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22 September 2009

Déjà vu : I've Been There

I don't know about you but for the past couple of weeks I have been having a sense of Déjà vu. A thought that something similar had happened earlier, has been gnawing at my bones. Though my head tells me that something as extreme as 2007 may not happen but then why take a chance? So I went about investigating further.

Index Valuation
The Nifty is currently at a PE of 22.41 with 74% of the Nifty constituents (by weight) trading above this mark i.e 31 stocks by count. The balance 19 companies are from the cement, metals, BFSI and PSU Oil& Gas spaces - all historically low double digit or single digit PE sectors. Suffice it to say that the index is trading close to the danger mark. Have a look at the graphic given below. Notice the PE 20 line. 

Without fundamentals following the rise above the 20 mark, the move could be termed as euphoric, with catastrophic results for the retail investor. The cliff face that you see there is Jan 08, wherein not many of us were able to move out of the market. If you wanna climb this mountain be well equipped.

Relative Valuation
Let us assume that the complete EPS of the index i.e the sum of the EPS of all 50 companies of the Nifty is distributed amongst the shareholders as dividend. Then the dividend yield (currently 1.02%) would become 4.46%. Remember, the future EPS has a certain amount of risk embedded with it.

Compare this to the risk free rate i.e the yield on the long term govt security or the 10 year Govt of India Bond which currently stands at 7.06%, a difference of -2.6%. So rather than getting compensated for taking enhanced risk in equities you are losing money and in a riskier asset. 

On 06 Mar 09 the Nifty touched a low of 2539 and a PE of 12.44 i.e an yield of 8.19%. The 10 yr bond had an yield of 5.78%, a difference of 2.41%. Need I say it was the right time to invest. (Of course hindsight is always 20:20!). 

Now have a look the graphic given below.

So the better period of investment in the Indian stock market is past, unless the bond yield goes down to about 5 % or the Nifty PE falls to a safer level say 13-14. Preferable both together! I would then plough my savings right in!!

However liquidity is a beast which may take the market to a higher level from here like Sep 07 to Jan 08. For fall in liquidity watch for two indicators - appreciation of the rupee and rise in interest rates.

So should I sell - maybe not but definitely get rid of the weaker suits, hold the trumps. 
Should I buy - I would hold on to that cash.

19 September 2009


The Festival of Stocks is a blog carnival dedicated to collating the best, recent posts on stock market related topics. It includes fundamental research and commentary on specific stocks, industry analysis, ETFs, REITs, stock derivatives, and other related topics. Its originator is Fat Pitch Financials , where you can read the previous edition.

It is the privilege of Kuberkhana to present to you the 159th edition of the Festival of Stocks. In this edition, we have for you 12 articles on subjects ranging from the tactics to strategy adopted in the stock market, a couple of research reports and a host of issues related to personal finance. 


Jeff Rose presents One Year Ago and What it Means Now posted at Jeff Rose.

The Investor presents Are you lost in Neverland? posted at Monevator.


Investing Toolkit presents Why Trade In The Forex Market? posted at Investing Toolkit.

Research Reports

Personal Finance

13 September 2009


In the previous post (read here) we spoke about the business of IVRCL.  Here let us look at its fundamentals first and then the valuations.

The company has 13.35 cr shares with a face value of Rs 2 (after a 1:5 split in Mar 06) and a Book Value of Rs 135. The current market price is Rs 379.

Its turnover rose five times in four years i.e from Rs 1054 Cr to Rs 4983 Cr. At the current price its a Market cap : Sales of 1. Y-o-Y it is up 35 % from 3698 Cr. There is revenue visibility of upto 2.5 years . Q-o-Q the sales are up 17% despite Jun traditionally being a slow qtr. 

PAT rose 4.5 times in four years i.e from Rs 56 Cr to Rs 226 Cr. (Infra is typically a low margin(single digit) business).  EBIDTA at Rs 451 Cr translates to a margin of 9.06% down from 9.9 % last year and an EPS 0f 16.93. At the current margins the estimated EPS for FY 2010 would be 19.8.

Though the debt equity ratio at .77  is higher than what a typical conservative investor would be comfortable with (.5) , IVRCL has a Compund Leverage Factor of over 1 for the last two years, indicating a positive contribution of leverage towards the Return on Equity, which is currently at 12.5 %, down from 13.13% last year.

This company has consistently given a dividend for the last ten years!  

The current price of Rs 379 implies a TTM PE of 23.16 and a forward PE of 19.13. A shade more expensive than I am comfortable with. So - buy on dips is the mantra for this stock. Remember , the best things in the stock market come at a price!

12 September 2009


In the previous post (read here) I pointed you in the general direction of infrastructure spend in the country. Now we move on to the specifics. We discuss a company which dominates a crucial segment of the sector and has presence in a majority of them - IVRCL Infrastructure Ltd.

This company is a market leader in water and irrigation infrastructure development. It also has presence in transportation, building, industrial construction and power transmission. Of late it has also forayed into projects related to hydro power and railways. 

With 69 % of the order book being from the water and irrigation segment, it is correct to classify IVRCL as a 'Bridge over Troubled Waters' ! (I know Simon and Garfunkel will not agree to this allegory). But lets have a closer look here.

Water is a Rs 6000 Cr industry in India with waste water treatment (read here) and drinking water (read here) taking the lions' share at Rs 3000 Cr and Rs 2000 Cr respectively. This industry is growing at 18-20 % per annum. This is the dominant vertical for IVRCL wherein it constructs, owns and operates water projects. It executes lift irrigation and reservoir projects, drinking water and sewerage schemes,treatment plants and pipelines, main and distributary canal networks, industrial water solutions and desalination plants. Suffice it to say it has a diversified portfolio in this very important segment. We have in a previous post (read here) discussed the importance of water and how it impinges on life in general and businesses in particular.

Transportation is a segment which accounts for almost 5 % of the order book. In this segment IVRCL focuses on the ongoing NHAI projects which it is executing while bidding for the future road, rail, bridging and tunneling projects on a turnkey basis. It is also bidding for the dedicated rail freight corridor between Delhi and Mumbai as well as working on the Bangalore Metro.

The other segments and their contribution to the order book (Rs 13,682 Cr) is given in the graphic below.

Just as an aside, if you look for this company on www.Valueresearchonline.Com, a total of 120 mutual funds own this stock compared to 19 for GMR Inf (its closest rival). 

Having become acquainted with the business of IVRCL, in the next post we will have a closer look at its fundamentals IVRCL and the likely valuations.

07 September 2009


Legend has it that in 1928 a severe famine and drought hit the erstwhile princely state of Jodhpur. The then Maharaja Umaid Singh of Jodhpur was quite moved by the plight of the populace but did not think it a prudent policy to open the gates of the royal treasury. Instead the young Maharaja ordered construction of a Palace thus providing employment to thousands of subjects, ensuring free flow of liquidity, disposable income in the hands of the consumers and managing to pump start the economy.

Circa 1999 a similar action plan commenced with the Golden Quadrilateral at a cost of Rs 60,000 Cr. Since then, the infrastructure sector has not looked back, enabling it to remain the darling of the stock markets. Year 2008-09 the story remains the same, only the lead character has changed. Dominating the scene are power, irrigation, water management and other urban services. 

Industry Overview
The XI Five Year Plan envisages an investment of Rs 2,60,000 Cr in the seven sectors of power, roads, airport, oil & gas, ports, rail and urban infrastructure. 

Infrastructure construction grew 12% PA for the past five years. However due to the slowdown, this growth has fallen since the second half of 2008. Engineering and construction linked to real estate have been the worst affected. Irrigation, power, roads and water infrastructure being govt funded have been largely unaffected (at least in funds allocation!). 

These fund allocations include Rs 34,700 Cr for improvement of basic civic services like water supply, sewerage and storm water drainage in major cities. We have discussed the importance of these in a previous post (read here). For 5098 other towns, the govt has set aside Rs 12,300 Cr for improvement of civic services out of which Rs 7064 Cr is allocated for water services alone.

I am of course leading this discussion towards a specific company straddling most of tha dominant segments of the infrastructure sector. Watch this space for more.

02 September 2009


In a previous post (read here) we discussed the business profile of Network 18 with its integrated media play covering all aspects both vertically and horizontally. Must say it is quite an ambitious company.

However in this part we shall be discussing its fundamentals as a company and valuation as a stock.

While the sales dropped 30 % year on year, the expenses dropped 20 % only, largely due to doubling of administrative expenses. Running a media company is an expensive business, one not conducive to slowing economic trends.

While the operating business was profitable at Rs 36 Cr (an OPM of 36%), it was the Net Profit which took a hit( an actual loss of Rs 21 Cr ) against a profit of Rs 43 Cr last year. This was largely due to doubling of financial expenses from Rs 26 Cr to Rs 53 Cr. The quarterly picture is grimmer. Operating losses for three consecutive quarters.

This calls for a deeper look at the balance sheet which has taken a hit, on two counts. 

Firstly. An equity dilution via a Rights Issue and Preferential Allotment(which incidentally saw the promoter holding drop from 54 % to 49 %). Secondly. Unsecured loans of Rs 114.38 Cr. (Unsecured debt is generally at higher rates than secured debt).

The result of the above is a negative EPS of 2.7, a fall from the high of 8.55 last year when the stock was trading at Rs 204. This can of course be laid at the feet of the slowdown. However it only highlights the edge of the seat action in such stocks, something which only a strong stomach can digest.

I think the way to value such companies is to do a sum of the parts. The two major pieces of action are TV18 and IBN18. A 50% stake in the former and 39 % in the latter gives Rs 643 Cr and Rs 826 Cr respectively. This itself is a 58% upside from the current market cap of Rs 929 Cr. There are a host of other businesses as mentioned in my prior post on Network 18 (read here) most not worth a lot except a 5% stake in The Indian Film Company. Valuing all these businesses at a total of Rs 100 Cr and giving Network 18 a 20% discount for being a holding company, we arrive at a value of Rs 199/-(quite the Bata price it is!), which is a double from the prevailing market price. 

The Dampener
This analysis is not complete without the dampener I alluded to in a previous post. Firstly cash flow seems to be a serious problem with the group. However the more serious issues plaguing it are two - a lack of depth in the higher management and a lack of clarity on a number of issues. The board resembles that of a closely held company. For a company which lists 'Transparency' as a corporate governance philosophy, it is surprisingly opaque about a lot of issues. The Annual Report ignites more questions than it answers. There are a total of 81 companies that comprise the group. Does it have the management bandwidth to optimally run these or some of them are just some shell companies created for purposes other than the operations? Setpro 18 is listed as a wholly owned company. What does it do and is earning something for the shareholder? Why did Network 18 not comply with RBI norms of capital adequacy and concentration of investments? In view of the substantial losses of Rs 18.2 Cr to the company, why did the Managing Director take home a salary of Rs 1.146 Cr? Why was Rs 70 Cr raised as a short term loan, used for a long term investment? 

These are just some of the issues I highlighted here just to give a flavour of the dampener I had in mind. Suffice it to say, if one were to invest in this company, one must do so after significantly more research than normal.


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.