Jan 232012

Ref: 12A-01 Of 23/Jan/2012 by KALIDAS

PART – 1 (Part 2 will be posted on Friday, 27 Jan 2012)

Water and Money

Water & Money share many attributes. They follow same pattern all the time.

When water is in short supply, the people tend to save it, hoard it or even treat it as most precious commodity – more than even Gold. Almost every member of the family is under tremendous anxiety lest the local water authority in a bid to ration its supply stopped it within a few hours or minutes. Good morning wishes are forgotten and the shouts or rebukes greet the children or young members of the family.

When the same water is in umpteen supply, same people bother least about it. They let it flow carelessly and allow the water leakage to linger on for days without calling the plumber to fix it up.

Money is also following same ritual. When it is in short supply or income is less, the people get tense and run around like wild animals. When same money is in ample supply, the owners go around like spendthrift and waste it without any discretion. It is true for individuals, corporations and also governments.

Too scarce money (like water) is a problem and too much money poses even greater problem. Like water, the money begins to leak from every outlet it finds and the owner loses all sense of proportion, rationality and logic in managing it. It is easy to manage less money (or water) but it is extremely difficult to manage too much money (or water).

RBI’s aberrations:

When India’s Forex reserve touched $300 billions, RBI expressed helplessness in managing it and wanted to engage expert or professionals to manage them as if RBI considered itself as non professional, non expert or incompetent in the field of monetary management. China could manage $3 trillions or $3000 billions, but RBI could not manage even $300 millions. This is why Chinese Yuan appreciated from 8.28/$ to 6.30/$ in less than 18 months (by +24%) whereas Indian Rupee under the guidance of RBI depreciated from Rs 44 to almost Rs 54, (by – 25%).

Mukesh Ambani of Reliance Industries Ltd has also realized that too much money is a big problem for him after 40 years of RIL existence. Rs 70,000 crores is too much for him to handle, and when he saw the fortunes of RIL flagging for a short while, he could not control the urge to lose focus, forgot the teachings of his father and Harward Business School, and embarked upon a journey to waste the money in every small opportunity he saw. The money, like water, started leaking from the RIL Storage tank without anyone noticing it.

Learning from the past…

For almost 40 years, his father (Dhirubhai Ambani) and both sons, Mukesh and Anil Ambani, have been creating and printing shares in the backyard by declaring free bonus shares from time to time with a view to enhancing the value of shareholders. They never paid liberal cash dividend. Their philosophy was ”we give you the paper; go, get out and sell in the market”. That is, we will not pay anything from our treasury but get yourself paid by the open treasury in the form of stock market.

Since they were controlling shareholders, they issued extra (bonus)shares to themselves to the extent of their shareholding – over 40% . When the crores of shares could be issued to themselves “free of cost” what made Mukesh Ambani to open the company’s treasury, take out over Rs 10,000 crores, and buy back the shares from the market paying as much as Rs 870 per share? It was a total loss – in as much as he issued (Sold) the shares to shareholders at “Zero” price, and buying them back at “Rs 870 per share”

There are 327.3 crore shares outstanding, and spending about Rs 10,400 crores amount to Rs 30+ per share outstanding? He would be buying back about 12 crore shares from the market, about 3.6% of total shares outstanding. Why did not he declare special cash dividend of Rs 30 per share instead?

Leakage of Money:

This is what is called the “leakage of money”. It followed three minor leakages in the form of his investment foray in telecom (broadband), hotel and entertainment industry. When the leakages are not arrested at the first sight, they get bigger and bigger, and this is what happened here. When the first “three minor leakages” that cost over Rs 2400 crores did not stop, the leakage got bigger and bigger,  and now would cost Rs 10,400 crores! A trickle if left unchecked becomes a torrent of flood later on.

I do not count his investment into shale gas ventures in USA because it is related to his core business – energy. How other three investments such as Hotel, Entertainment and Broadband Telecom fit into his core business? Indian markets are at very low. There are umpteen bargains not only in his core industry but also other ancillary businesses indirectly related to them. He could have invested there at lower end of the spectrum and potentially made 300% to 500% in next 5 years. We are detailing those opportunities later to justify our opinion.

RIL and other equally large global majors compared…

  • Have you ever heard major energy companies such as Exxon, British Petroleum, Royal Dutch Shell, Chevron, Total (of France) with billions of dollars in their kitty, investing into non core industries like telecom, hotel or entertainment?
  • Have you ever heard IBM, Apple Computer, Hewlett Packard, Google or Dell Computer trying to invest into non – core business such as hotels, entertainment or telecom?
  • Have you ever heard major auto makers such as General Motors, Ford, Toyota, Honda, BMW or Mercedes making investment into non core business diverse from auto trade?
  • Were they all stupid and only Mukesh Ambani was a clever guy?

I have great respect and admiration for Mukesh Ambani. He made correct decision most of the times in the past because he listened to himself or his mentor-father Dhirubhai Ambani. However of late, he has begun to falter by listening to the market forces, so called financial experts and not himself.

Those guys never made even Rs 100 crores either for themselves or for others, whereas you, Mr. Mukesh Ambani, made over Rs 70,000 crores in last few years; so who should you listen to – the mediocre and unsuccessful them or a smart and successful person in yourself?

RIL Buy back is a “subjective investment”…

Let us now see how much his subjective investment into RIL itself will give return compared to same amount he could otherwise invest “objectively” in other companies, some in his own core industries (Oil exploration and production, gas exploration, production and transportation), undervalued companies in his own sector, be they PSU or otherwise, alternative energy related companies in wind and solar power sector, highly troubled core industries, aviation and infrastructure, electrical energy sector such as Power or backwardly integrated coal industry and related financial industry.

It is not the investment itself but the modality of investment that would prove the success of his proposed actions. Each model will differ for each destination company, the industry, security regulations (SEBI rules) and investment products (Stock, Bonds -direct debt or convertible debt securities- and direct project investment)

We have identified various companies of alternative investment (to his own company – RIL) based on following criteria and principles.


  1. Total portfolio = Rs 10,000 cr. minimum or Rs 30,000 cr. Maximum
  2. Individual Investment amount: Minimum Rs 1000 cr Maximum Rs 4000 cr
  3. Currency of Investment : Indian Rupees or US$ in exceptional cases.
  4. Form of Investment : Shares (Equity), Secured Collateralized Debt ( straight bonds or convertible bonds in rupees or FCCB)
  5. Style of Investment : 30% to 40 % from open market (purchase of shares, bonds, CB or FCCB) and 70% (or 60%) by taking stakes in the target company ( so that the target company gets the cash to alleviate its liquidity troubles or for project development)

INVESTMENT TARGET:(Industry and individual companies)

Energy sector

  1. Your own core industry – Oil and Gas exploration, production and distribution.
  2. Highly undervalued own core industry candidates in public sector (PSU) and private sector.
  3. “Alternative Energy Industry” – candidates or AEI – such as Wind and Solar Power, which is the future for next several decades.
  4. Atomic power
  5. Ancillary industries related to his own core industry or company.
  6. large CAPEX oriented electrical energy sector such as power.

Non Energy sector
7.        Troubled Infrastructure companies, which are more than half way through in project implementation.
8.        Aviation industry, a major consumer of his own industry’s products (ATF = Air Turbine Fuel)
9.        Infrastructure Companies which are already half way through in project implementation. This will include power industry also.

Finance sector
10.     Involved in financing any of the above industries

DIVESTMENT (Rs 8,400 cr.) from following industries or companies

11.     Hotel sector – non priority and non related. Amount released : Rs 1000 cr. estimated (est.)

12.     TV Media and Entertainment sector : non priority and unrelated  Amount released : Rs 2400 cr. (est.)

13.     Broadband and Telecom sector – non priority and unrelated. Amount released: Rs 2000 cr. (not sure of amount committed) (est.)

14.     Retail sector – non oil/gas based which is non priority and unrelated such as Reliance retail – such as selling vegetables and food grain. Amount released: Rs 2000 cr. ( not sure of amount committed) (est.)

15.     Real Estate: Non priority and unrelated – except land for future projects.  Amount released : Rs 1000 cr. (est.)

Getting out of non priority or non related sectors (to his own industry) and getting into own but diverse industries, is the advice this Kalidas gives to maximize the earning potential of the large cash holding. No more wandering eyes 360 degree around, but look only 45 degrees from either side of his core industry and company. Just stay focused on your core business with unwavering attention.

Following above strategy would divest him of non core industries, realize Rs 8000 cr. and invest additional Rs 10,000 cr. reserved for share buy back, making him available Rs 18,400 cr. at least. He will still have Rs 60,000 cr. in balance after above employment (Rs 10,000 cr) and redeployment. (Rs 8,400 cr.)

End of Part – 1 (Part 2 will be appended here on Friday, 27 Jan, 2012)

Anil Selarka (Kalidas)

USA, 23 January, 2012


 Posted by at 4:41 pm
Jul 122010

Ref: 10-005 of 12th July, 2010

A golden opportunity struck a few days ago when Government of India changed its “Oil Price policy” drastically. I was expecting it to come in a few years, and it did. Just revisit my small article under NASA Ref: 0901-004-NASA dated 6-Jan-2009 Titled – Golden Era may arrive soon for Indian Oil Refiners. Click this link to read and download this article.

Compare the stock prices at the time of release of that article with present day stock price. The prices are extracted from Yahoo India.

Name of Refiner Symbol Price at 6Jan09 CMP on 9Jul10 Change % Time Mo
Indian Oil Corporation

(Bonus 1:1 adjusted)

IOC 217.50 396.50 + 82.29% 18 Mo
Bharat Petroleum Ltd BPCL 372.90 708.90 + 90.10% 18 Mo
Hindustan Petroleum HPCL 261.00 488.70 + 87.24% 18 Mo
Mangalore Refinery MRPL 43.25 84.70 + 95.83% 18 Mo

We had mentioned very clearly in January 2009 that..

•        The era of low share prices of all SOE (State Owned Enterprises) will be gone forever…

•        My dream of SOE Refiners to multiply 5 to 10 times in less than 2 years is now a distinct possibility…..

•        …believe me if Government of India follows up with the deregulation of oil prices, the SOE Refiners will give over 500% return in less than 3 years.

The words have proved to be more than prophetic. The return is more than 80% in less than 18 months, but the real return will begin to accrue from now on. Sit down with these stocks in your portfolio, and you will find them growing even 5 times from current level (10 times from previous recommended level)

Why the SOE Refiners will give return over 500%?

This is purely a volume play. If the prices rise, those who have large volume (sales) will benefit most. Each liter or gallon of gas (petrol or diesel) will bring them additional return that will add straight to the bottom line. (Profit and Loss account). The EPS will rise tremendously.

By rough estimate, the current oil prices should have been at Rs. 75 to 80 level – about Rs 25 to 30 more (+ 47% or about). The Government of India was subsidizing to the extent of Rs 20/liter in case of Petrol/Diesel and ATF (used in Airlines). In other words, the profitability of these stocks have to rise by 47% per liter (less taxes) if the prices rise to that extent. If the Tax slab is 30%, the PAT (Profit After Taxes) have to rise by 33% per liter on increased income. (Not existing profit).

Take the example of BPCL (Bharat Petroleum). Now look at the following scenario with just about 6% increase in petrol prices recently. The company has total product sales of Rs 122,000 crores in 2010 of which almost 95% is refinery product sales or about Rs 115,000 crore. If the prices rise by 6% in petrol and diesel segment, the higher profit will be 6% of Rs 115,000 crores or Rs 6,900 crores before taxes or Rs 4,800 crores after taxes. (PAT). The company has only 36 crore shares outstanding. It means that the EPS may rise by massive Rs 135/share. If you assign PE ratio of about 10 (for growth stocks – it is no longer in non growth category), the stock price has to rise by Rs 1330 from current level. (To reach over Rs 2000)

Again, we have to reduce the subsidy level from higher profits. However, the past practices were to treat the subsidy as “investment” because they were in the form of bonds. They were not taken into account as “profit” for strange reasons. May be, they wanted to account for it on “realized cash flow basis”

NOW, this is the effect of just 6% rise in prices. What will be level of profit if the prices rise by full circle of 33% PAT? It means that the EPS has to rise by nearly 8 times or minimum Rs 1080 per shares. What will be the effect on share price in that case, after about 18 months? They will simply explode to the uppermost stratosphere.

There are many variables here. We do not know for certain how much price rise will be affected in 18 months. However, we are certain that the profits will grow much faster than historical standard. The earnings of these SOE Refiners will be in uncharted territory. Most analysts will be guided by charts, support and resistance level. They would not know that almost all of their calculations based on historical performance would fail.

Such huge rise in profit will be a distinct possibility – the only caveat is how much? There will be lot of opinions in this regard. My approach is just simple and arithmetic. Just increase profit by multiplying “revenue” by “% rise in oil or petrol prices” reduced by tax slab on increased profit. This is what happens in almost all commodity companies be they in steel, copper, aluminum or mining.

I am giving you tool. Use your common sense and arithmetic skill to work out the possible scenario. Further, the SOE normally declare higher dividend – almost 35% of their profits. If the profits rise by Rs 420 per share as PAT, the 35% of PAT will be Rs 147 per share – that will be dividend payout. In other words, the dividend yields will be nearly 21% when the prices clock full circle. Most of the dividend will go to the Government of India who owns 54% of total equity as per latest filing with NSE.

Following factors will fuel further stock price rise:

– The company will have higher cash flow for expansion

– Debt will reduce that will reduce the interest cost

– there will be much higher expectation on earnings due to expansion.

– If global prices go down, the local prices will go down less than expected because the company will use this opportunity to raise under recovered subsidy from past actions.

It all depends how speedily the prices are raised by these corporations. Although the prices will be decontrolled, the government with controlling stake in these companies will have greater say how much the prices to rise having regard to public sentiment.

Who will benefit most?

Use peer comparison in Moneycontrol.com with reference to Sale volume. If a company has larger sales than others, its profit will rise faster than other competitors. The State Owned Refiners are having sales of over Rs 122000 (BPCL) to Rs 300,000 crores (IOC). Naturally, IOC has to gain more. Those who sell more liters of petrol or diesel, will earn more – it is as simple as that.

See the following table. We considered only 6% rise in petrol prices as announced by these companies. (Annualized). Last column takes only 70% of extra profits as PAT and then divided by number of shares outstanding. This is Additional earnings due to rise in petrol prices alone – other volume increases due to higher incoming capacity is not considered.

SOE Refiner Shares Gross Sales 2010 Qualified Revenue for Price Rise 6% of QR 10 Extra EPS – PAT
Indian Oil Corp (IOC) 125 Cr. 234,933 Cr 223,186 Cr 13,391 Cr 74.98
Bharat Petroleum (BPCL) 36 Cr 122,276 Cr 116,162 Cr 6,969 Cr 135.50
Hindustan Petroleum (HPCL) 34 Cr 111,467 Cr 105,893 Cr 6,353 Cr 130.79
Mangalore Refinery (MRPL) 175 Cr 31,885 Cr 30,291 Cr 1,817 Cr 7.27

It will be observed that –

1.       BPCL is largest beneficiary in terms of EPS. Its stock price is Rs 708 now.

2.       HPCL is most valuable because its stock price is at Rs 489 – 32% less than BPCL with almost same profits and number of shares

3.       IOC earns most but its EPS is less due to large number of shares – almost 3.5 times that of BPCL and HPCL. It is however trading at just < 400 – about 57% of BPCL and 80% of HPCL. It will earn most when the price rise completes full circle. It is poised to grow most. Its market cap will grow so much that it may become leading BSE/NIFTY Index Stock, outstripping even ONGC. Most Index Tracking Funds will have to buy this beauty whether they like it or not.

4.       Private Refiners like RIL or Essar Oil Ltd are not considered here. They are already trading at much high PE ratio – almost 3 times of SOE Refiners. So they will underperform compared to SOE Refiners.

5.       See the market cap existing and future based on price projections after about 3 years.

Market Cap of SOE Refiners – Present and Future (after 3 years)

SOE Refiner Shares CMP (9Jul10) Market Cap Projected Price (> 3Y) Projected Market Cap
Indian Oil Corp (IOC) 125 Cr. 400 50,000 Cr 3,000 375,000 Cr
Bharat Petroleum (BPCL) 36 Cr 709 25,524 Cr 5,400 194,400 Cr
Hindustan Petroleum (HPCL) 34 Cr 488 16,592 Cr 5,400 183,600 Cr
Mangalore Refinery (MRPL) 175 Cr 84 14,700 Cr 360 63,000 Cr.

Current Market Cap of top leader – ONGC is about Rs 278,000 crores. IOC is therefore poised to overtake even ONGC in just under 3 years to become top ranking stock in India. Almost all funds will have to buy this stock to track BSE/NIFTY Indices.

Government of India will become Trillionaire if all PSU are combined and its stake recalculated. It will be the richest government in the world.

How the stocks will move and what will boost and hurt them?

I have always mentioned that the stock has 4 strengths – its own, industry’s, country’s and international. The SOE Refiners will have strength of their own, Industry’s (oil sector), Country’s (India due to its growing status and higher GDP expected over 9%). The only remaining and uncertain effect will be Global Stock Market, dictated by United States which is in perilous state. Add the strength of 3 factors and deduct or add the weakness or strength of fourth factor.

Each quarter will show better and better performance because the SOE Refiners will steadily raise the prices in order not to rock the boats, and avoid discomfort to government.

Rise in oil prices will also fuel protest. At the same time, the intended practice to change Gas Station prices every fortnight will also ensure that in the days of steep correction in oil prices abroad caused by stronger dollar, the prices could go down. Once the people understand that the prices could go higher or lower, the protests would begin to disappear. Until now, Indian consumers were looking at only local prices in Rupees – in future they will see the international prices as guide. They would not blame government if the world prices move higher.

Higher consumption will also move the stocks higher due to higher demand. First is the value growth and then volume growth caused by expansion will drive SOE Refiners prices higher.

Higher Rupee will bring down the oil prices. Rupee is the only major commodity which is still under the control of the government and RBI. When the artificial intervention ends, and free market is allowed to play role, Rupee could rise to 26/$ from current 47/$. In that case, the oil prices could drop by over 50% from current level. However, the margin of the companies would be protected. The refining margin determines the profit, not the actual sale or purchase of the commodity.

If the international oil prices begin to climb again, then only the government will come under pressure to roll back on decontrol. If that happens, then my above targets will be severely affected. I do not think that GOI would roll back on decontrol. It has two choices – either free market determines the prices or it has to offer massive subsidy that would strain its budget.

India’s Debt rating will improve due to removal of major obstacle to deficit – Subsidy. It will bring down interest cost internationally. FII may pump in more money into the market, especially SOE Refiners stock that will propel the prices higher.

The credit rating of SOE Refiners will get back to AAA level domestically and their foreign currency bonds rating too may improve. That will reduce their interest cost boosting their existing profits.

If any of these refiners decide to float ADR or GDR, they will be most sought after. They will attain premium to domestic price and also higher rupee could boost the prices of GDR/ADR. They will be the best to invest. Return on future ADR/GDR will be 50% higher than domestic stocks. All NRIs should seize this opportunity when presented.

Some of the stocks, notably Indian Oil Corporation, may achieve cult status and propel into BSE/NIFTY indices due to its sheer size and rise in market cap. It will become almost Number 1 index stock, outstripping even ONGC and Reliance. Those stocks may suffer due to their index dilution. They will have to work much harder to retain even existing prices.

Uncertain global monetary conditions will hurt these stocks in normal course. That is only market related weakness.

Due to weaker dollar and unwillingness of Arabs to oblige United States, it is likely that oil prices will have upward bias. That will ensure higher and higher profits for the SOE Refiners.

Is my forecast accurate or reliable?

I use common sense and project the prices. I have given the reasons as above. If you agree to the reasoning, you may buy into these stocks on long term basis. One should reduce their reliance on bank’s FD and also draw loans from Provident Fund account to buy these stocks only. This is one of the safest investment bet in the world.

The global market is very risky. By my assessment, United States is almost bankrupt and it is also following bankrupt policies. All actions so far by Obama Administration are going to work in opposite directions. He should read my book “SUB PRIME RESOLVED” to direct his future economic policies to resolve the impasse.

If you are losing over 20% in leading index stocks, switch to these SOE Refiners. Do not be afraid that they have risen already by 20% recently. They have lot to go higher as mentioned above. However, buy only if you are convinced.

Anil Selarka (Kalidas)

Hong Kong

Ref: 10-005 dated 12th July, 2010

©Copyrighted by Anil Selarka (Kalidas)

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 Posted by at 11:44 am