Stocks

Why Is The Market Going Higher Every Day?

No Comments » Written on April 14th, 2014 by
Categories: Premium, Stocks

This is a post for Capital Mind Premium members.

The mad markets are getting more mad. The Nifty made yet another all time high today and it’s almost like the market can do nothing wrong! Let’s take a quick look to understand why the market’s doing what it’s doing.

There is no single answer. Or no single correct answer.


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Top Stocks in March: It’s A Good Kind Of Madness

No Comments » Written on April 12th, 2014 by
Categories: Premium, Stocks

This is a post for Capital Mind Premium members.

It’s been a rip roaring month for the markets. While there is one day left in the month of March from a trading standpoint, Deepak is off for a holiday to Goa and therefore this month-end post comes to you over the weekend.


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Promoters Sells Big Chunk of DB Corp Shares

2 comments Written on April 10th, 2014 by
Categories: Stocks

DB Corp has just seen promoters sell big chunks of their stake. On April 9, they sold about 10% of the (unpledged) stake they owned, for about Rs. 159.6 cr.

image

 

(Note: the Total Holding and subsequent columns refer to the shareholding BEFORE this transaction)

As a total of the company’s stock, this is only about 3% of the outstanding shares. Promoters, before this transaction, owned 74.94% of the company. Now they’ll own about 72%.

DB Corp is a media company that publishes newspapers (Dainik Bhaskar, Divya Bhaskar etc.) and runs FM Radio channels.

It’s a little strange that just before the massive election madness, when media companies would earn their most revenue, that promoters would sell their stake, especially when the stock’s off the highs it made recently. And only promoter has sold about 30% of his unpledged stake.

At the same time, HDFC Infrastructure Fund has bought 10 lakh shares for Rs. 295.

Promoter sales are not usually a big deal and sometimes help them get liquidity. But the size of this deal - Rs. 160 cr. - makes one wonder why they’re selling all this much at this time. The stock closed today at Rs. 291, marginally below where the promoters sold.

image

Sun Pharma and Ranbaxy to Merge, Create Giant Pharma Co

2 comments Written on April 9th, 2014 by
Categories: Stocks

The big news of the week was about a mega-merger of two of India’s largest pharma companies, Sun Pharma and Ranbaxy.

            Ranbaxy

Ranbaxy shareholders will get 0.8 Sun Pharma shares for each share they own. This is a stock only merger, which means no cash will be paid out.* 

* Except if you get a “fractional” holding. If you own 22 shares of Ranbaxy, you’ll get 17.6 Sun pharma shares. In India you can’t own fractionals, so they’ll give you money for the 0.6 shares, and you’ll have 17 Sun shares.

The merger will create, according to the companies, the 5th largest generic pharma company in the world. Ranbaxy has had serious issues with the FDA of late, resulting to blocking of imports from many of its plants in India including the big Toansa plant.

Ranbaxy was sold to Daiichi Sankyo by the Singh brothers in 2008, at a price of Rs. 737 per share. Since then the price has tanked, going as low as Rs. 300. This deal, with Sun Pharma prices at about Rs. 600, values Ranbaxy at Rs. 480 per share. (It trades lower today, at Rs. 453)

The deal should be completed by end-2014. Daiichi has had to give an indemnity for any FDA actions against Ranbaxy so that Sun is insulated from this exercise. This indemnity does not impact any other shareholder at this point.

In the last week, it looks like someone had a whiff of the deal. Why else would the price shoot up from the 370 mark upwards to 460 in a few days?

image

SEBI must investigate, and fast.

Here’s the company presentation.

 

Capital Mind View: This is a phenomenal deal in the pharma world, where size does matter. More doors open as you grow bigger. However there is a bigger risk with adverse FDA action against Indian companies (which could stem from lobbying by the US giants which feel threatened). Having said that the ability to both innovate and increase their generics footprint gives the combined entity a larger scope for growth.

Disclosure: We have had family investments in Ranbaxy for around 2 decades, and it’s done really well. In one sense there’s a sense of sadness that the Ranbaxy brand will be gone, but the prospects with Sun look better for the company.

SEBI Calls Financial Technologies "Not Fit And Proper" To Promote a Stock Exchange

Comments Off Written on March 20th, 2014 by
Categories: FinanTech

Finally, the ball has fallen. SEBI has found FT to be not-fit-and-proper to run a stock exchange. In an order yesterday:

  • FT isn't Fit and Proper to own shares in a stock exchange.
  • FT must sell its holdings (equities or warrants) in all stock exchanges, including MCX-SX.
  • FT can't even have voting rights if it has indirect holdings (through a subsidiary)

Remember the NSEL Crisis? Capital Mind covered it in extreme detail.  (Read our full page on all the posts)

FT owned NSEL, which was responsible for a massive Rs. 5,500 cr. scam. We've seen the whole thing in detail, and the exchange was running what was a financing scheme instead of actually trading commodities. Just 24 borrowers were on one side, while more than 12,000 investors were on the other, and the exchange , it seems, facilitated the transfer of money in one direction, as if the borrowers were "temporarily" selling commodities to the lenders, and then buying it back a few weeks later.

It has been found that exchange officials have been complicit in the process, and some of them are in jail.

The ultimate big boss of FT, Jignesh Shah, has been charged in a CBI chargesheet. Strangely, the CBI is tracking two people who were responsible for bringing the politically well connected FT group back down to earth by demanding they follow the rules in spirit and letter - CB Bhave and KM Abraham, the SEBI bigwigs. They are under investigation for "irregularities" in giving MCX-SX the licence to run a currency exchange. (Sources tell me this is being done to placate a certain very powerful person who doesn't like bad things to happen to Mr. Shah; which means the investigation into Bhave and Abraham will quietly die)

I'm very happy that FT has received what it deserved. However, the stock market loves it. Despite such an order, the stock is up to Rs. 377, and was up 5% on this news. We don't know why, and we don't really know why this stock is worth even this much. Apparently, some people continue to like a company which provides software to brokerages but isn't really "fit and proper", and they believe it will continue to sell its software. This is not going to end well.

Premium: Top Performing Stocks in 2014 To Date

2 comments Written on March 5th, 2014 by
Categories: Premium, Stocks

Header

This is a post for Capital Mind Premium subscribers, sent on March 4, 2014.

Movers and Shakers

It's now two months into 2014, and some stocks have gone all ballistic on us while we weren't atching. Here's a quick look at the biggest and smallest of them.

Note: we have a filter; that stocks should not be in the "illiquid" category and should, in our opinion, not be a manipulated penny stock. We will still miss some gems but when gems are plentiful, we won't crib about completeness.

First, the large caps.


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

Comments Off 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.

Premium: Two Momentum Stocks That Had Great Results

Comments Off Written on February 6th, 2014 by
Categories: Premium, Stocks

An archive for Capital Mind Premium subscribers, on 05 Feb 2014. Learn more!

In Capital Mind Premium, we look at two stocks that are making new highs consistently and have just announced stellar results. A question I usually get asked is: Why do you buy stocks making new highs? Should we not wait till they retrace? Shouldn’t we buy stocks making lows instead?


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Maruti Jitters: Suzuki Goes Alone Into Gujarat

2 comments Written on January 29th, 2014 by
Categories: Stocks

Maruti makes cars. A lot of cars. Over a million cars in the last year. And it’s had problems. Worker union trouble at its plants in Gurgaon and Manesar has had the company considering moving out of the Haryana state. It recently got to acquire land in Gujarat and was going to set up a plant there.

However, news came in yesterday that instead of Maruti investing in the Gujarat plant, it’ll be an investment by Suzuki directly with an unlisted subsidiary. Suzuki has a ton of cash in Japan lying idle. Maruti will then only buy the cars from that subsidiary.

The stock crashed after the news. This is like a promoter saying - don’t build your own cars, I’ll build them, and you take them from me and you sell them. The fear is that the company will over-pay for the cars.

Mint talks about the investment and raises pertinent questions:

For the longer term, however, the negatives outweigh the positives and raise many doubts on the parent company’s intent. How will vehicles made in the subsidiary be priced when transferred to Maruti (in which Suzuki has a 56.2% stake) for marketing? Will exports, which comprise about a fourth of Maruti’s revenue and which improve realizations, be diverted through the Gujarat unit, which in turn could curtail benefits to the Manesar factory in Haryana and hence to Maruti’s profitability? Will this also hinder further localization as more auto components could be imported?

If Suzuki exports cars made in their subsidiary directly, then Maruti will see none of the revenues or profits. In fact, if Suzuki decides to make cars ONLY for exports - cars too expensive for the Indian market or that run on fuels that are not retailed easily, such as high-octane ones - then Maruti will definitely not benefit.

Transfer pricing could be detrimental to Maruti’s profits - currently, Marui company has all the profits of a car. Tomorrow, when Suzuki makes the car, it will take some of that profit as its own when it sells from Gujarat to Maruti, and only the remaining profits come to Maruti. But Maruti says the transfer price will be at cost:

The new plant will sell cars only to Maruti under the deal at a price that will include production costs plus enough cash to cover further capital expenditure requirements, Maruti said.

(This is a “funnymentals” problem. Do you believe them?)

The good thing: That Maruti wouldn’t have to invest in the Gujarat plant itself. But they’ll still have to deal with employee unrest at Gurgaon and Manesar where other factories (like Hero Motocorp) have also seen serious unrest. The hope was that Maruti’s moving to Gujarat would solve that problem - and it might, but to the benefit of Suzuki, not Maruti shareholders.

Good Results From Cost Cutting

The company announced good results, where:

  • Revenue has been down YoY (10,893 cr,. versus 11,200 cr.)
  • Profits are up 36% (681 cr. versus 501 cr.) from lower cost of material due to localization and cost cutting
  • EPS is up 39% (22.55 versus 17.35)

However, the fact that all the growth is coming from cost cutting is not sustainable, and eventually they’ll have to raise prices or increase car sales.

Stock Falls and then Rises

image

The stock fell by over 8% yesterday and has recovered about 7% today to Rs. 1680. The support at 1550 seems to have held. This would be a key number for the stock.

My View

Considering car sales have gone hugely down in the last year, Maruti hasn’t looked very attractive, but as you can see the chart has only gone up. Further news about how the Gujarat plant operates, what exactly is charged as capex, how the game on exports will play etc. will determine future direction. But I don’t see much positive news - at best they can say yes, we’ll bill things at cost, and so on. From a fundamental aspect the stock has more weaknesses than strengths.

The chart shows a support area and a downtrend right now. Going long would have to see a breakout above the 1780 line. A retracement from the high to the low shows that the stock might move to the 1680 levels (61.8%, where it is today) before it goes back down. The trend’s negative.

This is more a short position than a long one, but there is the lack of a real trigger for entry. At best, I might go with a small short position with a stop of 1780. The lower support of Rs. 1550 is now far, but it should be a hard stop in case the stock goes through it.