Is Infy Topping Out in Earnings? Results in Charts.

2 comments Written on July 15th, 2014 by
Categories: Infosys

We’re a few days late, but here’s Infy results in charts:

Revenue Growth Interesting YoY, Flat QoQ

They’ve grown revenues about 13% over the last year, but it’s been flat QoQ


Remember that the USDINR equation went above Rs. 60 in Sep 2013, which would have helped their rupee earnings. The rupee has fallen about 12% from last year, and their revenues are up 13%, so that’s about that.

Earnings, on a trailing 12 month basis, have grown 17% after a period of being very flat.


Headcount Growth is a concern

Infy’s trying to hire like crazy, but they’re losing people like crazy too. Their profits are coming in from higher utilization:


Net additions are only 879 people in the June quarter, even though they hired more than 11,500 people! Meaning - the difference is the number that left the company.

Stock Performance

The stock is up about 25% from the lows of August 2013, but has been steadily falling since March. While the last month was good (a move from the 2900 levels back up to 3200) the stock remains a little shaky with support at the 50 day moving average (3167).


The next move will happen after Sikka takes over and the direction of the company changes. What’s really scary is that their employee count isn’t moving much, and they’re losing more people each quarter.

Disclosure: No positions.

Go Healthy: Tobacco Duty Hike of Upto 72%, Coke and Pepsi Get a 5% Tax

3 comments Written on July 11th, 2014 by
Categories: Budget2014, ITC

It’s going to cost you a lot more to light up. The excise duty on cigarettes is up 72% for cigarettes less than 65 mm, and 11% to 21% on other cigarettes.

Chewing Tobacco and Gutkha see rates go up 60% to 70%. Pan masala too goes up.

This should have hit ITC hard, but the stock didn’t hurt much, actually closing up 0.4% at 344.

A smaller cigarette company, VST Industries, which makes the shorter Charms and Charminar brands, fell 16% on the news.


On another note, Aerated waters containing sugar will now pay a duty of 5%. This means your regular pepsi and coke consumption needs to be cut as well.

It’s not just the government finances they plan to make healthy. But Mr. Jaitley himself isn’t in the pink of it - he had to take a 5 minute break mid-way into his speech, and delivered the rest of it sitting down. Now if we had a tax on overweight politicians….

Mahindra Holidays Acquires Finnish Holiday Resorts for EUR 13M

No Comments » Written on July 8th, 2014 by
Categories: MahindraHolidays

Mahindra Holidays will pay Rs. 104 cr. or EUR 13 million to buy 18.8% of a Finland based resort called Holiday Resorts. Their press release says they have the right to increase its ownership over the next two years.

Holiday Resorts has 32 resorts, most in Finland, and makes EUR120 million, but profits of only EUR 5 million. The transaction values them at about EUR 70 million for a P/E of 14. This is far lower than Mahindra Holidays’ own P/E of 30. (EPS of Rs. 11, price of Rs. 330)

Holiday Resorts actually makes more revenue than Mahindra Holidays (EUR 120M= Rs. 1000 cr. versus MHRIL’s 777 cr.) but a lower profit (40 cr. versus 95 cr.). So there’s probably scope for efficiency here. However, profits have fallen 25% in the last year, which isn’t very different for Mahindra Holidays either.

MHRIL’s share price at Rs. 330 is at a very high valuation of 30 P/E - so it might be better for them to sell shares and pay for this company rather than take on debt. After all, shareholders are the suckers geniuses that don’t get their money back from the company.

Mahindra Holidays owns Club Mahindra, which I have written about has a huge problem in India - they have to increase room capacity by 40% to just be able to serve existing members!

The Negatives

This deal doesn’t change that one little bit, because it means the company spends money to buy a Finnish company, and therefore will not be able to spend that money expanding in India.

The scope for fractional holiday shares - Club Mahindra’s model - isn’t exciting in my opinion, especially when you can plan holidays over the internet, and find excellent hotels and food for way cheaper. If you took the membership value of Rs. 3.5 lakhs and put it into a mutual fund, the interest alone is likely to pay for a holiday at a five star hotel for a week each year.

But the share has gone up about 50% in the last two months, so yes, I’ve been wrong on this share!


While I don’t like the model in India, will Europe change the equation for the company? It may be a good idea as their market saturates in India, and they are buying a company at a relatively cheap valuation.

Disclosure: No ownership.

Maruti Makes The Best of Car Sales Growth in June

Comments Off Written on July 2nd, 2014 by
Categories: Stocks

It’s been a good June for Car Sales, it seems. The top 8 manufacturers sold 16% more cars than in Jun 2013, and of them Maruti has done the biggest improvement.


How big is Maruti? Well, it’s half the top 8 in terms of car sales. The rest are just playing catch up.


Losing sales on an annual standpoint are Tata Motors (domestic sales), M&M, Toyota and GM. Honda did a massive increase on a new car booking the biggest deal was Maruti’s 31% increase which amounted to over 23,000 cars, or about 86% of the total increase in cars sold in the country!

The Maruti stock is up 10% in two days after the news. But that is no big deal because the underperformers, Tata Motors and M&M, are also up 3% to 7%. The market loves any news!

Bahl’s Exit at Network18, and the Collateral Damage of Paid News

1 Comment » Written on June 23rd, 2014 by
Categories: Network18

An interesting story on the Reliance takeover of Network 18 by Ashish Mishra at Mint.

“I am quitting,” Bahl said. “Reliance wants to take over.” The words hung over the meeting; silence reigned for a while. “Why?” someone asked. “They want to take over,” replied Bahl. “They are completely within their rights to do it. So I have decided to move on. They made an offer that I could continue as a minority shareholder, but I have decided to exit.”

Two days later, Reliance Industries Ltd (RIL) announced that it would spend Rs.4,000 crore to take complete control of Network18, the company Bahl founded in 1993, in the biggest takeover in India’s media industry and followed it up with an open offer to the public.

The mail has details of how things panned out. In the next few days, top execs quit, including the CEO, CFO and some board members. Bahl was losing what he took 21 years to build, and he was leaving.

Not Really a Surprise

But it wasn’t that he was just leaving and was all surprised by RIL’s behaviour. It had to be well known, and a well timed exit. Bahl had, in 2012, all but sold his company to RIL, in a deal that ensured his ownership could go to zero any time that RIL wished. And all that, to get money in order to buy something from RIL - which effectively meant that RIL was paying itself and getting all of Network 18 in the process.

Now, all that RIL did was exercise its rights. It had bought Network 18, effectively, in 2012, and now it was saying, “I’m actually taking over”.

Why Did Bahl Sell Out?

The post talks about how Bahl was “desperate” when he went to Reliance. The group had around Rs. 1800 cr. of debt and they would retire it through the Reliance purchase (which was in total around 4,000 cr. at that time). If you think about it - around 2,200 cr. to buy ETV from Reliance and another 1800 cr. to clear out debt - that’s all the money was spent for.

Effectively, Bahl sold out, for nothing? Because in the end, all that changed was that his shareholding went to zero, and the company went to zero-debt. Why would he do that?

I think the answer was that eventually, Bahl would be paid when RIL actually acquired the shares which has now happened in 2014. And he has been paid, now. The exact amount isn’t entirely clear but there has been money paid.

I’m fairly sure Bahl knew this would happen, regardless of whether Network18 turned around. It was inevitable, and he had two years more than other people would give to enjoy being at the helm of affairs.

The AAP thing and the Collateral Damage of Paid News

Interesingly they mention how Reliance wanted the media to shut-up about Kejriwal.

[Manoj Modi is a big-swinging-top-guy at Reliance]

“Modi was furious. He was like—‘tum humko dacoit bulate ho, tum chilla rahe ho ki hum crony capitalist hai. Agar aisa tha to dacoit se paise mangne kyon aye the? Tum kaun se doodh ke dhule ho?’ (You are calling us a dacoit, you are shouting that we are crony capitalists. If that is so, then why did you come to us for money in the first place? Do you think you have a clean record?),” says the official.

Oh but really, this can’t be a cause to cry about. Media companies created the concept of paid news. Now it’s coming back to bite them! I’m not saying that Network18 had paid news, because I don’t have evidence that it did - but in general when the media as an industry doesn’t rally against a practice of keeping business and content tightly linked, then one day this practice will extract its pound of flesh. 

Why Doesn’t The Government Sell 50,000 cr. of Shares It Holds in Private Companies?

4 comments Written on June 9th, 2014 by
Categories: Macro, Stocks

We’ve been crying hoarse for the government to not be in business, that it needs to “divest” its holding in public sector enterprises.

Why aren’t we calling for it to divest its holding in private sector enterprises?

There’s a Specified Undertaking of the Unit Trust of India (SUUTI) that is owned by the government, which does nothing but own some shares. Of these, there are three of significance:


SUUTI owns significant chunks of Larsen and Toubro (Rs. 13,000 cr.) ITC (Rs. 30,000 cr.) and Axis Bank (11,000) cr.

This adds up to a humongous Rs. 54,000 cr!

How did it get them? Well, it bailed out a mutual fund called US-64 which had these shares but whose value didn’t even add up to the guarantees it had given years back. So the government bought the shares and ponied up the money. These shares have multiplied mani-fold since. But that’s irrelevant today - once they had recovered the money, they should have sold.

Why is the government holding on to this stake even now? Answer: Inertia.

To their credit, the previous government did sell a good chunk of Axis Bank for Rs. 5,500 cr.

The current full market value is 10 times that amount!

How To Sell?

The horrible part of our market is that as soon as the government decides to sell shares, it tries to do it through an auction, and the market immediately sells off and gets the government a low price. Try to sell it too high, and then the issue has to be “rescued” by having the likes of LIC (the big government owned insurer) buy shares instead.

Can’t We Use Technology?

India can, and does, use technology to sell shares. Algorithms such as “VWAP” (Sell at Volume Weighted Average Price) are routinely used to sell larger blocks of institutional shares in chunks. The algorithms aren’t complex - they hunt for volume, and when they find that volume, they send orders, and each order is executed at or close to the VWAP of the day so far.

The government can create a mechanism where shares are sold over time. They can announce what they are selling, but not how much each day, or if any shares will actually be sold at all on any given day. The algo takes care of the rest. At no point should the government’s volume be more than 10% of the total traded volume of the day, for any share. It might take more than a year to sell shares, and that’s the correct way to do it so it doesn’t disrupt the market. Over time, shares will be sold.

(At all points, the government should keep a large sell order about 5% above the VWAP, so that some block buyer can get shares if they want to take the stock up)

If the government wants to divest from other listed PSUs, but in small quantities - like 1% to 5%, where there are good chances the institutions aren’t interested enough - this route can be used again. It’s a single window for the government to divest stake.

It can be transparent, with daily reporting of shares sold and even the algorithm’s source code being available to avoid being gamed.  (Yes it will be gamed, but the impact can be reduced substantially.)

Check out Capital Mind Premium! Take a 30-day Free Trial.

The only thing the finance ministry has to do is to decide which shares will be sold, what total quantity, and over how much time (and even that can be disclosed in advance).

But The Main Point Is…

that the government must sell those shares.

It can find methods. It can auction shares, it can invite bids or it can simply do a “5% discount for retail investors” and have a public divestment mechanism. It could use the above mechanism. How they do it is less important than that they decide to do it.

And It doesn’t matter if they sell and then the shares go up further - no one should care, because the government should not be a speculator, or an investor in private companies.

50,000 cr.

That is about 10% of the fiscal deficit. And there is no one, apart from the managers of those companies, that won’t like it. Why aren’t we doing it?

HT @baddutt for the heads-up.

Interviewed on ET NOW: BEML, Sintex, Astra Microwave

Comments Off Written on June 5th, 2014 by
Categories: Stocks

I was featured in ET Now on Wednesday, on a show with Ayesha Faridi and Nikunj Dalmia at 1:20 pm yesterday, talking about a few stocks.


I talked about a few CAPM Portfolio stocks such as:

  • BEML
  • Astra Microwave
  • Sintex

Note: These are Capital Mind Premium portfolio stocks, which we have bought and mentioned to Capital Mind Premium members.

Check out Capital Mind Premium! Take a 30-day Free Trial.

A quick summary of the discussion (I don’t have the video yet)

Q: Do you think 7500 is a barrier for the market?

Me: It’s too close to an all time high to believe this is a top. Keeping the price perspective aside, if you look at the fundamentals, there’s nothing that tells us it ends here. The new government in in, we have a budget coming up, and everything’s looking up. Hardly any reason to believe markets will stop here.

Q: What do you make of RBI Policy of going with the status quo?

I think status quo was expected and the only thing significant was the RBI’s allowance of speculation in currency trading by FIIs and domestic corporates, which they have earlier disallowed from doing so. $10 million is not a lot, but it’s a start. It’s also credit to Dr. Rajan that they have clarified monetary policy enough that the rate status quo was almost universally expected. At Capital Mind we expected an SLR cut, but that’s also a long term process of reduction that was due to happen.

Q: You seem to like BEML, Astra Microwave? The FDI in defence?

Yes, the FDI in defence is a big thing there. BEML is more of a defence plus railways play, since they make metro coaches. But the FDI in defence, and the fact that the new government is likely to push these sectors more is going to take these stocks to the next level.

Q: Sintex has had problems of late with promoter’s creeping acquisitions, FCCB reissuance, the slowing monolithic business and the big debt on their books. What do you make of that?

The FCCB piece is interesting. The conversion price was Rs. 75 and that has recently been brought down to Rs. 65. The stock trades at Rs. 80+ (now actually Rs. 96) so it’s quite likely they convert to equity. That will take $140 million, or about 800 cr. off the debt load.

The company has a good CSR initiative, and with things like the recent attacks on women, their portable toilets are an innovation. Their custom moulding divisions will do well with the recovery in France and the US. They have had trouble with government payments in their pre-fab business (where they make schools and stuff) but that should get better with the new government. The point is that they’ve got a good diversified product portfolio and the push in infrastructure is going to help all their businesses.

Q: Any Disclosures?

You should assume that all the stocks mentioned are owned by us, so we’re biased.

I’ll post the video if I get a hold of it. Transcript is not exact, I’m just writing from memory.

Why Did Reliance Buy Network18 When It Already Owned Network18?

13 comments Written on May 30th, 2014 by
Categories: Network18

The buzz in the media industry is that Reliance Industries (RIL) has decided to buy Network18. What fantastic news, you think, until you understand that Reliance Industries:

  • already quasi-owned a substantial chunk of Network18
  • and are asking remaining shareholders to sell their shares at less than current market price

Wait a second. There’s got to be juicy stuff here, right?

(Warning: My answer involves conjecture. You’re likely to be disappointed)

But first, the boring but required history

To Keep Things Short

  • Reliance owned a good chunk of the Eenadu channels, it seems (Source: Check my own post)
  • TV18 wanted to buy Eenadu, we don’t really know why.
  • TV18 runs the CNBC TV18, CNBC Awaaz and the CNN-IBN set of TV Channels
  • They didn’t have the money either. They planned to raise it from their investors.
  • So Reliance decided to help. Not by giving TV18 money - that would be too obvious.
  • They gave the promoters of TV18’s effective owner, Network18 - money through optionally convertible debentures. These would convert to 99.9% ownership of those companies, meaning Reliance would effectively control Network18 and TV18 if they wanted. (Source: Competition Commission PDF)
  • After all this, TV18 would get money, use some of it to retire debt and the rest to buy the Eenadu stake from RIL.
  • This was a complex mechanism for RIL to pay itself but it was done anyhow.
  • The rights issues for Network18 and TV18 were at Rs. 30 and Rs. 20 respectively, in 2012. They went through, and the Bahls - the promoters of Network18 - got themselves a juicy 70%+ ownership that was effectively RIL’s through their convertible debentures
  • To avoid having to actually aggregate Network18 into their consolidated results, this whole thing was done through a trust, called the Independent Media Trust (IMT), whose sole beneficiary was RIL (and which was funded by RIL)

Fast Forward to May 29, 2014

RIL has officially bought out Raghav Bahl’s ownership. They’ve decided to fund IMT to actually buy the stake of the Network18 promoters, and eventually will own TV18 as well.

This triggers a lot of SEBI regulations, so they have to make open offers to:

Lots of top management of Network18 have quit, and apparently RIL has been hiring media people to potentially replace them. Rajdeep Sardesai and Sagarika Ghose will quit, as has Raghav Bahl and many other top people in the company.

The Open Offers Won’t Work

Yes, we’re getting open offers. But they won’t work.

Because Network18’s price in the market is Rs. 45 today, and TV18 is at Rs. 34. Both at 10% above the offer price. Why would you sell to RIL for lower?

(Infomedia is trading below but it’s too small to be worth the discussion)

So they really don’t want to acquire the rest of the shares. They will if they have to, I guess, since that’s the offer; but if the market remains at this level, the offer won’t get much response.

Which means:

  • The companies remain listed
  • Reliance spends nothing (it’s payment to Raghav Bahl was already made in 2012)

But Why Did They Bother?

So if RIL already quasi owned stake in the Network18, why did they formally acquire Network18 and TV18? It’s not evident, and they’re saying it’s some kind of deal about their 4G license. Which to be honest, seems like a load of bull because Reliance has simply not done anything with their 4G license so far and they already controlled the company anyway.

So the answer has to be something else. But what?

I don’t know much. No one tells me anything because I’m a relative nobody. So I’m going to make some guesses.

It’s about taking over Network18. Network18 has been losing money forever. And Reliance probably needs to change that, and will have to be in the driver’s seat.

It might be something in the new Companies Act, 2013. The act has some crazy requirements of companies that issue debentures, including those that convert to shares.

Bahl wanted out. You can only be a pawn that long.

(Something more sinister?)

The Management Trust Issue Continues To Be A Problem

If Network18 continues to be listed then it’s going to have to deal with the fact that there is an ESOP Trust called Network18 Senior Management Welfare Trust that owes it over 500 cr. This was given in the past to effectively buy Network18 shares in the market. Capital Mind has written about it extensively.

Given the structure of the deal, it might still not be required that RIL consolidate the results of Network18/TV18 with its own. Because in the middle lies a trust, the IMT. (I don’t know the law well enough though) This management trust issue is not something RIL wants on its hands, apart from the crazy web that Network18 has become over the years. (See Posts One, Two, Three)

I wish the employees of Network18 the very best. I hope they don’t get fired, but it seems like the people who would have fired them have been asked to leave.

And if you’re wondering if Network18 is a good buy at this price, I have a Suzlon to sell you.

MCX Audit by PWC Shows Lots of Related Party Issues, Sham Trades

4 comments Written on May 29th, 2014 by
Categories: FinanTech

The Price Waterhouse Cooper report on MCX insider transactions is pretty damning. It’s at the end of this post, but here’s a quick summary:

  • FTIL, which owns 26% of FT, controlled a lot of the vendor contracts given out by MCX
  • FTIL has a stranglehold on MCX operations, getting paid 649 crores over the years for services from MCX. NBHC, a warehousing company owned by FT, got 42 crores for its services.
  • And there was no open-tendering for price discovery. So FT charged anything, there was no cross-checks.
  • Related parties to FTIL companies have traded on the MCX (not allowed)
  • MCX had even paid some such parties money, either as vendors or as donations
  • MCX paid 55 cr. to parties that either didn’t have a physical presence, or where the transaction was shady.
  • Lot of manipulation has been detected in trades by clients which have been changed or reassigned after the time allowed for such changes.
    • Many big brokers like Riddhi Siddhi  and Edelweiss conducted “wash” (sham) trades on MCX
    • FTIL would get upto 12% of gross fees, plus Rs. 1 crore a month for the technology and services they provided to MCX
    • Even a foreign stock exchange which wanted to buy a sake in MCX had said that the agreements with FTIL were one-sided.

The point now is that MCX has been delinked from FTIL forcibly after FTIL was declared “not fit and proper” to run an exchange after the NSEL crisis.

However, if MCX operations depend on FTIL technology so much, there is much dependency at stake here. And if agreements are one-sided, and don’t allow MCX to back out (which is one case pointed out) then a buyer of MCX will have to live with “one-sided” deals for a long time, and that could impact their ability to make the exchange more profitable.

The full report:

Mahindra Holidays Hits a TRAI Wall, Falls 20% Below IPO Price Five Years Ago

9 comments Written on May 8th, 2014 by
Categories: MahindraHolidays

Club Mahindra’s been getting the rough end of the stick recently. With the stock languishing below their IPO level of 300 per share about five years ago, in 2009. It trades at about Rs. 232, down around 20% from the IPO price.



I didn’t like the IPO (Read my IPO notes) for an overvaluation and the lack of credibility of the idea of paying for a long term membership. They have been able to see revenue up, but profits have been stagnant.

Check out Capital Mind Premium! Take a 30-day Free Trial.


With a 24 cr. profit in March, they had shown a lower profit than five years back, when they had made Rs. 29.80 cr.!

The earnings per share hasn’t done that well, especially since they have dropped EPS 25% year on year.




Still Have A Capacity Problem

They’ve always had a problem with the inability to satisfy customers properly. Each customer is given one week a year. There are 52 weeks in a year, so each room can effectively satisfy 52 members (max). So effectively, each room is 52 room-weeks; and if we multiply their total number of rooms by 52, we can see how many members they can satisfy. The answer continues to be horrible:


They can’t really support over 50,000 members, around 30% of the total. This has been increasing recently.

They’ve actually cut the number of rooms this month by giving up one resort. Mahindra Holidays is trying to change this equation by building about 500 rooms over the next 18 months, spending Rs. 400 cr. on the exercise.

Run-in with TRAI Hits Member Addition

They have had a run-in with TRAI, which seems to have affected their “model”. Apparently their model was based on some kind of spam calling, where TRAI would cut off all their lines if someone complained of spam. This has been mentioned in the last two quarters. This drastically reduced their marketing ability in the last two quarters.


Their addition numbers in my book include the net additions, which is gross additions net of cancellations and net of expiring members.

It seems they have managed to convince TRAI on a per-call basis that they have the authorization to call, such as their having signed a form etc.

My major concern is that the fix is short term. If the fact that they were calling DND numbers was causing TRAI to ding them, and they fixed that by only addressing people who weren’t in DND and who had signed something allowing them to call, this has probably resulted in a short term addition. Eventually they’ll hit that spam wall again, and the rapid growth they saw in earlier years will come down.

Exciting Enough To Buy?

Sadly, not for me. At a Twelve Month EPS of Rs. 10.75, the P/E, even at Rs. 231 is 22+. There are better businesses at far lower P/E ratios and way better growth.

And I’m not very excited about their product either. Their minimum costs are Rs. 3.5 lakh for membership, and I would do better by putting that money into a short term mutual fund, and using the money to pay for holidays each year, it seems. I just paid less than Rs. 50,000 for 6 nights for a 5 star hotel in Goa, including all meals, and all sorts of extras. This is way better than a pre-committed exercise; and has only reduced in price in 10 years!

Either ways, the issue is this: If they have 30% unserviceable members, then there’s no point even thinking of buying their product. And if enough people realize that, there’s no point buying their shares either.

Suzlon Faces 70% dilution on FCCB Restructuring Proposal

3 comments Written on May 5th, 2014 by
Categories: Suzlon

Suzlon has managed to get lenders to restructure $485 million of FCCBs, with a step up convertible bond issue that can be converted at Rs. 15.46, over five years, with an average coupon of 5%.

This sounds like Greek. But it’s like this:

  • Suzlon had to pay back $485 million, some in 2012 (already defaulted), some in 2014 and 2016.
  • Tough.
  • So they said okay, guys, what will it take?
  • They finally agreed to not demand $485 million (which is all of the 2012 and 2014 bonds, and half of the 2016 ones) immediately.
  • Instead, those loans are rolled over another five years.
  • The new loans will be paid at 5% per year in a step-up coupon, meaning the first year coupon will be low, the next year higher and so on. (Source: Bloomberg)
  • If the lenders want they can convert it any time at Rs. 15.46 per share.
  • RBI still has to approve, and I presume all shareholders need to say okay as well.

Truckload of Dilution

Suzlon has around 266 cr. shares outstanding. This includes a recently issued 18 crore shares as part of a Corporate Debt Restructuring agreement for rupee debt.

The new bonds carry a coupon of average 5% over five years. The first 18 months carry 3.25% interest and the rest, 5.75%. (Source: Company disclosure)

At the end of 5 years, lenders can convert the shares at 15.46 if they like. Assume they do.

At Rs. 60, $485 million is Rs. 2910 cr.

Converted at Rs. 15.46, that is an issue of 188 cr. more shares.

Remember they have only 266 cr. shares outstanding right now.

That’s 70% dilution.

Or Truckload of Repayment

What if the share doesn’t go above Rs. 15.46? Lenders won’t convert, and the company will have to repay all of that money.

It’s not apparent how, after the wind bubble has more or less gone bust, the company can generate the 3700 cr. needed to pay this loan back.

It had a loss of 4700 cr. in FY13, and a loss of Rs. 1,000 cr. in the last quarter.

Markets are loving it, with the stock up 6% at 14.1. The stock saw a run-up recently.


My view: I’m coloured by the past. So I’m not very confident of this deal helping the company, unless energy prices go through the roof. Technically though, the stock looks like an interesting short term trade if it went strongly above 15, with a 10% stop loss. Of course that applies to literally every stock nowadays - you could randomly pick a stock and it seems to go up 20% in no time!

Whatever Will Be, Will Be 20% Up!

3 comments Written on May 3rd, 2014 by
Categories: Stocks

In December 2013, I was looking at this stock:


At the point of the purple arrow, the question was: would I buy?

The answer, at the time, was: Why not?

All time highs appeal to me. I don’t often catch them the first time, but this was a stock I’d traded earlier and was a little shocked that it had nearly doubled in a year.

That stock just did this.


It’s a stock called Cera Sanitaryware. They make ceramics. For toilets. And that stuff seems to be quite seriously in demand, because they’ve just done a fairly good deed for profits:


They’ve made an EPS of Rs. 41 for the whole year, which is 12% higher than the previous year. That gives them a P/E of nearly 30, which isn’t too high considering they have taken profits up 4x since 2009 (5 years).

There’s no shareholding pledged, and promoters are consistently buying and upping their stakes.

The stock is up 20% today on Friday (May 2).

It’s a little weird, this move, coming about six days after results were announced (25th April). Is there more happening here? 20% on high volumes (22 cr., or 10x the average) is strange, but will it sustain this move?

That Question…

There’s also the eternal question of “should I buy this stock now?” - if I wasn’t already invested, I would have bought with a 10% stop loss; in a time of mad momentum, everything moves without reason.

And appropriately, the song goes:

When i was just a little girl
I asked my mother what will I be
Will I be pretty? Will I Be Rich?
Here’s what she said to me:
Que Cera Cera
Whatever will be will be
The future’s not our’s to see
Que Cera Cera

Disclosure: Long. Hoping the new government will build more toilets.

Sun-Baxy Deal Dinged For Insider Trading

Comments Off Written on April 30th, 2014 by
Categories: Stocks

The SunPharma-Ranbaxy deal has hit a little snag. The Andhra Pradesh High Court has temporarily stalled the merger, asking SEBI and stock exchanges not to approve the merger until it decides on whether there was illegal insider trading with respect to the deal.

Business Standard reports that Silverstreet, a Sun Pharma subsidiary had bought 60 lakh shares of Ranbaxy, in the march quarter. But Sun Pharma has said these shares will be annulled on the merger as it cannot be issued Sun Pharma shares, since it’s a subsidiary.  (HT @madmanweb)

In my first post on the merger, I had brought this up: Why did the shares of Ranbaxy go berserk?


SEBI Must Investigate

This “SilverStreet will not be given SunPharma shares” doesn’t make sense. So Silverstreet will LOSE Rs. 280 crores? Who in his right mind believes that?

There are only two things - that shares will be issued as treasury stock like Reliance did when it merged with RPL (and Reliance owned a significant chunk of RPL shares). So Sun Pharma will own its own shares in some kind of treasury stock which can be sold at a later date.

Or, secondly, that Silverstreet will sell the Ranbaxy shares before the merger.

In both cases, there is a clear case for dinging them for insider trading. That Silverstreet will, in some way, profit from this deal, and Silverstreet is an insider.

Silverstreet should be asked to immediately sell the shares, and disgorge any profits. And on top of that, to pay a fine. This is similar to Reliance Industries’ insider trading case for which SEBI has demanded a 11 cr. fine for a profit made by a promoter entity in trading in IPCL shares before IPCL merged with RIL. The fine is about 3x the profit made.

Will the merger be stalled?

Not for this reason. SEBI will be forced to investigate. It has become a regulator of convenience - with next to no investigations on large companies or deals recently.

If SEBI does investigate, then the High Court has no reason to stall the merger. Insider trading is first handled at SEBI, not at the high courts. First SEBI must pass an order, which can be appealed at the SAT, which can further be appealed at the courts. There is no implication on the merger - as in, the investigation on insider trading is independent of the merger, and both can happen simultaneously.

The stocks of both Ranbaxy and Sun Pharma are down marginally. If the market feared that the merger would not happen, Ranbaxy would fall a lot more and Sun Pharma not so much. So it’s likely the market isn’t really fearful of a breadown in the merger.

DIsclosure: Family owns Ranbaxy shares.

India’s First Commercial Mortgage Based Security (CMBS) on Offer by DLF

7 comments Written on April 24th, 2014 by
Categories: Debt, DLF, Stocks

DLF has launched India’s first Commercial Mortgage Based Security (CMBS) by securitizing the lease rentals on two malls in Vasant Kunj in Delhi, DLF Emporio and DLF Promenade. DLF will receive Rs. 800 cr. for a period of 7.5 years, where interest is paid through rents received from tenants of the property.

How CMBS Works

The idea is that the mall owner (DLF) issues Non Convertible Debentures (NCDs) to investors and gets money immediately.

Then, to pay off the interest each month, it sends the lease rentals of a mall to a single escrow account, which first pays off the interest portion to the CMBS debenture investors.

At the end of the CMBS Period, DLF will pay off the principal. (As a “bullet repayment”)

Crisil has rated the debentures AA, and has the following diagram.


What happens in case of a shortfall or default?

Supposedly, this CMBS has a coverage ratio of 1.7 to 2 - meaning, the lease rentals will by 1.7x to 2x the required monthly interest payment. For example, if the interest rate on the debentures is 15% a year on Rs. 800 cr, then the interest payment per month is Rs. 10 cr. But the rentals will pay between 17 cr. and 20 cr. per month (in the two malls put together), according to Crisil.

If the lease rentals can’t cover interest for any reason (lack  of occupancy or default by renters), there is a “DSRA” (Debt Service Reserve Account) with three months of interest payments that will kick in.

There is a put-option provider who is supposed to pay back the principal+interest in case there is a longer default.

If the put provider doesn’t pay, the debenture holders can enforce the mortgage on the properties (that is, to sell the shops or the malls).

And beyond that, there’s also shares of DLF that are pledged, which can be sold.

Also there can be no further debt taken by using the properties as mortgage.

So it’s a multi level protection against default. Of course, if there is a major crisis, none of these will have value (the property may not be worth much) and DLF shares will be in the toilet.

Who’ll invest?

It will be institutions for the most part. Hedge Funds, Realty funds, PE funds and foreign investors, and possibly HNIs as well. I doubt retail can play a part.

Notes, Risks and Benefits

Malls have three sources of revenue:

  • Parking
  • Lease rentals
  • Revenue share with restaurants/shops

Only the lease rentals and revenue share has been pledged. Not the parking fees, or monthly maintenance fees, from what I can glean. Even the security deposit is not going to be held by the debenture holders. DLF benefits by continuing to have some revenue streams to themselves and get upfront cash of Rs. 800 cr.

We don’t know the costs of the debt yet (interest rate) but if it’s lower than what DLF is paying elsewhere, it can retire higher cost debt.

The lease rentals are pretty big in number, if we assume the CMBS requires Rs. 10 cr. per month as interest, on a presumed 15% interest on Rs. 800 cr. The malls add up to Rs. 800,000 sq. ft of space. With 75% occupancy I estimate that the malls needs to charge Rs. 160 a square foot per month to be able to service the interest. Currently the rates in these malls are upwards of Rs. 500 per sq. foot per month. (Source)

DLF also has to pay back no principal till the very end (7.5 years later) which helps with cash flow. (Bank loans require partial principal repayment too along with interest). Investors will then get interest on their full investment and have no reinvestment risk. Of course, DLF might default after 7.5 years on the principal, which is the major risk with balloon repayments.

The biggest benefit is to the ecosystem. By securitizing receivables, providing a liquidity backstop and providing collateral, the age of the CMBS is here. More real estate owners may go down this route and deepen the market, plus provide higher yield avenues for investments that are secured in multiple ways as above.

Of course we should avoid the problems that have existed elsewhere. Like, ensuring DLF has not taken other loans mortgaging the same property. Or it is not currently funding other loans with these very lease rentals. And that the papers are proper that DLF owns the property (this is a big pain in India, to verify ownership). Most importantly, that the properties don’t violate environmental or zoning laws, in which case the malls can be shut down and/or razed. (There is then very little recourse left for investors)

DLF Benefits but Profits Might Be Hit

DLF benefits from the deal, where they get an upfront Rs. 800 cr. in exchange for this debt.

However, their profits might still take a hit. My reading is that with the new debenture rules in the Companies Act, they will have to invest 15% of the amount to be repaid each year - in this case, 18% of Rs. 120 cr, or Rs. 18 cr. per year - into government securities. And, they will have to set aside Rs. 400 cr. as a debenture redemption reserve. That will hurt their profits!

(DLF reported a net profit of Rs. 729 cr. in 2012-13)

DLF’s share price has been falling in the last three weeks, and is down to Rs. 152 after being at Rs. 180 in early April. The damage is political it seems, with their alleged ties to the Congress party which might be routed in the ongoing elections.

The CMBS, although a good first step to derisk the company from banks and the banks from a large single borrower, might hurt the company’s financials because of the new debenture rules. But this opens the doors for other players to join.

Biocon Rumours of Oral Insulin Deal Push Up Stock 10%

Comments Off Written on April 22nd, 2014 by
Categories: Stocks

Biocon has been rumoured to have serious developments in its oral insulin product, and in talks with a few large pharma companies to license the product. This supposedly involves a big upfront payment and some kind of investment by these companies into Biocon.

The stock is up about 10% on the news.



Biotech stocks are useful to own if you believe in their capability to develop drugs or do deals. Biocon makes “biosimilars” of insulin, and they own IP in the oral insulin space (as opposed to injected insulin which is the standard today) The result of investing in such companies is often one-shot, where the stock sputters along for a long time, but when they do a deal it gets a massive surge of income. (And the stock goes up big).

While I’ve invested in Biocon, it’s mostly been for the fact that I believe they will make such deals, not because of their biosimilar manufacturing (which is more bread-and-butter). The stock price increase, though, is just on speculation, so I’m not really confident this deal happens. In fact, the Biocon CEO, Kiran Majumdar-Shaw, just tweeted that this is “irresponsible”.


So what’s it going to be? Real news or profit-taking rumour?

Disclosure: Long the stock.

KPIT Gets Hot and Bothered about Acquisition Rumours

Comments Off Written on April 22nd, 2014 by
Categories: Stocks

So there’s some rumour abuzz about KPIT Technologies and it’s price has just gone a little berserk. In a clarification to exchanges about why its price went up suddenly, it has written:

We understand that yesterday CNBC Awaaz, a media channel, carried a news item stating that KPIT is going to be acquired by some other company. Possibly, the spurt in volumes is on account of that news. There is absolutely no substance to this news.

This is the third or the fourth time that this channel has carried such a news relating to us. Last time when they carried this news, we spoke to the news channel about this irresponsible reporting and the channel apologised to us for carrying this news. We are really surprised that the channel did the mischief again yesterday.

We are examining legal options for a suitable action against this channel. We would like to know from you whether, in such circumstances, the exchange can also proceed against the channel for such malicious and fictitious news propagation.

(HT @b50)

If this is true, then there should be an investigation into the channel’s behaviour; but the freedom of the press (whatever little we do have) ensures they won’t have to face any penalties.

It is usually strange for a company to get so antsy about a channel reporting news that is positive for the stock price. They should have just said, relax, we have nothing to say. 

The only reason they would be so ticked off is if the news was actually true. Or, worse, that they want you to think the news is true by denying it. (Massive game theory in action?)  Strangely again, there is no “sudden” spurt in price. Only some volume, but that seems to be a single day. And yesterday (21 April) the stock made a sudden jump of 5%.


In KPIT’s case, Management has sold part of their stake in Dec/Jan and FII’s own 42% of the company. It’ll be interesting to see where this goes:

Disclosure: Long the stock.

Infy Results in Charts: March 2014

1 Comment » Written on April 15th, 2014 by
Categories: Infosys

Infosys results have become less relevant than they used to be. A few key things about their results, in charts.

Revenues are Down, Profits are Massively Up


Profit growth went above 26% over last year. However, revenues suck.

P/E Still at 18, Trailing Twelve Month EPS Growth at 13%

If you take the EPS of the last four quarters and add them up, and use to determine the Price to Earnings Ratio (P/E) and the Growth over last year, here’s what you get:


While TTM EPS has begun to grow again, Infy’s P/E remains high.

Employee Headcount Addition Dismal, Utilization Constant


They’ve only managed to hire 2001 people, after taking in nearly 11,000 (and nearly 9000 left). This is dismal because Infy makes money billing its employee based services.

They’ve had some top and mid management attrition recently which would probably add to their margins in the near term. However, how sustainable is that? They’ll still need to hire others to replace them (at a higher cost) and then raise salaries of the rest of the staff.

Reducing US Footprint

You can see that the US is losing it’s weight on Infy’s revenue:



It’s not been that much of a stock and moved less than 1% today. Volatility on Infy results has been high in the past, but this time it’s just gone pffffft like a balloon.


Overall, reasonable profit numbers, but they have to get their revenues going faster. From an industry perspective other companies like TCS, HCL Tech and some of the second tier players seem to be doing a better job.

Why Is The Market Going Higher Every Day?

Comments Off 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.

The rest of this content is only available to premium members.

Register for a premium membership today! Apart from this content you will get our proprietary research and weekly newsletter too!


Already a subscriber? Log in now!

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

Comments Off 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.

The rest of this content is only available to premium members.

Register for a premium membership today! Apart from this content you will get our proprietary research and weekly newsletter too!


Already a subscriber? Log in now!

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.



(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.


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 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?


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


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.

The rest of this content is only available to premium members.

Register for a premium membership today! Apart from this content you will get our proprietary research and weekly newsletter too!


Already a subscriber? Log in now!

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

Comments Off Written on February 24th, 2014 by
Categories: GMR Infra
Check out Capital Mind Premium! Take a 30-day Free Trial.

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?

The rest of this content is only available to premium members.

Register for a premium membership today! Apart from this content you will get our proprietary research and weekly newsletter too!


Already a subscriber? Log in now!