THE DEAL IS DEAD. LONG LIVE THE DREAM
South African nationalism and India's hesitation on capital account convertibility scupper the creation of a giant MNC from the emerging markets
INDIA'S telecom czar Sunil Mittal's dreams of forging a transnational alliance with Africa's largest telco MTN were shattered for the second time in less than two years with Bharti Airtel and the South African company calling off talks a few hours before the expiry of the September 30 deadline after the South African government refused to soften its stance on the proposed deal structure.
"Bharti and MTN have decided to disengage from their discussions when the exclusivity period ends on September 30 2009. This (deal) structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form. In view of this, both companies have taken a decision to disengage from discussion," Bharti Airtel said in a statement on Wednesday evening. ET NOW this paper's television channel, was the first to break the story at 7.25 pm, even ahead of the official statement from Bharti.
The statement was issued in India even as the top management team of Bharti — chairman Sunil Mittal along with top executives Manoj Kohli and Akhil Gupta — was at an offsite in Thailand. The deal fell through, say sources, after two crucial meetings in South Africa on Wednesday — in one of these, the key representatives of the government expressed reservations about the deal and refused to budge from its earlier stance on dual listing of companies or DLC. Thereafter, the MTN board met and formally called off the deal.
The announcement pulled down MTN's shares by 5.5% on the Johannesburg Stock Exchange (JSE) before the South African company requested a suspension of trade in the stock for the rest of the day. "The JSE has been requested by MTN to suspend trading in its securities until the commencement of business on Thursday, October 1, 2009," the JSE said in a statement.
Codenamed 'Project Green' by Bharti Airtel and 'Project Saffron' by MTN, the two companies and their numerous advisors and bankers had worked on the transaction since the beginning of the year. After over eight months of torturous and complex discussions, both companies reached an agreement for a $24-billion alliance to create the world's fourth largest telco spanning 24 countries and 200 million subscribers But the South African government's refusal to budge from its demand that the Indian government amend laws to allow dual-listed companies as a precursor to the deal sealed its fate
Dual listing allows companies to retain their separate legal identities and listings on stock exchanges while entering into "equalisation" agreements to collectively run operations and share profits or losses. Such arrangements are also seen protecting the national identities of companies. ET was the first paper to flag off the issue of dual listing as a major stumbling block for the deal in its edition dated July 31, 2009. Bharti has not given up yet
INthe end, the politics of national pride derailed the deal as South Africa did not want MTN to lose its independent identity. It wanted an assurance from the Indian government that it would amend laws to allow DLCs. While Prime Minister Manmohan Singh assured South African President Jacob Zuma that the Indian government would discuss all issues, this was evidently not enough for the South Africans. This also marks the seventh attempt by MTN to enter into a merger or strategic alliance with global communication majors. The South African giant has in the past been in failed discussions with the likes of Vodafone, China Mobile and Reliance Communications. Pallavi Ambekar, analyst, Coronation Fund Managers, Cape Town, a shareholder in MTN, is relieved that the deal has been called off. "We are shareholders of MTN and we are quite positive that the deal has been called off. We felt that the deal in its initial format was quite complicated and felt that the price being offered undervalued MTN itself. I can't comment on any new deal because we haven't seen any new deal that was being presented. The deal was complicated. Several things would have come in the way of actually concluding the deal, not necessarily just the SA government," she said in an exclusive chat with ET NOW soon after the Bharti statement. Naturally, friends and well-wishers of Sunil Mittal are disappointed. Dabur India chairman Anand Burman, Mr Mittal's close friend for over 20 years, castigated government officials for derailing what would have been the country's largest cross-border deal. "It is a bit of a setback for Sunil. But he's a gogetter. He will go for something bigger than MTN. It's rather sad that India's best company with the largest number of subscribers and the pioneer of the low-cost business model had to fall prey to the technicalities of some government babus somewhere," Mr Burman said.
Ironically, the transaction under discussion did not involve any loss of national identity for MTN. It was a cash-cum-stock deal which would have resulted in Bharti Airtel getting a 49% stake in MTN and the South African telco and its shareholders getting a 36% economic interest in Bharti. But the South Africans wanted assurances for the future, which the Indian government was not in a position to give as it said that allowing dual listing will need major amendments to key corporate laws and cannot be done in haste. Finance ministry officials had earlier told ET that DLCs do not figure anywhere on the government and RBI's radar at the moment because that implied a situation close to full capital account convertibility, which the Indian government and RBI were unwilling to consider. Following Bharti's statement, the South African government said: "When companies structure their relationships outside the current exchange control regulatory framework for such transactions, they require the approval of the minister of finance. This was the case with the proposed MTN-Bharti merger, which required certain exchange control and other approvals." Despite the South African government's failure to approve the deal, Bharti Airtel defended the proposed deal structure and said that 'the broad structure being discussed by the two sides had taken into account the sensibilities and sensitivities of both companies and both their countries'.
The Indian telco also said that since both companies were the national champions in their respective countries, the proposed deal structure had taken into account their leadership in their respective geographies to ensure continuity of business — including listing, tax residencies, management, brand etc. "This transaction would have been the single largest foreign direct investment into South Africa and one of the largest outbound FDIs from India. The deal would have been a significant step in promoting South-South cooperation — a vision of the two countries," Bharti Airtel's statement added. But the Indian company has not totally given up, if its statement has is anything to go by. "We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage." Bharti Airtel also added that it would 'continue to explore international expansion opportunities that are consistent with its vision and bring value to its shareholders'. The Indian telco even politely observed that it "enjoyed its engagement with the MTN management and its board and wished them continued success."
Last month, Bharti Group chairman Sunil Mittal told ET NOW that the company's second attempt to forge an alliance with MTN was a well thought out move. "I would not call it an audacious move. This is our second attempt at forging a deep and meaningful alliance with MTN. It is a very well considered move and there is a very strong rationale. Our business model is ready to go out and that's why I am exploring the MTN opportunity." Over the past month, Mr Mittal had aggressively wooed the Indian political establishment to help Bharti clinch the deal.
The Bharti Group head had met the prime minister three times and held discussions with with finance minister Pranab Mukherjee as well as top government officials in a number of ministries. Bharti also indicated its gratitude to the Indian government for its support: "Bharti is grateful to the various Indian government authorities, in particular the minister of finance, the minister of commerce and industry and the minister of corporate affairs. We express our profound gratitude to the honourable prime minister of India for his strong support to what could have been a transformational partnership."
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Wednesday, September 30, 2009
THE LINE GOES DEAD: DUAL LISTING DASHES MITTAL’S HOPE
Posted by Unknown at 7:07 PM 2 comments
Those who didn’t panic, made money
IT'S WISE TO STAY INVESTED IN DOWNTURN AS SENSEX DEFIES ALL ODDS TO RISE FROM A LOW OF 8K TO 17K IN 7 MTHS 20 Of The 30 Sensex Stocks Are At A Higher Level Than They Were In September 200
Mumbai: 'Don't Panic' is the maxim from Douglas Adams's Hitchhiker's Guide to the Galaxy. It could as well be the survival mantra on Dalal Street. Chances are that those who had the nerve to stay put in the market, when it plunged in the aftermath of the financial crisis, are richer now.
Consider this: On September 26, 2007, the sensex had for the first time gone over the 17,000 mark. Over the next seven months, it crossed several milestones to top 21,000 in early-January 2008. But within the next 10 months, it had lost nearly two-third of its value to a multi-year low of 7,700 in late October of the year. In less than a year from then, the yo-yo is back at 17,000. However, investors' wealth, measured by BSE's market capitalisation, is now Rs 6 lakh crore more than what it was when the sensex had crossed the 17,000 mark earlier. Additionally, 20 of the 30 stocks that are represented in the sensex are at a higher level than they were in September 2007. And if one had put Rs 1 lakh in each of the those 30 elite stocks, despite the volatilities and crashes of the last two years, they would still be richer by about Rs 4 lakh, or 13%. Remember, since we are considering a period of over a year, this gain is tax free. So keeping faith in the long term power of Dalal Street does have its rewards.
While the past few months have been unusually good—sensex has more than doubled in a little over six months—the road ahead too looks relatively free of unknown financial landmines. "There are at least four reasons why we believe the Indian market will give strong returns over the longer run,'' said Ved Prakash Chaturvedi, MD, Tata Mutual Fund. "Firstly, its strong resilience (during the financial crisis) has boosted the faith of overseas investors in our economy. Secondly, it is now clear that some of the emerging markets will outperform most others and India is among those outperformers,'' Chaturvedi said.
Two other reasons are, stronger belief in India's domestic market and a higher level of confidence in the continuity of the economic policy because of a stable government at the centre, the Tata MF chief said. In September 2007, when sensex had crossed the 17,000-level for the first time, the uncertainties of a general election were just round the corner, as were the fears of discontinuation of economic policies if the then incumbent government was sent packing in the polls.
Technically too, the markets are on a strong footing. At 17,000, the sensex has crossed an important psychological and technical level. Similarly, the nifty crossed the 5,030 level decisively. "In all likelihood sensex will move to 17,300 and most likely to 17,500, based on F&O data. The corresponding nifty levels are 5,200 and 5,250,'' said Amitabh Chakraborty, president-equities, Religare Capital Markets. A correction thereafter could be expected, he said.
Posted by Unknown at 7:01 PM 0 comments
Tuesday, September 29, 2009
FMCG cos stay in shape, eye 13% growth
THE July-September quarter for the FMCG sector is expected to post healthy 12-13% topline growth riding mainly on margin expansion and companies pushing volumes. Delayed monsoons and increased commodity prices is not likely to impact sector sales this quarter and may have a lag impact over the October-December and January-March quarters, say analysts.
Godrej group chairman Adi Godrej said: "The economy has done exceedingly well and we expect healthy growth. The delay in monsoons has not had much impact on our sales which continue to be robust."According to analysts tracking the sector, a combination of demand coming from rural India, companies pushing volumes at key price points to retain consumers, and new product launches mainly in the form of variants have been the key highlights of the July-September quarter.
Increased ad spends, higher levels of localised promotions, price-offs and freebies are also expected to aid volume growth in the period.
That apart, companies ranging from Hindustan Unilever, Godrej Consumer Products, Nestle, Dabur, GlaxoSmithKline, ITC, Marico and Colgate have all stepped up investments in distribution infrastructure. Analyst firm IDFC SSKI Securities MD Nikhil Vora said: "We expect the July-September quarter to be fairly resilient, and we don't expect any pressures on either volumes or margins." Dabur India EDD Rajan Varma said: "Business has been good and there has been no major impact on consumption by way of delayed rains." In fiscal 2008-09, most companies had hiked prices to protect margins towards year-end. But off late, prices have stabilised. In fact, in the January-March '09 quarter, most FMCG companies had benefited from increased operating profit margins, riding on declining raw material prices.
And in the April-June '09 quarter, companies had posted gross margin expansion, aided by the lag impact of price hikes.
Angel Broking's FMCG analyst Anand Shah said: "The corresponding July-September period last year had seen pressure on margins. But we expect the same
growth as the previous quarter."
Under pressure from smaller B-brands and private labels, companies across categories such as soaps, detergents, shampoos, toothpastes, biscuits and snack foods have introduced multiple pack sizes and convenient price points of Rs 2, 3, 5 and 10. Apart from pushing volumes, the companies believe low-priced packs will prevent consumers from switching to other brands.
Posted by Unknown at 6:08 PM 0 comments
D-DAY:HOPES STILL ALIVE FOR BHARTI-MTN DEAL
THE Bharti-MTN talks entered the last round as the final decision from the South African government is expected on Wednesday, the last day of the exclusivity period between the two companies. A source close to the finance ministry said the Indian government is waiting for its South African counterpart to revert with a new deal structure that will comply with Indian laws.
The finance ministry is likely to accommodate the deal if it is not in direct violation of India's policy on dual-listed companies, which in its current avatar may need changes in the capital account convertibility regime.
"We are hopeful the deal will go through, but don't have a real idea of the conditions the SA government may impose in the new deal structure. They have indicated a decision on September 30," a source close the Bharti Group said.
From available indications, a decision on the deal is likely on Wednesday. But SA government officials are keeping the Bharti top brass guessing on what the last-minute changes in the deal structure are likely to be. "I can't say anything at this point. We are all waiting for the final word from Johannesburg," Sunil Mittal told ET NOW outside the Bharti office on Tuesday evening.
It is widely believed that the South African government is looking at an executive order to accommodate the deal structure. "We are awaiting the final deal structure after which we will explore ways to fit it in with the policy regime here," an Indian finance ministry official said.
"The visiting delegation discussed a structure where Bharti would be listed in India and MTN in South Africa and the possibility of a common holding trust," the official added.
The official word from the Indian government has also kept hopes alive for Sunil Mittal's audacious cross-border merger that's likely to create a $23-billion giant with operations in 24 countries.
GUESS WHAT?
The Suspense Lingers
Bharti brass keeps fingers crossed on the new deal structure from SA govt
Final decision from SA govt expected on Wednesday, the last day of the exclusivity period between the two companies
Finance ministry is okay with the deal if it is not in direct violation of India's laws'PM, FM have a positive outlook on Bharti deal'
FINANCE Minister Pranab Mukherjee said that he and the Prime Minister had a "positive approach" on the deal and that the government was working on it. "Both me and PM have a positive outlook on the deal," he said on the sidelines of a book release function in New Delhi. In a separate briefing, finance secretary Ashok Chawla said, "There is no public policy in India regarding dual listing. Our officials and looking into the regulatory aspects of dual listing. But neither of the two companies has as yet formally approached the ministry."
Official communication from South Africa also echoed the same sentiments. President Zuma's office in a communication to ET NOW on Tuesday said that the South African government was 'interested in pursuing a mutually beneficial commercial relationship with India.' "This interest is in line with our foreign policy to strengthen South-South relations," President Zuma's spokesperson added.
The Bharti-MTN transaction is largely in line with the structure unveiled in May. The deal's contours involve a complex structure in which both firms would pay cash and equity for stakes in each other, the end result of which will see Bharti Airtel get a 49% stake in MTN and the South African telco and its shareholders getting a 36% economic interest in Bharti. In the next leg, both telcos say they will look at a full-fledged merger. At the same time, President Zuma's office also emphasised that 'any commercial transaction that involves a South African business entity must satisfy the laws of the land in terms of regulatory requirements'.
soma.banerjee@timesgroup.com
Posted by Unknown at 6:05 PM 0 comments
Monday, September 28, 2009
Nifty:The Tug Of War
AS we expected last week, the Nifty's affair with a crucial 5000 mark was indeed brief. Even as there was a healthy roll over of 70% into the next series, the rise in the open interest of the October future on Friday was not encouraging. On the other hand, the Nifty's repeated rebound from just above 4900 highlights a rising importance of this level as a near term support.
IN A QUANDARY: Even the progression in the options' open interest suggests that the encounter between the bulls and bears may be defied by the battle ring of 4900-5000. This is validated by the fact that October 5000 calls as well as 4900 puts held the maximum open interest for the respective sides as on Friday. Moreover, in the last two trading sessions, since the time the October series commenced, in-the-money 4900 calls as well as 5000 puts both added about 9.2 lakh shares in the open interest. Though the September series ended with a high Put Call Ratio (PCR) of about 2.5, the same for August series continued to fluctuate between 1.35 and 1.39. However, The PCR could uptick further as the series progresses.
After hitting its 15 month high, the Nifty closed below its 5 Day Moving Average (DMA) for the first time in three weeks. During the week, it continued to take support from its 10 DMA (currently at 4936). As can be seen from the first chart, the importance of this short-term support is increased by a trendline emerging from July 2008 highs.
JITTERY DOW: While the movement in Nifty showed signs of optimism, its big brother, the Dow Jones Industrial Average (DJIA) seemed jittery through out the week. As on Thursday the US index had lost nearly 1% for the week and at the time of this article going to press it was trading well below its Thursday's close. After facing resistance by the trendline, which joins its highs since April 2009, it also closed below its 10 DMA after two weeks. Now the index is eyeing a support near 9600, closer to its 20 DMA.
A LOOK BACK AT HISTORY:
A breach of this support could intensify the nervousness among traders. It is observed that in the recent run, after every euphoric rise when a significant correction sets in, fears of a repeat of the market moves of the great depression of 1930s increase. The second chart shows that the plunge in Dow since October 2007 almost mirrored the index's fall in the earlier duration of the great depression. However the strong recovery (point B or March 2009) arrived much earlier in the latest cycle considering the number of trading days. This point onwards the upmoves in the recent cycle are of longer duration unlike the cycle of 1930s, when the recovery was short lived.
The last week's declining streak of Dow appeared at the 535th trading
day since the time of its bear market decline, similar to the turning point
(e) of the cycle of 1930s that appeared at the 532nd day of the start of the
plunge then. From this point onwards the Dow had lost another 43% in a span of 16 months.
Though such a comparison brings in a dreadful depiction, one striking difference between the two cycles is the placement of points Bs and Es. During the great depression, while points (b) and (e) more or less coincided with each other in terms of the Dow's value, this time around these two points (B and E) are positioned at the extreme end of the rebound since March'09.
VOLATILITY FIX: Besides a breach of 9600, what could help us identify the future of Dow is the Chicago Board Options Exchange Volatility Index (CBOE VIX). As we highlighted last week, since July'09 the VIX has made several failed attempt to move past 50 DMA. Also, the 20 DMA is more or less moving in tandem with 50 DMA from the start of September. The index's move will now be decided by either a divergence of these two DMAs or VIX's rises past them and towards its 100 DMA.
FRESH TRADE: Last week we suggested initiating a short position in 5000-5020 range to benefit from the Nifty's decline towards 4890. Our call was based on our assessment that for a sustained rise past 5000 a considerable retracement could be essential. This week while we believe that the tussling forces near both 5000 and 4900 are equally strong, the Dow's behavior indicates that the retracement in Nifty could extend further.
On this backdrop, we suggest building a short position in 4980-5000 for a move towards 4820, albeit with a closer stop above 5030.
devangi.joshi@timesgroup.com
Posted by Unknown at 6:32 PM 0 comments
Oiling The Wheels
Growing order book and healthy financials make Shiv Vani Oil an attractive long-term investment
SHIV VANI Oil & Gas Exploration Services (SVOL) grossly underperformed the markets last year despite its excellent performance in FY09. This offers a great opportunity for long-term investors to accumulate the scrip, as the company enjoys strong cashflows and a bulging order book.
BUSINESS: Shiv Vani Oil (SVOL) is India's largest integrated service provider for onshore petroleum exploration and production. Its services start from collection and analysis of seismic data till actual extraction of petroleum and include services such as well logging, cementing, mud engineering, directional drilling, well testing, etc. It presently has 10 seismic equipment sets, 350 shot-hole rigs and 40 drilling rigs - the largest in India.
The company has also emerged as the leading integrated provider of services for coal-bed methane (CBM) development in India, owning eight sets of modern directional drilling equipments. It is executing a long-term contract in Oman for PDO and Shell, which has no expiry clause. The contract generates annual revenues of $18 million. More than 98% of the company's domestic revenue comes from national oil companies, which provides great visibility on its future earnings.
GROWTH DRIVERS: SVOL is currently carrying an unexecuted order book of nearly Rs 4,000 crore, which is 4.5 times its FY09 revenue. While nearly Rs 750 crore of these orders relate to the contract in Oman to be executed over the next 10 years, the rest will be executed over the next three years. The company won a three-year Rs 1,610-crore contract from ONGC last year, which, after a year of delay, has started getting implemented recently.
Additionally, the recently launched eighth round of NELP bids and fourth round of CBM bids will ensure that the company continues to receive a steady flow of orders in the years to come.
SVOL last year added 16 new drilling rigs to its fleet, for which FY10 will be the first full year of operation. The impact of these additional assets will reflect in the company's earnings going forward. Since almost all of the company's assets are now deployed for the next three years, it can consider buying new equipment based on new order flow.
For this purpose SVOL has passed a resolution enabling it to raise up to Rs 600 crore while increasing the authorised equity capital to Rs 75 crore from present Rs 63.5 crore and raising the ceiling on investment by FIIs to 49% of paid-up equity capital from 24%.
FINANCIALS: After three consecutive years of negative operating cashflows, SVOL reported substantially strong cashflows in FY09 despite the economic turmoil. In the last five years, the
company's profits have grown at a compounded annual rate of 94.7%, as against a CAGR of 59.2% for net sales. As a result, the net profit margin has been continuously improving and reached 22.1% in FY09.
The company's expansion spree last year has left it with a debt-equity ratio of above two and bulging interest and depreciation costs. However, the burden on profits has come down to just 35.2% of the company's operating profits in FY09, down from 62.7% in 2004.VALUATION: At the current maket price, the scrip is trading at a P/E multiple of 8.9 on a consolidated basis. Considering the current unexecuted order book position and the capacity creation of last year, the company's profits next year are likely to touch Rs 203 crore with revenues of Rs 1,090 crore. As a result, the FY10 forward P/E works out to 7.4, which is attractive for long-term investors.
ramkrishna.kashelkar@timesgroup.com
Posted by Unknown at 6:27 PM 0 comments
Picking up stocks of fundamentally strong companies
Picking up stocks of fundamentally strong companies during the corrective phase on certain valuation benchmarks could benefit investors when the market turns around
"There is nothing so easy to learn as experience
and nothing so hard to apply"
—Josh Billings
This seems enduringly applicable to equity investors, especially during the market volatility in the last one and a half year. The last year bear market plunge and the subsequent rally have baffled investors and traders worldwide due to the sheer price moves in both directions.
In retrospection while it may be easier to say that one could have ridden the trend both ways and benefited from the swings in prices, it is very difficult to pinpoint an opportunity to enter the market during a phase when such sharp price moves take place.
However, an ET Intelligence Group study of the last three major corrections in the markets since 2003, show that it is possible to benefit from the corrective phase of the market by accumulating stocks of leading companies which have sound fundamentals and which closely follow the market trend. Even if it may not be possible to bottom pick these stocks, various valuation yardsticks can be explored to buy them at an appealing price. As and when the market revival sets in, these stocks can either be sold for profit booking at an attractive price or kept in the portfolio for long term returns.
THE DRILL
For the study we considered the data since 2003, the early period of the biggest bull run for the domestic markets. It thus encompasses two major corrections, one in 2004 and the other in 2006 besides the historic fall of 2008. We selected those companies, which sustained their presence in the major indices. This criterion helped us pick companies that maintained their position in the leading indices through out all ups and downs of the market due to their operational and financial performances. For simplicity, we have restricted our analysis to companies that are part of Nifty-50 and Nifty Junior indices and whose financial numbers are available for last seven years. Further we dropped real estate firms such as IFCI from the list. This gave us a sample of 44 companies.
We further refined the list by finding out the companies, which have given the maximum return by annualizing the median monthly return of their stock prices since 2003. This exercise brought to light some leading performers in terms of monthly price gains.
In order to highlight companies that efficiently influence the market due to their presence in the respective indices, we found out the standard deviation of the monthly return of the stock prices. Since the standard deviation is a gauge of the dispersion of a data array from its mean (or average), it can also be looked as a tool to measure volatility. Thus a higher standard deviation of a company's stock price from its mean indicates that it reacts swiftly to the move in the market, in both the direction.
OUTPUT
At the end of the drill we were left with companies (see the table), which not only have provided high monthly returns since 2003 but also were highly sensitive to the change in the market's direction. As the table indicates, most of these volatile stocks belong to cyclical and high growth sector including metals, automobiles, financial services and capital goods among others. As the revenue and profitability of these companies vary widely during a business cycle, their share price shows sharp and sudden reversal depending on the mood on the Dalal Street.
What this means is that an alert investors can use any of these stocks or a mix of them to ride the ups and down in the market and make a neat profit. Accumulate when their price is falling and start booking profits when the counter began to heat up. The question however is 'when to press the buy button and when to sell.' As we found it's not that tough, as long as you remain optimist and have the resources to play the waiting game.
PRACTICAL EXAMPLES
Let's take the example of Tata Steel. One of the oldest and widely tracked companies in India, Tata Steel's stock price shows a high correlation to the broader market. For instance, during the 2008 meltdown, the stock fell lost nearly 85% of its peak value, compared to around 50% fall in the market. The turnaround in its fortunes has however been equally sharp. Since March this year, the stock has more than tripled against 86% rise in the Nifty during the period. So the stock was a right candidate to play this strategy. But one may ask when was the right time to press the buy button on the stock? The signals will come from comparing various valuation ratios of a company -price to earning (P/E)
multiple, dividend yield and price to book value (P/B) over a long period.
For instance, Tata Steel valuation has fluctuated between P/E multiple of 18 and 6, while the dividend yield on the stock rose to high of 6% in FY03 to a low of 2% in FY08. The price to book value ratio of Tata Steel ranged from 3.1x in FY05 to a low of 0.9X in FY01. The above valuation range act as marker for initiating buy and sell call on the stock. For example, Tata Steel would be a screaming buy if its P/E multiple falls below 6, dividends yield shoots past 6% and its stock price falls below the book value. Now cut back to the last calendar year. The stock began the year with historically high valuation ratios and as the year passed-by it got cheaper. Between November 2008 and March 2009, Tata Steel was trading at a P/E multiple of between 3 and 4 and the dividend yield on the stock was well above 10%, highest in nearly two decades and for months the stock was trading at half its book value.
Ditto with other leading stock listed in the table below. Let's take the case of ICICI Bank. Excluding the outliers, the stock traded in the P/E band of 15-20 in the last four years. Similarly, in terms of P/BV, it traded in the bandwidth of 2-3. In March'09, P/E touched 0.7 and P/BV was at 9.9. This shows that the stock was trading at a huge discount then. And, it would have been wise of long-term investors to accumulate it. In the current rally, its stock price has shot up. Consequently, ICICI Bank is trading at P/E of 24.5, which shows that investors should start reducing exposure to this scrip.
Similarly, ABB's P/E ratio touched a low of 14.2 for the month of Feb'09, more than 80% lower than its peak in Oct'07. The PE was lower than its average PE during Sept'03, nearly the beginning of the economic upturn, providing an
attractive entry opportunity.
The message is clear. Have a price band for very leading stock in your portfolio. Whenever the price falls below this band; buy the stock without waiting for it to bottom-out. If it falls further, accumulate more shares, if you have the resources. Similarly, start booking profits, whenever the stock price crosses your upper price band. The reversals in the stock market are sudden and come without warning. So never be fully invested nor sell your entire holdings. Idea is to maintain the flexibility to take advantage of the market volatility. As the legendary investor Warren Buffett says, "Be fearful when others are greedy and greedy when others are fearful".
Posted by Unknown at 6:25 PM 0 comments
Towards Greener Pastures
As the country gears up to reduce its carbon emissions, investors need to churn their portfolio to accommodate companies that are greener than the rest.
Now that the equity markets have firmly set aside the ghosts of 2008 and as global economy hits the growth track, it's time to acknowledge long-term concerns. And globally the biggest topic of discussion right now is the climate change and its impact on the business and economy. Till few months ago, it seemed that, developing countries including India would be spared the economic and financial pain of participating in the global effort to cut carbon emissions. With each passing day however it seems that large and fast growing developing countries especially India and China will have to do their bit to arrest climate change. In run-up to the global Copenhagen Conference in December this year, India has already established a climate change mitigation authority that will set targets to reduce emissions by 2020. There is also a proposal to establish a ministry dedicated to promotion of alternative energy.
Though the details of the emissions reduction programme are sketchy right now, the ball has been set rolling. It will gather momentum as the time passes and as the global debate on the subject heats-up. This in turn will set a chain reaction of new set of economic policies, which will have profound impact on business and the equity markets. Indian investors and business have grown-up with the idea that environment and natural resources are free public goods, which should be exploited to the hilt to maximise their profits. This mindset will not work in the new paradigm that is emerging.
India's economic and industrial policy will be tweaked in future to minimise the carbon footprint of every unit of economic output or GDP. This means that Indian companies especially those responsible for bulk of the emissions will have to progressively reduce their carbon intensity to the targeted level. This will require investment in new technologies, re-engineering of production process or changing their product mix altogether. Obviously it will raise their production cost, at least in the short-run besides slowing their pace of growth. The emissions reduction programme will also have a set of incentives for industries and technologies that will help companies and consumers to cut down their carbon intensity. This will pit many existing behemoths with new entrants and may create new winners and losers in the longer term.
The companies most at risk in the new regime would be those who generate coal-fired thermal power. Globally, such power plants are one of the biggest contributors of greenhouse gases and stand second only to transportation sector in pollution league table. Currently, power is the most happening sector on the stock exchanges and most power sector companies are enjoying rich valuations.The new regime may however make operations expensive for coal fired power plants and make them less attractive compared to rival sources of power such as hydel, wind, gas or biomass.
Among individual stocks, NTPC owns the largest number of coal-fired thermal power plants in India accounting for nearly 30% of the power generation in the country. Next comes, Tata Power, Torrent Power, Reliance Infrastructure and CESC among others. While there is no immediate threat to the economic viability of any of these power utilities, investors would be better of by rebalancing their power portfolio in favour of companies that are greener than others. For instance, among leading utilities, Tata Power has one of largest portfolio of projects based on renewable energy including hydel, wind and solar power. It continues to make several other experiments in renewal energy space. This puts the company at a stronger footing than the rest.
On the equipment side investors are advised to de-risk their investment bydiversifying into companies that are supplying the equipments to renewable energy sector. This includes companies such as Suzlon Energy, which makes wind turbines, Moser Baer, which is investing heavily into solar photovoltaic technology and Thermax that supply pollution control equipments and heat transfer equipments.
The most revolutionary change may however occur in the transmission and distribution segment of the power business. Right now, the entire power infrastructure is based on the concept of centralised (and large scale generation) and distributed consumption. Power is generated in huge generating station located near the source of energy i.e. coal mines in central and eastern India or river valleys in Himalayas and transmitted to the consuming centres hundred of kilometres away through high tension transmission lines. This however leads to huge transmission and distribution losses, which could be as high as 30% of energy generated. Besides, its requires use of metals and cement -two of the most energy intensive materials -to build the transmission infrastructure
The new regime will give fillip to the concept of distributed generation near the site of consumption. In practical terms it means small and compact power stations supplying a neighbourhood or an industrial estate. These small plants are also likely to harness locally available resources such as biomass, wind, small stream or waste heat to generate electricity. This is already happening with the establishment of 10-120 MW size plant based on biomass or waste heat recovery. The movement is expected to gather pace as the concept gets established and the supporting ecosystem evolves. This may make dinosaurs out of existing power sector behemoths.
krishna.kant@timesgroup.com
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