ROCE and Growth

Long term "sustainable" growth for companies is limited by ROCE (actually ROCE*PloughBack Ratio) of the business. Important implication of this is that high growth companies with moderate ROCEs have to dilute to keep growing at the same high rate

Everonn - Appointment of JJ Irani and Nikhil Gandhi as Directors

Everonn, today, announced the appointment of JJ Irani as Director and non executive chairman and Nikhil Gandhi as director on the board of the company. Here are my thoughts on this

1. Nikhil Gandhi's appointment was expected and should have not effect (he has put in 200 cr into the company)
2. JJ's appointment is a positive development and potentially serves two purposes
    a) Gives an important face lift to corporate governance at Everonn. The company could be planning to raise further capital and JJ's presence would be a big confidence boost for potential investors
    b) Helps to counter NG's influence to push Everonn for benefit of SKIL

Tata Motors- Q2 FY11 Results Update - Buy!!

Tata Motors posted excellent results with revenues up ~35% YoY and profit up to 2223 Cr vs only 22 cr last year in the same quarter. Its seems that the contrarian  investments that the tata group had made during the downturn (Corus by Tata Steel and JLR by Tata Motors) is now paying rich dividends, as the global economy recovers.

These are fantastic results by Tata Motors and much beyond street expectation, despite the fact that Tata Nano is yet to take off. Could lead to serious re-rating of the stock over the next couple of quarters. Won't be surprised if the stock climbs 50%+ in the next one year. Key thing to watch would be how it absorbs commodity  price increases in the next 2 quarters as a result of QE2

Common Wealth Games 2010: Opening ceremony rocks,CWG a hit in the virtual world too

The 19th CWG games got off to a spectacular start yesterday, with the gala opening ceremony. The giant helium balloon was fantastic (despite the $15 million price tag). Hope the rest of the games build on this and and we see records being broken in each of the 17 sporting disciplines and that the focus remains firmly on sports.

Another thing which the games organizers seem to be getting right is their virtual presence. The website is good, but they have a fantastic social presence through facebook and twitter (115K+ people already like it on facebook and twitter account has 5500+ followers) with quick updates (Nigeria won the first gold medal in weightlifting, Australia won their first in swimming)

Obituary: Gurgaon Roads

This post is in loving memory of the Roads in Gurgaon that died prematurely (yet again), due to heavy shelling by the rain gods during the current monsoon season. The same rains have also taken a toll on roads across NCR and other parts of the country.

RIP Gurgaon Roads (2010-2010).


PS: All hail the builders and bureaucrats who would procreate again to give us new roads again next year.

Google Funds Khanacademy

Google is giving Salman Khan, of khanacademy.org, 2 million dollars to further the cause of making education content available online for free.

That is 2 million dollars well spent.


Check it out here http://www.project10tothe100.com/index.html

common wealth games - the reality

delhi would be hosting the common wealth games from the first week of october. After a barrage of controversies and setbacks, hope is that delhi would pull through
What is sad about all this tamasha is that no one is really talking about sport and the human spirit, any such sporting event is meant to celebrate.
Feel outraged and disgusted with not just the politicians and administrators but also with the media, and perhaps more so with the more progressive media
That said, the comments of some of the phoren babas from respective sports commitees, reeked of gross racial bias. It is time we stopped taking s*** from these guys

SAIL in a fix as i-banks race to the bottom to manage its FPO - The Economic Times

Came across the following post on economic times

SAIL in a fix as i-banks race to the bottom to manage its FPO - The Economic Times

The real cost to Sail and eventually the people of India is not the fee that the investment banker would charge but at what price the deal happens.

Kale Accelya Deal Analysis

Kale Accelya Deal Analysis

Accelya is niche BPO player based in Europe. From Accelya's perspective the deal has the following positives.

1. It gives them entry into IT services with a player that knows the airlines space well, allowing them to further penetrate their clients through cross selling
2. They can now offer integrated BPO/IT Services and a stronger value proposition for new customers
3. Gives them scale- The combined entity would be the largest IT/ITES services provider for airline industry
4. Most importantly, it gives them local knowledge and strong base for offering offshore BPO services from India helping them lower their operating costs

While being listed gives them some additional credibility it is not a huge advantage. Although listing costs are not very high in India

Kale's promoters

1. Decent premium price over current price and a large premium over the undisturbed price
2. Continuing employment for Vipul Jain - the current CEO and co promoter(who got 2 cr salary last year and possibly a sweeter/upgraded deal going forward)
3. Promoters get to keep the logistics division and possibly an opportunity to build another logistics focused IT services company. (the slump sale just before the deal also allowed to plug the valuation gap for both parties; as per the company the logistics division had ~4 cr revenue and about ~6 cr loss;This is theory means higher profits for accelya, which wants to remain only in airline space and a positive option value for the promoters )

They could have possibly got higher valuation, but the softer benefits in this deal may have trumped other potential offers

Kale Consultants - Accelya Deal

The promoters have sold their 36% stake in Kale Consultants to Accelya at a price of 172 per share. The deal also ensures that Vipul Jain (co-promoter and CEO) continues in his role. As discussed in my previous post they could have got a higher price, especially with the restructuring (slump sale of their loss making logistics business to promoters)

The deal will trigger a mandatory open offer to acquire at least 20% of the company. It will be interesting to see what the open offer price is as that would determine the total upside to minority investors.

Value Stock - Kale Consultants

Stock Pick - Value Stock

Kale Consultants

This stock is what you call a low downside, high upside stock. Kale consultants has been in the news recently with all the rumors of it being acquired soon (first by wipro, NTT and then by InterGlobe or another European company)

The rumors have since been denied by promoters (check bse company annoncements) but the recent slump sale of one of its loss making divisions could possibly be cleanup before the actual sale.

Kale had  net earnings of 26 crores (EPS of 18.1)  last year with 40 Cr EBITDA and a healthy growth year over year. It has about 40 Cr of cash and no debt. At current market cap of about 200 Cr it has a PE of 7.6 and EV/EBITDA of 4.2 (versus average PE & EV/EBITDA of about 10 and 5.5 respectively for the smaller listed IT companies) which gives it an upside of 30-40% even if there is no control premium or deal does not happen

The slump sale of its logistics division gives it about 6-7 Cr of profit and therefore about 60 cr additional equity value. for a total possible upside of  60-70%

Value Picks - Equity Investing: Empee Distilleries (NSE Symbol - EDL)

Value Picks - Equity Investing

Empee Distilleries  (NSE Symbol - EDL)

• At Rs149 it has a market cap of 281 Crores
• It holds 2.81 Cr shares of Empee Sugars with market value (at CMP 66) of 185 Crores
• Company made a profit of about 12 crores in Q1 FY11  (double that of Q1 in FY10)  and eps of 6.2 Rs per share (non annualized and standalone). 
• It had reveneues of 900 Cr in FY10

Net value attributed to the business appears to be very low. The promoters have been recently increasing their share through open market purchase. Represents an excellent value buy and can be a multibagger especially if the company can improve its profits even marginally and improve investor awareness.

What makes it even more attractive is the high dividend yield.It has announced a dividend of 6 Rs/Share, which gives it an high dividend yield of 4% (tax free) certainly higher than your savings account which gives 3.5% yield (before interest)

Are equity analysts over-optimistic? Implications from past data

Came across the following data in a recent Mckinsey article on long term forecasts vs actual earnings. The implications are interesting

1. Analysts are (at most times) over-optimistic on growth trends and perhaps underestimate the effect of competition (companies don't exactly play tennis against a wall), challenges to scale, change in consumer taste, alternative products etc
2. Follow earning revisions after trend change in actual earnings rather than vice versa (which is their real worth)
3. However, during periods of recovery they get over pessimistic and estimate lower recovery

While this is important point to remember for fund managers who follow their advice, this has important implications for analysts, themsselves (The good ones should know this intuitively)

• Its generally more accurate to be lower than consensus
• It helps to be contrarian

This, of course is aggregate data and would be interesting to perhaps look at the top 5 rated analysts

11th Five Year Plan - Planned Expenditure On Education In India

Budget Impact on taxes: Save Rs 50 Thousand + 6.5 thousand in personal taxes

The new proposal announced today in Budget speech by pranab mukherjea provide for up to Rs 50 thousand saving for income up to Rs 8 lac. due to change in slabs. For income between Rs 3 lac and Rs 8 lac, the average reduction is 10%, across various slabs

In addition, you could save  upto ~6.5 K on additional investment in long term, government infrastructure bonds, giving a total benefit of upto 56.6 thousand

Revised Tax Slabs are as follows

• No tax for income upto 1.6 lakh.
• For income between 1.6 lakh - 5 lakh tax liability 10%. (old slab was Rs 1.6 to 3 lakh)
• For income between 5 lakh - 8 lakh 20%. (old slab was Rs 3-5 lakh)
• For income above 8 lakh 30% (old slab was Rs 5 lakh +)
• Additional investment of 20K in infra bonds over and above Rs 1 lakh in 80C

3G Auction Schedule

The Government has announced the Schedule of 3 G Auction. The auction process for 3G will follow the schedule given below:

Notice inviting applications: 25th February, 2010
Last date of submission of application: 19th March, 2010
Publication of ownership details ofapplicants: 26th March, 2010
Pre-qualification of bidders: 30th March, 2010
Mock auctions: 5th and 6th April, 2010
Start of 3G auctions: 9th April, 2010
Start of BWA auctions: Two days after the close of 3G auctions

Source: PIB

Public Private Partnerships: Why they may not be the solution?

PPP’s have become the latest buzzword in town. Politicians and Babus hawk 'Public Private Partnerships' as a silver bullet to help Indian economy achieve breakneck development while upholding government’s inclusiveness agenda. Here are my views on the matter

• India needs a huge pile of cash to develop its infrastructure, both hard and soft. Funding these is well beyond the means of the government.  
• That does not mean that government is not spending. The government spends huge amount of meney every year. The problem is that most of the money is spent on salaries and other operating expenses with little left over for new capacity expansion 
• The hope is that PPPs would attract the private sector to made the deficit investments and drive capacity expansion. Private sector responds to incentives and is looking for return on its investment. Given the large opportunity, PPP is a very attractive concept for them  
• However, in reality, the government loses all concept of partnership and sharing of risk/rewards when dealing with the private sector. It carries a huge intellectual baggage when it comes to partnering with the private sector. Take education for example, government has been allocating money for PPP for model schools every year for two years now (has been talking about it a few more years). It still has to come out with the model for sharing rewards with the private sector. It expects private sector to put money. However, whenever a model is proposed, the politicos run for cover. How can anyone make profits from education or more importantly how can the government approve a scheme which legalizes profit making from education? Does the government expect to attract all the money required from charitable organizations?  
• The problem is not just confined to one sector. Pick up any education, railways, power, roads the story is the same. The best solutions is to allow privatization, create level playing field for private players , have an independent regulator and foster competition. Healthcare and Telecom are the two sectors that stand out. Government allowed for profit companies to enter these two sectors a few years back. While there is room for improvement both private players have made healthcare and telecom available to a large number of people who otherwise were left out of government ‘inclusive’ plans

 

Are PPPs the magic wand that government hopes they are? My short answer is ‘No’

 

Working Today?

Bharti Zain Deal Analysis

Bharti has decided to acquire the Africa operations of Zain at an EV of $ 10.7 Bn . This comes after its earlier failed bid to acquire MTN.

After the recent entry of new players in the Indian market, Bharti has been desperate to acquire major presence outside of India and Africa is probaly the only large scale growth market that it can gainfully deploy its cash in.

Bharti joins the long list of other Indian companies trying to strike it big in the continent. NIIT is already making it big in the region through franchising of its IT training business

While the story is good and deployment of exess cash makes sense,  it would not be an easy task for Bharti to create value from this deal. The market senses this and which is why its stock has been punished in the last few days
As earlier discussed on this blog, the current acquisition makes a lot more sense for Bharti than its previous bid for the largest player in the contient (MTN). Can Mittal work his magic in the the region and propel Zain to the leadership position, ahead of MTN?

Are you an 'Average Person'?

Talking of averages... we have all heard the example of "...average depth of water"  trap. Here's an alternative version of that (from levitt and dubner..superfreaks)....

"The average person (man or waman) walking this earth has one b * * b and one t * * t * cle".

Next time you look at statistics, make sure that you don't fall into the 'Average Person' trap

Educomp Results Analysis

Educomp Solutions' consolidated revenues, EBITDA and PAT rose 37%, 86% and 92% YoY to Rs2.6bn, Rs1.33bn and Rs612mn respectively.


Educomp, as indicated in Q2FY10, initiated the process of securitizing its Smart_Class revenue through selling contracts to Edusmart (which borrowed from banks against receivables from schools and corporate guarantee of Educomp) where Edusmart is a non-Educomp company apparently owned by ex employees of Educomp and is independently run (Yeah right!!)

In Q3FY10, the company transferred 518 schools with contracts worth Rs980mn (on top of 300 schools in Q2FY10 with contracts worth Rs630mn). Educomp has received sanctions worth Rs4.15bn for securitisation of Smart_Class revenues from many leading banks and has received Rs2.45bn disbursement. Besides, securitisation proposal worth Rs2-3bn is under consideration.

The transfer of existing Smart Class contracts to Edusmart would be done in tranches over the next few quarters.

The apparent reasons given are

• The new Smart Class model would improve cashflow for the company
• Would address the issue of frequent equity dilution,
• Some convoluted tax saving logic (I have no idea how this is possible)


Here is my analysis of the situation


1. This is a more expensive form of debt structure except that ‘Financing cash flows’ appear as ‘Operating cash flows’ in Educomp’s books

2. People say it increases lumpiness; Incorrect. It gives them a perfect tool to smoothen earnings and show growth, as there is absolutely no logic to how many contracts are securitized in a quarter.

3. Of course this can last for a short while only. Once they have securitized all their contracts, they would have to rely on new additions every quarter(growth in which is slowing down due to increased competition and lower realizations as Educomp is forced to cut prices because it no longer has the best product in the market). After that, the growth at least if not revenues, are likely to fall off the cliff

4. Once there are no annuity revenues from smart class, they have to keep adding a large number of schools every quarter to remain at the same level. You are already seeing that in their Government Schools business (predictably, they have started to hide their Gov’t business numbers by clubbing it with the smart class segment)

5. However, I hope you would agree with me that value cannot be created (or destroyed) through accounting changes. Stripped of the accounting treatment, the organic growth in their smart class seems to be slowing

6. The fact is, that with high stakes on their stock price, Educomp simply must keep showing growth to survive. In securitization, it has found a legal way of doing so.

7. Promoter holding is already down to 50 percent and may not want to dilute more. Debt is already at 1000+ Cr (excl unconverted FCCB of another 400 Cr and not counting off balance sheet guarantees for smart class securitization) despite diluting additional 35% post the IPO.

8. Of course, the hope is that some of their new initiatives (Own K-12 schools, online learning, and hundreds of other options that Educomp is buying with its overpriced currency …read stock) would by that time (when there are no more contracts to be securitized) begin to contribute materially.

9. For now, at least one will see their numbers grow at 100% over the next year or two, with a much smaller actual growth.

Educomp Results Update

Educomp today announced a ~95% jump in net profit in Q3 FY10 (year over year) to over 61 crores. That's a fantastic growth rate. What makes it more fantastic is that in terms of topline (at 260 crores) it has started to challenge the largest training company in India (NIIT Limited). However don't get taken in by the reported growth numbers.

Educomp had changed its accounting policy recently (to securitize its earnings in the smart class segment) in Q2. So it would be interesting to see how much of this growth is due to revenues profits being pulled upfront and therefore what will be the growth rate in the coming year. The grapevine is that Educomp has resorted to slashing prices for its smart class product to keep competition out of the market.

Remember, CLSA had already downgraded the stock after Q2 results due to the same reason.

Will put an update out post analysis...

Accounting Fraud - Scoreboard Vs. the Real Game

Loved this quote from Hamel on Accounting Fraud

In too many companies, senior management has mistaken the scoreboard for the game. Quarterly Earnings are the score; customer pleasing, competitor-slamming innovation is the game. Wildly manipulating the numbers on the scoreboard is no substitute for playing the game.