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
Jun 032011

2011-11 of 2011-06-03 (3rd June, 2011)            PDF Download

In financial markets, the people are never afraid of heights, but always worried of lows. Almost all hyper activities are taking place at the height of the market, which is determined by fast and hectic rising of the almost all equities.

In Goonda Raj, the bad news pervade from one gang to another easily. The gang leader knows in matter of days how the other gangster made so much of money in so little time. They adopt same methods to succeed, and they often do.

Greed and Fear are inseparable parts of any market. Money makes everyone corrupt. Almost everyone wants to become a millionaire or billionaire in matter of days. When the bureaucrats and Ministers see the businessmen making money so easily, they come in like “mafias” and start seeking their cuts, fees, haftas (installments) or whatever christen names you may want to assign to such activities.

When the market has risen from one peak to another in rapid succession, a time comes when it begins to either crash or climb down slowly, surely and steadily. There is no more upside, so the best thing that can happen at the peak is to come down due to its sheer gravity.

So it applies to corruption as well. Scam and Scandals begin to emerge when the market is jumping from one peak to another. The ignominious methods adopted by one minister becomes example to pursue by another minister. When one is caught, the entire range of gang operators come within the net.

Media like vultures pounce on such stories and sell their newspaper or magazines at maximum rate by publishing juicy stories. They call it “investigative journalism”.

No one wants to become Lord Rama, a higher rated moral God with “ek patni vrat” (believer in only one wife). However, everyone wants to become Lord Krishna who was darling of many girlfriends or dasis or sakhis (Companions). Similarly, in financial market everyone wants to become Warren Buffett, but they do not adopt his strategy. They worship Madoff, Stanford, Harshad Mehta, Ketan Parekh etc etc. to become instant billionaire like instant coffee.

Of late lot of money has flowed into South India. Initially, lot of Keralites went to Gulf and became richer. They sent lot of money home in their home state, so the prosperity flowed there. However, they were low level workers who earned by hard physical work. They could not engage themselves into corruption. South Indians in north of Kerala were good mathematicians for a long time. They got hold of Software or computer technology. This was instant hit. So Software exports generated billions of dollars or thousands of crores in South India. Hyderabad, Bangalore and Chennai became the focal point of interest.

Such flow of enormous money attracted crooks and scoundrels in the industry and scams and scandals started erupting like volcano in government circle. While License Raj has ended long time ago, the government officials and ministers started reformed “Spectrum Raj” to capitalize on telecom revolution.

In state of Maharashtra, a new Raj called “TDR” started which means Transfer of Development Rights in real estate business. Here the official or minister allows higher FSI (Floor Space Index) against the rule by permitting the developer to transfer his right in one development to another development obviously for a hidden fee. Like Mafias, the ministers and officials at the top started charging fees to the developers and builders. In short, paper derivatives like operations started in “Spectrum Raj” and “TDR Raj”. Everything was up for sale, including IPL.

The scams and Scandals follow same pattern of stock market. When they come out with increasing frequency, they denote the first sign of “cleansing up” . The scams and scandals have no where to go up now, but only down. It is a self healing process.

A few years or decades back, Bihar, Uttar Pradesh, Haryana and Madhya pradesh were considered the most corrupt places in India. Our famous Lalu Prasad Yadav and his bibi Rabdi Devi became the household name. Their fodder fraud of Rs 700 crores look minuscule by today’s standard. In fact, Lalu compensated the country by turning Indian Railways into highly profitable public enterprise earning thousands of crores in revenue and made it a shining example. Phoolan Devi was forgotten and replaced by Maa Rabdi Devi his wife. They are no longer counted because after many scandals in Bihar and Uttar Pradesh, a correction set in and now they are nearly out.

The slack was taken over by the South India where the prosperity flowed due to rise in software exports that brought in thousands of crores of money.

A honey bee goes where the flower blossoms. The honey bees in this case were corrupt politicians and their bureaucrat secretaries. Flower pots or money were in South India. Hyderabad, Bangalore, and Chennai were the places where the crooks and criminals arrived and mushroomed. Andhra Pradesh fired the first salvo when Rajus and Reddys took over the reins.

Satyam Computer’s Chairman B Ramalinga Raju became the first billion dollar fraudster of India. If Guinne Book of Records recognizes the corruption as outstanding achievment, Raju of Satyam will enter the roster of “Fame of Records”. Once tamed Andhra Pradeshi became famed “fraudsters”. 3R – that is – Rajus, Reddys and Rajas started as roosters. GTB or Global Trust Bank where thousands of crores of frauds took place also originated from Andhra Pradesh and RBI’s Reddy took the reins indirectly behind the curtains.

When the storm or tornado arrives, it changes the directions by turning a few degrees all of a sudden. The corruption started traveling from Andhra Pradesh to Karnataka (Bangalore) and to Chennai where Maharani Jay Lalita ruled over the state with thousands of saris and sandals in her closet.

Now that we know the natural process of creation of scams and scandals and their self destructions, let us see whether they help us in making good investment decisions. The dilemma facing the innocent nationalistic investor is whether he should sell and get out of the market or use the correction as outstanding buying opportunities?

Our experience opts for latter – that is – outstanding buying opportunities to buy the tainted yet high growth and potential stocks. The stocks are some of the simplest, finest and efficient financial instruments. They are extremely volatile because very few understand them. The stocks make money when they are bought at lowest and sold at the highest. However, in order to buy high end growth stocks, we need the help from fraudsters, scam artists and scandals at the top. They cause the stock prices to crash to the lowest to afford the intelligent and smart investors extra ordinary opportunities. Otherwise, how could one buy the stock at the cheapest?

Look at the Satyam which was taken over by Mahindra group to rebrand it as “Mahindra Satyam”. In spite of accounting fraud, the company was in one of the best health by all counts. Debt free large balance sheet, huge cash chest of Rs 1600 crores, high end growth, acceptability by high end customers such as Pharma industry leaders, well trained and qualified software engineers, erstwhile good reputation in its real field, sufficient margin and rising too, and competent management.

Almost all the bad things that were to happen to Satyam had happened and the company has written off all past losses of settlement of all law suits. It starts with the clean slate now, and the stock which we recommended strongly at near 60s has risen to Rs 89 today, a gain of 50% in just under 8 months. We have set the target of Rs 160 in less than 10 months or gain of about Rs 100 or 170% .

Political events, as different from financial event, provide the high quality opportunities. A stock makes money for the investors if the underlying company makes profits consistently which is a financial event or cause. The stock price therefore goes up. However, a non financial event such as scams or scandals involving promoters or their blood relations provide the outstanding opportunities to the real gem investors.

Such scams or scandals give them “god send opportunities”. They understand the risk and reward and go for it when the scandal dies down or getting reported on inside pages of financial newspapers instead of on front page.

A case to the point is SUN TV and SPICEJET which is controlled by Kalanidhi Maran. His brother Dayanidhi Maran, a former Telecom minister, is being investigated for his role in showing favors in 2G telecom licensing, a spectrum matter. The stock of SUN TV lost 27% in one day, and Spicejet by 17% which is holding most prospect amongst the listed airline. These companies were in different industries and have no vested interest in telco licenses. Their prices crashed due to poor sentiments generated by the main promoter’s family blood relationship.

A question arises – when to buy such scrips? The answer differs from exchange to exchange. In India, Bombay Stock Exchange sets the circuit limit which varies from 5% to 20%. Some stocks do not have any circuit rule attached. When the stock falls to lower circuit, it means that buyers refrained from buying. It is possible that the stock may go to lower circuit again on next day. It is also possible that the stock may have hangover from the scandal for a few months. However, we follow the following strategy not to miss the lower prices.

  • See the intensity of the bad news and see whether the stock trades near the lowest circuit all through the day on heavy volume.
  • Start buying from third day if the intensity of news is very high
  • If the company or its promoters were not involved in seemingly bad news, ignore the news and start buying on 1-2-3 basis as under:
    1. Buy small to test the water. Say you bought 1000 shares at CMP or Current Market Price
    2. If the publicity of news is very bad, buy on alternate days. That is, after buying 1000 on first day, leave second day and buy more on third day. Say you bought 2000 shares now.
    3. Leave again for one more day and on fifth day from the news, buy small portion, that is, you buy 1000 more if the price is lower than previous purchases.
    4. Then stop. Now allow the stock prices to recover. If you have enough stock, ignore the urge to add more.
    5. If the stock recovers strongly, start selling from last purchase. Say your last purchase was 1000 shares, so begin to sell it.
    6. Sell more (say 2000 shares you bought under Stage 2 above) if the stock continues to surge. Here again sell on alternate days or if the stock trades at upper circuit or up by 15%
    7. Allow one more day to pass, and then sell the last lot under Stage 1 (1000 shares)
    8. Do not worry by selling if the stock goes higher. You made your money. If the stock goes higher, you already have old stock which was averaged down. Sell only later as per your convictions.

Allied Digital Services Ltd was hammered down due to Income Tax Raids alleging tax evasion. Good part of interpretation was that the company was making good money which was the reason to save taxes. However, the news here is bad because the company’s management is directly involved. Not so in SUN TV and Spicejet.

Buying and Selling stocks is a imperfect science. It is at the most an Art. Use your common sense, and listen to only yourself. Do not be guided by media news analysis except to know the bare facts. Trust the company’s news release as provided to NSE or BSE under Corporate announcements. Do not act on impulse and sit in quiet corner to think over whatever happened and what could be the reasonable truth. This is the best way to deal with the stock price crash of any substantive stock.


Kalidas (Anil Selarka)

June 3, 2011