Thursday, August 30, 2012

China Equity Bear Continues...

China Bear Market.

With two sessions remaining in the month of August, the Shanghai Composite (SHCOMP) is closing in on a new 4-month low, as well as a test of its March 2009 low of 2037.

From a technical perspective, let's notice that all of the action off of the major low in October 2008 at 1665 has formed an intermediate-term rounded distribution pattern.

Such patterns, especially on an intermediate-term basis, tend to move into a steep, near-vertical, phase of weakness prior to completion, which suggests that the Shanghai Comp could become unhinged in the days ahead, driving the index toward a full-fledged test of the October 2008 low at 1665.

Should such a scenario unfold, then the Shanghai Comp will have relinquished all of its 3-year post-crisis gains, while the S&P 500 remains approximately 112% above its crisis low of 666.79!

Something to ponder? What does the huge divergence mean? Is China cheap, or is the S&P 500 expensive? Or, can the divergence exist in a vacuum indefinitely?

Test of 2037 will be a major test for Shanghai Index and it will be broken and would be headed lower. The index may bottom out at 1665 (Oct 2008 Lows).


Tuesday, August 28, 2012

Long on Gold - CLSA.

We have been bullish on Gold and Silver from quite some time.

CLSA confirms our understanding. Happy Investing!!

What is a fairly good indicator that the bull market in gold is yet to run its course? Look no further than the purchases of gold by central banks across the world.

Here is what CLSA strategist Christopher Wood has to say in the latest issue of his newsletter 'GREED and fear':

"There is the continuing evidence of the growing number of central banks announcing that they are buying more bullion. Korea, Russia, Ukraine or Mexico are all recent examples of this trend. Thus, the Russian central bank reported this week that its gold holdings increased to 30.1 mn ounces as of 1 August, up from 29.5 mn ounces on 1 July, accounting for 9.5% of its total international reserves. The World Gold Council reported that central banks` gold reserves increased by 157.5 tonnes in 2Q12, the largest quarterly net buying since the official sector became a net buyer in 2Q09. The conclusion for investors is stupefyingly simple. Stay long gold."

According to Wood, while the official data on gold purchases by Indians shows a decline, that may necessarily not be the case:

"India is also still on course to purchase another 700 tonnes compared with 933 tonnes last year again based on World Gold Council data. If the official figure for India is falling, GREED & fear hears that the reality is that Indian people are now buying gold with cash to avoid the higher duties imposed in March when the gold import duty was doubled to 4%. As a result, these cash purchases will not be recorded in the official data."

One more reason why gold still retains its lure despite the high price:

"It is also the case that the rupee`s recent weakness means that the gold price has been rising in rupee terms enhancing its appeal to Indians as a store of value."

Sunday, August 26, 2012

Acquisition of Coal Mines rings Alarm Bells.

A handful of Indian companies that had together invested over $10 billion in acquiring 14 coal mines abroad are now worried after coal prices have dropped 40% in two years to about $80 a tonne.

For example, GVK Power and Infrastructure pumped in $1.26 billion to buy an Australian coal mine less than a year ago when coal prices were at $124 a tonne and Adani Enterprises put $2.68 billion on the table two years ago to buy another mine in the country when prices were at $95.47.

Acquisition of Coal Mines rings Alarm Bells.

"As we speak today, we are not seeing good times for coal globally," admits Lanco Infratech chairman L Madhusudan Rao. The Hyderabad-based builder of roads and bridges, which paid $750 million to acquire Australia's Griffin Coal in December 2010, has Rs 32,000 crore in debt and posted a Rs 442-crore loss last quarter. It is looking to sell non-core assets to lighten its debt burden.

"Of course, we will be worried if the stressed cycle (of low price and demand) continues," adds Rao. "If the situation persists for the next 4-5 years, then it's not a good situation to be in. Our view is that the current situation may probably last for the next 14-15 months."

"It can be a cause for concern for bankers as the stakes are too high," says Seshagiri Rao, joint managing director and CFO with the JSW Group. "If the ability to repay is reduced, bankers will resort to extreme steps to cover losses. But most such deals have covenants built in, that protect them (bankers) in the event of a major downside (in prices)," he adds.

Typically, banks press for shares in parent companies as a comfort in the event of an acquisition going wrong. The clause can be invoked if the price falls below an agreed level.


Saturday, August 25, 2012

Grexit is just around the corner.

The bad boys' nominal debt levels are not the full story. 

Because of the immensely foolish design of the Eurozone's "Target 2" payments system, huge obligations have grown up between the central banks.

The German Bundesbank is due 727 billion euros ($850 million) from other countries as of July 31, while Greece's obligations under Target 2 are themselves over 100 billion euros. 

Since Greece has no hope of paying an extra 100 billion euros on top of its official debt, that's not a cost of euro breakup; it's money already lost, which will have to be repaid by German taxpayers. Presumably Mrs. Merkel is aware of this, and will thus be flinty against Greek pleas for more money.

In any case, a "Grexit" is only a matter of time, and from the point of view of both Greece and Europe, the sooner the better.

However, given the other crises looming, Greece won't be the only country to exit. At some point, probably after the top traders' vacations end but before the French crisis actually looms, the markets will wake up to the French risk.At that point, the game will be up, and the euro will be forced to break up of its own accord.

There are a number of possibilities for what follows. My guess is that since both France and Italy are badly run, they will see the euro breakup as a chance to spend some more mad money. Thus both countries will go their own way, restoring the franc and the lira.

On the other hand Germany, Scandinavia and the Netherlands, all well-run, will want to keep the benefits of a common currency, and so will form a strong "Northern Euro" which will rise in value steadily against the dollar and other currencies. 

The most interesting possibility is that Spain and Portugal, fairly well run but unable to bear a strong common currency, may combine with Slovenia, Slovakia and possibly Ireland and Belgium, to form a weak but stable "Iberian Euro."

Greece and probably Cyprus, meanwhile, will be sent off to the dunces' corner, to join the likes of Bulgaria and Romania outside any common currency.

For us as investors, it's probably best to steer clear. Every summer I've ever seen eventually comes to an end.
But if you must play the breakup, the best bet is probably the iShares MSCI Germany Fund (NYSE: EWG). The fund currently trades on a P/E of 11 times earnings, with a yield of 2.9%.

Let's just say it promises to be an interesting fall. 

My Thoughts:

Even though "Grexit" is a better solution in the long run. It would be delayed till year end to avoid any problems for Obama's re-election. There are also many other elections in Euro nations in coming months. 

Any  "Grexit" conditions will bring down the stock markets world wide and its impact will spill over to the main street, affecting the common man. This will jeopardising the re-elections of the current candidates.

So expect more band aid solutions for the EURO financial crisis.  


Friday, August 24, 2012

Manipulating Stock Prices using ESOPs

  • In the absence of express norms, companies use secondary market buys to accumulate shares for Esop schemes
  • Some employee welfare schemes have accumulated a disproportionate amount of shares from the market
  • Analysts fear these schemes are used by promoters as vehicles to “increase control surreptitiously”
  • Sebi has decided such schemes would not be allowed to make purchases from the secondary market

The Securities and Exchange Board of India (Sebi) has cracked down on the misuse of Employee Stock Option Plans (Esops) and other employee benefit schemes by promoters. In its latest board meeting, the regulator decided such schemes would not be allowed to make purchases from the secondary market.

“Such schemes will be restrained from acquiring their shares from the secondary market,” the Sebi decided last week. An employee stock option gives directors, officers or employees the benefit or right to purchase or subscribe at a future date securities offered by the company at a predetermined price. In the absence of any express provision in the companies’ law or Sebi guidelines, companies use both fresh issuances and secondary market purchases to accumulate shares for these schemes.

Some employee welfare schemes accumulated a disproportionate amount of shares from the market, evoking fear among some analysts that these schemes, originally devised to encourage employee participation in creating shareholder value, were used by promoters as vehicles to “reduce float in the market and increase control surreptitiously”. There were also reported instances where the schemes borrowed heavily from group entities to finance share purchases.

Ashvin Parekh, national leader, Ernst & Young, said, “Such schemes often become vehicles to disguise real wealth or income. The latest move suggests that Sebi is going to be strict in the implementation of the guidelines.” The employee benefit schemes by listed companies are governed by Sebi (employee stock option scheme and employee stock purchase scheme) guidelines, 1999.

According to a BS Research Bureau study of listed companies that have declared their shareholding patterns as of June 30, there were over a hundred companies that had employee welfare schemes as shareholders. Of these, 15 employee welfare schemes had holdings of over five per cent in their respective companies. L&T Employee Welfare Foundation, which holds 12.14 per cent in diversified major Larsen & Toubro, is the largest such scheme. Esop trusts with high holdings include PSPL ESOP Management Trust, which holds 8.67 per cent in Persistent Systems. Patel Engineering (8.66 per cent), B2B Soft Tech (5.18 per cent), Solix Technologies (4.72 per cent) and Agrotech Foods (4.01 per cent) also have significant holdings by employee welfare schemes.

Pavan Kumar Vijay, managing director, Corporate Professionals, said, “Esop trusts have a specific purpose. They are meant to hold shares on behalf of employees. These trusts should not be used as portfolio managers for promoters.”

Earlier this month, the Canada-based Veritas Investment Research pointed out how Indiabulls’ employee welfare trust (EWT), an Esop trust of the Indiabulls group, held a huge chunk of shares in Indiabulls Real Estate. According to Veritas, EWT was formed in October 2010 and soon after bought some 26.8 million shares of Indiabulls Financial Services (IBFSL) at a cost of Rs 480 crore. It also purchased 39.7 million shares of Indiabulls Real Estate during FY11 and FY12. In response, Indiabulls had said the EWT was not a 100 per cent subsidiary and operated at an arm’s length through independent trustees. “IBFSL has maintained a very healthy practice of grant of Esops to employees even before it went public in 2004. The Esop scheme of the company is in line with the other leading housing finance companies and NBFCs,” Indiabulls had said.

Parekh said regulatory guidelines on the timeline for non-compliant schemes to fall in line were expected. “If everyone unwinds in one go, there could be some impact on the market. They might have to phase it out,” he said.


Wednesday, August 22, 2012

How to buy Agriculture Land in India?

As per law, unless you are a farmer, in majority of the Indian states, you are not allowed to buy agriculture land. So you can buy this land only if your father or grandfather owned land and was a farmer or else you need to show that you already own some farm land. Most of us urbanites are not farmers, even remotely, so you then need to apply for conversion of land to non-agriculture purposes. 

In Maharashtra buying agriculture land through a legal process is virtually impossible as one needs to be a farmer, or needs to show proof of his relatives being a farmer or show proof of being an agriculture worker on a farm. 

The way around this is to buy land in states like Tamil Nadu, Punjab, Harayana, Rajasthan or Madhya Pradesh; buy around 16 guntas which is 0.40 acre in these states, get the patta or the 7/12 issued in your name, making sure that you also get a valid translation in English to reduce registration time when you buy land in Maharashtra. This patta will show proof that you own agri land and this in turn will enable you to purchase land in Maharashtra legally. And once you get the farmland in your name in Maharashtra, remember, there are restrictions on the size of farmhouse and sheds that you can construct on the land. 

Remember, the process is pretty tedious and you might have to go against Annaji and grease some palms to get the land. And before buying ensure that the land is freehold and free from any encumbrances and litigations. One you buy farm land, maybe you can get contract labourers to start tilling the land! 


Thursday, August 9, 2012

How much is your private company worth?

You may have a great clientele, a super high turnover or a perfect business model, but the one thing that matters the most to an investor is "How much is your company worth?" and "What is the valuation of your company?"

There are many established procedures to arrive at an early valuation for a company. The method ultimately selected also depends on a company's profile and is sector-specific.

NAV: One of them is called the Net Asset Value (NAV) method. This is the most common method. Under NAV, you take together all the assets of your company like the machinery, the office furniture, the vehicles, etc and arrive at their total worth. It is then divided by the total number of shares and you get the value of per share. 
Cash flow:The second way is the earnings and cash flow based method. Some experts consider this to be the most accurate and effective way of establishing a company's value, especially from an investor's viewpoint. In this method, future cash flows are taken into account, i.e how much of cash or money is likely to come into the company over X  or Y period. Based on that, the evaluator will ascertain how much an investor will gain on his investment. Eg: If an investor puts in Rs 10 lakh today, this method will tell him how much he will earn on his Rs 10 lakh investment in the next, say 5 years.

Liquidation value:
There's a 3rd way called liquidation value. Like book value, liquidation value is based on a company's assets. It is the amount of money one can get by selling off all the assets of the company. So, for example, you do know that the land on which your plant stands and its equipment will fetch some value as of today, if sold.  That is one factor. The other factor in this method of evaluation is the inventory of your company and the receivables. These, though, be factored in at discounted rates. 
Eg: Inventory would be the raw material in your stores, while receivables is the monies your company has to receive.
Some experts believe in valuing a company based on its cash flow and in-built ability to earn profit.  The seller then projects this stream of cash over a period of time, say 5 or 10 years, to arrive at the company's worth.

Early Calculation:

"For an early calculation, one should benchmark against a listed company in the sector and then give a discount. For startups, at least 30 percent discount is a must to arrive at the value," says Ambareesh Baliga, COO, Way2Wealth Broking. 
Factors taken into account for evaluation:
> Annual turnover 
> Profitability of the company
> The future prospects
> The sector your company is in 
> How established your brand is
"The balance sheet is also very important," says Santosh Naik, MD and CEO, Disha Direct.
Examples:a) If you have established that your company is say worth Rs 20 lakh, and if you then want to sell off 25% equity to an investor, the money you will get by doing that will be Rs 5 lakh. 
b) If you were to sell 25 percent stake in your company for Rs 3 million, your company is then said to have a total value of Rs 12 million, even though you may have initially invested only Rs 2 million in it.
Normally, you must carry out an evaluation of your company after about three years of operations. By that time, you, the promoter would have generated enough data and feedback of your company's operations.
Can you, as an entrepreneur, calculate your company's worth on your own? Yes, an entrepreneur can do it.  But he needs to have the  knowledge to do so. It is always better, though, to appoint a valuations firm. A third party valuation is always preferred by investors. Anyway, business valuation is a complex task and should be left to the experts.

Wednesday, August 8, 2012

Insurance Mis-Sellings in India.

1. Fraudsters claiming to be IRDA representatives- When a consumer called Mishrilal first came to us with a complaint about fraudulent calls from people claiming to be IRDA representatives, we could hardly estimate the extent of this ongoing scam. These so called IRDA representatives claim that some ‘bonus’ has accumulated with respect to their policies and which is being allegedly polished off by their agents. All they are required to do is deposit some amount with these ‘representatives’ and they will ensure that the bonus is transferred to the policy holder. What happens after the amount is given is anybody’s guess.  Authorities having realized the gravity of the scam have been trying to warn the consumers against such fraudsters.

We understand that this is hardly a matter involving the agents directly but what really stumps us is the accuracy of the information that these so called representatives usually have with respect to the policy holdings of their victims, an obvious indication of insider involvement. A simple way to address this issue is always checking the credentials and insisting on identity proof of whichever individual the consumer is dealing with.

2. Selling policies without consumer consent- Another spin to the very same IRDA representative fraud is when these so called representatives take the money from the policy holders and then instead of vanishing with the money, very ‘honestly’ invest it in buying another policy for the consumer, albeit without his consent. These agents then conveniently vanish, leaving a hassled consumer in their wake, with his hard earned money stuck in a policy he never actually intended to buy. In most circumstances, it is next to impossible to get such policies cancelled. This fraud redefines misspelling by agents, dragging it into the territory of pure fraud.

3. Selling the wrong policy- Ok. So you were very clear what plan you wanted and with what company. Everything was in order. But what if your agent, without your consent goes ahead and invests your money in a completely different plan? Horrifying thought, especially when huge sum of money is involved. This is what precisely happened with a consumer we came across while doing a story on ULIP( For pros and cons of Unit Linked Plans or ULIP, read this story To ULIP Or Not To ULIP).

Amit Jamwal never intended to buy a ULIP. All he wanted was a simple term plan. But his agent, nevertheless, went ahead and invested his money in a ULIP. To make situation worst, disappeared without giving him proper documents. Jamwal is now stuck with a policy he never wanted, with hefty charges and two premiums paid. “I hate all agents”, he says before slamming the phone down. Understandable emotions. We empathize, barring the fact that the poor kid who was talking to him was a harmless budding lawyer-journalist. He neither was nor intends to be an agent-ever!

4. Skirting the free look period- For the uninitiated, free look period is a 15 day period starting from the date of issue of your policy within which you can opt out of the policy without any charges and with full refund (barring cuts for medical tests, stamp duty charges etc.) if you are not in agreement with the terms and conditions of the policy. This period is stipulated by IRDA during which the holder can cancel the policy or switch to another.

However, agents have been increasingly coming up with ways to ensure that the policy holders are not able to use this period for what it is intended. The most common way to get past this period is non-delivery of policy documents within the free-look period, denying the holder an opportunity to examine his policy and its terms and conditions. Our only advice in all such circumstances is vigilance- cancel your policy the moment your agent even remotely tries to stall or unnecessarily delay the delivery of documents during the free-look period.

5. Selling policies that are not needed or that are not in accordance with the financial goals/condition of the holder- This is probably the most complicated aspect of misselling and usually happens with individuals who are relatively new to the field of investment. The result is a policy holder who is stuck with a life insurance policy that protects him only till the age of 35 years and consumes 15% of his salary as premium. To address this issue, IRDA has proposed that the company should assess the needs of the holder in detail before issuing him a policy and have for this purpose, have a detailed form that covers all aspects like income, goals and risk appetite of the holder.

As we had stated earlier and as is evident from the proposals, IRDA is constantly trying to curb this menace of misselling at a macro lever. However, no such attempts can be entirely successful without awareness and vigilance at the micro level. Consumers opting for insurance must abide by a certain thumb rules like-check for credentials, identity proof of the agents, always take second opinions, never rely on one agent completely and most importantly, be very paranoid, almost clinically-in this case, that is the only thing that can save you.