Wednesday, November 23, 2011

Short Term - Gold will again loose its shine.

On Oct-18, I had posted that gold will be loosing its shine for the short-term. There was 3-4 day of capitulation and 20-Oct was the lowest for gold. 

Gold has again raised it head and is at a all-time high of around 30K. Even though I am bullish on gold till Mar 2013 (Thanks to the FED announcement of keeping low interest rate regime till mid-2013). Its quite possible that gold may be stuck in a range for next 1 year with an upward bias.

But in next few days or weeks(before 15-Dec), I would expect another capitulation in Gold. Lots of Hedge Funds may have to liquidate their gold position in coming days/weeks. So folks who are still out expecting the gold to come down can load some of their truck with gold at 25K and lower.

There is another interesting, trade for the long term(3-years plus) and that's Silver. But I still don't have a good way to invest in Silver in India other than holding Silver in physical form. For US-folks its 'iShares Silver Trust (ETF)'. Silver price will be lot volatile in next 1 month but can be bought at dips (every month/week) as per your averaging strategy. 

GOLD ETF is still my preferred way to invest in Gold in Indian Markets. 

Sunday, November 20, 2011

Land Deals from developers in India is still Risky.

Buying Land in India have always been risky. Lots of developers have started emerging in Pune who are selling Agriculture Land to retail customers. The only hurdle is you need come from a farmer background. 

Definition of ‘Farmer background’ is your paternal side (paternal uncle/dad/grand father) should hold a farm land.

Here is the business model that these developers have come up with.
Farmer’s Deal:
1. Create a Legal MOU with a farmer saying they will sell their land and will pay the farmer a fixed amount once they have sold the land.
2. Create a valid Search Title Report. There may be minor discrepancies with the report.
3. Create a Fancy Pamphlets promising plot fencing, street lights, etc.
4. Try to rope in customer with those fancy Pamphlets.    

Customer’s Deal:
5. Once a customer is interested in the site. They are asked to pay around 20% amount as a booking amount and the documents are provided to the customer. If there are any discrepancies in documents the amount will be refunded. If you need a refund, even if the documents are correct, around 15% of the booking amount will be deducted.
6. The Customer is expected to verify their documents from an advocate.
7. Now the Customer's advocate will come out with the problems related to incomplete documentation.
8. The builder will delay the documentation.
9. The builder invests the booking amount and tries to delay the processing for incomplete documentation for 3 months.
10. The customer has 2 choices:
               a. Buy the land since the developer does not agree with the incomplete documentation.
               b. Worst case the developers will cut 15% of the booking amount and return the money to customer.    

The concept is really good. Developer is making money without any major investment. Extreme innovation in Indian Real Estate is picking up.

I think this should soon pick-up in Listed Real Estate entities who have lots of land banks.

Saturday, November 19, 2011

TechM Results Q&A

BT’s share has come down from 80 per cent a few years ago to 37 per cent. Do you think this will be the level for BT?
When BT contributed to 80 per cent of our revenues, it accounted for less than $100 million. At current levels, BT’s contribution is around $450 million. So, while the percentage of BT in the overall pie has come down, we have been able to increase our share of business with BT. We have also been able to grow business from other telcos.

But BT has called for re-tendering. What will be the impact and would the stake sale of BT impact business?
I suppose as a percentage, BT will go down, but not in absolute numbers. That is what we hope to achieve. As for the re-tendering impact, we had a $6-million fall in revenue. That was the amount of reduction we had in the business from BT. But since the re-tendering, we have got more than what we were already working with BT. In the IT deal, we have got a larger chunk, except that the pricing that we have got is at a lower level. The BPO business with BT has grown and continues to grow. We will try and optimise the BT account by moving away from pure outsourcing work to more transactional work. The BT stake sell will impact our business with them.

How has the 2G scam and expose impacted your business with Etisalat?
We are very satisfied with our deal with Etisalat. We have been serving them and we have been compensated on time. So, from the business point of view, everything is the same.

With all the legal hurdles and issues solved, by when will the merger with Mahindra Satyam happen?
We hope to complete the process of merger by next year.
There are tax issues, but we are contesting them. As for the share swap ratio between the companies, it will be decided by the bankers.

Can you give us some details about the pending US SEC cases and when do you see a possible solution in Satyam.
Nayyar: That issue has been resolved. We have agreed to delist and the process is on. It will be completed by end of February.

On the class-action cases in the US, the federal court judge had accepted the settlement, and orders to that extent had been passed. But one case related to Abardeen, a particular investment fund, is on. And we will see how it turns out.

How many payment obligations do you have at present in Satyam?
Nayyar: About $125 million for class-action, $70 million for Upaid and $10 million for SEC have been paid .

At what stage is your battle with the Income Tax department that you are currently waging in Satyam?
Nayyar: Our statements have been very very open. We believe that the demand on that fictious income is unreasonable. At this stage, I can only say that it is sub judice and we are currently presenting ourselves. I don’t see this dialogue (with I-T department) getting resolved pretty easily.

A Short History of Assam.

Pre-colonial Assam had a feudal economy. The Assamese king was the absolute owner of all land except the royal grants of land to the high officials in the administration and the grants to the temple and Vaishnavite Satras (monasteries). The peasantry had no private property (land). As there were plenty of land available with a sparse population, there was always a tendency of the Assam peasantry to shift their cultivation sites. The mode of business was barter because money was not in vogue. The people were self sufficient and agriculture was the main occupation. Though the kingdom of Kamrupa (ancient Assam) had international trade practice, the Ahom imperial Government did not encourage much trade with the outside world and foreigners were frowned upon. With a self sufficient feudal economy, with no money or coins introduced till the 16th century, with a very low volume of trade with foreign kingdoms, the market system did not develop in pre colonial Assam. There were of course a trading system between the hills and the plain’s people of Assam.
The revenue collection of the Ahom administration was based on thekhel system. The administration did not have a money oriented revenue system. The entire male population with the exception of the artisans, fisherman, gold washers and other non agricultural profession was divided into khel or clans numbering from 1000–5000 men in cash. The system was based on personal service and an article of produce rather than monetary taxes. The khels were then sub-divided into different gots or units. Eachgot consisted of three or four pikes or individuals. The paik was the lowest unit of khel system. These paiks were assigned to different jobs, such as building of roads, embankment etc and had to serve the country or the aristocracy for one third of the year. Except for a small batch of regular army guarding the capital and the royal household, the Ahom imperial administration had a peculiar Army system. During a war ever paik had to take part in war once called by the king. The paiks becomes the army and all the able bodied Assamese males go to war. The whole populace becomes the army. With the repeated Mughal invasion from 1615, the Ahom monarchy established a regular army.
But with the annexation of Assam and the introduction of British revenue rules and regulation of land rights to the peasants slowly disintegrated thekhel system and the paiks were freed from personal labor. The dismantling of the paik system had reduced the Ahom nobility to poverty because there was no body to serve them or cultivate their land. The cultivator of the soil and the aristocracy become the same. The paiks become the ryots under the British system. The British established the cash or money system of payment.
The Wasteland Grand Rules, 1838 was formed to attract foreign capitalists. The Assam Company, the first Indian Tea Company was flouted in 1839 in London and was granted about 33,665 acres under the Wasteland Grant Rules. Later it was modified to suit the British and the European tea planters and they slowly became the biggest land owners in Assam by paying the least revenue per acre land. Many tea planters encroached land belonging to the Assamese people. The ownership of Assam’s land right was transferred from the Ahom king to the British. By 1901, about one fourth of the total settled area of Assam Proper, i.e. about 6, 42,418 acres came under the tea gardens. Though the Assam land and Revenue Regulation of 1868 were introduced in Assam with their best intention of regularizing the land rights to the Assam peasantry who practiced shifting cultivation, the British became the absolute land owner. The dearth of paying land revenue on long term land leases forced many Assamese landless. The pre-colonial system of cultivating anywhere was stopped. The Assamese peasantry was totally confused with the sudden change of the land rights and the mode of cultivation. The Assamese learnt about the value of long term land leases when vast tracts of land were allotted to tea cultivation on one hand and with the land hungry East Bengali immigrants started settling in the chapori belts or flood plains used by the Assamese peasantry for shifting cultivations.
Though Assam was annexed in 1826 and wild tea plants were discovered in 1823 by Robert Bruce, the opium war with China diverted the attention to the newly conquered territories of Assam. Chinese tea was to be imported to England by The East India Company and it was a monopoly trade. The Charter of 1833 stripped the monopoly business of the East India Company but allowed Europeans to hold land on a long term lease outside the Presidency towns which opened the colonial plantation economy in Assam. When Assam tea was auctioned in London in 1839 it created the Assam Tea Mania.
Since 1840’s, the next few decades witnessed a global investment in far off remote Assam in the tea sector which gradually destroyed the Ahom’s feudal institutions and economy and led to the growth of the capitalist economy. The British introduced the monetized economy in Assam. The tea industry identified Assam with the commercial map of the world. The huge capital investment did help to the growth of modern capitalist economy in Assam by the turn of the 19th century. The tea economy not only changed the political and economic scenario, but also environmental changes. The tea plantation required huge plots of land. The tea planters cleared the jungles for tea cultivations. In the process destroyed most of the forest cover in Assam. The tea industry as well as the timber industry was mainly responsible for the rampant deforestation which permanently transformed Assam’s landscape and greatly affected the climate and the culture of Assam in the next century. The forest policy was also introduced to suit the colonial and the tea planter’s needs.
The growth of the tea industry necessarily led to the growth of communication and infrastructure network. The industry which was totally dependent on an external market required the basic routes to and from Calcutta. Building of roads and bridge were taken up. Navigation by the Brahmaputra river was introduced by the Assam Company by a steamer service from 1841. Railway lines were laid from Dibrugarh to Ledo in 1882 by the Assam Railways and Trading Company with the aim of joining the remote tea gardens to the streamer service.
The opening of the frontier land and the global investment led to an economic boom in Assam. European tea planters flocked in Assam by 1860s. The planters had faced difficulties because there was no basic infrastructure apart from the inhospitable terrain and epidemics. The transport and communication was mainly done by the rivers as there were no proper roads. The banking sector was in a very poor state. Though a few banks were set up by Govt. by 1870, there were always storages of coins in the treasuries.
The whole economy evolved around the tea industry even though the coal and the oil industry sprang side by side. From 1847 regular coal mining took place. The first refinery in Asia, the Digboi refinery was commissioned in 1901.By 1871, about Rs. 18.6 million had been invested in the Assam tea industry. The total investment by 1881 had touched Rs. 63.8 million. And the total investment in the organized economic sectors (tea, railways, coal, petrol and saw mills) from 1881-1901 was about 200 million rupees. It was one of the highest investments in a region in British India.
The transition of the pre-colonial feudal economy to a modern capitalist economy was too fast for the Assamese people to adjust to the new system. Suddenly the Assamese people faced land hungry East Bengali immigrants and tea garden labors from other Indian provinces in huge numbers. Bengali clerks, Marwari traders and Hindi speaking semi skilled labors flocked in the closed Assamese society. The population of Assam increased from an estimated 8 lakhs in 1826 to about 22.2 lakhs in 1901, out of which one third of the population were non indigenous . Modernization of Assam was accompanied with the formation of the Assamese middle class.
The huge British capital invested in Assam did not help in the growth of domestic capital of the Assamese people. The Assamese people remained mainly dependent on agriculture. The increased land revenue rendered the peasants poor and the savings was meagre. The economic situation hardly improved for the people. The tea planters made huge profit because the land tax was very nominal for them and the tea labors were poorly paid. The surplus income of the tea planters was usually remitted back to London or re-invented in the tea, timber, coal or oil industries. The immigrant labors, other professionals and the petty traders from India never invested their savings in Assam. In these ways, most of the income generated in Assam was drained out. The surplus of the foreign investment was never reinvested or diversified in the overall growth of the economy.
After 1901, foreign investments came down and the new investments came from income generated in India. But the land grabbing by the tea planters continued till 1947. The influx of the immigrants, specially from East Bengal began on a larger scale by 1911. The economic transformation of Assam witnessed the demographic shift in a big way encouraged by the colonial masters. After the partition of India in 1947, East Bengal became East Pakistan and then Bangladesh in 1971. The immigration continued unabated. The Indian state did nothing to stop the influx from the foreign country.
Assam’s present economy is simply a continuation of the British colonial economy. The transaction from the feudal economy to the modern capitalist economy without diversification to other traditional sectors hardly benefited Assam’s economy. The resource mobilization of Assam’s national wealth to fulfill the British interest was carried out in the same way under the Indian administration to benefit the Indian economy at the cost of Assam’s interest, which is already a most economically under developed region in the Indian sub-continent. In spite of its precious natural resources such as mineral oil, gas, coal, timber and tea, Assam remained basically an agricultural economy. Assam, which was previously internationally connected under British Raj became land locked in the post colonial period. Indian investment dried up by 1950s and after the Chinese intrusion in 1962 it was completely stopped. The Indian state started using Assam as its hinterland with neo colonial policies.
There was never an attempt to mobilize the natural resources internally for industrialization of the region. The Indian state, even after the liberalization of the Indian economy from mid 1991, never tried to maintain the priority and the trust applied by the British to boost the global investment in Assam. The economic liberalization and the new industrial policy of the Indian Government attracted huge foreign direct investment (FDI). From 1991 to September 2011, about 162.11 billion USD has been invested mainly in the services (financial and non-financial), telecom, IT, roads and highways, housing and real estate, construction and power sectors in the comparatively developed region in India. The under developed eastern region, especially Assam, was left out. The Look East Policy (LEP) was introduced as an extension of the economic liberalization policy of India to forge ties with South East Asia, but it is mainly guided by defense and strategic interests. No foreign country has invested in Assam. Foreign investment in Assam came only as loan through The World Bank (300.6 million USD), Asia Development Bank (420 million USD) and the Japanese Bank for International Co-operation (Rs. 1200 Cr) for development of rural infrastructure, agriculture, roads and highways, administrative and fiscal reforms, urban infrastructure, flood control, power sector, water supply and other urban services. The exploitative and the hegemonistic approach of the Indian state has to be abandoned for a healthy economic growth in Assam.

Wednesday, November 16, 2011

How PIIGS Defaults Could Affect The Markets.

PIIGS is not the most flattering acronym to describe a group of countries, but Portugal, Ireland, Italy, Greece and Spain may have to make due for the time being. The name is thrown around to describe a set of eurozone countries considered to be the most at risk when it comes to sovereign debt and has grown more popular by the frequency at which stories relating to their economic woes appear in the news. Images of rioters in Greece and protesters in the streets of Spain have come to symbolize both the follies of governments and the fear of future austerity.
Three "Little" PIIGS CrisesPortugal, Ireland, Italy, Greece and Spain are in trouble – this is a given – but looking at individual statistics doesn't show how complex the current situation is. There are really several crises occurring in rapid succession: a crisis related to PIIGS banks' exposure to debt, a crisis related to PIIGS government debt and a crisis related to non-PIIGS banks' exposure to PIIGS debt.

The first crisis is related to government debt. Take general government gross debt as a percentage of GDP. We've got some pretty high numbers: 83.9%, 82.3%, 75.5% and 94.3%. Those aren't for the European countries on the brink of collapse; they are for Germany, France, the United Kingdom and the United States, respectively. The figures for Ireland, Italy and Greece are 94.9%, 118.9% and 142.7%, respectively. They are much higher. Government debt levels are expected to increase in the coming years due to deficits, pensions and rising healthcare costs.

PIIGS banks' exposure to their own sovereign debt is troubling. Of the $763 billion in sovereign debt held by 90 European banks, 59% of it was held by banks in the country that issued it in the first place. Spanish banks hold 78% of their country's sovereign debt. As the risk of holding that debt increases, these domestic banks will find it increasingly difficult to get funding from other financial institutions. This is especially concerning because these banks rely heavily on wholesale sources of funding, and these sources will become more expensive as countries lose their creditworthiness. Suddenly you have sovereign risk becoming general bank risk.

The third crisis relates to non-PIIGS financial institutions exposure to PIIGS sovereign debt. Spreads on sovereign debt bonds over German bunds grew wider as investors' faith in PIIGS government wavered, and were hit especially hard by a Greek debt downgrade in April 2010. Yields on two-year Greek debt jumped from below 10% in October 2010 to above 76% in October 2011 and 10-year debt rose from 5% to 24%. European governments have certainly taken note of this, since they know that in order to preserve the euro they will have to prop up PIIGS governments or allow them to go through default in a semi-orderly manner. (For more insight to the correlation of risk and governments, read The Government And Risk: A Love-Hate Relationship.)

PIIGS and The BanksThen there are European banks. The European Banking Authority (EBA) conducted a stress test on 90 different European banks, including an examination of their exposure to government debt. When banks were not "allowed" to raise capital, their average Capital Tier 1 (CT1) ratio fell from 8.9% to 7.7%. If banks were required to raise capital, eight would have CT1 rates below the 5% threshold set forth in test, and a further 16 would be perilously close to falling behind. Without capital raising, 20 banks would fall below 5%, which is a frightening statistic because banks may very well lose access to capital if governments start to default. The EBA found that 42% of bank funding came from wholesale and interbank sources, rather than less risky consumer deposits. If markets freeze up, banks won't have access to capital. (To learn more about how the Tier 1 Capital Ratio measure a bank's health, check out Is Your Bank On Its Way Down?)

Sovereign Debt
This brings us to bank exposure to sovereign debt. The 90 banks reviewed by the EBA had gross exposure to PIIGS debt of $763 billion, with 80% coming from Italy and Spain. Fourteen of the 90 banks had more than $30 billion in individual exposure, including BNP Paribas (France), Intesa (Italy), Unicredit (Italy) and Banco Santander (Spain). If the EBA requires banks to shore up their Tier 1 capital, these banks could find themselves well short of the requirements. As the value of sovereign debt bonds declines, the balance sheets of these banks look worse and worse.

The more out of control this amalgamation of financial terror becomes, the worse off European businesses will be. This is especially true considering how some of the more healthy European economies wind up sending a lot of exports to PIIGS countries. In 2010, Germany exported $1,300 billion worth of goods, with Italy ($75.6 billion), Spain ($36.9 billion), Portugal ($10.10 billion), Greece ($6.1 billion) and Ireland ($4.65 billion) representing roughly 10% of all exports. Because this is a cascading problem, once exports start to fall so too will unemployment rise, tax receipts dwindle, unrest build and bank runs pop up. In short, it's a mess.

The Bottom LineThere is no easy solution to this crisis, but one thing that everyone can agree on is that no one wants disorderly government defaults. Banks will have to be recapitalized, just as they were in the United States in 2008. The composition of debt held by banks will need to become more diversified, since it was the reliance on "safe" sovereign debt that put them in the precarious position that they are in today. Banks will have to show their hand in terms of their debt composition, which will make investors more confident in the health of each bank. Government regulations will have to ensure that sovereign risk is kept separate from bank risk, which will require an end to implicit government guarantees of support for banks in times of trouble.


Thursday, November 10, 2011

Generating Green Energy from Coal Mines.

The principle is simple. When a large amount of wind and solar energy is available, it is used to pump water out of the mine tunnels into an artificial lake on the former mine grounds. When there is an electricity shortfall or if the energy supply begins to fluctuate, the floodgates are opened and the water drops through the giant pipes to drive the turbines 1,000 meters below the surface. The entire output becomes available to the grid within a very short amount of time.


Wednesday, November 9, 2011

10 Golden Rules that can make you an Millionaire.

In my experience, lack of financial literacy has been the main reason why people have not made the best use of their money. Their potential to become millionaires has, therefore, unfortunately remained unrealised. Worse, they have repeatedly fallen prey to fraudulent schemes. If you want financial success, this has to change. You have to become more vigilant about your financial matters.
For your convenience I have listed below 10 Golden Money Rules that are the catalyst to your millionaire-aspirations.
1. Invest in financial lessons before investing in financial assets
You don't drive without learning driving and getting a license. Do you? Similarly, you need to first learn how to acquire good assets and manage them appropriately. Educate yourself. Books, internet, seminars . . . you have so many avenues to choose from. After all it is your hard-earned money. So please do take good care of it.
2. Have a detailed Financial Roadmap
Without one you could easily get lost in the financial maze and may not reach your goals. Get yourself a financial GPS.
3. You are unique. Hence, do what suits you
Blindly copying others is not a good idea. Your assets, liabilities, needs, desires, time-frame, risk-appetite are different from your friends, neighbours, colleagues, relatives. So naturally, your investment pattern too has to be different from them.
4. Keep things simple
A simple term plan, a simple mutual fund, a simple medical insurance plan, etc. will work well in most cases. Don’t be under the false impression that complicated products give better returns.
5. Start early, invest regularly and stay invested
Time makes money. Even Einstein was impressed by the power of compounding. Assets are merely the tools, which Time employs to make money for you.
6. Always pay your credit card bills before the due date
This will not only save you lots of avoidable interest charges, but also prevent splurging. It will ensure that you buy only what you really need.
7. Avoid Leveraging
A millionaire with debt is a fake millionaire. I am sure you wouldn't want to be one. All Debt is not bad. Understand good Debt and Bad Debt. Keep a check on your Debt to Networth Ratio. Also monitor the effect of the new loan on your monthly Cash Flow.
8. Avoid exotic products and derivatives
They have been rightly termed as Weapons of Mass Financial Destruction. Look what happened even to the mighty USA. 
9. Seek guidance from professional financial advisors
Right directions will save you a lot in terms of time, efforts and money.
10. Beware of scams and scheming agents
If anything sounds too good to be true, it usually isn't true. Don't trust anyone. Triple-check every deal offered to you. Internet is a great tool to get right information.
This list should, however, be your starting point, not end-point. Educate yourself. Books, internet, seminars . . . you have so many avenues to choose from. After all it is your hard-earned money. So please do take good care of it.
In fact, I would go to the extent of saying that if you just follow one rule - KEEP THINGS SIMPLE - you will not go wrong with your financial decisions. (The financial lessons will be easy, the roadmap would be simple, you will not need any experts, you will avoid scams and exotic products, you will keep away from debt, you will not have any problems in paying your bills on time, etc.).

Wednesday, November 2, 2011

Papandreou's Master Plan.

Germany and France seemed genuinely shocked by Papandreou's decision to call for a referendum. This morning, officials from both countries telegraphed that there would be no alterations made to the plan and that Greece was going to have to accept it in its entirety or lose the billions of euros in aid it needs to keep paying its bills.
So who holds the advantage here? If Greece goes ahead with the referendum, its citizenry would most probably reject the plan, creating a wave of instability in the region. In response, the EU would probably cut its lifeline to Greece, forcing the nation to default on its debt. That would cause all of the major Greek banks to collapse, as they are the largest holders of Greek debt. But at the same time, it would cause several European banks to take billions of euros in write downs, as they too hold significant amounts of Greek debt.
Snowball effect
It doesn't end there. Since the Greeks were forced into default, credit default swap contracts on Greek debt would be triggered. That means the banks and hedge funds that were short Greek debt would now be owed billions of euros in insurance payments by those that were long Greek debt. It is widely believed that the large banks, which issue and sometime hold on to all those CDS contracts, have not set aside enough capital to payout claims. This could lead to an AIG-style meltdown of many financial institutions. That explains why bank stocks around the globe fell hard yesterday, especially those that play big in the CDS market like Bank of America (BAC) and JP Morgan Chase (JPM) in the U.S., which were both down around 6%, as well as those in Europe like Societe Generale, which was down over 16%.
This CDS chain reaction is one of the major reasons why the Europeans have kept Greece on life support for so long. The total collapse of the Greek economy would be a sad event, but a confidence crisis in the word banking system, three years after the fall of Lehman Brothers, would be a catastrophe. One of the major planks of the latest fix-it plan was to get the banks and other major holders of Greek debt to agree to take a 50% haircut on their bonds. Since such a cut would be voluntary "soft default," it would not trigger the CDS contracts, therefore limiting the fallout to those banks that physically held Greek debt.
A hard default would probably see all that Greek debt go to zero. While that would wipe the slate clean for the country, it would be a pyrrhic victory as its economy would be decimated. Papandreou is fully aware of this fact, as are members of Greece's main opposition party in parliament, which has blasted the prime minister for being reckless. If Papandreou survives a vote of no confidence Friday, the stage will be set for months of further market instability. The referendum would take place probably at the end of December or beginning of January.
To avoid all of this, the French and the Germans may need to swallow their pride and work out a better deal for the Greeks with the banks. Under the current plan, Greece's debt-to-GDP ratio is projected to be around 120% by 2020. While that is an improvement from the projected 190% ratio projected by 2013, it's still very high. The plan assumes further cuts in Greek government spending and a positive economic growth rate. Those assumptions are generous, since the cuts in spending, coupled with a strong euro, would probably lead to much slower economic growth. To dig itself out of this hole, Greece needs to cut its debt by more than 50%. The banks have balked at taking a larger haircut, but the threat of a hard default may scare them into accepting a greater loss.
Warren Buffett once called derivatives financial instruments of mass destruction. The CDS contracts attached to Greek debt are proving to be quite a destructive force indeed. Papandreou is now threatening to push the button. To avoid a nasty surprise, the Europeans will probably need to yield to Greece's demands.

How to Value Commodities?

You cannot analyze commodities apart from their relationship to other commodities.

It's a simple mathematical truism: say you have a closed system, for example, an island, with fixed amounts of critical resources such as food, energy, base metals, even labor. And each of those resources is used in some way to obtain, refine or simply process all other resources. In that case, you can never really talk about peak oil, peak zinc or peak anything as a separate, unitary factor; you're really talking about peak resources.

For when one resource that's critical becomes increasingly scarce, that resource by virtue of its relationship to all other resources will in turn make all those other resources scarce as well.

Again, the idea is that each resource is necessary, but not sufficient, to produce any other resource.

Obviously, this is an outline of a trivial mathematical proof concerning commodities.

Why Satyam and TechM went up today??

In 2006, CanvasM took shape due to the determination of Motorola, Tech Mahindra, and Mahindra Satyam to test the waters of the dynamic VAS market. CanvasM has emerged as one of the key contributors in shaping the VAS ecosystem. The company is spearheaded by Jagdish Mitra, chief executive officer, who came with over 15 years of rich experience in various areas, including business development, IT program management, and marketing. CanvasM's major focus is on VAS applications across multi-access networks, including fixedline, cable, wireless, Wi-Fi, WiMax, GSM, CDMA, and UMTS.

Fact Sheet:
Revenue: Rs 105 Cr.
CEO: Jagdish Mishra.
Founded: 2006
Key Products: Mobile Coupon, Content Aggregation, Content Hosting.

The company offers services in various segments such as system integration, application hosting and outsourcing services, service delivery platform, mobile virtual network enabler (MVNE) services, content aggregation, content hosting and delivery, OSS/BSS integration with VAS applications, application engineering and certification, and joint go-to-market programs. It serves different segments of the ecosystem such as global telecom service providers, content owners, media houses, and application vendors and developers. CanvasM gets a competitive edge from its state-of-the-art lab to demonstrate VAS applications, global support and presence, facilitation of third party VAS application development and deployment, and integration of Global Applications Management Architecture (GAMA)-a service delivery platform and framework. The prominent solutions offered by the company include commerce enabled platform (CEP), which offers a range of real-time transactions. It provides mobile banking services on its unique and patented mobile transaction platform (MTP). Its mobile couponing application helps the registered users to select the preferred category of purchase. Coupons specific to the categories are sent to the user. During purchase of any of the chosen category, the user can redeem the acquired coupons from the counter.

The company functions through many engagement models such as traditional license based, project based, transaction based, or revenue sharing based models. These models ensure lower barriers of entry for its customers. It has focused on the models of build, operate, and manage VAS solution. The organization draws upon Motorola's significant investment in R&D as a technology leader and Tech Mahindra's expertise in integration and service delivery. The company has targeted APAC, MEA, Europe, and North America regions; it has set up a leadership and sales team in these regions. It is working with tier-1 and -2 providers in the US, Middle East, Europe, and India.

CanvasM operates on an open-innovation concept through 3 programs. Firstly, on an 'Idea Factory', a platform for all employees of the Mahindra Group to post their ideas about VAS segments, turning mobile end users into customer satisfaction consultants who can tell us exactly what users want and need from their VAS. Secondly, it has initiated the InnoVAS University Outreach Program to cooperate with colleges and universities across India to generate new ideas. Lastly, the company's ideas on apps platform-it organizes collaboration with external developers to create new VAS products. It intends to take content delivery service to customers located worldwide. Therefore, this solution creates tremendous opportunity for CanvasM-not only in the telecom industry-but also in industries such as media/broadcast, where rich content is stored.

In June 2011, CanvasM joined hands with Rashtriya Rozgar Mission to offer employment services by connecting job seekers and employers directly through phone. To avail this service, customers have to dial 1860 180 1100 to register and get details of the service. This service targets blue collar workers primarily. At this point, the service provides jobs in Delhi NCR region. The pan-India rollout of the services would be extended from the second quarter of 2012. The service has already collated a database of 25,000 job seekers and 500 employers, with more than 4,000 jobs on board across 100 categories and 200 vacancies are from Mahindra Group companies itself. In December 2010, the company tied up with Qualcomm and established the first 3G device test lab in Noida (India). This lab provides quality testing to 3G handsets and devices for compliance with regulatory, technical, and international performance standards.

Tuesday, November 1, 2011

Satyam ADR

I believe that the ADSs of Mahindra Satyam are misunderstood and mispriced. Early next year, the ADSs will be canceled and converted to India-traded shares (which trade at a 5% premium at current exchange rates). Another catalyst is Satyam’s impending takeover by Tech Mahindra. Satyam has scored contract wins and partnerships with major firms such as EMC (EMC), Oracle (ORCL) and Mastercard (MA). Earnings are growing quickly and ROE is now over 30%. This is no longer a turnaround story with fleas. This is an opportunity to buy one of India’s leading businesses before it is rerated as a growth story. Satyam trades at just 1.6X FY2011 sales vs. 4-6X FY2011 for other Indian IT companies. This would be a perfect pitch, if not for the potential tax liability (more on this near the conclusion of my writeup).

You probably last heard about Satyam Computer Services in January 2009 when the Chairman and founder admitted to falsifying the company’s financial statements. Satyam lost several important clients and the stock declined by over 80%. Tech Mahindra, the software unit of Indian manufacturing conglomerate Mahindra & Mahindra, then installed its own management at the company in April 2009 after winning a government-led auction. The ADSs were delisted from the NYSE in October 2010 because Satyam could not file with the SEC on time, adding further downward pressure on the stock.
Recovering From the Fraud
During the financial year ended March 31, 2010, Satyam, under new management, took several steps including the appointment of a new Audit Committee, the revision of the Code of Ethical Conduct and the nomination of a Corporate Ombudsman. The internal audit function was also strengthened by appointing Deloitte, Haskins and Sells as the internal auditor.
In September of 2010, Satyam released restated audited financials. This was an important step in the recovery, as clients often consider a service provider’s financial resources when awarding contracts.
Business Description
Satyam is an information technology consultant to mid-size and large corporations. It helps clients become more efficient and more profitable. Competitors include Wipro and Infosys. I do not profess to be an expert on the IT business so here is a link describing Satyam’s various services.
I spoke with two employees of Infosys: one is an IT consultant; the other is a business analyst. They are paid rather well since their work involves a lot of technical knowledge about computer programming. Their managers are Americans who went to business school to learn management skills, but it is really the Indians who do all the real work. Cliches aside, the most important asset of this business is people. (Incidentally, this is an ideal business to own during inflationary periods because capital investment is minimal.) My Infosys contacts said that Satyam is full of talented employees.
Catalyst for the ADSs
Satyam’s ADSs represent two shares of common stock trading on the Bombay Stock Exchange, which last traded at 66.9 rupees. At current exchange rates, this means that the ADSs should trade at $2.94. The ADSs last traded at a 5% discount, which is much larger than usual.
The reason for the mispricing is that Satyam plans to delist its ADSs and convert them into common shares trading in Bombay. As a result, I believe that retail holders and perhaps some institutions are selling their positions. The idea of owning a stock trading in India may be too awkward. Moreover, even some large clearing firms such as Penson cannot facilitate the conversion as they do not have trading desks in India. ADS holders do have the option of receiving cash in lieu of Indian shares, but they need to pay a fee of 5 cents per ADS, or almost 2%.
The reason for the ADS Delisting is Disclosed here:
The Company’s equity shares underlying its American Depository Shares (ADSs) and the ADSs themselves have been registered with the US Securities and Exchange Commission (SEC) since 2001, when the Company began trading on the New York Stock Exchange (NYSE). The registration obligates the Company to file annual and other reports with the SEC. The Company has, however, been unable to file the required reports post September 2008, because the financial irregularities identified for earlier years were substantial in amount, perpetrated across multiple accounting periods affecting many areas and due to non-availability of required information/documentation relating to several unexplained transactions and amounts pertaining to the period affected by the financial irregularities. This has a resultant continuing impact on the Company’s ability to prepare the financial statements under U.S. GAAP and to achieve a form of audit opinion thereon that would comply with the SEC’s requirement that such opinions contain no audit qualifications including scope limitations arising from the Company’s inability to provide required information/documentation relating to the period affected by the financial irregularities as indicated above. Accordingly, the Company has now determined that it will not be able to become current in its SEC filing obligations.
This disclosure seems a little unsettling, but I think Satyam’s restated financials are fine. It is simply not worth the time to satisfy the SEC’s requirements as Satyam is soon going to be merged into Tech Mahindra.
The Merger Catalyst
Satyam shareholders will inevitably own shares of Tech Mahindra after the merger, so it is important to look at what the combined business will look like. This article provides an excellent description. More information on Tech Mahindra can be found here:
Tech Mahindra is an above average business, with 20% EBITDA margins. Unlike Satyam, however, its earnings and revenues do not grow. Moreover, the customer base is much more concentrated. There is the potential for the combined entity to cross-sell and thereby increase revenues.
Satyam Standalone Turnaround in Middle Innings
I spoke with someone who advises the board of Tech Mahindra, and he said that Satyam is a great turnaround story. Revenues are improving, margins are improving. Deals are being signed with EMC, Oracle and other big names. Despite its comparable quality to other Indian IT companies, Satyam trades at 1.6X FY2011 sales vs. 4-6X FY2011 for competitors. Here’s what some local sell-side analysts have to say.
Tax Liabilities Depress Stock Price
Alas, this fat pitch is not perfect. In late August, the Indian tax authorities sent Satyam a draft notice (not a final notice) that it owed $463 million for years 2002 and 2007. Satyam has argued that since taxable income was fictitiously inflated during these years, the actual tax liability should be much lower. Satyam’s legal team is preparing to appeal the case to the Andhra Pradesh High Court.
I expect the High Court to resolve this case in Satyam’s favor. First Satyam needs to prove that the former Chairman did in fact fictitiously inflate earnings. The income tax department’s view is that this has not yet been proven. Apparently they don’t read the paper. Ramalinga Raju has been sentenced to prison for several years, and the Andhra Pradesh High Court (the same court in which Satyam is arguing the tax case) previously denied bail for Raju, presumably because he is an evil man. Second, Satyam needs to argue that taxes cannot be levied on income that does not exist. This point I believe is self evident. To argue otherwise would be unjust and nonsensical. You can watch Vice President Vineet Nayar argue this point here.
Satyam has reserved about $87 million for tax liabilities related to a similar tax notice covering 2003-2009. It has no reserve set aside for the $463 million claim received this past August. In a worst-case scenario, which I find very unlikely, Satyam would still be able to earn its way out of this taxing problem.
Obviously Satyam’s earnings have been obscured by many non-recurring gains and losses (mostly losses) over the past few years. Here I will try to estimate the company’s normalized earnings as difficult as this task may be.
In the fiscal year ended March 31, 2011, Satyam earned 5.67 billion rupees, or $124.2 million. This is before charges for class action lawsuit settlements and other non-recurring charges related to the fraud. I would argue that the $124.2 million figure understates earnings going forward, as the company continues to win new clients, and QoQ earnings will probably continue to grow in the mid-teens percentage-wise. This compares with a low single-digit increase in Infosys’ QoQ earnings.
There is a clear upward trend in Satyam’s earnings. As you can see below, earnings grew 16% MoM from March to June of this year. There is no seasonality in this business that would explain the increase.
  • Quarter ended June 30, 2011: 2.7 billion rupees, or $59.2 million
  • Quarter ended March 31, 2011: 2.3 billion rupees, or $51.2 million
  • Quarter ended December 31, 2010: 1.3 billion rupees, or $29 million
Again, it is difficult to estimate Satyam’s normalized earnings, but I am confident that the company will earn at least $50 million per quarter going forward as the operating momentum continues.
Satyam’s capitalization consists of the following: (a) 564,222,092 common shares publicly trading at 66.9 rupees–equivalent to $829,406,475, (b) 501,843,740 non-encumbered shares–equivalent to $737,710,297 and (c) 110,604,486 ADSs trading at 2.77–or $306,374,426. Total market capitalization is $1.87 billion.
Based on my $50 million quarterly earnings assumption, Satyam is trading at less than 10X forward earnings. This compares with 13-14X for its Indian peers.
Satyam is a prime candidate for rerating. Now that impact of the scandal has diminished, new perceptions will emerge. This is a rare opportunity to buy a leading company at a cheap price (on an absolute and relative basis). It may soon be perceived as a secular growth story Or a great emerging markets story. There are at least three catalysts. You even get a 5% discount by buying the ADSs. If you believe as I do that the Indian tax authorities have no case, this is a fat pitch.