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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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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MoneyLife Study on the Stocks of the Decade

Posted on January 4, 2011 by Ranjan

Moneylife has a report on the top wealth creating stocks of the decade (2001-2010)

In the same release, they talk about the lessons we can derive from a 10-year study such as this one, they would be:

• Take a lot of common ideas about wealth creation with a pinch of salt.(Emphasis mine) For one, higher GDP growth does not translate into high returns from stocks you own. Conversely, even when GDP growth is low, some sectors and stocks will do very well. Two, popular and well-performing companies may deliver average to poor returns. Their future growth may already be reflected in the stock price.
• Smaller companies offer better potential for returns, but carry substantial risk.
• The single most important factor that determines stock returns is the starting price. You just have to be patient and buy cheap.
• Following the above-mentioned point, buying unloved and beaten down stocks and sectors could be one way to catch hold of the next Unitech or Sesa Goa.
• Having done that, remember that the bulk of stock returns comes only in bursts-much of the gains in stocks today were captured during the bull market of 2003-07.

Valid points all. But it is important to remember that it’s all in hindsight. Can anyone predict correctly the top stocks of the next decade please?

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How Much To Pay Your Portfolio Manager?

Posted on October 6, 2010 by Ranjan

I know that Portfolio Managers do not always clearly explain the fees and charges payable by the client. SEBI has stepped in regarding clauses relating to fees and charges in the portfolio manager-client agreement.

The SEBI order is very lucid and comes with simple illustrations. But it’s sad that they have to regulate such basic stuff like being transparent on the fee that they charge.

Some excerpts:

The portfolio manager shall charge performance based fee only on increase in portfolio value in excess of the previously achieved high water mark.

Illustration: Consider that frequency of charging of performance fees is annual.

A client’s initial contribution is Rs.10,00,000, which then rises to Rs.12,00,000 in its first year; a performance fee/ profit sharing would be payable on the Rs.2,00,000 return. In the next year the portfolio value drops to Rs.11,00,000 hence no performance fee would be payable. If in the third year the Portfolio rises to Rs.13,00,000, a performance fee/profit sharing would be payable only on the Rs1,00,000 profit which is portfolio value in excess of the previously achieved high water mark of Rs.12,00,000, rather than on the full return during that year from Rs.11,00,000 to Rs.13,00,000.

Another lucid illustration of the fees and the returns are as under:

The assumptions for the illustration are as follows:
a. Size of sample portfolio: Rs. 10 lacs over
b. Period: 1 year
c. Hurdle Rate: 10% of amount invested
d. Brokerage/ DP charges/ transaction charges: Weighted Average of such charges (as a percentage of assets under management) levied in the past year/ in case of new portfolio managers indicative charges as a percentage of assets under management (e.g. 2%)
e. Upfront fee (e.g. 2%)
f. Management fee (e.g. 2%)
g. Performance fee (e.g. 20% of profits over hurdle rate)
h. The frequency of calculating all fees is annual.

The example cites a case when the portfolio has increased by 20%. The return for the client after accounting for the fees works out to 11.72%

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How many Stocks do you have in your Portfolio?

Posted on September 18, 2010 by Sumant Kant Sahai

We should have between 15 & 20 stocks in our portfolio. The deciding factors are:
1. The need for diversification across sectors,
2. The number of Stocks you could reasonably monitor regularly

The above is what the experts keep advising. The truth in the above statement dawned on me only after I lost one big opportunity. And, I want to share this experience with you.

As I shared with you in my last post, I had, slowly but surely, progressed to some kind of ‘Stock Analysis’. As often happens, people close to you start seeking advice. I would avoid dispensing any advice; but if pestered, I would recommend some of the safe, long-term stocks; viz. Torrent Power, Adani Power, Cairn India, ABCL, etc. or Tata Motors to those with more risk appetite.

Sometime around Jan, 2010 I noticed that I was ‘Voluntarily’ dispensing advice. I was advising my friends (And, almost anybody I knew!!) to put-in money in Gujarat Fluorochemicals & Liberty Phosphate. I almost forced one of my subordinates to buy into GUJFLO.

No surprises. Both the shares did very well in the next six months. I guess I was so sure of my analysis that I wanted all the people close to me to take advantage. I am still not as matured in Stock Selection as to confidently say that I will strike a GUJFLO at regular intervals. But at that time, I had identified the opportunity & I was more than 100% sure.

However, the story is not over yet. Where was the impact on my portfolio? It was hardly there. It was then that it dawned on me that I was having far too many stocks in my portfolio & had arrogantly (Or, ignorantly?) ignored the advice of all the experts. While I had invested a reasonable sum (to my mind!) in absolute terms which was close to what I had decided for each Stock, in late 2008 when I had started investing. My Portfolio had run-up by then, and in terms of percentage I had only put in ~2% in GUJFLO (In which I was more confident!!); and only ~5% in LIBPHO. No wonder there was little impact on my Portfolio.

I recount the following advice of experts in regard to size of Portfolio:
1. Our exposure in any one share should be between 4 – 20% of our total Equity Exposure.
2. The Portfolio should not have more than 20 Stocks
3. One should have a core portfolio wherein the Stocks may be for keeps.

Despite the realisation of the above Truths, I am still far from the ideal Portfolio (I am having ~40 Stocks.) I am having some trouble trimming down to the recommended number. I have realised, why, and I am still working on resolving it. I will share this wisdom in my next blog.

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Rediscovering The Stock Market

Posted on September 12, 2010 by Sumant Kant Sahai

After my experience in Stock Investing in 1994, I went as far away from Stock Investing as you could imagine. But, do not think I was letting my money rest in my Savings Account. I was doing better. I was on to my own business!! Right through 1997 to 2004 I was into my manufacturing/exporting business. It was a bitter-sweet entrepreneurial experience with loads of learning.

The long & short of it was that I restarted my life from scratch in 2004. Back to having a regular job, I started reconstructing my life brick by brick. Sometime during late 2006 I got an introduction into a new business; that of recruiting skilled workers for foreign companies. I was only in a niche segment, but the business was good. Let me remind you that this business happened to me quite by accident. I cannot take much credit for having established it.

However, like all good things, it did not last long. The world was soon to go into the recession due to the sub-prime crisis in the US (early 2008). Unemployment rates in the developed economies shot-up & Governments started closing the doors on foreign workers. It put paid to my dreams of making it big. Nevertheless, after a long time I had some spare cash.

I do not quite remember how & when my Demat account got opened. It was definitely a non-event. I got a marketing call & I just had to evince interest. God-send, you could say. I vaguely remember that it happened sometime in May – June, 2008.

I have been an avid reader of the newspaper and I started reading the Business pages with more interest. I used to read it earlier as well, but it was more detached. The market was in correction mode & I started watching it closely. God-send, you would repeat. I agree. The timing for entry into the market could not be any better. You could not go wrong, even if you wanted to!! Roger, once again.

Nevertheless, you will have to give credit to me for having the guts, without having the requisite knowledge. I did not quite know what it was to be a ‘Contrarian’. I had also not been introduced to the concept of ‘Asset Allocation’. I would say that I knew the tools of Equity Analysis but they were in the realm of knowledge only. They were not yet a part of me. They had not transformed into my ‘wisdom’.

It was only after reading enough & watching the stock market till September, 2008 that I made my re-entry into the Stock Market.

I am encouraged to share the evolution of my Stock Investing Strategy in my next post.

Sumant Kant Sahai

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