The Coal Judgement That Took Down the Market

No Comments » Written on September 25th, 2014 by
Categories: Stocks

The Supreme Court has ordered that 214 our of 218 coal block allocations since 1993 be "quashed". Only about 46 of these blocks were actually operational, and all those that were not operational cannot be made so (because they are now illegal).

That means the companies that got them are in trouble, for two reasons:

  • They can't operate these blocks after March 31, 2015
  • and they have to pay a fine of Rs. 295 per tonne of coal produced till now (and from now till March 2015)
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Just four blocks were spared the axe; two given to Reliance Power for their Ultra Mega Power Projects, and one each of NTPC and SAIL. The reasoning: the first two is for an Ultra Mega Power Project (UMPP) and the others are for public sector enterprises. (We protect our own!)

The Judgement Provides Scary Interim points

The judgement says that some of the reasons the defense gave to not cancel the blocks was

  • SBI has an exposure of 78,263 cr,
  • overall loans to such companies are at risk, amounting to 250,000 cr.
  • investments of Rs. 287,000 cr. have been made to extract coal
  • REC and PFC have even more exposure than banks.

Even if this defense is overstating the case, the numbers in this are huge enough that even half their value would be scary. Even a 100,000 cr. hit to banks means that more than 15% of banking capital will be eroded!

Why Are The Coal Blocks Illegal?

The case is long and shady. The main point here is that these allocations weren't actually following the principles of justice or equitable distribution. These blocks should have been auctioned out - they weren't, and were given "arbitrarily".

This went through a few cases, and the CAG had a detailed report, saying that these non-auctioned blocks involved a loss to the government, adding up to Rs. 295 per ton. This much was a "windfall" gain, said the CAG. The court has agreed, and that much has to be paid back.

(I'm not sure the courts are considering the time value of money and that Rs. 295 ten years ago is not the same thing as Rs. 295 now, but let me not get all mathematical on you)

Impact: Power, Steel and Financials

Obviously the big impact is to the power producers. Here are a few charts that show the carnage:


Jindal Steel is down 20% to Rs. 175 from the 220 levels it started with on Tuesday, and more than 40% off the 300 level! It has the biggest impact - over 1.2 crore tons of coal it mines per month is at stake. It will pay a fine of about Rs. 3300 cr. for the 11 cr. tonnes of coal it has mined since it started. This is more than the company's net profit in the last 12 months (1800 cr)!


Hindalco, which had clawed its way upto Rs. 200 in July, has fallen to below Rs. 150, even as it had a steep intraday fall today.

(Read: Rulings on Coal and Coal will take their Toll)


Rural Electrification Corporation (REC) has fallen about 10%. This company finances the power sector. It doesn't have to pay fines, but the fear is that the companies or projects it has financed are in trouble.


Banks have fallen off a cliff. Every bank has some exposure or the other to the power and steel sectors, and the fall in three days, of about 1,000 points in the banking index, tells you how big this situation is.

We have a more detailed post on the impact on Coal India. (which is largely positive because Coal India will get all those coal blocks deallocated until fresh auctions are done).

The impact remains negative for banks currently, but it will be a good thing to clean up the system. Banks have other mechanisms for recovery (there are power plants, steel mills and promoter assets) and of course, there will be fresh auctions for the coal blocks which, if purchased, can make the plants operate again. However, this will involve a capital hit - we don't know how much just yet.

The Problem of Going Back Till Forever

The problem is that the cancellations go back all the way to 1993. Imagine you got something allocated by the government even before there was a policy for such allocations. You invested money to get the coal out and sold it, and now, 21 years later, you must pay a fine because supposedly the allocation was illegal in the first place.

At some point we must have a statute of limitations. Even if it means some bad people will get away - remember, even now the UMPPs have gotten away. The point is that if you can't be sure of a government decision today and it can be upturned by courts two decades later, then would you really want to invest?

Anyhow, this remains the only major issue, but if you look at the situation in detail it remains a mess involving corruption, shady deals and dirty politicians/industry. The hope is that that the judgement is a one-off - it's quite unlikely that anything being done now, like spectrum auctions will remain legal even many decades later. (But you never know!)

The Actual Judgement

For those of you that are interested:

We'll cover this story in more detail as things move forward.

Supreme Court Coal Block Verdict: Is Coal India a Winner?

No Comments » Written on September 25th, 2014 by
Categories: Stocks

On Wednesday, 24th September, the Supreme Court upheld its August judgement to scrap 214 out of the 218 coal blocks that were allotted since 1993. This was widely expected, and resulted in share prices of big players in this sphere, dropping massively. The worst-hit include Jindal Steel & Power, Hindalco, Usha Martin & Monnet Ispat to name a few.

The remaining 4 blocks that were not repealed (government-run, non-Joint Venture allotments) belonged to NTPC, Steel Authority of India Ltd and 2 to the 4,000 MW Sasan Power Plant (owned by Reliance Power) in Madhya Pradesh.

The SC has given the affected companies 6 months to cease operations. Additionally, they will incur a penalty of Rs. 295/metric ton of coal extracted, which will have to be paid on or before the end of the year.

Wow. At those rates, the penalty itself will be more than Rs. 8,083 cr., based on the approximate figure of 274 million tonnes that companies have mined thus far.

40 of the 214 are currently active; coal is being mined from them as we speak. 6 coal blocks can produce coal pretty much immediately. Power plants here are already facing a severe coal supply crunch; more than half of our thermal power plants cannot even last a week with their current stocks!

In their judgement, the SC also recommended that Coal India Ltd be allowed to run these 46 coal blocks until they are ready to be auctioned. This news has thrust CIL share prices upwards by 7.57% from Wednesday morning. Shares of Coal India Ltd (BSE: 533278; NSE: COALINDIA) surged for the second day in a row to reach an intra-day high of 358.90.


Things do look good for CIL. What can we expect going forward?

  1. CIL has entered into 161 Fuel Supply Agreements (FSAs), with a combined capacity of 73,675 MW, with a few more expected to follow suit soon.
  2. As per a report by the Financial Express, CIL may also raise prices of lower-grade coal (the kind that is supplied to power plants for power generation).
  3. CIL is expected to become a part of International Coal Ventures (ICVL), a syndicate that currently includes five other state-run Indian companies. ICVL would rope CIL in as a part of its plans to expand operations in Mozambique.

This bodes well for CIL, which has also received flak for its apparent inability to meet demands till date.

Disclaimer: We do not own any positions on the stock.

Step 1: Convert FCCB Into Shares. Step 2: Sell Like There’s No Tomorrow (Suzlon)

5 comments Written on September 22nd, 2014 by
Categories: Suzlon

Suzlon's shares have fallen around 20% in two days (10% every day). The stock is now halfway down from the peak.


It seems that FCCB holders have converted $69 million worth bonds to shares at Rs. 15.46 per share. That's 27.04 cr. shares more. The company earlier had just 278 cr. shares issued, so this is a 10% dilution. (to 305 cr. shares)

It appears like those FCCB holders who converted have attempted to sell in the market, leading the market to have no buyers, just sellers (lower circuit).

The new shares have been listed on September 19 (Friday) which is when they had been sold, continuously. Suzlon had moved up from 14 n May to more than 36 in mid-June, and has been on a downslide since.


The folks who converted include:

  • Cowell and Lee (Mauritius) : 5 cr. shares
  • Goldman Sachs (Mauritius) : 5.6 cr. shares
  • Deutsche Bank AG (London): 5.3 cr. shares
  • Merrill Lynch Espana : 3.5 cr. shares

And it gets worse. There is $477.5 million worth FCCBs still remaining to be converted. If they are converted, it would result in 186 cr. shares more being issued (another 60% dilution!)

We had written about the massive dilution earlier. (See: Suzlon faces 70% dilution on FCCB Restructuring proposal) But look, the stock took off from there and is still about 30% above the price when we wrote that post. The euphoria of that stock seems to have faded and now what's left is a lower circuit.

Disclosure: No positions, no plans for positions either.

Ramky Infrastructure To Sell 3 Projects: Share Price Jumps

No Comments » Written on September 17th, 2014 by
Categories: Stocks

Shares of Ramky Infrastructure (BSE: 533262; NSE: RAMKY), saw a surge in their prices today (17th September).


The stock closed yesterday at Rs. 54.05. At 09:24 a.m. today, it touched an intra-day high of Rs. 63.60. That is a jump of 16.37%! The share was trading between a low of Rs. 56.80 and a high of Rs. 63.60. The rise in their share price comes on the back of a drop in prices during the previous trading day.

Why did it see the sudden jump?

Earlier today, rumors of The Ajay Piramal Group being in pole position to purchase 3 of Ramky’s infrastructure projects surfaced. The 3 projects in question are:

  1. Ramky Eslamex Hyderabad Ring Road;
  2. Sehore Kosmi Tollways, and
  3. NAM Expressway

Ramky entirely owns Ramky Eslamex and Sehore Kosmi, and has a 50% stake in NAM Expressway.

Having a look at Ramky’s Balance Sheet,


We can expect that the money raised from the sale of these assets, will likely be used to pare a portion of Ramky’s debt.

At 2:30 p.m. today, Ramky Infrastructure made a clarification to the BSE regarding the rumor. They state that they had informed the BSE through prior intimations, of their intentions to sell their road assets. The sale would be to "ease their operational concerns"; we can take that to mean that proceeds from the sale would very likely be used to reduce their debts. The company also vehemently states that any discussions regarding sale of the assets, are at a preliminary stage, and that no decisions have been made yet.

As of end-of-day 17th September, shares of Ramky Infrastructure closed at Rs. 57.60, 6.57% up from the previous day’s closing price.


We do not hold any positions on Ramky Infrastructure.

The Curious Case of Venus Remedies – Potential CDR?

2 comments Written on September 16th, 2014 by
Categories: Stocks

A curious story emerged earlier today.

Venus Remedies, a pharmaceuticals company listed on the BSE and NSE, saw their shares plummet nearly 20% from yesterday's close of Rs. 378.50 to Rs. 302.80 (as we write this). Charting the stock over the last few months:


 And that after a stellar run saw its share price touch Rs. 381.75, a 52-week high, on the 15th of September. The spurt in their share price can be attributed to 2 major announcements:

  1. Agreement with TEVA for development and sale of a cancer drug in Canada;
  1. Agreement with Mylan to market an anti-biotic Meropenem in Europe;

Why did the share price fall then?

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Earlier today (16th September), Crisil downgraded their ratings on the bank facilities of Venus Remedies down to a "D". As per Crisil definitions,

                "Instruments with this rating are in default or are expected to be in default soon."

Crisil expects the company to default imminently, if it hasn't already. We looked at Crisil's report to ascertain the reasons behind the downgrade. Strangely, they say:

“The ratings continue to reflect VRL's comfortable financial risk profile, marked by a healthy net worth and strong debt protection metrics. The ratings also factor in the company's strong presence in the high-value critical care segment and the healthy growth in its domestic and export sales. These rating strengths are partially offset by VRL's working-capital-intensive and small scale of operations in the overall formulations market.”

How does this work? They are going to default, but they have “healthy growth”? (We are not enamoured by rating agencies, as you might have guessed)

The downgrade was applicable to all the bank facilities that VRL availed, and amounts to a total of Rs. 265 cr. The rating implies Rs. 265 cr. is under serious threat of not being repaid. To break-down their debt:


According to the report, the downgrade was due to,

                "Delays in repayment of term loan by the company driven by a stretched liquidity. VRL's stretched liquidity is on account of the significant increase in total cost of the large debt-funded capital expenditure over the past one year and high working capital requirements. The company is undertaking capex towards setting up marketing office. The total cost of this capex is estimated to have increased by about Rs.100 to 150 million. In addition to the above company's liquidity has also deteriorated on account of the high working capital requirements reflected by inventory of about 131 days as on March 31, 2014."

Having a look at their income statement, we see that their interest coverage ratio has been varying:



Things do look bad. Their Interest Coverage Ratio (Profit before Interest & Taxes divided by Interest charges) has reduced sharply from last quarter. At 2.23 they pay 44% of their pre-tax income as interest. 

Venus has been in trouble earlier, having hedge funds really ticked off with them for not paying up on Foreign Currency Convertible Bonds. (FCCBs). They settled part of that claim but still have $4.59 million worth FCCBs convertible at Rs. 364 per share by Feb 2015. Basically if the share price less than Rs. 364, Foreign investors are unlikely to convert and will demand their money back - which would add another Rs. 27 cr. to their payables. 

Interestingly, they made an EPS of Rs. 54 last year, which would make the share a fairly cheap one. But what is cheap often hides things you don't really know - so is it really so that the company is in trouble?

The official response of Venus Remedies is that their loans were for research which have long gestation periods, and that they have asked for a postponement for repayment of principal for 2 years without any sacrifice (i.e. the bank loses nothing). (Thanks to commenter Krish for a more detailed link)

Update: From their annual report, they have four banks: SBI, IDBI Bank, Allahabad Bank and HDFC Bank. We don't know how much they owe to whom.

We might have another candidate for Corporate Debt Restructuring.

Disclosure: We have no holding in the stock at any time in the past 30 days and do not plan to purchase this stock in the immediate future.

Is Orchid Chemicals a Wilful Defaulter?

5 comments Written on September 15th, 2014 by
Categories: OrchidChem, Stocks

Every quarter all banks are supposed to provide a list of Wilful Defaulters to CIBIL (and other such agencies). A wilful defaulter is someone who can, but will not repay his loan. There are serious consequences of being listed as one, such as not getting access to any other loans by any financial institution, and that directors are "not fit and proper" to serve on company boards.

It turns out that a listed company, Orchid Chemicals, has been listed as a Wilful Defaulter at the end of the quarter ended Jun 30, 2014.

Here's the CIBIL entry, from ING Vysya marking Orchid a Wilful Defaulter:


If you click "Composition" you get:


These are the same as the directors of Orchid Chemicals, the listed company. (K. Raghavendra Rao's name is spelt wrong)

What about the CDR?

Orchid recently went through Corporate Debt Restructuring (CDR) which it has said (in a report) that has been implemented in July 2014. The wilful defaulter list is as of 30 June 2014, but why did ING Vysya report it as a wilful defaulter if a CDR was in progress?

The amount is not that much; just 54 crores. (In comparison with a Bhushan Steel's massive 36,000 cr. loans this does sound insignificant).

We are awaiting a reply from the company about this issue, and at the time of writing this post, haven't received a reply.

There are other listed companies noted as wilful defaulters - like Winsome Diamonds, Sterling Biotech, Parekh Platinum and so on. Many of them trade at very low prices, and are "penny" stocks for the most part. Orchid seemed like a big anomaly!

Mallya Is Tagged a Wilful Defaulter, Affects UB Group Companies

Comments Off Written on September 3rd, 2014 by
Categories: Commentary, Defaults, KFA

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

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

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

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

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

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

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

Should Infy Buy Back Shares?

14 comments Written on August 6th, 2014 by
Categories: BuyBack, Infosys

Infosys ex-biggies Bala and Mohandas Pai have requested it to buy back shares worth Rs. 11,200 cr. at the peak price of Rs. 3850. (Economic Times) (HT @b50)

Would that be a good use of its cash?

Looking purely at cash levels - Infosys has:

  • Rs. 23,000 cr. in cash
  • Rs. 3,000 cr. in liquid funds and CDs
  • Rs. 1,300 cr. in tax free bonds

That’s Rs. 27,300 cr.+ of money that, effectively, lies around doing nothing. For the 57 cr. shares that Infy has, that’s Rs. 478 per share. At the current price of Rs. 3400, that’s about 14% of the share value.

Infy can use that in multiple ways:

  • Acquire someone. They haven’t shown the appetite for large acquisitions. With that cash they could buy many large companies, but they lack the will and the integration will be a nightmare of epic proportions.
  • Pay dividends: But since this is income on which tax has already been paid, a further 15% dividend tax is just tax on tax.
  • Buy back stock: doing a market or tender buyback is another option.

The buyback of 11,200 cr. wouldn’t do much. It would just remove 5% of the outstanding capital of the company, at Rs. 3850 per share. Using 40% of the cash reserve to reduce the outstanding shares by just 5% isn’t a great use of cash. (Though it is better than letting it stay)

They could pay a dividend but that would just make the founders richer. The founders aren’t massive spenders so even that money will just lie around doing nothing.

If Infy needs to grow out of that cuccoon it’s built around itself, getting rid of the cash may help. The cash is a comfort zone, and unless it’s used for a daring purpose it will be useless. While I think the best way for them to use it is to acquire, aggressively and big-ticket, the absence of the gut lining within makes me feel that they should just return it to shareholders.

Club Mahindra Gets Penalized for Giving Rooms to Non-Members, Denying Members

14 comments Written on August 2nd, 2014 by
Categories: MahindraHolidays

Club Mahindra has offered rooms to non-members while members were refused, it turns out, as a State Consumer Forum orders them to pay back all money received plus 12% per annum, totally 3.5 lakh rupees, to a couple in Mumbai. (HT Manoj Nagpal)

Ritu and Navdeep Uppal bought a Red membership to Club Mahindra for Rs. 1.92 lakh in 2006, the highest membership level at the time. This should have, in their opinion, given them access to any Club Mahindra resort at any time, if it was available.

They soon found out that it was never available for them. They tried from 2006 to 2009, to book rooms - remember, they get a week a year - but nothing was available for them when they wanted it. They paid the Annual Maintenance Charges of about Rs. 7K a year for four years, taking their total payment to Rs. 2.21 lakh.

In October 2009, they wanted to book the Goa Varca resort and were told that the hotel, for their dates - for December 2009 - wasn’t available. And that they could go to a new resort called “Goa Jasmine” instead.

So the Uppals decided to test this “not available” theory, and requested a booking for the Varca resort as a non-member, via the internet. Apparently, the resort WAS available for a fee.

Then the Uppals went to consumer court. After getting rejected at the district level, they went to the State Commission to appeal. (See District Level rejection - in Marathi only )

Club Mahindra tried evasive tactics to defend their action, but did not provide a list of bookings for those dates so they could prove the resort was booked before the Uppals tried.

The State Commission thus found Club Mahindra guilty for having breached the contract, and have told them to pay :

  • Rs. 2.21 lakh plus 12% p.a. from 12/10/2009. That, as of August 2014, adds up to about Rs. 3.5 lakh.
  • Rs. 30,000 as costs.

Our view: We’ve maintained that Club Mahindra has never had enough rooms to satisfy all its members, even if they wanted holidays spread proportionately during the year. It was obvious from the IPO itself. It still is the case.

We would encourage more such dissatisfied members to go to consumer courts and demand full compensation if they unable to get a resort; importantly, please ask for a list of current bookings in case you are refused, and even attempt booking through an internet site (directly or through an agent) so you can prove deficiency in service.

In their Q1 2015 presentation, their “room” revenue (as against subscriptions) has gone up 62% from last year and they have again started marketing rooms to non-members. So we’re likely to see many more such cases going forward, I think.

Is Infy Topping Out in Earnings? Results in Charts.

4 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

Comments Off 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.)

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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.

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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.

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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.