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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

GMR Dilutes 12% Issuing Equity to Temasek and Manipal Pai Family

No Comments » Written on February 24th, 2014 by
Categories: GMR Infra
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GMR Infrastructure has had to compensate private equity investors who bought into their energy subsidiary. After getting Rs. 1,375 cr. as convertible debt from private equity investors in its subsidiary, GMR Energy Limited, in 2010, the investors were promised exits through an IPO. Which isn’t exactly forthcoming. Therefore the parent company will be diluted and convertible debt alloted to those investors.

GMR will dilute equity 12% in exchange for compulsorily convertible preference shares of Rs. 1137 cr. from the original PE Investors. These will be converted around 17 to 18 months later (Sep and Oct 2015)

The prices they will pay are market prices, the higher of past six month and two week average weekly closing prices - at this time the price works out to around Rs. 21, but the price calculation will be done after 17/18 months.

GMR’s equity will increase from 389 cr. shares to 443 cr. shares. I could talk about their Earnings Per Share if they had any earnings; they just posted a Rs. 441 cr. loss.

Who are the private equity investors?

While the mainstream news networks talk about “Temasek and an IDFC consortium” this is slightly misleading.

Temasek is the biggest investor in the lot, getting to buy Rs. 788 cr. worth of GMR stock, and will hold about 8.5% of GMR Infra, if converted at today’s prices.

IDFC is a tiny piece, only Rs. 40 cr. , or 0.45% of GMR Infra.

The Tulsa Community Foundation gets 54 cr. (0.6%) and what seems like an Indian construction family company, Premier Edu-Infra, buys 42 cr. (0.45%)

The biggest non-Temasek investor will be the Manipal Pai family (Ranjan Pai and co) who have to put in Rs. 210 cr. (2.26%) Of course Ranjan Pai also has investments from IDFC in other group companies, so it’s a complicated loop.

There’s about Rs. 270 cr. of residual investment in GMR Energy that will continue.

The Company Won’t Benefit

The money invested is likely to flow back to these investors after flowing through to the subsidiary (because it’s just a rejig of the original investment).

It’s plain dilution, and GMR infra isn’t going to save much on interest costs or actual debt. The original investment in GMR Energy too was in convertible debt. Effectively its dilution for the company’s past borrowings through a subsidiary, a factor that needs to be considered when valuing shares of this company.

Lesson: So now, apart from knowing who owns shares your company has, you must know who owns preference shares in a subsidiary of the company, and whether that will eventually dilute your stake. 

GMR Infra listed at Rs. 40 (post-split price). I didn’t like it. The price went to Rs. 1,000, and I was feeling stupid. Then it fell all the way to Rs. 62, and I still didn’t like it. And right now, for me, there’s no real reason to like it either.

Note: if the stock doubles from here, it will return you exactly what you invested in 2006 if you bought into the IPO.

Disclosure: No positions.

The Absurd Situation in Greece: Mostly Second-Hand and Small Cars After Crazy Tax Laws

No Comments » Written on February 22nd, 2014 by
Categories: Greece
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Greece has had multiple problems in the past, and has required a massive bailout from the EU which has bought its bonds in exchange for a program requiring that the government cut expenses and increase revenues.

The action has resulted in an impact to car ownership. In a post on reddit (HT Madhu Menon), “kirlefteris” says:

Cars are taxed according to engine displacement. Extra luxury tax is also applied by displacement, and not real cost. For owning a car, you must "justify" being able to afford it, by an absurd system of "supposed income", again based on displacement. Anything above the "supposed income" is taxed by 26%.

Anything above 1929 cc is supposedly taxed extra. And then the requirement to “justify” that you have the money is a very interesting concept.

This could be because Greece wants to increase revenue. A lot of Greeks hide Income, like Indians in India. The Government has gotten very strict about finding out if people have high income. They assume that if you can afford a big car, you ought to have that kind of income, otherwise they ding you for taxes.

The other thing is that such a rule prevents outflow of Euros from Greece since most cars are imported. Greece can’t afford a wide current account deficit either - they don’t have a currency of their own to devalue; so they have to finance that deficit by borrowing, and they’ve already gotten a taste of what it is to borrow what you can’t afford to repay.

So what do you do if you’re a borderline case? Like a guy saving for three years to buy his SUV? You just got screwed. So you buy a smaller car, or use loopholes like buying an older car (which, presumably doesn’t result in imports so it’s not too bad). And:

As a result, 90% of the cars on the streets are under 1300cc, and at least 5 or more years old. The realistic dream car is the new Yaris Diesel. The average "good" car is the Suzuki Swift 1.2. The show off/douchebag car is the BMW 316i, and yes, they make 1600cc versions of it.

Luxury car buyers are taxed as if they had that kind of income to support the purchase. So people with luxury cars get very low resale values. And it seems some car dealerships have figured out how to make a profit:

Some Greek car dealers, however, have seen an opportunity. Instead of importing such cars, they now do the reverse, shipping used luxury cars out of the country to Germany and Saudi Arabia, according to George Pappas, a spokesman for Sarakakis, one of the largest car dealerships in Athens.

The most interesting thing is that if you’re a greek resident for five years, you can’t even leave easily:

If an individual who has been a Greek tax resident for five consecutive years, amends his/her tax residency status, he/she will be considered a Greek tax resident and be taxed in Greece on his/her worldwide income for five years following the amendment of his/her Greek tax residency status if the following conditions are cumulatively satisfied:

  • the individual becomes tax resident in any country having a preferential tax regime
  • the individual has substantial financial interests in Greece.

Preferential tax regimes are determined as those in which the tax rate is equal to of less than 60 percent of the Greek tax rate.

So, you leave to come to, say, Singapore, where taxes are 20% (Greece has 42% personal tax in the highest bracket) and you will have to continue to pay Greek taxes as if you were a resident. Of course they can’t enforce this easily, but if you ever have to visit Greece again, they could easily ding you for back taxes.

Basically Greek citizens are paying for their past sins, or that of their government. The problem is that this kind of austerity will simply continue, and Greek citizens will continue to find ways to not pay these taxes. Without people buying luxury cars and expensive things, the top end of the economy (which typically pays most of the taxes, both income and value-added) will simply stall, and revenue to the government will reduce, not increase. They can’t cut expenses by that much, now that they’ve squeezed as much as they could.

The best thing to do is to get out of the Euro and default on the past loans (or to pay in their own currency after it is devalued tremendously). That will guarantee a recession but also guarantee a recovery within five years - like Iceland. Currently it seems like Greece is sitting frozen in a foetal position waiting for something, just anything, to happen.

Private Banks Hike Rates, Public Sector Banks Drop Rates Since 2012

No Comments » Written on February 21st, 2014 by
Categories: Banks
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The RBI released some interesting data today about interest rates on a bank sector wise basis. While we focus on the repo rate, what really matters is the rates at which banks lend onward. And that rate has, as a whole, been coming down!

Let’s first look at the repo rate of the RBI in the last two years. We might have moved to hiking rates recently, but it still remains lower than the highs in early 2012.


And then let’s look at the new data: the lending rates of banks, weighted by the rupee amount of each loan and then averaged, on a bank-group basis:


You’ll notice:

  • Rates have fallen from about 12.6% (for the system as a whole) in January 2012, to about 12.31% in Sep 2013. This remains at a 4% spread above the repo rates.
  • For public sector banks - which are the biggest banks as a whole and are responsible for about 70% of all lending, interest rates since 2012 have only gone down.
  • Private sector and Foreign banks have either been steady or hiked rates, even though, till Sep 2013, the cost of repo was falling!

This data is only till Sep 2013, which was the start of the rate hiking cycle. We’ll know in a few months what lending rates were for the December quarter - are we going to see a sharp move up? And will private banks have moved their rates even higher?

My view is that Private banks have realized that there are big NPAs coming, and raised rates. Public banks have been politically motivated to not do this; which is why they lent more, at lower rates, and their NPAs are very high and unmanageable today.

Premium: The Meteoric Rise of a Shrimp Exporter – Will it Last?

1 Comment » Written on February 21st, 2014 by
Categories: Premium

Archived for Capital Mind Premium subscribers, sent on 21 Feb 2014. (Subscribe now!)

Sometimes there are seemingly awesome stocks and just looking at them makes you wonder, “If I had invested even Rs. 10,000 in 2009….”. But among these are stocks that see both awesome returns and huge heartbreaks. And when a stock goes up 30% in a week, you have to ask whether the bus still has some distance to go or have you missed it?

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Optionalysis: Exit Strategies When You’re Making a Loss

No Comments » Written on February 21st, 2014 by
Categories: Options, Premium

This is an archive of Optionalysis, for Capital Mind Premium subscribers, sent on Feb 18. 2014. Subscribe now!

In Optionalysis today, let's talk about exit strategies, where we find ourselves in a loss making situation on the single position: ICICI.

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Taibbi On Crony Capitalism, And Me on How It’s All Familiar to us Indians

12 comments Written on February 21st, 2014 by
Categories: Commentary

In one of his last pieces for Rolling Stone, the brilliant Matt Taibbi writes about a piece of legislation in the US that has probably equalled and even surpassed India in cronyism: The Gramm-Leach-Bailey act, or the Financial Services Modernization Act of 1999.

The key was repealing – or "modifying," as bill proponents put it – the famed Glass-Steagall Act separating bankers and brokers, which had been passed in 1933 to prevent conflicts of interest within the finance sector that had led to the Great Depression. Now, commercial banks would be allowed to merge with investment banks and insurance companies, creating financial megafirms potentially far more powerful than had ever existed in America.

All of this was big enough news in itself. But it would take half a generation – till now, basically – to understand the most explosive part of the bill, which additionally legalized new forms of monopoly, allowing banks to merge with heavy industry. A tiny provision in the bill also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally."

Complementary to a financial activity. What the hell did that mean?

The piece is incredible. It’s in five parts, so don’t miss the little links at the bottom.

Matt writes about how large entities like Goldman and Morgan Stanley have become huge banks, but also exert tremendous control on the commodities markets. Goldman reportedly controls a lot of the warehouses that store the metal that’s traded on commodities exchanges, and in order to charge higher rents, just kept moving them between warehouses. And they get away because, well because.

The banks have colluded time and time over to screw the rest of the US and the world, and they repeatedly get away.

This isn’t unfamiliar to us in India. We hear of the big guys - be it Lanco or Reliance or Praful Patel or whoever - allegedly twisting the system to their advantage. And we’re used to it. The government, it does things to its own advantage, like bailing out Air India with taxpayer money and then abusing it to help themselves. The big guys have the power, and we’re outraged when we hear of it, and when some "party” decides to fix things all they do is forgive a hundred defaulters their electricity bills and run off into the distance.

It is a shame, a disgrace, that we allow this to happen. That we will not debate our laws, like we didn’t debate the internet law that allows any random joker to take down anything because he’s frikking offended, the maker of which should have been fed to the wolves. That we stand by when the supreme court says it can’t decriminalize gay behaviour because the lawmakers have to remove that law - and the lawmakers are the elected doofuses who won’t. That we let those deaths of the RTI-using whistleblowers just go by. That we refuse to jail the bankers who lent those bad loans to Vijay Mallya, but want Mallya to go to jail. That we believe the government should subsidize fuel even though the leakage through those subsidies lines the pockets of those people we call corrupt. That we rail against black money, but won’t dream of selling our houses without “black”. We allow these big people to manipulate the system because we are manipulating the system ourselves, in our small little ways.

We don’t give a rats ass about our own behaviour, or for fighting against a wrong, and we fully deserve what we get. And it seems like America, it’s going down the same way if it doesn’t protest. The banks, they will rule that country if they do not do so already.

Reads: Hawala Premiums, Chinese Taper, Airtel Loses, Don’t Go To Jail

No Comments » Written on February 20th, 2014 by
Categories: Readings

Hawala premiums for gold smuggling are up to 4%, says Business Standard.

Bad Housing Starts data in the US? No, says Calculated Risk; it’s the cold weather and higher prices.

Why I didn’t go to jail, writes Ben Horowitz, on doing the right thing instead of doing what other people are doing.

China’s flash PMI for Feb falls to 48.3, a seven month low and takes European stocks with it.

Bharti Airtel loses appeal in case to Econet Wireless in Nigeria, has to pay $3 billion to Econet which was wrongfully denied its shareholding in the company acquired by Airtel from Zain. Airtel has to pay to acquire Econet’s minority shareholding, and this is the third setback in the case (which has seen unfavourable judgements from an international tribunal and then two lower courts in Nigeria). Share’s fallen to Rs. 298.

Whatsapp founder was once on food stamps. (Business Insider)

China wants to fund 30% of India’s $1 trillion infra investment. That’s probably their diversification strategy as they have just cut their US Treasury holdings exposure by $47 billion. (The “Chinese Taper”) Oh, we should let them. If they invest money in our roads, they’re hardly likely to bomb them.

Whatsapp Bought by Facebook for $19 Billion

3 comments Written on February 20th, 2014 by
Categories: FaceBook

The famous messaging service, Whatsapp, has been acquired by facebook for:

  • $4 Billion in cash
  • $12 Billion in facebook shares
  • $3 Billion to employees in stock options over 4 years

The deal needs to be done by Aug 19, 2014, (extended by one year only for certain regulatory approvals) otherwise Facebook pays a termination fee of $1 billion (payable in facebook shares also). (Source: Part one of the 8k Filing)

Dilution of 9%

Facebook will issue 183.87 million shares to shareholders of Whatsapp. At the last traded price of Facebook of $68, this is worth about $12.5 billion.

Whatsapp employees will be given another 45.97 million shares as ESOPS (restricted share units). This is further valued at about $3.13 billion.

Existing shareholders will be diluted by about 9% (7% upfront, the rest as ESOPs) - Facebooks market cap is $173 billion.


Are you kidding me? Come back in Web 14.0.

But Seriously?

From the 8K filing, Whatsapp has 450 million users, 70% of them are active daily. They are adding 1 million users a day. They are mostly non-US.

Effectively Facebook pays about $40-$45 per user to acquire this company. Given that it’s mostly funny money, this is not too bad (the company pays just $9 per user in cash).

But it is unlikely this growth will go on for too long. The world has 6 billion people, and getting to more than 25% of them will be tough, especially for a mobile app. Eventually this will have to paid for by advertising. (Whatsapp does have a subscription model of $1 per year, but less than 10% of the current users are likely to pay that, in my opinion. The rest will just move to another free service)

If you consider a 15% return per year on investment, the acquisition must return about $2 billion to $3 billion a year in operating profit on whatsapp. (The return on cash is even lower at $600 million)This might be difficult in year one, but it is likely to do so as people move away from horizontals like Google and even traditional facebook to more targeted ones like Whatsapp and Twitter.

Given insane valuations of web startups, this one seems just about right. And given the euphoria such deals generate, the correct thing to do if you are a US market investor would probably be: Buy facebook. (But this is not advice!)

My View

This is why more companies should go public. Facebook just needs to pay $4 billion to acquire something for which it values at about 5 times that. The rest is in dilution of shares. Facebook shares can be worth even more (if the share goes to $100), or half that if the share falls back to $35. There is no cash needed to be paid, companies can be paid for in stock!

In comparison a merger of private companies cannot easily be valued in stock. Surely, the merger between Babyoye and Hoopos involved a stock swap but there’s no real way to value it because there is no liquid market where Babyoye shares could be independently valued. The analysis has to include a lower bound of $0 for the shares given as compensation!

I’ve been talking about why companies like Flipkart and Infibeam should go public. People tout various excuses like they don’t want to dilute 25%, or that they want to value the companies even more or some such crap. This is utterly ridiculous because we are starved of good companies in the digital/web space in the public markets, so we buy stuff like Justdial which has TRIPLED in market cap since listing last year. The flipkarts are losing the scarcity premium, and they are losing the chance for great mergers like the Whatsapp FB one.

Coming to that, I think it’s a good deal for FB, but not so much in the short term for FB shareholders. It’s probably not great for Whatsapp users - one of the reasons I personally like whatsapp is that it’s simple, and whatever Facebook does makes things complicated. Imagine having to only connect with Facebook users, or not knowing if your text actually reached all the people that you sent it to (which will only be known if you have paid Facebook). But for facebook the acquisition gives them access to whatsapp’s user base for a relatively cheap cash cost of $4 billion.

Finally, these numbers are great to look forward to. At $19 billion Whatsapp is valued at over Rs. 120,000 crores, and about 25% of India’s fiscal deficit. It is a higher value than all but the top 10 Indian companies listed on the NSE. It is massive if you compare it with Indian stocks, but it’s a relatively small number for the behemoth that is Facebook. Next time we call ourselves a superpower, we are probably not getting the picture. But it gives you hope - this is the future!

Great P/E but Anaemic EPS Growth on the Nifty

2 comments Written on February 19th, 2014 by
Categories: Nifty

Nifty’s Earnings Per Share has now risen to 348, derived from it’s P/E ratio of 17.59. This gives us an EPS growth of just 7.9% over the previous year, showing you a massive difference between valuations and reality.

Nifty P/E versus EPS growth

Even if we assume that P/E is for the future and EPS growth is of the past, then if we offset the P/E chart one year back (that is, compare the P/E of 2013 with the actual growth we saw in 2014) we get a picture of stark differences: (We compare the “normalized” P/E versus EPS growth).

Normalized Nifty P/E versus EPS growth

No, Watson, we did not have a P/E of 7 last year. In fact even if you look at 5 Year EPS growth (annualized) then the Nifty comes up terribly low:

5 year annualized EPS growth: Nifty

Even today it’s at a 10% to 11% range with a max of 14% in 2009, which is absolutely horrible considering we’ve given ourselves a P/E of more than 15 for all of the last five years.

Valuation isn’t only about P/E but P/E plays a huge role. When earnings growth recovers, it could just be that the P/E goes back into the 10-12 range and thus, results in no change in the Nifty. A lot about equity markets is sentiment, and the graphs above tell you that we have had high expectations of earnings growth, but substandard actual growth.