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Infy Drops 20% on Results, See Them in Charts

4 comments Written on April 12th, 2013 by Deepak Shenoy
Categories: Infosys, Mar2013, Results

The Infosys Stock is down over 20% today as results came in. As I mentioned (Chart of Infy on result days) the stock was expected to be volatile – and I ended up closing a good profit on some put options I held.

The results aren’t quite so bad, but expectations were too high. After all, with the dollar at 54, one doesn’t expect a software exporter to be doing badly. Let’s take a look, in some charts.

Revenues are flat (QoQ) and Profits have been flat

(Click for larger image)

Note that profits, at about 2,400 crores, are nearly at the same level as the March 2012 quarter (3% up) but more importantly that profits have more or less flattened out. Revenue growth in the last quarter of the year has been very little, despite a global market recovery (in the stock market, at least).

P/E to Growth now Greater Than 1

Even as the stock goes down, the P/E remains high at 14+ (Trailing 12 month). The 12 month EPS growth is down to 13.3% which after four quarters is actually lower than the P/E.

Employee Growth Stunted

For a company that needs to hire more to make more money, employee growth has been very low. Inspite of hiring nearly 9,000 people in the quarter, attrition is so high that only 1,059 people were added this quarter – the difference is attrition.

This is the lowest net-addition number since Jun 2010.

Lower Focus on North America

North America’s share of business has been steadily declining, which might have impacted the lower numbers – the US seems to be recovering versus Europe, and the mix has gone in favour of Europe by 5% in the last three years.

Future guidance is also for a weak 6-10% growth in revenue. Considering they’ve not raised salaries for a while, they might have to this coming year, so it is likely margins are hit some more. In general, not a very exciting quarter, but honestly, with Infosys, that’s not something new.

Disclosure: I have no further positions.

Posted in Infosys, Mar2013, Results

Chart: Infy Result Tomorrow, What To Expect?

4 comments Written on April 11th, 2013 by Deepak Shenoy
Categories: Infosys, Mar2013, Results

Infosys’ Results tomorrow will kick off large cap results for the Financial Year 2012-13, and is expected to be a really big thing. The stock was up over 3.5% today, closing in at 2915.

The last three times, the stock has moved in the opposite direction of it’s previous day. Since 2007 though, going the other way of the previous day, versus the same direction is 13:10. And this is the biggest pre-result day move since October 2007.

What happens tomorrow? I’ll post an update. The result day moves have been quite dramatic, and I was long a strangle (2500 put, 3000 call) which went up nearly 100% in two days and I exited for the most part.

Disclosure: I am short through puts.

Posted in Infosys, Mar2013, Results

Zenith Sarafs Accused of Fraud, Asked to Produce $34 Million Bank Guarantee

6 comments Written on March 29th, 2013 by Deepak Shenoy
Categories: Suckered, zenith

SEBI has ordered the Saraf family of Zenith Infotech to produce bank guarantees of $33 million without using any funds of the company. SEBI has found evidence that could show that the promoters have siphoned off money from the company, to the detriment of bond holders.

The TimeLine

2006-07: The FCCBs were issued in 2006 to convert at Rs. 310 per share, and in 2007, another $50 million was issued to convert at Rs. 522 per share, due to mature in August 2012. FCCBs are debt and can be converted to shares at the conversion price on maturity; failing conversion, the money has to be returned at the “coupon” rate of interest.

2011: Zenith defaults on payment of $33 million FCCBs. Admits it in October, and says it’s trying to settle. This, despite noting in the Sep results that it had 187 crores in cash and bank balances, which would have been adequate to cover the FCCBs. The stock market didn’t like it – the stock fell nearly 50%.

Automatically, due to a clause of no-default, even the later $50 million FCCBs became due, and went into default too.

Alongside, Zenith said they’d sold their managed services division (MSD). Bondholders were refused details when they asked about how much they sold it for. Eventually, the Bombay High Court made them reveal it: they had sold it for $54 million to Summit Partners, a PE player.

But it turned out things were more sinister. Just before the MSD sale, Zenith transferred it to a holding company in Mumbai in which the Sarafs (promoters of Zenith) owned 60%. That company was then sold. The money received was shared between Zenith Info (the Indian, listed company) and Zenith Dubai (a fully owned subsidiary).

Now the drama begins. Zenith India and Zenith Dubai together transferred $10.4 million to a singapore based subsidiary, and another $13 million to Vu Dubai and Cloud Dubai, both promoter owned entities, which are now subsidiaries.

SEBI has recognized this as behaviour that is designed to potentially defraud bondholders, and to default on FCCB obligations.

The sequence of events and pattern of transactions in this case prima facie indicate that the ZIL and its promoters/directors not only wantonly defaulted in redemption of FCCBs and disregarded shareholders' resolution but also adopted fraudulent device and artifice to defraud the shareholders…

The Sarafs have been told to not buy or sell securities till further notice, and to produce a bank guarantee of $33.93 million, to cover the liability.

Those implicated are Rajkumar Saraf (Promoter), Devita Saraf (His Daughter), Akash Saraf (Son) and promoter entities.

The stock is at Rs. 16 today, more than 95% below the Rs. 320 it used to be just before the drama started in 2011.

The implication: This kind of case doesn’t do very well for our system, if it isn’t decided swiftly in favour of bondholders. The Courts, and SEBI, have moved way too slowly. With over a year and a half in default, bondholders must have given up most or all hopes of getting back anything. If promoters have siphoned out money, it should be forcibly brought back immediately (supposedly all the money lies with subsidiaries) and the company sent into liquidation. I have zero hope of this actually happening; what is more likely is long, delayed litigation. The message to other foreign investors (or even Indian investors) is:

If they defraud you, you can do nothing but wait, and wait for a very long time.

It’s a wonder why we don’t have our NASSCOMs and business players scream blue murder about such blatant wilful defaults by Zenith. Oh, but like Sanjay Dutt, they’ll probably ask for pardon instead.

Posted in Suckered, zenith

IT Falters, RE Stutters, Auto Flutters

4 comments Written on March 26th, 2013 by Deepak Shenoy
Categories: Auto, InfoTech, RealEstate, Stocks

Reuters thinks this is the end of IT Staffing as we know it. They quote a changing scene in IT, with headcount being shrunk while profits and revenues are increased – a sign that the business is lower margin than it seems. Projects are harder to come by, and require lesser of the “fresher” population and more of the experienced “lateral” junta. However, it seems like project sizes have shrunk as well, as it seems to have become quite difficult for middle-management people to find new positions.

Hearing the woes of freshers breaks my heart; those that had been given campus jobs in 2011 for when they graduated in 2012, and still have only seen postponements of joining dates. I was like them – a company had offered me a job on campus in 1995, only to send me a letter in 1996 that my joining date was delayed 3 months because they had divided the joinees into two batches. After they snubbed my efforts to substitute with a non-joiner in Batch 1, I told them to go take a hike, and joined a smaller company that paid half, but where I could join immediately. Anyhow, it sucks to have a job but not a paycheck.

Real estate seems to have been impacted. Commercial space has been hit, says TOI, with:

Figures provided by two property consultants — Cushman & Wakefield and DTZ — show that absorption of office space in 2012 across the top eight Indian cities stood at 29.05 million sq ft, a 23% decline over the previous year. Of this, the share of the IT sector, which accounted for 64% of the commercial space absorbed in 2009, dropped to 44% in 2012 at 13.22 million sq ft. It was 16.08 million sq ft in 2011.

Commercial rentals are one thing; the other worry is residential, where ownership has been backed, in many cities, by the rising tide of the IT industry. With a slowdown will people buy less? Will people upgrade less? Already, too many projects are delayed – and they will get seriously delayed if people aren’t paying up.

And of course, automobiles. Already, auto sales growth have been the lowest in a decade or so, and as jobs stagnate, will people stop buying new cars in the immediate future?

A slowdown will be good to both correct price anomalies and to increase the likelihood of a great longer term future for both jobs (why only IT?) and other industries.

Posted in Auto, InfoTech, RealEstate, Stocks

If you want to do…

13 comments Written on March 22nd, 2013 by Deepak Shenoy
Categories: Bharti, Halonix, News, Suckered, Suzlon

I have recently realized that what you see as a “press release” that sounds like it will make the company a juicy buy, might actually have more to say on the negative side than the positive. Let me cut the theory and get to the real world examples.

Suzlon’s Selling Of Key Units In The Future

Suzlon, on February 7, 2013: News comes in after a sharp rise in the stock price, that the company “may sell stake in three divisions to pay off debt”. A banker, supposedly involved in the CDR process with Suzlon, seems to have said that Suzlon needs to get rid of some key units in order to pay back the debt; prompting calls that this would be an awesome thing for the stock. It was not:

The big candle is the stake sale by promoters (largely to Morgan Stanley) which was on the budget day.

However, the stock has only been making new lows. The rise from the sub-17 levels in November to nearly 27 in Feb – more than 50% in two months – had people wondering.

My problem was that piece of news. Which banker would reveal that a company has committed to sell some key assets? If you are a buyer and you know the seller is desperate to sell because he has a commitment to bankers, will you not squeeze the fellow out dry? Why would a banker jeopardize a deal? Why not sell and THEN reveal that this was part of the commitment?

That would be normal behaviour. When you find abnormal behaviour, you ask questions. With Suzlon, I had told a friend about this and he smartly sold the stock. I, being a sissy, did not go short (there were more complicated reasons but you can attribute sissy-ness).

The correct trade would be to put a stop loss of around 30 and go short. (30 is a nice technical level in the past)

Airtel’s So-Called DTH Sale

Again, coming after a near-term upmove, there was a news piece on Airtel that said it is in “talks to sell a 25% stake in the DTH arm”. The news was remarkably detailed, like this:

Sources with direct knowledge suggest that the company is expecting a valuation of $1 bn. Bharti Airtel has already signed a non-disclosure agreement (NDA) with at least seven strategic and private equity players for the stake sale, sources confirmed.

U.S. based DTH players like Comcast and Liberty Global are said to be in talks with Bharti Airtel for buying stake in the DTH arm. Some of the private equity players like KKR, Providence, Bain Capital, GAAP are also said to be in the fray. Bharti is looking at raising over $200 mn via stake sale.

This I can’t digest. Airtel wants to sell stake, that’s okay. But to reveal that it’s already signed an NDA, with named players, with already a number out there about how much it’s looking for…who does this? Deals happen behind closed doors, numbers are discussed face to face, in the back seat of a car or over a phone conversation. No one gives you information in such detail BEFORE the deal has been done.

And then, the Airtel stock was showing a sign of technical weakness. A H&S formation, with a key moving average just proving to be strong resistance.

So if this news was all bull, nothing would come out of it, and the trade was: Short Airtel at 322, with a stop of the 50 DMA (around 329) and the interim target was the last low (actually just below it) of around 290. It was a 10% profit chance for a month’s trade, with a 2% chance of a loss, and I took it. I exited around the 290 level.

But the trigger wasn’t the technical story – the trigger was this piece of news that sounded incredulous to me.

Note: In both the above stories there was no management involvement. People make money on stocks and they have incentives to rig up prices, even if they are not management, and this includes big brokers and banks. So we don’t know where these rumours came from, but it definitely “marked the fall”.

The Unfinished Demerger of Halonix

Owned by Actis, a PE fund, Halonix has in the past stoked investor appetites by saying it will sell the profitable arm of the company by demerging the less-useful general lighting division to a promoter owned entity. The whole story is here, but my question then was: If you want to demerge, and you have all the permissions, you should demerge – why are you not doing it? The answer, six months later: The selling of anything is not happening.

Recently, the company again reported plans to sell the general lighting business. And yet:

I’m not saying that there is fraud involved by management or otherwise. I’m just saying that when I find news that a company WILL do something, I always wonder why they don’t just do it if they want to, instead of telling us they’re considering it. I mean we have enough information already, and adding a “maybe” is just useless.

I have of course shown you survivor bias – that the stocks I mention are the losers of the pack, and others may have seen great gains based on similar rumours. I’ve not seen many in the recent past – though in 2007, all you had to do was mention a stock’s name and “acquire” in the same sentence for it to go up 10%. However, please notify me of such stocks you’ve seen recently, to keep me honest.

I suppose this boils down to a mantra:

If you want to do, do. And then say.

(I’m guilty of violating this as anyone else. I have still not started gymming. I have still not lost the weight I said I will lose last year. This needs to be a mantra for me!)

Posted in Bharti, Halonix, News, Suckered, Suzlon

Chart: Stock Market Volumes at a Low

No Comments » Written on March 11th, 2013 by Deepak Shenoy
Categories: ChartOfTheDay, NSE, Stocks

Since 2007, stock markets have seen highs and lows. India’s GDP has more than doubled. The money supply in the system – total deposits in banks for instance, has nearly tripled. Yet, the growth in volumes in the stock market has, for the most part, not happened.

Note that we’ve gone from about 1,100 securities traded daily to about 1,600, and even with a near 50% increase in numbers, and a jump of Nifty from about 5,000 in 2007 to nearly 6,000 today, volumes remain just around 10,000 cr. per day.

In addition, I believe the top few stocks take a considerable percentage of turnover each day. Essentially, volume of trading has died, and it’s pretty much the low of the trading cycle if you weight money by inflation.

For volumes to return, you need a certain level of euphoria. I think the US is providing the path ahead with a recovery looking to happen, and Europe, as long as it stays together, will be a second level force. Japan’s printing – and more money is initially good for stocks. The only bone in the kabab is China, which seems to be continuously slowing down.

Internally, no one trusts stocks, and it’s getting worse with stocks like Core Education falling 80% in two days, or even public sector stocks like NHPC down nearly 30% in a less than a week. With low volumes even legitimate cases for a fall – like pledged share owners selling shares – will cause a steep drop in price. While the drop in STT from the next financial year will help traders and speculators return, it is quite unlikely without a very positive environment. And that is doubtful until elections next year; but watch for a new high to break all the rules.

Posted in ChartOfTheDay, NSE, Stocks

The Great Fall of NHPC

3 comments Written on March 6th, 2013 by Deepak Shenoy
Categories: NHPC

I’ve recently had a chance to trade into a few stocks, and one of them was NHPC. Unforunately the stock has crashed beyond imagination, hitting my stop loss at 27 and then 25, and then spiralling down all the way to Rs. 18. It’s back at Rs. 20 now, but the swiftness of the move is surprising.

The rumours are that the company may have to transfer projects to the J&K government, but that is supposedly not true, says their director-finance ABL Srivastava. In the interview they have large receivables from Bihar, J&K and Delhi.

Another rumour is that bear operators have tried to hammer the stock, which has a very low non-promoter holding of about 14%.

Of course the other issue is that the government (the promoter of NHPC) will reduce its stake from 86% to 75%.

The stock had an IPO at Rs. 36 per share in 2009 and has never really gotten back to that level. While my entry was technical (strong new 52 week high with volume around the 26 level) the fundamentals of this company are reasonable. With a serious power crunch and with plants in the himalayas both supply and demand are reasonably assured. Yet, the risk is that the government owned entities that buy power won’t pay, and that the power generation could get too expensive.

Their dividend of Rs. 0.6 to 0.7 per share gives about 3.5% dividend yield. If interest rates drop, this will be an attractive stock to be in. However, I would wait for a recovery in the price back to the 26 levels before jumping in – if there are problems, the price will talk first, and then problems will get visible. The price has talked on the downside, so we’ll have to see where this goes.

However, with a thinly traded stock, one could take a chance on the fact that this was just operator movement – but like most bets, the risk of an uneducated guess is as good as a gamble.

Posted in NHPC

Network18 Trust Gets Big Loan From Company, Won’t Buy More Shares

1 Comment » Written on February 25th, 2013 by Deepak Shenoy
Categories: Network18

Network18 has a press release in response to SEBI’s regulation on Employee Trust activitystating that the Network18 Senior Professional Welfare Trust (which is a promoter entity) owns nearly 1.6 crores of Network 18, and will not sell these shares but will no longer buy more shares from the market. (Actual holding: 15,922,729 shares, or 1.52% of capital – severely diluted due to the recent massive buy in by Reliance and the subsequent rights issue)

Remember that SEBI has banned ESOP trusts from buying shares from the stock markets, on Jan 17, 2013.

Remember also that Network 18 has in the past pledged its owned shares in TV18 and IBN18 , so that the trust could borrow money. (To buy Network 18 shares!)

Won’t Buy More Shares

While this is not a stock option scheme based trust, Network18 has decided to listen and not have the trust buy any more shares.

8. How the Trust/agency is proposing to deal with the existing holding (whether to be transferred to the employees, or to be sold in the market for transferring the beneﬁts to the employees, if so, details regarding proposed date of such transfer or sale shall be given) Such date shall not be later than June 30, 2013:

The Network18 Trust was created with the objective of generating Wealth and employee
beneﬁts for its large pool of employees over the medium to long-term horizon. In this
respect, the NetworkI8 Trust was duly tabled before the Board of the Issuer and
subsequently, speciﬁc approval from the shareholders of the Issuer was also obtained.

It was intended that the Network 18 Trust would monetize its holdings and distribute the net proﬁts to its employees based on employee needs and opportunities that arise from time to time. The beneﬁts that accrue in the form of stock appreciation will be shared with employees who stay and grow with the Issuer over several years. Accordingly, at no point in time was it envisaged that the Networkl8 Trust would grant stock options to employees.

As set out above, since the Network18 Trust is not formed for granting stock options to
employees, the Networkl8 Trust is not one, which deals in securities of the Issuer as
contemplated in the Circular. Since the Networkl8 Trust does not contemplate granting
options to the employees, the question of aligning the Scheme or the Networkl8 Trust to
the ESOP Guidelines does not arise and the shares held by the Networkl8 Trust cannot be transferred to the employees. These shares will continue to be held by the Network18 Trust for the beneﬁt of the employees.

Meanwhile, in keeping with the overall spirit of the Circular, We hereby undertake that we
will suitably amend the Network18 Trust deed in order to prohibit the Networkl8 Trust
from purchasing the Issuer’s shares through secondary market. Additionally, we would like to bring to your notice that the Network18 Trust has not engaged in any secondary market purchases concerning the lssuer’s shares since October 25, 2011.

The trust won’t buy any more, which is a good thing.

I would still question the presence of such a trust – if it’s not a stock option scheme, why should it even exist, and why is it funded by the company?

Network18 Loans More Than 500 crores to Trust in 2011-12

However, it seems that last year Network18 directly provided a loan to the Senior Professional Welfare trust . In the annual report 2012, Network18 has reported that it has not provided any shares as collateral to the trust – meaning that the earlier security (of IBN18 and TV18 shares) was withdrawn.

(Page 153)

Security provided in favour of the lender in connection with the loan to Network 18 Group Senior Professional Welfare Trust - Rs. Nil (Previous year Rs. 2,552,000,000).

Did the trust return the money? Apparently not, since Network18 has directly given this trust a loan now, of over Rs. 500 crores.

With more than Rs. 570 crores due from one entity – the Senior Welfare Professional Trust, which is a promoter linked entity – one has to wonder what happens if this trust can’t return the money.

The Trust Seems To Have Lost Money On Some Shares, At Least

However on the concept of the fund not selling shares, that much should be obvious since the trust seems to have bought shares at prices that are substantially higher than current market value. The last few purchases of shares – as revealed to stock exchanges – seem to have a loss of over Rs. 8.5 crore (85 million) at current market values. (Of course, shares purchased earlier might have a much lower price, which hasn’t been revealed)

Figure: Shares of Network18 bought by Network18 Senior Professional Welfare Trust

Of course, this cannot be conclusive that the trust has lost money but it’s quite likely, that unless the stock recovers from its lows, that the trust will find it difficult to service the loan or the interest cost. Look at the stock chart, from Network18’s owned site moneycontrol.com:

In context, the 574 crores represents about 1/4th of 2012 consolidate revenues (around 2,000 cr.). It would be wise for shareholders to question why this trust continues to be funded by the company, and if they might provision for any potential default.

Disclosure: No positions.

Posted in Network18

Suckered: Manipulating Expiry Prices, Ruchi Soya Edition

12 comments Written on February 22nd, 2013 by Deepak Shenoy
Categories: RUCHISOYA, SEBI

SEBI has just passed an ex-parte interim order (meaning, without hearing the defence of the accused, and potentially more orders to follow) against entities it alleges to have rigged the price of Ruchi Soya, a listed edible oil manufacturer.

Investigations by SEBI seem to show that nine entities – Aventis Biofeeds, Moebius Credit and Capital, Sunmate Trade, Shreyans Credit and Capital, Vision Millennium Exports, Navinya Multitrade, Uni24 Techno Solutions, Betul Minerals and Construction, and Betul Oils and Feeds (all Pvt. Ltd.) – colluded together to manipulate the price on Sep 27, 2012, in order to earn a huge profit in the futures market.

The Idea

First, the concept. Ruchi Soya was being taken out of the "F&O” (Futures and Options) list in September, with all contracts expiring on September 27. All F&O positions would be settled at the closing price of the equity share, in cash, on the expiry date.

Remember that the closing price is the volume weighted average price (VWAP) of the stock in the last half an hour. To read more about how it’s calculated, I’d created a video which is useful here:

So if you take a position in the futures market, and put a huge buy order and a corresponding sell order in the market at a high price, just before the close, you can easily manipulate the “closing” price of the stock and thus, profit from your futures position.

The Evidence

SEBI claims this is exactly what happened. More than Rs. 5 crores were earned by the above entities, by taking the VWAP up by nearly Rs. 7 (or 10%) by co-ordinated buy and sell orders in the last three minutes of trading (3:27 pm to 3:30 pm). In (SEBI’s) pictures with my annotations:

Over 60% of the volume of the day comes in the last three minutes!

And finally, was this very different from normal? It seems so:

Modus Operandi

Many of these entities placed buy orders at Rs. 64 at around 2:30 pm, and simultaneous sell orders for Rs. 88.20. Others placed just sell orders for Rs. 88. Order quantities were as high as 30 lakh shares (implying a transaction value of between 20 and 27 crore rupees).
At around 3:37, three minutes before the market closes, the buy orders were moved up to around Rs. 88, and all other sell orders in the market were executed all the way up to Rs. 88 including those of the selling entities involved.
62 lakh shares were bought, in total. Of these, nearly 12 lakh shares were traded between these above entities. (The rest were bought from unrelated entities). Most of the rest
These trades took the VWAP price of Ruchi Soya up by Rs.8.15 according to SEBI.
The gain wasn’t in these shares – since many weren’t sold. The gain was in the futures market – these entities had already taken long positions of 72 lakh shares which got the Rs. 8.15 benefit – thus earning over 5.86 crores as profit.

This can only be manipulation if the 9 entities are linked. Which they seem to be, considering many have the same address in Nariman point, or that they share directors, and in many cases, have the same phone number. There is definitely a good case.

Entities banned

Pending further investigation, these above entities have been barred from the market immediately. However, this comes around 5 months too late: it’s now Feb 2013.

The Promoter Link?

Ruchi Soya promoters haven’t been named in the SEBI order, but I hope SEBI investigates their link with the “price manipulation” allegations. Betul Oils, one of the “manipulating” entities (alleged) named in the SEBI order, has in the past been accused by the Forward Markets Commission of conspiring together with Ruchi Soya management, and manipulating guar prices, earning part of 1,291 crores of profit.

Ruchi Soya’s promoters have also been accused, in the past, for share manipulation and other controversies and are supposedly well connected politically. (I’ve written about their steep drop after an IB investigation)

The To-Do

SEBI needs to investigate this thoroughly and, if the parties are found guilty, it must:

a) fine the entities with at least 2x the profits that were made by manipulation; just a ban will not suffice.

b) make such investigations faster through technology. Much of the above could be ascertained through intelligent algorithms.

c) return money to investors who lost on their futures trades, to the extent they did. This would do wonders to confidence in the regulator.

What would be defeating is to have this meander through bureaucracy, and a timid order passed a couple years too late. That would answer partly why retail investors don’t invest in equities – if you can’t even fine or discourage people who manipulate markets, what’s the point investing?

Disclosure: I have never owned or traded in Ruchi Soya, stocks or futures.

Posted in RUCHISOYA, SEBI

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