and are paid for it. The services could be performed remotely (such as over the internet), or locally (such as an Indian travel agent charging fees to organize a tour for a group of people coming from Germany)
  • Workers from a country who have gone abroad will send back money (remittances or transfers).
  • There’s “income” such as foreign companies sending money to pay salaries to their Indian branch employees, investment income such as dividends earned by residents on their investments abroad, and so on.

All of this, you might see, is money that typically comes into a country (or goes out) but has no “obligation” to return. It’s like if you go pay a barber for a haircut, you don’t consider that the barber owes you something because you paid him or left your hair behind. The money is the barber’s, to use as he chooses, and you needn’t figure in his future plans.

Think of this as a “current” account. If what a country gets from abroad (credit) is less than what it pays out (debit), then you have what is called a Current Account Deficit. Otherwise, you have a Current Account Surplus.

The Capital Account

A capital transaction is when you use your money to buy an asset abroad, or when someone abroad transfers money to buy an asset in your country. This is what comes under a Capital Account.

Together the Capital and Current Accounts make the Balance of Payments.

We’ll divide the current account into a financial capital transaction (where you buy financial assets like fixed deposits, or shares, or bonds) and non-financial capital transaction (where you buy stuff that’s not financial, like a house or such).

The latter, the non-capital-financial-transaction, is what the IMF calls the Capital Account.

The former, or the Financial Account consists of:

  • Foreign Direct Investment where businesses abroad will create or buy into businesses inside a country with the goal of operating them or with a “strategic” focus.
  • Foreign Portfolio Investment where investors from abroad buy into companies’ shares or bonds largely to participate financially only (no strategic input), and to benefit from either rising prices of securities or from dividends/interest.
  • You might have Non Resident Deposits from a country’s citizens who went abroad and want to deposit money in their home country. (This is a form of portfolio investment, agreed)
  • Local companies may borrow from abroad.
  • The central bank will either buy incoming foreign currency or sell it, thus changing the “forex reserve” of the country.
  • There’s a lot of the little stuff we just call ‘Other’.

It’s All A Zero Sum Game

The concept of a Balance of Payments is that the Current Account, the Capital Account and the Financial Account will cancel out each other. The Current Account is, by definition, financed by the Capital/FInancial Accounts.

In India the RBI releases this information on a regular basis, every quarter. The Current Account Deficit is a particular source of worry, because it had been widening and can result in a serious correction in the dollar-rupee equation - which it did, in 2013.

Here’s the data, as of 2014 (Jun quarter).

We’ve created a “waterfall’ model for you to understand this concept better:


That is:

  • In the quarter, we net imported $34.6 billion of physical goods
  • we exported $17.06 billion of services (mostly IT service exports)
  • We saw an income payout of $6.3 billion (interest, dividends and the like)
  • There were transfers/remittances from workers abroad, of $16 bn
  • The net Current Account showed a Deficit of $7.837 billion.

And then, here’s how the Balance of Payments works (the big pieces)


As you can see, the Green elements add to the balance, while the red elements subtract from it.

  • FDI and FPI (Direct and Portfolio Investment from foreigners) added over $22 billion in the quarter, and NRI’s chipped in with $2.4 billion.
  • RBI bought $11.2 billion , which, as BoP goes, is a subtraction from the BoP. (Forex reserves went up by that much)
  • Our Current Account and Net Borrowing were more than well financed by the FDI and FPI coming in. This quarter in particular! (This is how India has been, and how the US has been as well)

We hope this helps you understand the Current and Capital Account, and the Concept called the Balance of Payments. 

Here are three videos you may like, that are by Khan Academy, on the concept. This is marginally different for India, but we hope it will help you understand things better.

Macronomics: Liquidity Trend Reverses, Banks Plough Cash Into RBI as Credit Growth Hits a 5 year Low

No Comments » Written on September 3rd, 2014 by
Categories: Premium

What’s happening with the banking system?

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Mallya Is Tagged a Wilful Defaulter, Affects UB Group Companies

No Comments » Written on September 3rd, 2014 by
Categories: Commentary, Defaults, KFA

Vijay Mallya’s been called a “wilful defaulter” by United Bank of India. This means he intentionally defaulted on loans, and they can say that because he had a personal guarantee for the loans taken by Kingfisher Airlines and if he doesn’t pay up while owning assets, he can be given that label.

The label isn’t just one in name, it has repurcussions. A wilful defaulter cannot be on the board of companies that borrow money from other banks, because those banks can call back loans or refuse to lend.

Mallya is on the board of United Spirits, UB Holdings and MCF, it seems. But this is not a major situation as he can step down and nominate his son instead, who is not tainted with the label.

Mallya will fight this in court, and it is likely to be a long case. He didn’t directly borrow the money, but he did stand guarantee. This ‘personal guarantee’ means that he is liable to repay if the company does not. It does seem that he has personal assets, and banks will want to chase those assets and recover whatever they can.

India doesn’t have a personal bankruptcy law, and bankers can take everything that Mallya owns, and demand money from him in the future too, until the amount is fully recovered with interest. This effectively makes it impossible for Mallya to do anything - who will bother even trying if the bank has a lien on your future? Everything he does now will be through family members - and it’s quite likely he has transferred what he owns to others so that the banks can’t get at them.

But the premise on which he’s been labelled a wilful defaulter is flimsy. The Grievance Redressal Committee refused to let KFA be represented by its lawyers, and therefore gave Mallya the label because he didn’t attend a meeting. It’s not apparent that this is enough to prove a wilful default; it can only be proved if the said lawyers stall too much or present frivolous arguments to delay the case.

In many such cases, lawyers use delaying tactics to put cases off forever. Judges in courts can push things onward fast if they want, but even that process can be “managed”. Hopefully, with India taking stronger action against corruption and crony capitalism, cases like this will be quick to deliver justice. If Mallya has the ability to pay and does not, then he will have to bear the consequences.

The Long Note: Dispelling Myths about Jan Dhan Bank Accounts

7 comments Written on September 3rd, 2014 by
Categories: Banks

The Jan Dhan programme announced by the Prime Minister supposedly opened 1.84 crore accounts on one day. Much has been made of this programme, from measuring it as financial inclusion to saving people from money lenders to calling it an outright bad loan mela.

But it is unlikely to be any of these things. Let’s first look at the program:

  • A zero balance bank account is opened for people with way reduced KYC requirements
  • Each account gets a Rupay card (debit)
  • An accident insurance of Rs. 1 lakh per account, and Rs. 30,000 life cover is provided.
  • After six months, the bankers can provide an overdraft of Rs. 5,000 per account if they deem it fit.

How does it help?

The reduced KYC helps the underprivileged people create bank accounts.

At Capital Mind, we have advocated reduced KYC requirements because that is just a stupid gate. It’s better instead to have better internal checks, and to use technology to do verification instead, because your fear isn’t the poor person, it’s the rich moneylaunderer or the terrorist, and you can track movements of large sums (or massive inter-account transfers of small sums in a way to build things up).

The poor have traditionally been stopped from creating bank accounts because of this silly gate. Once they are in, then they can use the account - to keep money, to receive subsidies, to make payments, to store money as non-cash.

Bankers complain that most such accounts are inactive, but there are two reasons for it. To meet goals, bankers do just about anything to open accounts, even if it’s by forcing an existing account holder to create a new one. Second, while bankers will open accounts under duress, they cannot be forced to help people operate these accounts and deposit/withdraw cash. If you’ve ever been to a public sector bank you will see how shoddily they treat these customers (and the private sector banks don’t even let them get in the door). They have to stand in long lines, and when they get to the head, they are told that some form needs to be filled, or that something else is missing and such nonsense. This is criminal negligence and deficiency in service, but who gives a damn?

The customer, that’s who. And unless this attitude changes, the underprivileged will distrust the banks and the bankers.

Accounts remain inoperative because banks don’t want to service them. And that’s also because we don’t have enough banks - we should let 300 banks bloom, and surely some of them will want the money enough to give proper service.

Anyhow, what the Jan Dhan programme does is enforce account opening. But, as we’ll see, it’s not much more than that.

The Insurance

The cost of a Rs. 30,000 life insurance and a Rs. 100,000 accident insurance, over a large group, is not more than Rs. 200 per year (more like Rs. 50-Rs. 100), so at best the cost for 2 crore accounts is Rs. 400 crore. This is not much, and in reality even 10 crore accounts will cost the government less than Rs. 1,000 cr. For getting that level of financial inclusion this is not a lot of money (compare this with over 40,000 cr. we spend on the NREGA program).

But the fear is that claims will be a mess. Since there is “reduced” KYC, it is unlikely that insurance documentation is complete. If someone dies, who gets to claim the money? Proving “next of kin” for the underprivileged is a huge mess, given the lack of documentation. And then, who do you claim from? Does the banker help? Will suicide count? Will pre-existing diseases count?

Would it not be better to pay the Rs. 100 to Rs. 200 directly into the account, and then have the person pay the insurance company himself/herself? Suddenly insurers will have to do actual work and that, as always, is a good thing.

While the premium may be paid by the government, the poor aren’t going to really benefit that much unless the insurance company proactively works to verify people+kin. If it doesn’t, then it opens a pandora’s box of fraudsters who, after knowing a bank customer has died and that they don’t know about the insurance, will claim the insurance in their name. I’m sure someone’s already working on this business plan.

The Overdraft

Supposedly the big problem is that these customers can get a Rs. 5,000 overdraft after six months. But technically such ODs are to be granted by the banker, after they see satisfactory performance. That means the risk of such ODs is on the banker, and defaults will be investigated. Basically, the government isn’t underwriting this OD.

If the government isn’t on the hock, this isn’t a dole program.

If the account is used to get subsidies (food, fertilizer or nrega, directly paid in), then the overdraft makes sense. The limit of Rs. 5,000 is without any merit - the banker should be free to decide what level of OD he wants to give (since the bank’s on the hook anyhow).

We don’t know the operational details, but putting the government as the “backer” of such ODs will definitely result in fraud. However, such fraud is easily investigated and traced, and if they start putting fraudsters (including bankers who connive with them) in jail, much of this activity can be curtailed.

The fear of fraud should not deter us from doing good things (the poor have little or no access to credit), and in fact if we step up investigation we can find fraud, punish offenders quickly and that deters such behaviour.

Even if you assume the government pays, and 10% of all such accounts become eligible for overdrafts and another 10% of those will default, having 7.5 crore accounts (the program target) will mean defaults in 7.5 lakh accounts, which is Rs. 375 cr. If this bothers you, then you haven’t really paid attention to the budget where random veterinary institutes get Rs. 100 cr. a year.

Where is this going?

The only obvious benefit is the reduced KYC. None of the real problems for banking of the poor will go away unless bankers cooperate, and honestly, for that, you need a few banks to fail, you need to create a lot more banks, ensure that corrupt bankers are jailed, and they’ll have to pull up their socks.

The second piece is that this eases subsidy payments directly into accounts. Most fraud in the subsidy game is through leakage since the money is paid to intermediaries. The fertilizer subsidy is paid to fertilizer companies, not farmers. The companies can fudge data so that they get paid more,and that’s a well entrenched game. Pay the farmer direct and have him buy on the market, and that changes equations very fast - the fertilizer companies are forced to get more efficient, the farmer gets a choice, and if there’s fraud, it’s detectible even years down the line through the payment chain.

Finally, the insurance and OD aren’t path breaking though they may help in some way. The insurance will have to be smooth, which we don’t expect right now. It’s better that such OD be based on collateral (like gold), earning capacity (incoming subsidy payments or earnings) and repayment history.

CAPM Portfolio at 143% IRR, Adding Two More Stocks

No Comments » Written on September 2nd, 2014 by
Categories: Premium

As the Nifty goes past 8,000 we rest on the hope that our portfolio has done well. Despite a few stop losses, things look good.

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Winners in the 3% August Move (Premium)

No Comments » Written on September 2nd, 2014 by
Categories: Premium


We’ve seen a good August with a 3% return, and the Nifty has its second best year since 1999 (and the fourth best ever!).

The best performers in August were in very different categories. Here’s a look at the top 10 in each of the market cap segments.

(Large cap: >10,000 cr. , Midcap = 1,000 to 10,000 cr.  and Small cap = 100 to 1000 cr. )

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Monthly Moves: 4 Consecutive Wins as Nifty Moves 3% in Aug, 26% return in 2014

1 Comment » Written on September 1st, 2014 by
Categories: MonthlyMoves, Nifty, Sensex

In another fantastic month, August gives us a 3% return on the index, which closed near 8,000 (Nifty). This is now four consecutive up-months.


On the Sensex, the streak runs to 7 months, with only January showing a negative number.


The indexes have moved 26% in 2014 till August. Such great times!

Highest GDP Growth since Dec 2011, But Unlikely To Sustain

1 Comment » Written on September 1st, 2014 by
Categories: Macro

India’s GDP growth for Q1 2015 (Jun 2015) has come in at 5.7%, the highest since December 2011.



This comes with a stellar performance from manufacturing, which brings a +3.5% to GDP after many quarters of contraction, and mining, which too returns to a positive growth number at +2.1%.


The biggest were Personal services (grew 9.1% in real terms) and construction at +4.8%.

Lower in terms of relative growth were Financial Services (lowest in six quarters) and Trade and Transport (lowest in four quarters). Agriculture too didn’t do that well.

While these are total growth numbers, the absolute numbers for mining and electricity are tiny compared to the others. If we look at how much each contributed to the 5.7% growth:


As you can see, it’s the manufacturing and Personal Services that have gone up phenomenally, which Financial Services has actually reduced its impact. Construction too made a a decent improvement, contributing 0.4%.

The Broad Components

From a component perspective, the Government helped hugely:



Private Consumption is the biggest element, 60% of our GDP. Growth there will easily define our GDP growth.

The first graph is the “Real” growth (i.e. net of inflation) and the second one is the nominal number, which is basically the actual underlying growth number, which has the inflation number built in.

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This might have been because of elections. But note that it was still lower than the corresponding growth last year (of >20% nominal).

Real and Nominal Growth

To compare growth before and after inflation, we must plot real and nominal growth in the same graph:


While real growth has increased, nominal growth has been on a downtrend. Fortunately the first quarter of 2013 (Jun 2013) was a down-spike, which cannot hope to be replicated in Q2 (Sep 2014).

In fact, at current levels of growth are we likely to see a high nominal growth number? Remember that the base is higher in Q2 2013, which was +13.55% nominal, driven by a massive 23% increase in exports, after the rupee hit rock bottom at 68 from 55 in the quarter.

With a higher nominal number last year (but a lower “real” growth number) nominal growth numbers might not grow quite that much. if we grew 10% and had 5% inflation (we have at least that much), then real growth will be at 5% or lower, which is lower than the current quarter.

It’s going to be a challenge. In fact, given the dropping levels of growth of financial services and the ongoing crisis situation in coal allocations, the bad monsoon and international cues, this quarter’s +5.7% might be difficult to beat in the next two.

Optionalysis: Reliability of Max Pain on the Day Before Expiry

No Comments » Written on August 29th, 2014 by
Categories: Premium

A quick look at all stocks and Max Pain values (calculated by Options Open Interest) as of yesterday shows why Option Pain might not be all that reliable.

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Six Concrete Ways India Can Build A Better Future

4 comments Written on August 28th, 2014 by
Categories: Articles

I write for Quartz India, on how India can build a better future by focussing on doing things better.

We pay too little attention to building things better, so that they last, and they cost less to maintain. So that they stay built, and free us up to focus on building other newer things in the future. We often don’t address the “better” piece in a budget and, in order to protect the incumbent, established and inefficient industries, actually disincentivize newer technology.

Here are a few things that we can change.

Making better roads and bridges with high-density polystyrene

The very material that we call “thermocol” is very rigid and tough, at a higher density. It has been used since 1972 in Norway to construct roads, as a filler that can replace soil or gravel, while we widen or build new roads. It resists compression, but the most important part is that it is very light and easily transportable (and can be cut on site). Also called Expanded PolyStyrene (EPS) or Geofoam, it has been used to build fills for bridges, for stadium seating and even for constructing houses.

EPS is light and so doesn’t load the underlying soil, and its rigidity allows for roads that don’t sink easy. And because it’s easy to cut and place on site, it reduces construction time and labour cost by not involving earth moving machinery, doing area-constrained expansion of existing roads and also for building in any weather.

The cost savings might be substantial in terms of reduced labour requirements (more road per person employed)—a highway in the US saw a cost reduction from $1 million to $160,000.

Read the whole piece. Do let me know what you think!

The VIX Is Close to All Time Lows; But Does That Make Options Worth Buying?

No Comments » Written on August 28th, 2014 by
Categories: Options

The VIX has touched close to an all time low at 13.07, and at this point options aren’t just cheap, they’re the cheapest they’ve ever been.

Since the Vix is really the implied volatility of the oncoming month’s options, if we plot the VIX with the actual one month move after the date, we might see if the “low” VIX is tradable. A VIX of 13 or so probably expects the index to move about 3% in the coming month. To give you an example, today:

  • the index is at 7936,
  • the September 7900 call/put are at 156/74,
  • which implies a range of 7630-8130, if you sold both and got a premium of Rs. 230.
  • which is about 3% in either direction.

So technically a low Vix (15 or below) means that 3-4% moves are probably acceptable, but anything more should give a straddle buyer a profit.

Let’s see the plot:



I’ve shaded the “non profitable” zone of +4% to -4%. If a one month move lies within that range it’s not all that great for an option buyer.

In the last 1.5 years, we’ve hit the below 15 range four times.

  • In Mar 2013, when we hit the 13 level, the Nifty moved -6% in the month. (Put option buyers would have done well)
  • In end-April 2013, a similar move of the VIX saw the index move about 1% to 3% (Not good)
  • In March 2014, the move was beyond +5% in a month, while the VIX was low. (Call buyers positive)
  • ANd now, since July, the VIX has been falling. We don’t know what the Index will look like a month later.

There are other smaller data points out there, but I think there’s no clear trade this way or that.

But of course these are too few data points, so let’s take a longer term look.


Again, here, the VIX shows it was benign in Oct 2012 to March 2013 (mosly under 15) but the one month index move wasnt quite much.

It’s a little too early to say this but we are probably going to see some volatility in September. But will it be enough to cover a 240 move in either direction?

MA20 Update: Short Term Weak Reversal Visible

No Comments » Written on August 26th, 2014 by
Categories: Premium

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Macronomics: Bank Fraud Analysis Shows PSU Banks Get the Least, But Largest Frauds

No Comments » Written on August 26th, 2014 by
Categories: Banks, Premium

In July 2013, Dr. K. C. Chakrabarty , the Deputy Governor of the RBI, addressed the National Conference on Financial Fraud organized by ASSOCHAM at New Delhi. We take some excerpts from his speech to analyse the numbers behinds Financial Frauds that were committed.

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Rulings on Cars and Coal Will Take Their Toll, Haunted by the Past

3 comments Written on August 26th, 2014 by
Categories: Commentary

Two rulings have spooked markets yesterday, and the impact continues today.

First the Supreme Court declared that all coal block allotments since 1993 were arbitrary, did not follow due process and therefore are illegal. It will decide what to do with them on 1 September. We don’t really know if they will cancel such allocations totally, reassign them through auctions, impose a penalty, or demand a renegotiation of rights.

The most impacted seem to be Jindal Steel and Power, which lost 10% yesterday and is down about 4% today.The stock has fallen from Rs. 292 to Rs. 242. The company has existing operational coal blocks and also upcoming projects based on new allocations. These are all suspect now.

 Hindalco too lost 10% yesterday but has recovered a bit today. According to a MorningStar analyst, Piyush Jain, the company has a 10%+ increase in costs if it didn’t have a captive coal block for its upcoming smelter.

Tata Steel and many other metal players too have been hit. Power companies like Tata Power, Adani power and Reliance Power are down too (most Indian power generation capacity is coal based). Financiers like PFC and many banks have been hit.

Our view: This is going to unravel on September 1, so we’d wait to see the impact. Right now, there is some bottom fishing going on in stocks like Hindalco, and those may be bets on the Aluminium cycle (prices are starting to go up) which might make up for the margin pressure.

The second was an order by the Competition Commission of India (CCI) fining car companies - nearly all of them - a collective amount of Rs. 2545 cr. They supposedly colluded to deny access to independent repair workshops to their spare parts and diagnostic tools. These were restricted to their own service workshops (or their dealers’) which amounts to a monopolistic practice.

Our view: Auto stocks aren’t down so badly because the CCI order may get challenged. However this is 2% of their turnover, which might anyhow not be a big enough amount to fret about; these companies will challenge the decision but even at the extreme it won’t hurt them enough.

What’s happening, though, is that some of these chickens are coming home to roost. While the situation is addressed - and hopefully we will get free and fair auctions - we will see power plants scampering around to get coal which they thought they owned but no longer do. This might hurt banks much more than it hurts these companies, who at the very least have an excuse that they couldn’t have predicted this.

The banks though will be worried if the cash flow situation at the large companies deteriorates; they already face challenges in infrastructure, real estate and power, and this judgement could create hurdles for what they thought were more sound investments.

It’s also quite worrying to see rulings on stuff as long past as 1993. The coal block piece is effectively a retrospective issue, but then it’s been in the courts for over a decade now. One way to deal with things is to charge heavy penalties but to keep allocations going; this won’t hurt things going forward but they pay for the mistakes of the past. The other way is to charge penalties and at the same time, ask for complete rebidding and auctions of all blocks. Let’s see what the supreme court does.

Nifty EPS and P/E Chart: EPS Growth Dips to 10%

Comments Off Written on August 25th, 2014 by
Categories: Nifty

Nifty EPS Growth drops suddenly to 10% in the last few days. The trailing 12 month P/E (non consolidated) is at 20. This kind of thing happens a lot; but it’s remarkable that for the last seven years, our P/E ratio never went below our EPS growth rate (trailing).


Even the five year compounded growth rate on EPS is still at 11.4%, which is quite low considering these are the top companies in the country.

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We’re at all time highs on the index, but EPS growth doesn’t look quite that attractive. One of these days I will do the hard work of getting consolidated EPS numbers and tracking growth over time.

IPO Analysis: Snowman Logistics, a Cold-Chain Player (Premium)

Comments Off Written on August 25th, 2014 by
Categories: Premium


Here's a post from the Capital Mind Site that we thought would be of interest in your mailbox, as the IPO starts tomorrow.

Snowman Logistics is offering shares to the public in an Initial Public Offer (IPO)

• 26th to 28th August 2014

• 4.2 cr. shares on offer, 10% for retail (Up to Rs. 200,000 investment)

• Price: Rs. 44 to Rs. 47

• Total IPO size of Rs. 200 cr. or so.

• Values the company at around Rs. 800 cr. (25% will be in the public offer)

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IPO Analysis: Snowman Logistics, a Cold-Chain Player

8 comments Written on August 25th, 2014 by
Categories: IPO

Snowman Logistics is offering shares to the public in an Initial Public Offer (IPO)

  • 26th to 28th August 2014
  • 4.2 cr. shares on offer, 10% for retail (Up to Rs. 200,000 investment)
  • Price: Rs. 44 to Rs. 47
  • Total IPO size of Rs. 200 cr. or so.
  • Values the company at around Rs. 800 cr. (25% will be in the public offer)

What does it do?

They are largely into cold chain warehouses and distribution. Snowman owns 23 temperature controlled warehouses, in most big cities of India. They store and transport food items, including perishable (which is why they need refrigeration and temp control).

It works with some marquee clients like HUL, McCain and Ferrero (you’ve eaten the Rochers?)

Gateway Distriparks owns 54% of the company. Mitsubishi owns 15%, and Norwest (a PE Fund) owns 14%. The investors seem to be reasonably well informed.

Where will the money go?

They’ll build 6 new temperature controlled warehouses and two ambient warehouses with about Rs. 128 cr. and need 8 cr. for working capital. The rest is general stuff.


Revenues have grown nearly 40% to 155 cr. in FY 2014. 



They have an EPS of Rs. 1.96 in 2014, which values the company at about 24 P/E. Profit growth has been not so great; At Rs. 23.27 cr. in FY 2014, versus Rs. 19.9 cr. in FY 2013 (Growth: 17%)



Whoa! Net Profit Higher than Profit Before Taxes?

PBT fell from the earlier year largely because of high finance costs since the company took a bridge loan of 76 cr. But then how come profit AFTER tax is higher?

The company gets special tax treatment because it’s into cold chain warehousing. New cold chain warehouses get a 150% deduction on the capital expenses on set up. But they have to pay minimum alternate tax (about 20%) on the profits BEFORE this deduction. On the profit before taxes they pay MAT and add the “deferred tax credit” which means net profits go up.

This complicates the depreciation angle too. If you claim a deduction on the capital expense of something, you don’t get to claim depreciation in the tax statement. But depreciation does apply to the item as it has a life and must be replaced, so you have to calculate the depreciation and put it back as a “deferred liability”.

This can get confusing.

In effect, the net impact is to reduce income and taxes in the initial years (because there is a deduction for the expense on the plant) but in the longer term growth from the investments will drive profits (not a deferred tax asset).

This complicates valuation.

Do you value this company as a multiple of (currently depressed) earnings? Are these tax asset issues sustainable?

And then, there’s debt. The company has Rs. 130 cr. of debt. Some of this will be paid back through the IPO proceeds (it’s been taken to start work on the new stuff). With infrastructure status the company might get lower cost debt, and perhaps longer term debt as well.

There’s not that much in terms of listed competition, but there’s Concor with 20 times trailing earnings or Gati with 30+ P/E. The company is in the middle, but it’s only business is the cold chain.

Our answer is: it depends. Logistics, especially cold chain, is a a good business, as distribution and storage become more and more important to the Indian food supply chain.

Our View

The company valuation is reasonable. It’s not cheap, and it’s not too expensive.

In the longer term (3 years+), assuming the company can push up earnings 40% to 50%, we are likely to see cold chain warehousing become really big. The concept is sound - you want to keep produce fresh, and transport it in refrigerated vehicles (eg. Milk) so you will need the Snowman kind of logistics company. In the medium term, as more and more food gets processed, stored and forwarded, the company should get a great deal of revenue.

The IPO market is just starting up and it looks like nearly everyone advises a buy on the counter. This is dangerous (watch out for the mad crowd) but it’s not yet looking insane. This stock isn’t ludicrously priced, and the industry is actually worth investing in.

The risks are that warehousing costs rise a lot due to, say, increase in diesel prices, or transport costs. Or that the tax policy goes through some major reversal. They are low, in our opinion.

You are unlikely to get a lot of shares applying for the IPO, but it may be prudent to invest a small amount anyhow, since all they will do is block the amount in your bank account for the period even if you don’t get allocation. As the company releases results and progresses we might add more to our allocation as well.

RBI: No “Cheating” Two Factor Auth. Clamps Down on Uber and Others.

43 comments Written on August 23rd, 2014 by
Categories: RBI

RBI has, in a notification, banned companies like Uber (the taxi service) from charging Indian customers through US gateways and circumventing two factor authentication.

What the Heck is Going On?

Uber, a taxi service, takes your credit card details (card number, CVV2, expiry date). In India, of course, this would be safe to give, because online web sites cannot use your card to deduct money with just these details. Each transaction needs a “second factor” authentication, where a preset second password has to be entered on the credit card’s website for every transaction. Just with the card details, Uber couldn’t do a thing.

That’s what you thought.

Uber, though, wanted to do its thing. You take a taxi, but you don’t know how much it costs. Uber can’t bill you upfront because they don’t know how much, and they can’t "swipe” your card in the taxi because hey, that would ratchet up their cost tremendously (swipe machine in every car!).

So what they do is to effectively “work around the system”. The card details you give are used in a transaction gateway abroad.  These foreign gateways do not require a second factor auth, and will bill your card using just the details you provided. At the end of the ride, the driver clicks an “end ride” button, which then prompts Uber to bill you from their foreign gateway.

Uber would bring that money back in some other way (either as income or investment from their US entity to the Indian one), and use it to pay the taxi driver.

Uber ensured that the rupee amount billed to you was correct, using real time exchange rates (so you never saw a “dollar” charge, just a rupee fee for the exact amount). But some people might have been charged a conversion charge since the billing was effectively in dollars.

Why is this “cheating”?

The two factor auth was introduced to protect people on a per-transaction basis. So no one could steal your card and use it to transact online without your second password (which is not provided to anyone).

If someone takes your card in India and notes down the details, they can easily register on Uber and start using it. For you to find and reverse these transactions will have to involve complaints to your card company, the foreign gateway and the legal system, which is just too much of a pain. The Two Factor Auth prevents this madness.

That’s one reason. The other is that if the transaction’s being done in India between residents, why send the money out and bring it back, and incur unnecessary volatility on the currency? It may not happen today but if unchecked, obviously it will result in USD conversion of every rupee transaction. (The telecom equivalent is that you connect to an Indian website from India, but through hops that take you to the US and back)

Here’s an example of why this can be dangerous: Uber doesn’t call me to confirm I need a ride. My kids use the phone and can accidentally book something; and by the time I realize it and cancel, I might be charged a cancellation fee of Rs. 100 to Rs. 150. This is something they charge to my card anyhow, and they can do so because they have card details; and this is unfair, as they can charge any arbitrary amount any time and I have to find out and refute each one!

Two factor auth is what makes me comfortable in using cards online - this way I can be sure that the sites that take my details (including Flipkart and the like) don’t have access to one detail that will only put on the bank website (the second password). To bypass this security is to reduce such comfort.

(This isn’t about Uber; it’s just an example to demonstrate context. Indian CC transactions are safer for end-users because of the two factor, though as a system we need to ease the friction in two factor)

But I can’t even Buy Hosting?

There is a fear that legit purchases of foreign services will be banned. But the notification is clear - it’s only for transactions between residents where it’s clearly something that should have stayed in INR.

So buying Hosting on Amazon is fine; the service is provided abroad and normally this kind of thing would involve a forex transaction. Buying books off Amazon US is fine. But you will need two factor auth to buy from Amazon India.

The Technical Details

Here’s the relevant part of the notification.

3. It has come to our notice that despite the above clarifications there are instances of card not present transactions being effected without the mandated additional authentication/validation even where the underlying transactions are essentially taking place between two residents in India (card issued in India being used for purchase of goods and service offered by a merchant/service provider in India). It is also observed that these entities are evading the mandate of additional authentication/validation by following business / payment models which are resulting in foreign exchange outflow. Such camouflaging and flouting of extant instructions on card security, which has been made possible by merchant transactions (for underlying sale of goods / services within India) being acquired by banks located overseas resulting in an outflow of foreign exchange in the settlement of these transactions, is not acceptable as this is in violation of the directives issued under the Payment and Settlement Systems Act 2007 besides the requirements under the Foreign Exchange Management Act, 1999.

4. In view of the above, it is advised that entities adopting such practices leading to willful non-adherence and violation of extant instructions should immediately put a stop to such arrangements.

5. It is further advised that where cards issued by banks in India are used for making card not present payments towards purchase of goods and services provided within the country, the acquisition of such transactions has to be through a bank in India and the transaction should necessarily settle only in Indian currency, in adherence to extant instructions on security of card payments.

What does this mean?

  • RBI doesn’t like it when both parties are in India, but a payment is made by one to the other through a foreign gateway. Not because of any other reason, but because each transaction would result in outflow of forex and then an inflow, which is both unnecessary and a violation of the payments act.
  • So Uber is bad.
  • Amazon webservices is good (since the server is located abroad, and there’s no round tripping of the money).
  • Paying your web host is good.
  • Companies like Uber (and there are many now) should just stop this practice.
  • Banks need to be vigilant about services that are provided between Indian residents, and will have to introduce checks to ensure this happens. This is not rocket science: they can create a complaint mechanism where if you complain, they investigate, and if needed, effectively block such services through the Visa/Mastercard/Amex network.

Who Else?

It’s not just Uber. Companies like Freshdesk too have US entities that charge money from Indian subscribers in dollars, according to qz, because they need to do recurring payments. (Not possible in Ind due to need for second authentication).

Some other online companies do it because they don’t know how much they need to chare customers. Others because the billing details are stored and so rebilling an existing customer is easier.

All these will have to stop. They get until Oct 31, 2014 to fix things, so nothing changes overnight. But for companies like Uber, the business model will need to change. (It could still hold credit card details and ask for a prepayment for every ride, with an adjustment of the actual amount later)

Note: Yes, Uber is not a Taxi Service. But it’s a service you use to call a car for hire that will take you from place A to place B. You say Tom-ay-to, I say Tom-ah-to….

Update: Aditya in the comments mentions an elegant solution. That Uber be allowed to charge a certain amount on your card, as a "lien". This just blocks the amount from the card, but doesn't charge you yet - when your ride is done, it deducts the actual amount, and frees the rest of the lien. This transaction can use a 2 factor authentication, and might be more palatable. However, if the billed amount is greater than the lien (because someone changed destinations) it could be a problem but come on, this kind of stuff will even out eventually (and they can just pay the driver the difference, or agree to pay later). 

FIIs Eat Up Their Debt Limit in a 16,000 cr. Mega Purchase (Premium)

Comments Off Written on August 22nd, 2014 by
Categories: FII, Premium


FIIs just bought a truckload of debt. And by a truck load, we mean the kind of truck that can carry Rs. 16,000 crores.

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All You Wanted to Know About The Bhushan Steel Situation

1 Comment » Written on August 22nd, 2014 by
Categories: Premium


Note: This post was sent to Capital Mind Premium subscribers on Aug 20, but we've made it open for everyone. Do take a look!

The Bhushan Steel debacle continues. After the promoter, Neeraj Singal was arrested in a bribery scandal, supposedly giving Rs. 50 lakh to Syndicate Bank CMD S.K. Jain, in a much publicised CBI arrest. The money was allegedly being given to get a loan extension which, given Bhushan Steel’s books, would not have otherwise been forthcoming.

The Massive Debt Overhang

It has debt of over Rs. 40,000 cr. and all of it continues to be “standard”, it seems. That means there isn’t a default of interest or principal on the facilities.

The debt, from CARE’s rating report is:

  • 29,776 cr. of long term bank loans
  • 6,200 cr. of short term bank loans
  • 1,300 cr. of commercial paper
  • 2,500 cr. of others (NCDs, and other stuff)

That’s a Rs. 35,960 cr. loan that banks have given it. The rest - about 3,800 cr. - is in debentures and commercial paper. This adds up to nearly Rs. 40,000 cr.

(Which is a little short of 1% of the total country’s credit of 65 lakh crore. Put another way, just 150 companies with the debt of Bhushan Steel add up to all the debt in the country!)

This is huge by any standards. Even a Kingfisher’s massive default of Rs. 7,500 cr. would not sound as massive as an exposure of Rs. 40,000 cr. And according to Business Standard, there are 51 banks who’ve lent to it.

The Share Has Collapsed

There’s only one tiny little problem: Bhushan Steel’s total market cap, at today’s price of Rs. 145, is around Rs. 3,300 cr. That’s less than 10% of the overall debt of the company.


Promoters owned 71% of the company’s stock before it started to collapse. About 3/4th of that, or 53% of the company, has been pledged to lenders.

Even though the stock’s in the lower circuit, the company’s shares have been invoked by lenders in the last few days. Around 2 cr. shares (or around 10% of the company) have been “invoked”. This would have been sold in the market as invocation usually means lenders are trying to recover their money.

As long as lenders continue to sell shares, the share price will keep falling.

The situation

They lost Rs. 141 cr. in the last quarter, the worst in the last few years.



It’s not easy to run this company - they paid over 1800 cr. in interest in the last 12 months, which is a 50% increase from the 1200 cr. in FY13. (Some of the loans are denominated in dollars, which lets them be cheaper) In fact, in the last quarter, they earned an EBIDTA of Rs. 700 cr. of which Rs. 500 cr. was paid out as interest alone! (Look at the red box above - see how much more of a percentage of profit the company is paying out as interest)

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Banks should have been worried ages ago, but they apparently aren’t paid to be worried as long as there is no default. There wasn’t one - and Bhushan Steel was getting even more loans (their debt increased substantially, from 19,000 cr. in 2012 to nearly 40,000 cr. in 2014).

Now, as the Syndicate Bank story comes out, it’s obvious that they are not creditworthy and are trying all they can to just stay afloat. With the bribe case, no bank will want to lend more to them. What does this mean for banks?

Recovery: Sell Assets, Raise Equity, Oversee Operations

Banks are trying to fix things by selling non-core assets. The company owns four power plants, a Rs. 100 cr. worth stake in Orissa Sponge Iron and Steel, and Coal mines in India and Australia.



Source: Company Presentation.

Banks want Bhushan Steel to raise equity, of the order of $1 bn, but it’s not apparent how a company that’s worth Rs. 3,300 cr. today can raise Rs. 6,000 cr. in equity.

Banks want to appoint three directors to the board, but we don’t believe that will make a huge difference - it is quite unlikely that new directors will be able to control the madness that this has already become. They also want to appoint a forensic auditor, and a deep down forensic audit may reveal more issues than bankers would like to reveal, or even know. (Because that would definitely mark this asset as “non-standard”)

Some banks have even asked the company to sell core assets and lease them back.

In the worst case, the banks will have to take over the company and sell all the assets. It will however still mean a substantial loss, in our opinion. Estimates are that a plant costs Rs. 6,000 cr. per million ton capacity, and Bhushan, after its expansion is complete, will have 5.2 million tonnes per annum. That will still leave a hole of about 10,000 cr. in the system.. (And then, no one gets the market price in distress, people will pay lower)

Rating agencies have downgraded the debt multiple times. CARE has downgraded debt six notches in two months to BB, and Brickwork rates it at C, both of which will require banks to provision more. With no payments for 60 days, the account is an “SMA2” status, which is bank parlance for “oh-damn-this-thing-is-becoming-NPA-soon”.

Note: Too many people are saying that this was "obvious" because the debt to equity ratio was lousy etc. But a lot of companies have bad debt-to-equity ratios, even good ones before they turned the corner. We don't think it was obvious, and if you'd showed us public data earlier we might not have been unduly worried. Even then, it's apparent here that there was a lot of give-and-take involved and possibly, there is even more hidden out there than we know.

The End Game

This is a big exposure, and larger than Kingfisher. Assuming they can find buyers that will pay Rs. 30,000 cr. the net exposure may only be Rs. 10,000 cr. Banks may tide over this one, as there could be buyers for Bhushan Steel. However, in that eventuality, the shareholders will get zero.

The other alternative is that the management fixes company issues; however, it’s unlikely that happens unless the debt overhang is gone or reduced. Their capacity expansion comes online later this year (hopefully) and that production will help them get more revenue and interest paying ability. But till then they need cash, and banks aren’t going to lend cash easily.

In either case, debt will have to be restructured. This looks like a viable longer term asset (if there is no siphoning out of the money). But honestly, with all the bribes and what not, it’s not going to be a huge surprise if the forensic audit reveals that all is not what it seems.

The share isn’t a buy. However, the stock will jump on news - either of a restructuring (which has to happen), an asset sale, or just the fact that the sellers are exhausted and stopped selling. The rot might run much deeper, or this whole thing can be glossed over and RBI can protect everyone by just giving all bankers leeway on the provisioning in case of a restructure.

Banking: The problem isn’t just a Bhushan Steel. It’s the fact that there are such large exposures in the system that are waiting to be revealed, and banks will take the brunt of these revelations. Today, news comes in that Winsome Diamonds, a 6500 cr. default, might have involved siphoning of money abroad. The Kingfisher and Deccan Chronicle defaults are already known. We all know there are large exposures to RCOM, JP Associates and even Suzlon. Banks now have a large exposure to commercial real estate, which is going through the lowest phase ever.

The point is that if a few of these defaults happen together, we’re going to have a serious situation in banks, both private and public. Strangely, while we had mentioned that all was not well with United Bank of India earlier this year, one of the lenders to Bhushan Steel was United bank, which still has 10% NPA (and Bhushan Steel, remember, is not an NPA).

The key takeaway is that this is clean-up time. The mandate must have come from the government, and the CBI has caught more corruption in high places since. The result may be intermediate turmoil, but it’s positive for the economy in the long term.



Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.