IPO Scam Exposed on BloombergUTV

Posted on November 15, 2011 by Ranjan

There’s an interesting investigation being aired on “Exposed” on BloomberUTV tomorrow, i.e 16th November at 6.30 pm.

The show will expose every link in the IPO chain that is a nexus between Merchant Bankers and operators and the IPO scams where these operators help dubious companies go public and raise money from the public.

The programme exposes the modus operandi of the IPO scams where the listing happens at huge premium and then crashes, leaving the public investors high and dry.

Do share your thoughts if you happen to see the program.

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Investing in Low Risk Mutual Funds to avoid Choppy Markets

Posted on November 9, 2011 by Ranjan

This is a guest post by Karan Batra.Karan is a Chartered Accountant and lives in New Delhi.

When Recession came in the year 2008, many of us didn’t even know what Recession was and how it could impact the economy. Slowly and steadily everyone realised that the Recession has actually stepped in and the world won’t grow and the same pace as it did earlier.

It’s been a few years since the Recession came in 2008 and it till date the Stock Markets have not turned stable but are still volatile. Highly Volatile markets are the most risky as you never know at what stage to enter as they keep increasing and decreasing at a very rapid pace.

Despite the fact that Mutual funds are safe as compared to investing directly in Shares, but even the Mutual funds seem to have been caught in the ambit of Recession with the NAV’s decreasing constantly. In such circumstances, it is highly advisable to invest in low risk mutual funds such as debt oriented funds (e.g. Monthly Income Plans abbreviated as MIP’s and Gold Exchange Traded funds or Gold ETF’s)

As the fate of the economy still uncertain, it is highly advisable to have such Low Risk Mutual funds in your debt portfolio as Debt Oriented Mutual Funds are low on risk as compared to Equity Oriented Mutual Funds. And in the debt category, short term bonds and ultra short term bonds are even safer.

Despite the presence of such instruments in the market, many investors have either liquidated their investments or are planning to do so, in order to have a portfolio that is more of cash. Though it is not a bad strategy considering the way things have been of late, always remember that your gains would be limited to the Interest the bank can offer you in case you opt for liquid investments like Fixed Deposits. Adjusting for Inflation and taxes, it doesn’t cut a fetching picture at all with your real returns plunging into the negative territory.

Selecting the right Investment

If you are open to taking a significant amount of risk for capital appreciation, equity and equity related mutual funds are your best bet. That means if you are investing in equity MF’s through the systematic investment plan (SIP) route for your long term objectives, do not discontinue the existing SIP’s.

However, if you are conservative and think that the safety of capital is paramount, but still want returns better than what fixed deposits can offer, debt MF’s is the right fund for you. You can diversify across debt paper of varied maturity periods which will ensure safety of capital as well as optimum returns.

Selecting the right fund according to your risk appetitive is a very important aspect of investing as you yourself are going to enjoy the profits earned.

This article has been authored by CA Karan Batra who is a finance and tax blogger on http://www.charteredclub.com

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The Wall Street Dirty Business of Insider Trading

Posted on October 30, 2011 by Ranjan

You must read this story on NewYorker about Wall Street crimes. A bit long, but a gripping story. Worth making a movie!

Excerpts:

In the language of hedge funds, Galleon’s strategy was to “arbitrage reality” with the consensus on the Street—to find information about a given company that diverged from Wall Street’s view, allowing Galleon to cash in when the company’s stock price rose or fell. At Galleon, this was known as “getting an edge.” The analyst or portfolio manager with the best read on a company was called the “axe” on that stock. The surest way to become the axe was to have a source who passed on information about a company’s earnings, upcoming deals, and other confidential matters.

The ultimate edge was insider trading—the acquisition of nonpublic information about a company—and Rajaratnam was the king axe. At Galleon’s daily 8:30 A.M. meeting, he always had more information than his employees and didn’t hesitate to let them know it. By the mid-aughts, hedge funds accounted for nearly half of all stock trades, and there was ferocious competition for wealthy investors and the business of investment banks.

Lightly regulated and nearly opaque, hedge funds played a central role in the creation of credit-default swaps and other financial exotica that led to the economic collapse of 2008.

Rajaratnam’s goal was to be running a ten-billion-dollar fund by the end of 2009. In seducing Kumar, he made a valuable addition to the network that he had built up over the years.

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Pictures Are Worth Thousand Words

Posted on March 22, 2011 by Ranjan

Hemant Beniwal has 5 well researched images on TFL, that lucidly explains the basic and critical questions in personal finance.

Check 5 Important Charts that you must understand.

Another admirer of the above post, Madhupam said it succinctly:

……the simplest explanation to the 5 basic questions, which bother an investor. And these are:
1) Where to invest? (India)
2) Which asset to invest? (Equity)
3) How to invest? (SIP)
4) What minimum return to aim? (Alteast above inflation)
5) When to invest? (Always, with no timing)

Thanks Hemant.

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Buying Property v/s Stocks

Posted on March 10, 2011 by Ranjan

In the QnA session at a workshop on Investing, today a student wanted my view on comparing investments in property with investing in stocks. The following was my response:

While buying property is emotionally very satisfying and our elders encourage us to buy property all the time, let us look at some pointers before taking a decision on this issue.

Buying a house where you will stay yourself should not be taken as an investment. My own house has appreciated 5 times in 6 years. All the increase is just notional!

If you calculate the IRR for an investment in property, you also need to factor in the maintenance costs and the rent you receive. Often a 3 times increase turns out to be a 6% return on investments.

The student gave me an example where a relative bought a flat for just Rs 1.0 lakh in 1980s which is valued at more than Rs 1.5 crore now. I challenged him to find the IRR and after the class, we did some sample calculations, where the IRR worked out to be between 10 to 15%. We did not have the correct maintenance costs and accruals

To my mind, investments in property is effected by opaque practices of the Builders and the black money in India

Stocks create value while property depreciates!

You need heavy investments in property while you can buy just one share if you want.

Obviously, I favour stocks in comparison with property. But, having said all the above, I would like to add that you cannot make general comparisons. It’s impossible to compare apples with oranges, no?

Even if you want to invest in a stock, you need to be aware of the risks and be able to manage those risks. The same things apply to property investments. So I would not make any conclusions for you.

(Sidenote: Even in Mahabharata, Krishna gives all the advice he could give to Arjun and then adds that Arjun has to make a decision on continuing the fight himself!!)

Your call: If you are able to spot an investment, where you are aware of the risks and think it’s a good deal, go ahead. It doesn’t matter whether it’s a property or a stock investment.

Please also read Ramalingam K, who explains the real estate investment risks on my website

What do you say?

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Two Reviews on Noida Toll Bridge

Posted on January 11, 2011 by Ranjan

That is worth reading. Incidentally both reviews are from experts that I really respect.

Now the stock’s CMP is 28.95 and looks like a sound value investment. Here’s some view on the stock that you can read:

Mr. Parag Parikh’s article on Noida Toll Bridge Co. Ltd. which appeared in the latest issue of Outlook Profit, concludes:

Noida Toll Bridge has a strong and favorable business model. It has left it’s problems behind, while the future seems secure and stable to a large extent. The risk reward equation seems largely in favour of investors.

Rohit Chauhan’s has a detailed post on the same stock on his blog (Link). He says,

My own valuation estimate is around 50-55 Rs per share with an assumption in traffic growth of 5% and fare rate increase of around 3-5% per annum. You have two options – either take my estimate on face value, or you can use the assumptions I have provided to estimate the value on your own.

My personal preference is to consider a range of assumptions for traffic growth, fare rate changes and cost parameters to arrive at a range of fair value.

Noida toll bridge has a much higher probability of increasing revenue, though anything can happen to prevent it (such as people will start walking instead of driving). On the flip side, there is a limit to the growth and upside as the maximum capacity of the toll bridge is fixed and once that is reached, further increases will be limited to fare increases only.

May I make it clear that I am sharing the reviews and not recommending the stock. Take your own decisions, please!

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IPO from IOT Infrastructure: Invest or Ignore?

Posted on January 10, 2011 by Ranjan

IOT Infrastucture & Energy Services Ltd (IOT) has filed its draft red herring prospectus (DRHP) with SEBI for the IPO in Sept, 2010 and is testing market conditions to launch the IPO.

There is a big mental heuristic in India that investors can make good money by investing in IPOs or atleast make money on listing. But seasoned observers ask why we don’t have IPOs in a bear market! Investment Bankers and Promoters want the best price for giving out equity to the investors and that does not happen in a depressed market.

Apart from being aware of our psychological impressions about an IPO, we also need to understand the economics of the IPO. We need to understand why the promoters are coming out with the IPO.

Why IOT is coming with an IPO?
The object of the fresh issue is funding Rs 245 crore for building the Paradip Refinery Storage Terminal and Rs 342 crore for the Raipur Common User Terminal. The estimated cost of the Paradip terminal is approx. Rs 3000 crore and IOT has already invested Rs 78 crore into it. In other words, only 10% of the cost is being utilized from the IPO.

The promoters of this company are not individuals but they are big names. IOT Infrastructure & Energy Services Ltd. (IOT) is a joint venture between Indian Oil Corporation Limited, India’s largest petroleum refining and marketing company by sales and the highest ranking Indian company in the Global Fortune 500, and Oiltanking GmbH, the second largest independent tank storage provider for petroleum products, chemicals and gases world-wide. So, I don’t think the object of the IPO is to maximize profits for themselves.

IOT Infrastructure President (Finance) Jatin Mavani never appeared to be pushy about the IPO and was confident of their valuations. He said that IOT is not going to offer discounts in order to lure investors.

For any IPO or in any equity investment, I believe that strong company fundamentals and management team should be the main reason. Investing in an IPO’s requires the investor to understand the fundamentals of the company, fair valuations, future growth prospects all of which are beyond the understanding of a common investor.

As a general principle I stay away from IPOs. I first look at the time frame of the company’s existence as well as their understanding of the industry they are in.

IOT has been in existence since more than a decade and have deep understanding of the oil and energy business. Even though they started out as a venture to create Terminals for storage/receipt/despatch, they have branched out to Engineering, Procurement and Construction services (EPC) which is now generating the bulk of their revenue. They are also getting into other related businesses like the Upstream & Renewable Energy industry. More details on their site

To me, the impressive thing about IOT is encompassed in their tag line, “Glocally Entrepreneurial”. They have not been complacent about their rich parentage and have built/grown their business without favours from their parents. Mr Mavani said that they compete for projects from IOC and win on merit alone.

To conclude, I need to challenge my own mental heuristics/assumptions about an IPO (to stay away) and take a detailed look at their valuations. And perhaps invest, when IOT decides to launch their IPO.

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