Rocky Proposes .... Markets Follow :)

Its with great pride i wish to announce that Markets have once again saluted the meticulous analysis dished out in this blog

In my post titled "Hot Money Frenzy " in October'10 I had raised some pertinent questions about the uproarious rise of stock indices on the back of Hot Money flowing in and as to how the prudent investor must be on the guard and follow Cautious Optimism rather than be wayled by so-called analysts appearing in print n satellite media . The mighty fall our markets have been witnessing since past 2-3 weeks stands testimony to the power that acurate analysis could stand even in times when sanity is the last word on investor's mind .

In my last post on Corporate Bond's I had gone to an entirely non-glamorous area of Bonds in indian markets . But even here markets took cognisance of my analysis and in barely a month of my posting we have had a massive Rs 2000 crore debut of SBI Bonds . I'm happy to state that even in the mundane bond sector in india , Followers of this blog made some good money in barely one weeks time . I'll explain the modus operandi which this blog followers must have opted for . Each Bond had a face value of Rs 1000 . Premium is over Rs 400 in grey market . So for a dummy applicant with a corpus of atleast Rs 5,00,000 brokers would pay upfront Rs between Rs 16,000-20,000 depending on your negotiating power . This is a win-win for both applicant (he gets around 4% return in 7-10 days) and broker(he gets around 1.5% per applicant) . Also note that Retail Category is very attractive as coupon rate here is 9.95% as against 9.3-9.4% for other categories . SBI previous bond issue in oct-nov was subsribed 20 times and premium was Rs 600 . So i have factored in adequate risk factors and worked on conservative estimates only .

Corporate Bond---Bond with the Best...But How???

Financial markets are full of risky products and with people betting on their proven performance such products catch the fancy of novices and experts alike . Shorting stocks , playing with Silver , Going Long on Gold Futures -- is all part of financial play . But buying into GoI bond --the safest product is like searching for a needle in a haystack . There are just no sellers out there for retail investors !

RBI -- India's central bank in its holier than thou attitude is yet to usher in reforms in this space. A handful of players , mostly banks trade amongst themselves . Retail investors can't buy or sell bonds like they do in stocks . Huge inflow of money awaits if the regulator gives its green signal to arguably the most urgent of financial sector reforms . While important checks and balances need to be put in place but having the whole sector under covers for retail participation is , in according to my view , stretching things a wee bit too far . Corporate bond prices are a latent function of sovereign bonds , so for this segment to take off in big way RBI needs to begin with opening of GoI bonds . Rest assured there would be little opoosition to this move by investors and intermediaries --simply because they don't exist in the market and wish to be a part of it (subject to regulator's approval) !

Hot Money Frenzy !!!

Riding on the back of Hot Money Nifty has scaled past 6000 levels . But the retail investors are mostly absent from the party . And the reason isnt too far to seek -- scars left during global meltdown of equity mkts have left bleeding wounds in its aftermath!

FII fund flow trickle has turned into a flood in indian markts as the cheap money (better called Hot Money) finds its abode in india . Rationale economies have imposed curbs to check this colourless form of money which causes "Irrational Exuberance" but in india we call it by the name of "Cautious Optimism" . Its a myth to say that present rally is a testimony of india's growing clout --its just a testimony of our lack of spine ! Why cant policymakers learn to call spade a spade? Why are they shying away in imposing curbs on this flow which is severely distorting our trade balances?Why cant we step in and stem the tide before our export-oriented sectors bleed to death?From IT sector to textile sector to leather sector to precious stones market all are bearing the burnt of the sharp rupee rise . But is the government listening to their woes? How long would it remain a mute spectator?

Coal India IPO --the biggest IPO in the history of indian equity markets has come . Its success is crucial to public exchequers coffers .While the issue is attractively priced and with 5% mandatory discount to retail investors , its making all the right noises and the grey market premium is Rs 15-20(subject to daily fluctuation but reflective of broader sentiment ).The world would be keenly watching its listing and government needs FII crutches to ride it through the boom. Hence the reluctance on curbing the inflow .

A Winner Yet Again !

Last Investment Idea recommended on Sep 17 viz the Microsec IPO opened today . The stock has given a 20% Listing Gain to investor fraternity on NSE . It was priced @ 118 and it reached a high @ 142 on NSE . Its to be noted that markets behaved sluggishly today but still the winner from Rocky's Investment Idea defied market diktats and sailed through comfortably !

I hope that folks following this blog must have booked profits on Listing .

Microsec IPO -- Attractive Gains

Microsec Financial Services Ltd (MFSL) a NBFC dealing in finance , investment , broking and wealth management opened its IPO on 17th Sep at Rs 113-118/share . The company expects to mop up Rs 141.25 crore at lower end and Rs 147.50 at upper end with 1.25 crore shares at stake . Primary business is granting loans against shares which makes the company extremely vulnerable against market forces . It has 239 branches in 16 states with 178 of them west bengal alone . It operates in a fiercely competetive broking and investment banking industry . It plans to use the proceeds to increase its fnancing business .

EPS for past fiscal year was 12.58 . At lower issue end PE comes at 14.70 while at upper end it comes to 15.40 . While the fundamentals of the company arent too rosy but banking n Neo banking (NBFC) together with MFI(read SKS Microfinance) are the flavour of the season hence Microsec would see a smooth sailing . Attractive Listing Gains are in the offing for retail investors . My recommendation would be a BUY

Debt Instruments --- Your Weapon in Volatile Interest Regime

EPFO(Employee Provident Fund Organization) has hiked rates of EPF(Employee Provident Fund) by 100 basis point--from 8.5% to 9.5% for 2010-11 . According to EPF law, an employer deposits 24% of an employee's basic salary with EPFO annually . This includes employer & employee's contributions of 12% each . With the rate hike of 100% for 2010-11 , returns from EPF will be higher than bank deposits--the gap between EPF and PPF(Public Provident Fund) is going to be a whopping 150 basis points (PPF is @ 8%).

EPF as an asset class thus makes sense . Tax benefit is an added attractive feature but lock-in constraints must be looked into . There is an option to increase the allocation as well . An employee can increase his contribution upto 100% of basic to EPF . The employer will deduct his portion of additional amount and the money goes into VPF(Voluntary Provident Fund) . Also if one has both EPF & PPF account , one can reduce the amount being contributed towards PPF and allocate it to EPF . But the catch is this hike is operational for 1 year only . So tread cautiously !!!

Now as the RBI has hiked repo and reverse repo and reduced their mismatch to 1% point (repo stands @ 6% while reverse repo @ 5%) banks would raise deposit rates . Hence avoid Fixed Deposits and instead go for flexible deposits where the rate of interest keeps changing according to the prevailing market conditions .

Short Term Bonds and income Funds are gud bet with 3-6 mnths horizon . Liquid Ultra Short Term Funds will yield 6.5% in next 2-3 mnths . These funds invest in 1 year bonds and are thus riskier than liquid funds and short term debt funds . Such funds reprice quickly . Another option could be Fixed Maturity Plans(FMPs) . The yield could be around 8% in these .

Yet another option in a scenario of rising interest rate regime is Floater Rate Funds .

A B C of IPO---Unravelling the Mystery !!!

The term IPO is by far the most cliched word used in Indian financial system . Its users range from veteran market participants to overzealous youngsters , from novice housewives to barely teen adolescents . While first time investors use it as an entry vehicle for getting into markets , its the seasoned investors that know how to milk it the right way without missing the woods for trees !!!

My purpose of writing this post is to cater to the needs of first time investors in IPOs . As it is we have a clutch of new issues hitting the markets every fortnight from now , so it becomes imperative to help separate the wheat from the chaff !

For the first time investors or those lacking enough experience , the tough part is to assess the fair value of shares on offer in an IPO . An offer price or market price is actually a company's expected or total market value divided by the number of shares. Thus with different number of shares on offer , companies with similar mcap may trade at different prices . Thus the catch is the number of shares .

Oflate investors have been astonished by the sheer variance in the offer price and market price in the same peer group . A case in point is the Adani Power issue price at Rs. 100/share compared to its peer Tata Power market price at Rs. 1200/share . Then there is NHPC at Rs. 30-36/share as compared to NTPC at Rs. 210/share. To novice market participants it would appear that the offers are at throwaway discounts but then they fail to realise that even at its lower price band NHPC is 30 times EPS while NTPC is traded at just 20 times. The moot question that comes to mind is then how to evaluate an IPO ? Firstly read the fine print given in RHP(red herring prospectus) . Know the face value of share on offer , paid-up capital and the number of shares .

Adani Power

paid-up equity capital : Rs. 2180 crore

no. of shares : 218 crore

face value : Rs 10 each

Tata Power

paid-up equity capital : Rs. 222 crore

no. of shares : 22.2 crore

face value : Rs 10 each

Thus as can be seen Adani power has nearly 10 times more equity shares than Tata power . In other words , for same mcap Adani Power will trade at 1/10th of Tata Power . Now Adani Power at its issue price of Rs 100/share has mcap of Rs.21800 crore , if Tata Power gets same mcap then its share price would be Rs. 982 !!!This shows that there are listing gains on offer in Adani Power IPO .

Now the question arises what determines mcap ? At the basic level mcap is a function of company's earnings in previous year . More the profits , more is the mcap . The parameter used is called EPS (earning per share) .

NHPC

PAT : Rs 1244 crore

no. of shares : 1230 crore

face value : Rs. 10

EPS : Rs 1.01

P/E : 30x at lower price and 36x at upper price

NTPC

PAT : Rs. 8201 crore

no. of shares : 824 crore

face value : Rs 10

EPS : Rs 9.9

P/E : 21 times

A company with lower P/E offers more upside if its up n running already rather than a company that promises to use the proceeds to set-up a business that will generate cash-flow in future !

However if markets were so simple in its function then even my maid would have been in it !

Its to be noted that the issue is priced between 1.7x-2x post-money book value that is at a discount to the listed utilities in the space (for instance, JP Hydro trades at 3.7x FY2009 book value). This discount is justified on account of the lower return on equity (RoE) of NHPC and the higher risk of delays in the execution of its projects. Importantly, NHPC’s lower RoE is attributable to the higher capital work in progress, which results in lower component of equity which the company earns its returns on .

Considering this the issue should be subscribed .

No wonder then that NHPC IPO overbid 3.5 times on day 1