Tuesday, February 28, 2012
Q3FY12 numbers of India Inc were not as bad as expected. They were not good but yet, not exactly the washout one had expected. And the credit for this goes mostly to MTM once again, which thanks to the Govt rule coming in at the nick of time 'managed' to paint a better looking picture.
Earlier, till Q2, companies had to necessarily mark-to-mark the loss incurred on the various forex transactions, be it loans or hedging or complex derivative instruments. But in Q3, just before the quarter was coming to an end, a new rule was passed, Rule 46A in AS-11, wherein a company could either transfer the MTM loss to the balance sheet or adjust it against the P&L account. If the forex loan was for acquiring a fixed asset, it was allowed to capitalize the difference, meaning MTM loss arising could be added to the cost of the fixed asset in the balance sheet. This meant no pressure on the profitability. And if the forex loan was for not acquiring a fixed asset, it has given the facility to either create a special account where gains and losses could be adjusted or else, companies could write off the MTM loss in P&L account in same quarter or defer the MTM and amortise it over the borrowing period. Thus major 'hits' to the bottomline were thus averted.
Given the way in which the rupee had tumbled down and then climbed back, certain amount of flexibility was indeed required for adjusting the MTM losses. But it also means that companies were allowed to brush their losses, even though it was only notional, under the carpets. This meant companies 'managed' to show a better performance than what could have actually been. Being notional, could say that this flexibility helped present a better picture and not the distorted one. As such interest costs have eaten margins and this would have dented the margins even more, like in Q2.
In Q2, companies which were impacted by MTM were Tata Motors, Mahindra & Mahindra, Bharti, Exide, SterliteInds, Dish TV, Essar Oil, Arvind, Jet, Sesa Goa, Subex, JSW Steel, Shree Renuka, PFC, JSW Energy; around 70 major companies reported forex losses. Companies like Reliance Communications, Indian Oil , BPCL, JSW Steel , Bhushan Steel, Lupin, Aban Offshore, IOC, Chambal, SAIL and NTPC have forex debt which is around 18 to 52% of the total debt. RCom led at 52%. Thus new Rule allowed adjustment to be made in a staggered manner thus we saw some parts of its trailing in Q3 also.
The picture will change in Q4 as the rupee has appreciated dramatically. From an all-time closing low of 54.30 v/s US$ in Dec 2011, the rupee is now hovering around Rs.49.50, an appreciation of 10% in 2012 so far. Thus do not be surprised to see companies post forex gains in Q4. Forex losses will be there but will be trimmed down from Q2 levels. Aggregate forex losses have come down in Q3 and will go down further in Q4.
The one big question which comes to mind - should one invest in companies who have showed a better profit due to this MTM adjustment? That would not be a prudent move for the long term. The short term ride would be good but that's about it. It would be best to try and look at the complete earnings of the company. Look at the earning ability pre and post MTM. Best companies are those which have not opted for such 'adjustments' and have continued to follow booking the MTM loss/gain as that is the practice followed by global companies across the world. Remember, companies that have deferred or amortised the losses, will eventually have to show this adjustment some time. They may have been shunted out from the P&L account to the balance sheet but sadly, it will remain there for a long time to come. The stink raised in the P&L could be one time or maybe spread over a few quarters but the rot in the balance sheet will smother you over the long run.
Remove all the window dressings and the adjustments; look at the bare picture like examination of a body in the forensic lab; that will give you the true picture of health of any company.
Saturday, February 11, 2012
After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years (till 2014), gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday ... a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.
Money market funds are mutual funds. Investors who buy shares are pro-rata owners of the underlying investments that funds hold.
Money market mutual funds are restricted by SEC rules under the Investment Company Act of 1940 to purchasing only the highest-rated debt of issuing companies. They also invest in government securities and repurchase agreements.
The duration of the debt instruments they hold cannot exceed 13 months and the average weighted maturity of their portfolios has to be 60 days or less. Additionally, funds can't hold more than 5% of one issuer, except for governments or repurchase agreements.
The first U.S. money market mutual fund, The Reserve Fund, was established in 1971 to directly compete with banks for investor deposits. At that time "Regulation Q" prohibited commercial banks from paying interest on checking accounts.
Money market funds quickly drew in investors looking to earn interest on cash positions.
By September 2008, the size of the oldest money fund in the U.S., the Reserve Primary Fund, was $64.8 billion. Total industry assets were $3.8 trillion.
Wednesday, February 1, 2012
Technology firm Mahindra Satyam has reported a much better than expected growth of 29.4% quarter-on-quarter in its consolidated net profit of Rs 308 crore in the October-December quarter of FY12.
The company earned forex gain of Rs 66.3 crore in the quarter ended December FY12 as against Rs 33.7 crore in an earlier quarter.
Consolidated revenues rose 8.9% to Rs 1,718 crore from Rs 1,577 crore quarter-on-quarter.
Mahindra Satyam said the rupee revenue growth was largely due to rupee depreciation.
CNBC-TV18 had expected net profit of Rs 220 crore and revenues of Rs 1,735 crore.
Attrition rate declined at 16% in the third quarter of FY12 versus 25% in the corresponding quarter of last fiscal.
EBITDA margins came in at 16.2% as against CNBC-TV18 poll of 15.3%. EBITDA margin was improved by 10% in one year.
The company has appointed advisors for merger with Tech Mahindra. Merger may possibly happen by October, says company.
A share closed up 3.81% at Rs 76.25 on the BSE. Its traded volume increased 109% to 3,228,348 shares versus 5-day average of 1,545,545 shares.