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07 December 2008

THE FROWN OF TETHYS AND OTHER STORIES



The collective mass of water found on, under, and over the surface of a planet is called hydrosphere and it measures some 1.36 Trillion KM Cubes by volume. The distribution is given in the chart. (From the chart it is evident that Tethys isn’t too loaded. So we the inheritors of her ‘fortune’ need to be more prescient of its utilisation)

 The human body is anywhere from 55% to 78% water depending on body size. To function properly, it requires between one and seven litres of water per day to avoid dehydration; the precise amount depending on the level of activity, temperature, humidity, and other factors. Most of this is ingested through foods or beverages other than drinking straight water. It is not clear how much water intake is needed by healthy people, though most people advocate that 6–7 glasses of water (approximately 2 litres) daily is the minimum required to maintain proper hydration. (Makes you reach for that bottle of Perrier, doesn’t it!)

 Humans require water that does not contain too many impurities. Common impurities include metal salts and/or harmful bacteria, such as Vibrio. Some solutes are acceptable and even desirable for taste enhancement and to provide needed electrolytes.

 To India My Thirsty Land

India, a country of 1.13 Bn people, requires at least 2.26 Bn litres of drinking water alone. It is putting a severe strain on the country’s water resources. Most water sources in India are contaminated by sewage, industrial and agricultural runoff. India has made progress in the supply of safe water to its people with access to improved water currently stated to be at 86%, but gross disparity in coverage exists across the country. Although access to drinking water has improved, the World Bank estimates that 21% of communicable diseases in India are related to unsafe water. Lack of clean drinking water is a major cause of the high infant mortality rate (at 34.61 deaths per thousand). In India, diarrhoea alone causes more than 1,600 deaths daily—the same as eight Mumbai-Taj attacks each day (with much less media hoopla too).

 Its an irony that India surrounded by water bodies on three sides, home to 13 major rivers, the largest river island (Majuli) and the highest rainfall ( Mausingram) faces shortages every year. I have never lived in Chennai but 'no water' or contaminated water is commonplace news in its regional dailies. They are termed as ‘unfortunate incidents’ by the bureaucrats. Such 'incidents' occur throughout India, year after year, whether the monsoon is officially declared 'good' or not.

 Consider This

The per capita water availability in India was 3.45 kiloliters in 1952. It stands at 1.8 kiloliters now. i.e. a total of 2034 Bn Litres and by 2025 it is estimated to fall to 1.2 kiloliters per person. The Indian Army trains to fight and survive on 10 litres per person per day. For the rest of us even if we mandate 100 litres per person per day(that’s five buckets), we have enough water available 18 times over. Of course it doesn’t account for the swimming pools, car washes, artificial rain dances and omni-directional showers! That’s even more ironical considering the falling per capita availability. (I hope some bureaucrat is reading this and wondering how they got it so wrong!!) The bottom line is  - availability is not an issue.

 The Urban Milieu

Even though the rate of urbanization in India is among the lowest in the world, the nation has more than 250 million city-dwellers. Experts predict that this number will rise even further, and by 2020, about 50 per cent of India's population will be living in cities. This is going to further put pressure on the already strained centralized water supply systems of urban areas. The urban water supply and sanitation sector in the country is suffering from inadequate levels of service, an increasing demand-supply gap, poor sanitary conditions and deteriorating financial and technical performance. Supply of water is highly erratic and unreliable. Transmission and distribution networks are old and poorly maintained, and generally of a poor quality. Consequently physical losses are typically high, ranging from 25 to over 50 per cent. Low pressures and intermittent supplies allow back siphoning, which results in contamination of water in the distribution network. Water is typically available for only 2-8 hours a day in most Indian cities. The situation is even worse in summer when water is available only for a few minutes, sometimes not at all.

 According to a World Bank study, of the 27 Asian cities with populations of over one million, Chennai and Delhi are ranked as the worst performing metropolitan cities in terms of hours of water availability per day, while Mumbai is ranked as second worst performer and Calcutta fourth worst. (This picture here is an interesting aside I picked up from a friends e-mail.  Thanks Vinay.). It happens only in India.

 Urban centres in India are facing an ironical situation today. On one hand there is the acute water scarcity and on the other, the streets are often flooded during the monsoons. This has led to serious problems with quality and quantity of groundwater.

 This is despite the fact that all these cities receive good rainfall. However, this rainfall occurs during short spells of high intensity. (Most of the rain falls in just 100 hours out of 8,760 hours in a year). Because of such short duration of heavy rain, most of the rain falling on the surface tends to flow away rapidly leaving very little for recharge of groundwater. As water shortage increases, alternative sources of water supply are gaining importance. These include sewage recycling, rainwater harvesting, generating water from humidity in the atmosphere etc.

 The Significant Other

Shortages apart, the analysis remains incomplete if we don’t emphasize on the quality of water available for drinking. The fact is that it is deteriorating fast. As early as in 1982 it was reported that 70 per cent of all available water in India was polluted. The situation is much worse today. We have spoken about diarrhoea. The other common attacks due to the ill conditioned water in India are Hepatitis A, B, C and E viruses. Around 3% in India fall a prey to Hepatitis B. Around 2% are affected by Hepatitis C virus which attacks the bones. 

 Faced with poor water supply services, farmers and urban dwellers alike have resorted to helping themselves by pumping out groundwater through tube wells. Today, 70 percent of India’s irrigation needs and 80 percent of its domestic water supply comes from groundwater. Although this ubiquitous practice has been remarkably successful in helping people to cope in the past, it has led to rapidly declining water tables and critically depleted aquifers, and is no longer sustainable. Over extraction of ground water has led to salt water intrusion into coastal aquifers. It has also resulted in problems of excessive fluoride, iron, arsenic and salinity in water affecting about 44 million people in India. Ground water is facing an equally serious threat from contamination by industrial effluent as well as pesticides and fertilizer from farm run-offs.

 Sanitation and water management should be looked at simultaneously. Too often attention is focused on drinking water supply, leaving sanitation and wastewater treatment for later. For every 100 litres of water going into a house about 90 litres is drained back, bulk of it as sewage waste.

 A number of areas are already in crisis situations: among these are the most populated and economically productive parts of the country. Estimates reveal that by 2020, India’s demand for water will exceed all sources of supply. Notwithstanding the catastrophic consequences of indiscriminate pumping of groundwater, government actions – including the provision of free power – have exacerbated rather than addressed the problem.

 The End Game

So what’s in it for me? Well for starters these are problems which beg a solution. In the solution, we sense a business opportunity for us. The specific areas of opportunity could be divided into two distinct parts – usage and post-usage. Usage would include sourcing, treatment, supply and distribution of water for personal, agricultural, industrial and commercial use. Post Usage could include opportunities in waste water and sewage treatment, recycling, sanitation and similar genres. The Post Usage areas impinge on issues like conformity to eco- regulations and environmentalism and thus are a study in themselves – perhaps a topic for another research. Let us for the moment concentrate on the Usage part.

 Watch this space for more on the specific business opportunities and the Indian companies indulging in them.

 

01 December 2008

WATER, WATER EVERYWHERE BUT.......

Illumination strikes you at the oddest of all places.

I went to see Quantum of Solace at a PVR in the Capital. During intermission, while using the urinal, I spotted a small plate posted there. It was indeed illuminating. I now know that of all the water in the world, only 3% of it is drinkable. And that one single urinal uses some 101,000 liters of water in a year. ie 3 big sized swimming pools or so the urinal informed me. The whole point was that it was a water free urinal and it had small napthalene-cubish looking object which was supposed to keep it dry and clean. (With the onset of winter thats a prominent word at the back of my mind).

And there is a company out there making those small cubes and intending to make a lot of money selling those. 

And that water is indeed a precious resource. If nothing else, that parched my throat, exacerbated by the fact that Quantum of Solace was about water and revenge and not oil. I-raq is passe, lemme have a go at the himalayan glaciers(or some such words, in future, may cross the 'mind' of GW Bush the III).

13 November 2008

HEDGE : NOT A FOUR LETTER WORD

Hedge is not a four letter word.

Numerically I may be correct. Five. But in the world of investments? I am not too sure. Everyday, the global financial market meltdown throws up a new villain of the piece.Subprime and leverage in the first half were followed by greedy investment bankers and unscrupulous rating agencies. They all contributed to the downslide resulting in a flight of capital to safety. Especially so in the emerging markets where one often heard of another scoundrel - the fleet footed hedge fund manager selling out , resulting in a free fall of stock prices.

What do hedge funds do? I dont know. But I do know what a 'hedge' is.

Say you have a portfolio of Rs 1,110,000 , with Rs 900,000 in equity and the rest in cash. Having invested in the market in end 2007 you do not find it prudent to book your losses and move to cash. A part of you believes in the India story and the quality of the stocks you are holding. Hence you are prepared to stick it out for the next two years or so. This market strategy is for you.

Say your equity portfolio has a beta of 1 and the Nifty is at 3000. Over the next two weeks, the nifty grinds down to 2700. Your portfolio is now worth Rs 810,000 plus Rs210,000 i.e. Rs 1,020,000. Your decision dilemma is - should I sell or buy more to average out? At the moment I say - neither. Hedge it.

To hedge Rs 900,000 of equity portfolio, we require Rs 900,000 in futures. i.e. 6 lots of Nifty Futures of Rs 150,000 each. If you short these 6 lots at Nifty 3000, your total margin requirement is approximately Rs 210,000. So that is where you deploy your surplus cash. So in the event the Nifty tanks to 2700, your equity portfolio would be worth Rs 810,000 while 6 lots of 50 Nifty each will fetch you Rs 90,000 (6 x 50 x 300). No profit, no loss. despite a 10% fall in market. Now thats a simple hegde!

I wish life and investing were so simple. For starters your portfolio beta may not be 1. Say it is 1.25. So short 7 lots instead of six. But the real question is - what if the market moves up? 

Say the market moves up five percent from 3000 in one day. Your mark to market losses would be 150x50x6 = 4500. The same amount that your portfolio would gain. So what is the fun investing if the portfolio is going to work like a Not-For-Profit organisation? That fun can be introduced by keeping a stop loss, say at 3% above the market price. So the downside is fully protected but the cost is - a small fall in profit. In the current market conditions, that is a small price to pay.

Another variation to the strategy - if over a period of time the equity portfolio value falls substanitally ( and that seems to be the case for most of us!) and you find yourself overhedged, book your profit in a lot or two and use the cash to buy your favourite stock. 

Well I guess 'Hedge' is not a four letter word after all!

PS :- a word of caution - KISS.

06 October 2008

GATEWAY DISTRIPARKS LIMITED

BUSINESS
Gateway Distriparks Limited (GDL)'s principal activity is to provide logistics support services in India.The services offered by it include transportation of containers, to and from the port, stuffing / destuffing of cargo, customs clearance and storage in warehouse or as a full container load in the container yard. In addition, it also provides services such as general and bonded warehousing service, palletising, shrink wrapping and other administrative services.

GSL operates three lines of businesses:-
Container Freight Stations (CFS)
Container Rail
Cold Chain Logistics

Container Freight Stations (CFS)
In this business it recieves and stacks shipping containers before transporting them to various parts of the country by rail/road. Its CFSs handled 3.3 Lakh TEUs (Twenty feet equivalent units) which was up 48% year-on-year and contributes 73 % of the revenues.

It owns/operates four CFS in the country:-
Vizag - where it holds a 74 % share and is currently a loss making CFS. Likely to turn profitable in FY 09.
Chennai - which is a 100% owned subsidiary and in profit (Rs 8.7 Cr in the current year).
Mumbai - at JawaharLal Nehru Port Trust (JNPT) it has two CFS. The second CFS opened in Jul 07 and where GDL has a 15 year operations and management agreement.
Kochi - where GDL owns a 60% stake and is still in the process of setting up.

Container Rail
GDL runs it through a subsidiary where it has a 83 % stake. In this business it transports the containers by rail either directly to the destination or to the Inland Container Depot(ICD) for furthur transhipment to the destination. For this purpose it has :-

12 trains, each capable of carrying 90 TEUs. These include 6 domestic trains, 3 for Export- Import traffic and 3 reefer trains.(Reefer trains are used to transport refrigerated containers for the temperature sensitive cargo). It also has 10 trains on order.

ICDs. One rail linked ICD at Garhi Harsaru, near Gurgaon and one each at Faridabad and Ludhiana are expected to become operational in the next couple of years.

For last mile connectivity it has 300 trailors.

Cold Chain Logistics
This business is run through a subsidiary called Snowman Frozen Foods, a joint venture with Mitsubishi Corp. It has a cold stores network and refrigerated transport.

FINANCIALS
Financial year 2008 proved to be a mixed year for GDL as the company’s top line saw a strong growth in this period on the back of an excellent volume growth. However, a change in the revenue mix in favour of the new businesses and the lower-margin container freight station (CFS) of Punjab Conware at JNPT led to a decline in the profitability of the company during the year.

Growth in the container traffic is expected to continue in FY2009 (up by 15%) and GDL is in the process of expanding the capacity at its CFS at Visakhapatnam and setting up a new CFS at Kochi. 

The net cash flow from operations after working capital adjustments remained healthy for the company at Rs80.75 crore. Due to heavy capital expenditure on its businesses of CFS at Kochi , container rail and Snowman Foods and a decline in its profitability, the return ratios dipped during the year. The return on capital employed (RoCE) dropped to 12.5% from 14.4% while the return on net worth (RoNW) dipped to 11.1% from 12.4% during FY2008. The current debt/equity ratio is very manageable at 0.3x . Increased volumes in the core business, profitability from Vizag CFs, combined with the deployment of more rails on the export-import (EXIM) route, are expected to add to the bottom line of GDL . 

VALUATION
At the current levels(Current market price: Rs81), GDL is trading at 8.7x FY2010E earnings. We recommend a Buy on the stock with a price target of Rs240.

29 September 2008

LOGISTICS : AN UNSUNG HERO

Ever been to South Delhi's INA Market? If not, I recommend a trip. Besides the wonderous malayalee food in ramshackle 10'x10' restaurants, it boasts a magnificent display of fruit, fish and other culinary ingredients. Pears from New Zealand, australian apples, fish whose names I cannot pronounce and with shapes which can be described as exotic, to say the least.

That got me thinking - how could a small, apparently disorganised place like the INA Market come up with such wonders. I have a one word answer - LOGISTICS.

SECTOR OVERVIEW
The logistics sector like all other organised businesses has a heirarchy as shown by the graphic below.


Axiomatically, it also has a heirarchy of 'returns'.

Vertically it may be divided into :-

Services to include freight forwarders, shipping, labelling and packing, logistics park, fleet operators, warehousing, ports and terminals.

Hardware to include forklift, stacker, racking system and dock leveler.

Technology to include telematics, auto data capture, barcoding and ERP.

There are four means available for implementation of logistics :-

Shipping
95% of all indian exports are by shipping and that accts for 1 % and 5% of the world and asian cargos respectively. Cargos are of two types bulk and containerised and they are growing at 6% and 19% respectively.

Aviation
This segment caters essentially for the low volume, time sensitive sectors like Telecom, IT/ITES/BPO, electronics and fashion. It is more sensitive to the price of oil as fuel forms a larger component of the overall cost. Air Cargo movement is increasing at 14.7% per annum. The basic model followed is the hub and spoke model. Blue Dart a major player in this sector has 6 -Air Hubs.

Trucking
70 % of all transportation in India is by trucks and it accounts for 60% of all logistics costs.

Railways
The Indian Railways is a near monopoly with 2 Million Tonnes of freight transport every day which accounts for 70% of its revenues and almost all of the profits. Though it is moving towards containerisation, it still earns most of the revenue from blk transport. A recent wave of privatisation has resulted in private companies like Gateway Distriparks and ConCor being permitted to run their own container trains. Also a 11000 KM long dedicated freight corridor linking major cities is also on the anvil.

A NOTE ABOUT CONTAINERISATION

Containers are of standard sizes - 10, 20 30, 40 and 45 feet. Twenty and Forty feet are the benchmark sizes used in the industry with Twenty Feet Equivalent Units(TEUs) as the favoured size.Containerised cargo accounts for 30% of indian export-import and 70 % of all world trade. Though we are growing at 15 % per annum, we have a lot of catching up to do.

India has 12 major and 185 minor ports but JNPT and Nava Sheva together handle 58% of indian container traffic i.e. 4 Million TEUs. Chennai Port handles about 1 Mn TEUs.
Shipping Containers are berthed at Container Freight Stations(CFS) located at the Ports from where they are carried by freight forwarders (either rail or truck) to Inland Container Depots(ICDs).

23 September 2008

PROOF OF THE PUDDING............

Some time ago we discussed a veritable banquet of investment delight- Pantaloon Retail (You may like to check my posts for the month of june). I received scathing criticism from Talespinner for not giving a clear recommendation. I promised him I'd do it after the annual results. So here goes.

The company has come out with its annual results and it is heartening to note that the core operating business i.e. retailing, is doing very well. The Profit Before Tax has jumped 116 %. This is after accounting for a 126% increase in depreciation and a doubling of interest costs.Its total income rose by 52 per cent to Rs 5052.67 crore in FY 2007-08 as compared to Rs 3328.77 crore during the last fiscal. The Board has also recommended a 25 % dividend.

Well now, Ladies and Gentlemen, "Dinner is Served". Please help yourself to a generous helping of Pantaloon Retail. Cover charges are only Rs 285 per plate. With God and Kishore Biyani willing, in a years time, look for a price target of Rs 500.

Talespinner, now howz that for a recommendation!

..........IS IN THE EATING

21 September 2008

NOT A ONE ACT PLAY

ACT 1 Scene 1
In the post ICE 2000 meltdown United States of Alan Greenspan, the interest rates were loosened and money flooded the market. Average Joe Smith had a well paying job in the highest tax bracket so the thought of tax breaks available via mortgage on purchase of a flat(condo) was induced in his mind by the friendly neighbourhood banker, who incidentally happenned to have lots of loose cash lying about.So the first leverage of the system was born. 

ACT1 Scene 2
The next came in when Mr Bright Spark Investment Banker at L Bro collected lots of Joe Smiths together into a CDO(Collaterised Debt Obligation), asked his friend Ms Unscruplous at a rating agency to mark it as the next best thing to a US Treasury Bond and then sold it(on leverage of course) to Mr KnowNothing a deep pocketed investor. Mr Bright Spark earns the commission on the sale and management fee for the life time of the CDO ie till the time cash flows from Joe's pocket to the lender bank as an instalment. 

ACT1 Scene 3
The last level of leverage came in when Mr KnowNothing bought the CDO with money he didnt have, paid for by the bank at a handsome rate of interest.

ACT 2 Scene 1
Oh there is so much happiness in the world! Everyone is a born financial wizard. All you have to do is buy an 'asset' wait for a few blinks and you have a multiple on the 'asset'

ACT 2 Scene 2
Everyone in this three act play was happy till Joe paid up on time or till the price of Joe's flat/condo kept going up and Joe II bought it from Joe, restarting the process. But now the music has stopped. Joe IX is struck holding the parcel. He also does not have the bright job that Joe has and so ...........Sub Prime! Default!!No cash flows!!!Losses and bankruptcies.

Hey but what about Mr KnowNothing? Well that act of the drama is yet to unfold. Watch this space for more on ACT 3.

20 September 2008

THE CHICKEN HAVE COME HOME TO ROOST

Like all good sons, me and my brother used to have our regular disagreements with Father about how he never understood the 'new ways' of investing, how leveraging was the way to go and leveraging to pay for the new car was a done thing - he freshly armed with an MBA from the US and me with the street saviness of a financial rookie. We gave examples of how the US economy was the richest country in the world and was fully leveraged - from credit card debt to mortgage backed securities. Father patiently explained the concept of-'jitni chadar utne pare' - spread your legs according to the size of the covers.He also stuck to his guns and we bought the new car cash down.

Dad how true it was! Wish Alan Greenspan had listened to my Dad. Then we wouldnt have the spectacle of the richest country in the world scrounging around for money to keep its decades old institutions afloat.

This is also a lesson our own stock markets and individual investors would do well to understand - leveraging by itself is bad. Leveraging to buy an asset is good. And an asset by definition is something that brings positive cash flows , not one that merely gives a tax break and a notional high.

Mr Greenspan, your chicken have come home to roost.

31 August 2008

TELECOM SECTOR : ANOTHER UPDATE

Since the last post (now that sounds grim !) the telecom sector has been abuzz with a lot of news flow. Primary amongst them is the permission granted by TRAI for Voice Over IP (VOIP) within India. It begs a question – what is the likely impact on the telecom since providers.

OWN ASSESSMENT : VOIP
VOIP is not a new phenomenon. Having been around for a while, it has been unable to replace the landline, primarily because of Quality of Service (QOS) issues. Coupled with the fact that a VOIP provider would have to be an Internet Service Provider (ISP) and pay the various regulatory fees to include interconnect charges, it doesn’t seem to offer any distinct advantage over the humble land line. If there is any tariff arbitrage available, it remains to be seen. In any case VOIP cannot offer an alternative to mobile telephony. Also telephony services, by going mobile, are moving up the value claim and converging the Internet with it. In that sense, VOIP is a retrograde step. Last but not the least, let us not forget the low broadband penetration in India, which stands at a total of only 4.57 Million as on Jun 2008 (Compare this to the over 9 Million mobile connections added every month in the country!).

3G : DEMYSTIFIED
You know the scariest place to be in ? It’s a Telecom Regulatory Authority of India (TRAI) briefing room. The number and kinds of adjectives and terminologies flying around are mind boggling! MVNO, ISP, UASL......the list goes on! One such issue which bogs the old cranium is 3G. Let us try to wipe away some of the mist here.
3G in a broad sense permits a telecom services provider to launch the next step in integration between voice and data, towards achieving convergence. Hence theoretically a player can have a 3G license without 2G (the current) services. However that would leave the existing 2G customers out of the loop, forcing them to upgrade their handsets. As the radio frequency (RF) for 2G & 3G is different, switching from 2G to 3G i.e. transfer of signal etc and change of handsets will escalate the price further. Critical will be deployment of supporting network infrastructure i.e. base stations and transmission networks and acceptance of 3G-based mobile devices. Spectrum is a costly entity, which coupled with the cost of deploying infrastructure, will raise the bar for entry.
Hence the ideal proposition would be for an existing 2G operator to shell out an initial fee of Rs 1650Cr for a Unified Access Service License (UASL) for 3G and for that kind of money the operator will get only 5 MHz of spectrum. 3G is currently functional in over 25 countries with countries like Korea and Japan attempting a 3.5G before migrating to 4G.

MERGERS AND ACQUISITIONS (M&A)
This is a true ‘babus’ or bureaucrat’s delight – a veritable den of rules, sub-rules, by-rules and what have you.
India is a growing market for mobile telephony thus raising the interest level of the foreigners. Huge entry barriers in the form of licences, spectrum allotment, capital requirements for roll-out and subsequent implementation are pushing newer players towards Acquisitions. Smaller players are opting out, teaming with foreign investors/bigger indian telecom companies.
South Asian companies particularly from Singapore and Malaysia are showing keen interest in the Indian market. Some such M&A activity undertaken are the Vodafone stake in Bharti Televentures and Hutch, Maxis stake in Aircel, Telekom Malasiya stake in Spice Telecom and Temasek stake in Tata Teleservices.
A large number of Indian telecom firms are also looking for private equity funds to expand e.g. Hutch Essar, Reliance Communication, Idea Cellular etc. However not all M&A end up amicably like the ongoing tussle in Datacom principals Videocon and M/s HFCL.

GOVT/REGULATORY ISSUES IN M&A
Telecom licencees have to seek prior govt approval for M&A.
No M&A is allowed if the no of service providers in a circle are less than four consequent upon M&A.
Also all dues of the merged entity has to be cleared before merger.
The combined market share of merged entity should not be greater than 40% either in terms of subscriber base separately for wireless as well as wireline subscriber base or adjusted gross revenue (AGR).
Merger of licence is restricted to same service area. Excess spectrum is to be returned to govt, if any. Annual licence fee and spectrum charges are to be paid as a percentage of ADR.
10% or more equity holding by any indiviual/company in more than one licence in same service area not allowed.
Permission of merger is given only after completion of three yrs from effective date of licence.
Pace of growth is also restricted by delay in allotment of spectrum. M&A is likely to be the norm since permissible FDI in telecom is 74%.Less foreign players are likely to bid directly due to :
-Initial fee of Rs 1650 cr for UASL with no spectrum in 2G
-3G operators can not acquire 2G operators before 3 yrs period
-Spectrum not likely to be given beyond 5 MHz
-Administrative issues like No of blocks / circle, timing of auction rules on transfer and sharing of spectrum. However these issues are likely to be resolved in due time
Contributed by Sumeet Shahi, our telecom expert

16 August 2008

An IDEA Can Change Your Life

Till date I kick myself for the biggest investment blunder made by me. Back in 2001-02 I invested in Bharti at Rs 30 per share, banking solely on the technology being launched. However, soon the trader in me took over and I sold the stock at a grand profit of Rs 15 per share. Thereafter I was an observant spectator of the meteoric rise of indian telecom industry in general and Bharti(most sadly) in particular.Watching from the sidelines for so long has now paid dividend. I now observe another shining star,an IDEA whose time has come.....

I can give a lot of numbers which say why one must invest in Idea Cellular Ltd; like its over 71 % growth y-o-y in subscribers, 50 % growth in revenue, doubling of net profit and a rise in ARPU(Average Revenue Per User)(in an era when other ARPU souffles are deflating!).However in this case one must take a call on the business.

Promoted by Kumar Mangalam Birla, a part of the Aditya Birla Group, Idea Cellular boasts impeccable management pedigree. It operates in 11 circles with a subscriber base of 24 million(compared to Bharti's 64 mn). With a market cap of about Rs 26,000Cr IDEA is a good option since it is a pan India player with an existing UASL and is already providing 2G services.


IDEA has a subsidiary called Aditya Birla Telecom Ltd which operates the Bihar circle. A private equity player Providence has invested $640 Mn or Rs 2780 Cr for a 20% stake of ABTL, valuing it at Rs 13700 Cr. The market capitalisation of IDEA is Rs 26000 Cr. So for the balance Rs 12,300 Cr($2.86 Bn) one gets to buy - Punjab, Delhi, HP, UP(West),Uttrakhand, Rajasthan, MP, Chattisgarh, Mumbai, Goa, Karnataka, AP, Tamil Nadu including Chennai and Kerala. Quite the mouthwatering treat it is!The topping on the cake is the 16% stake in Indus Towers valued at Rs 37 per share, a Unified Access Service License (UASL) and a 3 G licence. Thus if I were an FDI player or an FII, $ 3 Bn is all I need to have the cake and eat it too.


But before you all start ordering the cake,a few words of caution- the FDI/FII player would need deep pockets - to roll out services in six out of eleven circles where IDEA is holding a license and for pan India 3G services. And not to forget the stiff competition being offerred by Bharti, Reliance, BSNL(dont laugh!) and Vodaphone, all of whom are similarly placed.


However with telecom penetration at 22%, well below the developed market levels, there is scope for improvement and co-existance of 7-8 pan-India operators.


So go ahead and buy with a time horizon of 2-3 years for a multibagger.To paraphrase a popular jingle - 'This IDEA can change your portfolio'

05 August 2008

TELECOM : A 3G PRIMER

India is the fastest growing telecom market next only to China.

It can be divided in a total of 22 telecom circles with major pvt players such as Vodafone,Idea,Aircel,Airtel,Reliance, Tata etc. All these companies have a pan India licence for 2G spectrum in 900,1800 MHz band i.e.they have a Unified Access Services Licence (UASL) and hence a substantial customer base, with infrastructure and interoperability aspects catered for. These companies already have 2G spectrum of minimum 4.4 MHz each.

Foreign Players
India being a high growth area in terms of mobile telephony MNCs are obviously keen to enter the market as can be seen from Vodafone - Hutch merger, Aircel tie up with Maxis Telecom, Idea (merger of Spice) and tie up with Telecom Malasiya, and the efforts between MTN and Airtel & Reliance on tie up. Mergers and acquisitions would also be the norm as indian companies try to grow to become competitive at a global level. Rural India and small towns and cities hold a lot of promise in terms of growth.
The Third Generation
The Govt of India has announced guidelines for 3G spectrum. It will initially release spectrum in 2.1 GHz. Each circle may have initially upto 5 players, while Delhi and Mumbai may have only 2 to 3 players each. This may go up to 10 companies subject to availibility of spectrum. Defence Services would be vacating some spectrum as per the agreement worked out between the Ministries of Defence and Telecom. Besides the existing Indian players, there are some new players which have UASL like Swan, Videocon & Unitech. However, these companies as of now are greenhorns with no infrastructure or experience and will need tie ups for any creating worthwhile business options. 3G guidelines have opened doors for foreign players. However,it is still inclined towards the existing UASL holders. New players will need to pay more for UASL with no guarantee of the 4.4 MHz start up spectrum(ie for 2G operations). 2G spectrum with 3G will be essential for a viable business model since 3G services will have immense competition with upto 5 payers in a telecom circle. 3G will bring in more user satisfaction in this high technology arena where people do not want to be limited by technology.
Next week we look for some companies to invest in against the backdrop of 3G launch and the likelihood of M&A.

This post has been contributed by my associate - Sumeet Shahi, who is a telecom expert.

23 July 2008

Result Update : NIIT Technologies

NIIT Technologies announced its result for QE Jun 08 on 22 Jul 08.

Geographical spread rose to 52% in favour of Europe while declining by 2% for the US. Orderbook additions were worth Rs 184 Cr in the qtr, with only 43 Cr coming from the US. Vertical wise - the share of Transportation rose to 28 % while BFSI dropped to 42%.

Net profit remained flat at Rs 35 Cr Q-on-Q which translates into an EPS of 5.99 while consolidated revenue rose 7% Q-on-Q to Rs 229.4 Cr. A higher outlay for depreciation and taxation and a reduction in the other income component from 33.21 Cr to 4.9 Cr caused the halving of net profits vis-a-vis QE Mar 08. The Operating Profit Margin remained flat at 19%.

The Trailing Tweleve Months EPS is Rs 22.57 and at the current market price of Rs 112, the stock trades at a PE of 4.96.I maintain a buy on the stock and the target price of Rs 172.

20 July 2008

NIIT Tech Ltd : A Gold Panner's Dream

During Ben Graham's time, there wern't many services companies going around. So that kinda explains the lack of guiding principles from the God of Value Investing for them. I cannot value an IT Services company using His rules directly, however, their greatness lies in universal applicability. Hence if I go by the first principles' approach I could sift through the lot and come up with a few gems (a lot of them, considering the level at which the market is). One such gem is NIIT Technologies Ltd, an IT Services company.

There are a lot of things that I like about this company. However what I like the most is that it is a high margin company operating in very sharp and focussed verticals with appealing geographical spread - something that the indian IT bellweather and its peers have been attempting unsuccessfully for sometime now.

Business

NIIT TECH is present in three main verticals - Banking, Financial Services and Insurance( 44% revenues), Travel, transportation and logistics(25%) and Retail and Manufacturing(12%). The company gets 50 % of its revenues from Europe, 32 % from the US and balance 18 % from APAC (Asia Pacific). Between IT Services and BPO, its revenue distribution is 94 % and 6 % respectively. In IT Services it divides its attention between Application Development and Maintainence(ADM), Enterprise Solutions(Basically SAP) and Infrastructure Management. It also dabbles in GIS through a subsidiary. It has also made a foray in to the Software as Service space and the launch of an IT SEZ in Greater Noida. The depth of its relationships with its clients is judged by the fact that 91% of its revenues were a result of repeat business.

Fundamentals

On a consolidated basis, it did a business of Rs 956 Cr and earned a Net profit of Rs 135 Cr. Not bad considering that the complete company is available for a market capitalisation of Rs 646 Cr. (Mkt Cap to sales of 0.687 at a stock price of Rs 110). What it actually means to me as a lay investor is that keeping other things the same, my investment in the company would yield a return of 15 %. And if the company grows faster than the current rate, the Return on Investment would be higher. To top it all, it had a net cash flow of Rs 66 Cr.

Valuation

Oh! Dont get me started on that one!! At the current market price of Rs 110/- the FY 08 Diluted EPS of 23.02 times gives a PE of 4.79 . The trailing twelve months EPS of Rs 26.84 gives a PE of 4.1. And this from a company which has an average growth rate of 61 % over the past four years. ie PEG of 7.8. So even if the company grows by 10% over the next 1 year, I suppose the stock should be available for at least Rs 268! But that is too simplistic.

However by both the Free Cash Flow to Equity and the Dividend Discount Models at a cost of equity of 17.4% and a growth rate of 10%, the stock price works out to be Rs 172, a decent upside of 56%!

10 July 2008

Ador Welding Ltd : Research Report – Initiate Buy

Summary of the Sector and The Company

Ador Welding is a leader in welding solutions providing arc welding and continuous welding electrodes, welding equipment and accessories. It has clients in high growth sectors like defense, ship building, power(nuclear, thermal and hydro), auto, general and heavy engineering, petro chemical and fertilizer plants. Almost all of which are related to the infrastructure sector.

Automatic welding (welding solutions), in India accounts for only 20% of the domestic market as against almost 60% in developed countries. This share is expected to improve, firstly due to the expected expansion in the infrastructure sector and secondly, as more and more Indian companies are likely to resort to automatic welding to achieve greater efficiency in their operations. Ador Welding with 400 distributors and 250 technical representatives therefore has the elements in place so as to be able to play a major role in this growth.

Fundamental Aspects

Amongst its peers the company has a low Price Earning Ratio(8.49) and an amazingly high dividend yield of 6.64%. It is a debt free company with a market capitalisation of Rs 192 Cr and a Return On Equity of 17.96%.

The stock is currently trading at Rs 141/- and we see it as undervalued by Rs 30 . The true value of the stock is Rs 171/- which translates into a return of 21.3%. This is the value of the arbitrage opportunity available in the stock. Any growth in the sector and company would result in a concomitant higher valuation.

03 July 2008

MY BARBER TELLS ME.....

I went for my triweekly haircut to the barber and while waiting for my turn I sat browsing through a pink paper. And as is the wont of the tribe of barbers(hairstylists?) he struck up a conversation with me using the pink paper as an opening gambit. "There was a lot of money to be made in the stock markets but that time is past. Now if one enters the market, one does so with the specific intent of losing ones money! For I dont see any other reason for doing so."On the way back it stuck me that such was an opinion voiced by all and sundry; be they on the boob tube or in the street or even in the papers.


Within six months had we gone from being the destination of choice for global money to being an economic equivalent of 'Ramu Ki Aag'? Was our economic ecosystem so fragile as to collapse under the weight of rising inflation (spurred by the rise in commodity prices incl oil)?Being the eternal optimist I do not agree with this hypothesis. However optimisim without the support of reason is irrational exhubarence. So what is my rationale for the optimisim?

The demographics of India itself can sustain many a sector. The low levels of penetrationshould be seen to be believed. Teledensity - less than .1%. Two wheelers - less than .05%. Education, energy, clean drinking water, roads, healthcare, governance.......I could go on and on. We all know of these ills. Let us look at them as opportunities. The opportunity is there but there arnt many who are taking advantage - for varying reasons (more of that later). So we need to perhaps sift a little more closely here - looking for gems which could help us ride this downturn and take us closer to the crest in the next wave. I bet on water and healthcare. I bet on life itself. Like the Oracle of Omaha famously said, " People gotta eat and drink".

They also need to survive.

Meanwhile I shall follow the obverse side of the market rule of thumb - 'sell when your newspaper seller starts recommending stocks to you'.

Well, my barber tells me .....

19 June 2008

Pantaloon Retail : A Wholesome Meal

Though Pantaloons is the flagship of the Future Groups's Pantaloon Retail, the overwhelming presence of Big Bazaar compels us to have a 'dekho' there first.


Big Bazaar : The Fundamentals
Out of India's GDP of $1 Trillion, retail consumption accounts for 30% or $ 300 Billion. With organised retail getting a conservative 4.8% of this pie, the current market size is $1.5 Billion or Rs 6000 Cr.In China, organised retail is 20% of the total market. To reach that figure in 10 years and assuming an 8% growth rate of GDP, indian organised retail would have to grow at 15 % per annum. This does not seem out of reach, considering the current rates of growth of over 30 %, low penetration and favourable demographics.
Big Bazaar, the largest constituent of Pantaloon Retail has been able to capture nearly 40 % of this total pie. So if you want to bet on organised retail, its single largest player may be of interest.
An oft repeated refrain against organised retail is the close and personalised relationship enjoyed by the customers and their neighbouring mom-and-pop stores. While these small stores outclass the Big-Berthas of retail in customer service, attention and proximity, they would be unable to compete on a sustained basis with the huge structural strength and sheer endurance of organised retail. Pockets of resistance may survive in all neighbourhoods but the day will be carried by the competitive pricing, range and depth of inventory and the promise of a family shopping experiance offered by organised retail. It would only be a matter of time before consumer preferences shift to organised retail. Another intersting statistic reveals the weakness of small retail shops. Pantaloon Retail as a group, averages sales of over Rs 8000 per square foot per annum. Big Bazaar does an estimated Rs 14000 per sq ft Per Annum implying that a 300 sq ft shop would have to manage sales of over Rs 42 Lakh per annum to compete. I dont see how my neighbourhood grocer can do that.
(To be continued)

17 June 2008

DOMESTIC RETAIL : TAKE A BITE

Shopping in India has lots of menus and flavours. As an event, it could be a one stop bhaji-subzi deal or a protracted family outing culminating in one sunday's worth of time sacrificed at its alter. As a dish, there are the food-chain guys, the clothing lines, personal accessories, electronics, home-improvement items and jewellery. These could be served in different formats like the speciality store(a thai restaurant), discount store (the thali), cash and carry business or a supermarket/hypermarket (a buffet meal). All permutations and combinations have their own dynamics.
However I am swayed by C K Prahalad in looking for fortune at the bottom of the pyramid. With a small modification - the bottom to be an Above Poverty Line. And any retailer in India who is successful in targeting this strata will in the long run make money. The thali caters for this segment. It signifies a wholesome, value-for-money and affordable meal, catering to a large cross-section of tastes.

The Discount Store : Thali
Subiksha, Vishal Mega Mart and Big Bazaar spring to mind. The first two though efficient, are one-trick-ponies. However Big Bazaar (though technically a hypermart is treated as a discount store due to its pure value-for-money proposition), being a part of a larger bouquet of offerings by Pantaloon Retail, looks more promising.

Big Bazaar : The Business
It offers some discount on the MRP or clubs items together as a 'deal'. Usually this is a practice followed by the general retailers to attract consumers and increase sales volume. It offers a broad variety of merchandise, limited service and low prices. It uses strategic pricing to entice consumers to shop more frequently and to increase their purchase quantity during each visit. Encouraging shoppers to make more frequent visits to the store is critical, because it increases the likelihood of unplanned purchases. Also, its stores emphasise the self-service format and employ minimal employees per square foot keeping operating expenses at the minimum.
Big Bazaar stores generally buy their merchandise in very large quantities, thereby getting the advantage of reduced prices. Part of this benefit of reduced prices is passed on to the consumers by employing various pricing strategies. It is a full line discounter offering a wide assortment ofmerchandise including apparel, home accessories, consumer electronics, house-ware, health and beauty products and children goods. It keeps private label brands along with branded merchandise to increase variety.
So in essence, Big Bazaar looks to make money by selling large number of merchandise at low profit margins. Hence the key determinants for its profitability are accessibility, a large range of inventory and low prices. It can achieve that by a combination of a good location, efficient supply chain management and low overheads.

15 June 2008

RECESSION : WITHER THOU ART?

I have heard that there is a Recession doing the rounds of the world of economics .
I went to Select City Walk to meet him but was informed that he wasnt around. Nor was he visible in CP, South Extension, Subhiksha, Big Bazaar or any of the Nokia or Reliance stores. Ditto for Gurgaon, Noida, Chandigarh, Mumbai or Bangalore. Maybe he gave me the slip and went to the countryside - for recuperation.
Why do I go out and look for the biggest enemy of growth? For many reasons. If he is around, then I have safety in Value, fixed-income and in defensives but primarily I look because negation of an antipode is perhaps the easiest way to prove a theory - mine being that the current 'recession' in US and western economies has little negative impact on indian stock markets.
If there were a recession, oil and other commodities wouldnt be at such commanding heights. Prices of real estate and commercial rental rates in India would not be matching those of Tokyo, New York and Hong Kong. Daiichi Sankyo wouldnt be buying Ranbaxy, Tata's the JLR and art collectors wouldnt be paying Rs 2.3 Cr for an unknown painting by a relatively unknown indian painter.Yes people in the US have lost jobs and money in the sub-prime crash and companies have gone near-bankrupt in an attempt to keep their nose above the waterline. Yes SUV sales in the US are at an all time low and people in urban Louisiana are buying bicycles by the gross. And Yes it does adversely effect a whole host of indian companies - auto ancillaries, IT, textiles - to name a few.
But that also leaves a vast universe of companies not directly linked with the US economy and a smaller subset which actually gains from this recession!You should try some for hors d'oeuvre - Domestic Retail, Telecom, food and agro processing. Bon Appetit!

DISCLAIMER

This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.