Financial Wisdom By Kalidas

Ref: 10-003 of 24 Jan, 2010            PDF Download from ScribD or Download Pool Sidebar>>Articles

Dear Readers,

The correction has started precisely on the date we mentioned – 21^st January, 2010. We predicted it more than a month ago.  Now, the situation has taken turn for the worse.  The trigger was provided by President Obama’s proposed clamp down on the banks proposing far reaching regulatory actions to rein in the banks in terms of their size and activities. A separate article will appear within a few days titled – OBAMA WAR with INTERNAL TERRORISTS

Dow has lost over 5% in 3 days. S&P has dropped to 1093, slightly above critical level of 1083. I do not care for technical indicators. My forte is fundamentals. The core fundamentals are worsening.

• Bernanke’s extension as Fed chief, once considered almost a done deal, is now in serious doubt.  If he is reconfirmed, there may be a short reprieve for the market.
• The future of Treasury Secretary Timothy Geithner is also in doubt.  The AIG dossier is becoming murky. The testimony of Paulson with Geithner in relation to AIG affairs is due on Wednesday, 27^th January, 2010.  It means that the Senators know something ignominious more than the investors are aware of.
• There are indications that the Senators have finally realized the extent of damage done by Henry Paulson of Goldman Sachs and Ben Bernanke from Fed.
  • President Obama’s pathani demand  “We want our money back” alludes that the $306 billions non fund based guarantee given for Citigroup’s worthless debt at behest of  Paulson – Bernanke combine are maturing into real fund based liabilities.
  • Read with massive profit of Goldman Sachs, and Citigroup’s insistence to cancel out the “loss sharing agreement with the Fed/Treasury”, the Senators and the President Obama appear to have realized the “foul play” and “Criminal conspiracy” against the State. Many frauds may come to light. It could have massive effect on Wall Street. Even Warren Buffet could become controversial. His days are beginning to have “U” turn for long.
• Two days – Saturday and Sunday, have passed since the President Obama disclosed his plan to rein in the banks, their size and their disapproved activities. The era of $25 billions of profit for the bank is gone for ever.
  • The earnings of almost all banks will be downgraded by the Analysts up to 30% to 80% that could collapse the prices of major money center banks. The entire banking structure globally will be re-assessed on severe downside. Bank of America, JP Morgan Chase, and Wells Fargo could face the burn of third degree.
  • There will be further lending squeeze from these banks raising real market interest rates.
  • If these banks can not make double digit billions of dollars of profit for next 5 years, , they will never be able to recover the past losses.  Nor will they be able to raise new capital due to poor earning prospects.  Fed/Treasury window will be shut for good.
  • In short, some major banks could become officially insolvent.
  • Goldman Sachs and Morgan Stanley may surrender banking license to avoid above restrictions.
  • The global banking giants operating in US such as Barclays, Deutsche Bank, UBS and Credit Suisse may have to realign their business. UK and Europe too could adopt similar measures with similar effects. UK and Europe always play monkey game.
• SEC is preparing for some tough times ahead. Bloomberg reports on 23/Jan that “Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.”  It adds that “The regulation would require the trades be executed above the best existing bid in the market when shares fall 10 percent in a day,” In short, alarm is on.

Massive collapse is about to set in from Monday onwards.  It is scary.  It was inevitable; we were merely waiting for the trigger. President Obama provided it. He is not to blame for what he proposes. It is the way he has presented them and timing thereof. He is under extreme pressure to perform that is telling on him for his expediency.

• The markets may lose anywhere from 5% to 15% in short time (< 1 month), and 15% to 50% in medium term (< 4 months) if the short term correction takes place.
• Margin calls will exacerbate the downside.
• Mutual Fund redemptions could cause massive slides.
• Money could become scarce overnight. Overnight Call rates could zoom and stay there for unduly long time forcing short term rates to rise. My previous article “Maturity Mismatch’ may become reality as projected.
• Monday could be the beginning of Tsunami wave, category 7. So many things could happen swiftly in short time.
• Massive losses to investors will become a hard reality.  What they lose this time may not be recoverable in next 3 to 7 years.
• The only reprieve will come when the Bernanke is allowed to continue his job. While he has lost all credibility and should not be confirmed, it is in the interest of the market that he continues for a while (temporary extension) until his successor is chosen. If he loses the job, one may be waiting for him at Goldman Sachs.

This time, protecting capital is more important than the earnings. If you have capital left, there would be earnings one day.  It is not necessary to make money in every trade every day. It is enough if you made good money some time rather than a little money every time. We therefore suggest the following from Monday onwards.

There could be huge meltdown. All markets may go down Minimum 3 to 7 days continuously in varying degree.

US Market:

1. Dow may lose another 14% (1400 to 1500 points) and then rest before going down again.
2. If S&P goes below 1083, it will be bad sign for technical analysts. In my view that it will be breached.
3. NASDAQ may outperform DOW.
4. Buy Put options on S&P 100 known as OEX-100 and Nikkei 225. These are very volatile.
5. Do not trade S&P 500, it is less liquid and does not move fast.
6. SELL short or Buy puts on ADRs of Wipro (trading at 43% premium) and ICICI Bank (-3%) and HDFC Bank (+15% premium). The heavy premium is usually lost in meltdown. Further, one can keep short position in US market on any equity or ADRs for about 12 months by paying suitable margin. Check with your US broker first.
7. Think of accumulating undervalued stocks like MTNL with Zero debt where discount will rise due to meltdown making it attractive. Stronger rupee tend to add more value in $ terms.
8. Indian ADRs could develop more discount than shown today, making them more attractive.  Some counters are better bought as ADRs than underlying equities in India. If you have choice between domestic share and ADR, prefer ADR of liquid counters. (large cap stocks)
9. A strong buy opportunity may emerge in FCCB (Foreign Currency Convertible Bonds) of Indian companies that may be hammered in meltdown. Their yields may rise, premium contracts or even trade at discount. They being denominated in $, stronger rupee will give better return than underlying shares in India. Watch out for them. Go only for well known battered counters in info tech, pharmaceuticals and telecom sector. This is for only wealthy investors having $ 1 Million or more investment budget. Not suitable for local investors due to larger size lot involved

10.  There could be political and social upheavals. Since hundreds of billions of dollars are at stake, and jobs being lost with increasing intensity, violent political removal at high level at many places is likely. This time for a change, the war will be within United States. Law may take a back seat.

Indian Markets:

Indian growth story could be dented but will remain intact than China. India is still safest place to invest. With US, Europe, UK, Japan and even China taking massive blow, India, Indian economy and even Indian Rupee (if made convertible) could become real alternative to US dollar.

Nevertheless, holed in the habit of taking cue from the Dow and Asian markets, SENSEX may tumble by 14% in a few days (2400 points). Huge margin calls from Wednesday onward could push it down further by another 1000 points. The market may reach 13,400 first, rebound for 800 pts in dead cat bounce rally, followed by sharp drop down further by 2000 points. In short, the market may lose 4600 points within one month. Even if the market recovers during intraday, it may close down near the close. Not many would want to keep their position open overnight.

However, there is a caveat. Indian budget due in February could provide relief or act as mild buffer against further sharp fall. It all depends how Government of India responds. The interest rates may be lowered, not raised to contain inflation, and Income Taxes could be lowered for Corporate and Individuals that may provide fillip to the Indian markets. This is however conjectural. Rely more on facts than rumors or opinion. Financial expediency will prevail over political one.

1. Stock financing banks like ICICI, HDFC, Axis Bank, SBI could tumble more due to proposed changes in banking law in United States.  They will not be able to carry out their investment banking activities as before. They could be the index draggers. Do not touch them for another 1 month even with remote pole. Swap them into neutral stocks like IDBI Bank or IFCI who are domestic oriented.
2. Stay on short side.
   1. If you do not want to sell down your portfolio, insure it by buying Out of Money Put option of NIFTY for February or March, if available.  Do not speculate, use it as hedge. The markets could have wild swings that could boost or bust the speculators.
   2. SELL 50% of remaining stocks held. You may have already sold 70% by now from the peak, if you have followed this column. What you may have is remaining 20% exposure.
   3. Possible exceptions are recovery play like Spice Jet. Ispat Industries and Dish TV who have returned to profits already or will return in one quarter.
   4. Finish your selling through out the day, taking advantage of intraday recovery. Even if the Asian markets recover during the day, continue selling. You may sell some Spice jet too if you are sitting on good profit, with a view to buying back later.
   5. Stocks like ITC and Hindustan Lever may perform better than others.
   6. SELL or reduce Mutual Funds (except LIC linked) by 70% and retain cash.
3. Focus on buying only after 3 days of fall only the following stocks. (1) Spice jet (<56)  (2) Ispat Industries (<23), (3) Dish TV (<41) , (4) Petronet (<71), and (5) Evinex (<3.65), (6) IOC (<270), (7)IFCI (<43), (8) UCOBank (<48), (9) LIC Housing Finance
   1. Avoid Oils, Metals, Ores, Infrastructures and all other high PE stocks. Also avoid story stocks like PSU on privatization list.
   2. Avoid oil producers; prefer State Owned Refineries like IOC, HPCL, BPCL, MRPL etc. Avoid private refiners like Essar Oil and Reliance.
4. Buy more of Gold, Gold ETF and Silver.
   1. Some may say that if Gold falls below $1065, there could be a meltdown. Do not buy those stories.  Gold rise most in uncertainty.
   2. Silver is generally stronger than Gold nowadays. Use major fall in their prices as strong buy opportunity.
   3. No targets are given because you will be in hit and run market for several days.
5. Please note that this article is meant for regular delivery based investors. Some hedging operations are mentioned to protect their portfolio.
6. Short term investors active in F&O segment may conduct their activities on their own impulse. This article is not meant for them.
7. When the markets correct as above, it will provide strong platform to build Long Term Portfolio of any amount as suitable to investors. Investments made in steep correction time will provide better return than properties.
8. Defer buying property for investment purpose until March 2010.
9. If you are keen on investing into property for investment purpose, not for self use, better look out for commercial properties from March/April. Read my all articles on “How to invest series….” again.

10.  Buy equities only when you strongly feel like selling gold or silver. At that time, one may buy equity or properties. Prefer “Ready to Possess” properties than properties under constructions from unknown developers who might close their shops suddenly and run away. This time around, avoid farm properties, and prefer commercial or residential properties in major metro cities or towns having population over 30 lakhs (3 Millions; +/- 20%)

Will the markets go the way as projected? I will be happy if I am proved wrong. The trouble is that I am often proved right than wrong. But do not take me for granted. Try to be rational and make your own calculated guess and decision.  There is not going to be time for analysis.

A question may arise, whether this crisis was solvable?  The answer is yes. For every problem there are multiple solutions. My father taught me once “For every problem, there are 10 solutions – just go out and find it”.  I therefore wrote the book “SUB PRIME RESOLVED” which provided comprehensive solutions. If US-A does not go the way I have suggested, the nation is set for gloom, doom and total collapse. It may not exist in present political form.

I also made several attempts to offer solutions to the US Administration as under. However, there was no response. No regrets. I did my job and would let them do theirs.

First, when I offered solutions to President Bush in August 2008 before crisis began.  However, he or his stooges in White House ignored.  My letter to President Bush is already in the repository and read by the readers. The real trouble started precisely three weeks later in September 2008.

Second, I offered similar solutions to Senator Obama while he was campaigning for Presidency.  There was no response. But I can understand that.

Third, when my book “SUB PRIME RESOLVED” was published in June 2009. I wrote to President Obama, the First Lady Michelle Obama and Vice President Joe Biden. No response either.

Fourth, when I wrote similar letter to ex-President Bill Clinton and Jimmy Carter;  they too did not care to respond.

Fifth, when I sent my book “SUB PRIME RESOLVED” to Sen. McCain, and Bobby Jindal, Governor of Louisiana and Chris Dodd, Chairman of Senate Banking Committee.  However I did not receive any reply or courtesy acknowledgement.

Sixth, when I wrote a letter to the President Obama very recently with similar letter copied to Vice President Joe Biden, Senator Christopher Dodd, Chairman of Senate Banking Committee, and Timothy Geithner, the incumbent Treasury Secretary. Again there was no reply or acknowledgement.

I threw a challenge to President Obama that if my solutions could not extract the United States from the severest financial crisis and make it healthy again within 9 months, I repeat 9 months, he can sign “Death Warrant” against me with my and my family’s full written consent.

Seventh, when I wrote to the Chair of FDIC (Federal Deposit Insurance Corporation). Again there was no reply or acknowledgement.

I wonder why we send our children to USA for higher education such as MBA when those expensive institutions do not even teach basics of Courtesy, Management and Administration to upcoming business and political leaders in United States itself. They keep their minds closed and ask us to keep ours open.

The Americans are suffering from “Superiority Complex”.  The past successes have gone to their head. They appear to feel that only they know everything, forgetting that the knowledge knows no bounds. It can spread anywhere. We are in internet age, America’s  own invention.

The White House may be thinking that this Kalidas, Anil Selarka or whoever he is, must be a crazy, egoistic, pseudo bastard.  When our Nobel Laureate economists, financial gurus and management experts in United States are not able to think of one solution, how on earth this Kalidas could have multiple solutions from Hong Kong 5000 miles away? Throw him into the dustbin for good.

There is one way Americans can come out of troubles learning from Americans only if they prefer.  Hand over the country to IBM executives. They know how to think, conceive, design, plan, implement, execute and bring positive result. They think out of the blue box. It was IBM who invented “Personal Computer”. Many years ago, the company was in shamble spending billions of dollars in advertisements.

However, they read the writing on the wall in time and did not take long to “dump” it by shifting to services and software solutions. There used to be IBM logo everywhere in the past.  The striped blue logo is rarely seen anywhere now; and yet, they are everywhere like God.  Look at them today – they are fast, nimble, profitable and as efficient as any coveted American enterprise ought to be.

President Obama has to take three decisions.

1. Dump GDP theory. (the way IBM dumped and got out of PC business)
2. Dump Goldman Sachs and quarantine every Goldman emission in Fed and Treasury (and everything should be fine in US and globally)
3. Pump Gold. (bringing back monetary stability by re-standardizing dollar)

Kalidas (Anil Selarka) Ref: 10-003 of 24 January, 2010 (Sunday)
Hong Kong

Personal Blog:     http://anilselarka.com
Book Web       :     http://www.subprimeresolved.com

Disclaimer:
Readers, before you proceed:
This article is released on Sunday so that you have enough time to deliberate on information available from various sources. This is for your informational purpose only. Consult your professional broker, banker or investment adviser before acting or taking any decision. No liability of any kind attaches  to the author.



NEWS

Date of News or Event: 2008/11/12 – Tata Tele Services – NTT DoCoMo- Japan  purchases

NTT DoCoMo Japan’s and perhaps world’s largest telecom company was rumored to have bought 26% stake in India’s Tata Teleservices Ltd (Unlisted), parent of Tata Teleservices (Maharashtra) Ltd. (TTML) a bleeding child of Tata group for over  3 years. The consideration is US$ 2.7 billions or Rs 12,825 crores or Rs 128,250 Millions at current rate of Rs 47.50/dollar.(It may go higher or lower on the date you read this) Bloomberg News links is Bloomberg- NTT Tata deal Also read in greater detail in India’s  Business Standard

 

It is also reported today that a press advertisement has been released in which mandatory offer of Rs 24.70 has been posted under SEBI’s takeover rules.

 

I had posted the article earlier as First Information Analysis based on sketchy details, but withdrawn within hours after realizing that some readers may act impulsively and take large position. Some astute readers did send me 3 comments that forced me to avoid the publication in the interest of potential investors.
 

 

 

1.      It is not known whether NTT buys 26% stake from existing shareholders of the Parent TTS or on its expanded equity…

2.      TTML has 190 crores shares outstanding today. Under mandatory offer of 20%, the company may be required to by about 38 crores of shares from the market. The average volume of this counter has been low of late at 3 Million shares (30 Lakhs) of late, and it used to be over 10 millions shares on NSE alone. It will take 10 days of heavy volume or nearly 20 days of moderate volume on NSE to buy 38 crores of shares (380 millions) from the open market. Look at 6m TTML NSE Volume : Yahoo

a.      The premium offered to be paid is only 25% on closing price on 12-Nov-2008

b.      It seems that the company has worked out the Offer Price in terms of SEBI Regulations for Offer Price – See 20(4)(c) under which average of last 26 weeks high and low is taken as basis.

 

.3.      As per BS report, NTT appear to have worked out acquisition price based on per subscriber at Rs 19,334. Obviously, NTT may have worked out the purchase price with reference to industry standard ARPU (Average Rate Per User.

4.      Please note that some reports do suggest that TTML has only 30 Mln subscribers (against BS report of 50 Millions). If that is true, the correct price could be Rs 24.35 or as offered now.

 

For NTT, this is a bargain. They are paying less because of 20% appreciation of Yen vs. dollar and 20% depreciation of Rs vs. $. Thus, the deal works out 40% cheaper in favour of NTT in Forex alone. 

 

Other Important Financial Implications:

Depending on the deal,

1.      The TTML will have deep pocket shareholder with latest technology. The past is history

2.      Its debt may disappear sooner or later.  It could be a debt free company in era of monetary crisis

3.      It will have access to latest technology, never seen by any of its competitor, including Vodafone

4.      TTML can now expand at fastest rate. Its rate of growth is over 25% compounded in sales. The growth rate could possibly expand to 50% (CARG) for next 3 years at least

5.      TTML can now bid for major and minor town’s circles and large non-metro cities.

6.      Funding will not be a major problem. While TATA has been under acute pressure, as anticipated by this author 10 months ago, NTT is reportedly having no funding problem. With Yen rising, the funding task become less daunting for NTT

7.      Other operators from Bharati (Airtel), RCom (Anil Ambani’s telecom outfit laden with debt), and Idea (Birla’s outfit laden with heavy debt) will face immense competition. They do not have the level of financing in current difficult credit environments – TTML will outpace them by yards.

8.      On its own, TTML is now on the verge of breaking even. Its current losses are dominated by non cash charge of depreciation. Look at the following numbers

a.      Between 2007 and 08, the sales rose by  Rs 298 crores and losses dropped by Rs 170 crores, That is with incremental sales of Rs 298 crores, the losses were reduced by Rs 170 crores. Current losses are Rs 148 crores, In one more year, the TTML could break even. It could be earlier with this deal.

b.      With increased sales growth next 12 months @40% due to availability of funds with this deal, the increased sale of 680 crores could generate Rs 388 cr of income that could wipe out the deficit of 148 crores and make net gain of about Rs 240 cr. The interest cost (Rs 182 crores) could be reduced to zero If parents remit extra cash to TTML.

c.      It looks like that surplus cash may be retained by the parent TTS and not much cash benefit may accrue to TTML. In fact, the company is entitled to 60% of cash received by parent TTS from NTT. (Rs 9000 crores) being its share of total enterprise value. If it receives Rs 6000 crores (less than 50%), it will wipe out the debt completely and also earn interest income before expansion @ 10% or about Rs 600 crores.

d.      TTML could earn (240 +180 + 600) or Rs 1000 crores given the margin for error. With revised 190 cr shares outstanding, the EPS could be Rs 3.90 or about.

e.      If TTML does not pass on cash benefits to TTML, to which it is entitled to, the EPS may drop by Rs 3 per share or to Rs 0.90 only. In that case, the price target will come down drastically. It all depends how TTS treats TTML – as normal parent or as sucker – to take all gains and pass on all losses.

The stock could therefore see good rise in value in short to longer term. It is also possible that Tata will have to sell larger stake in future, could sell out entire company to NTT, to get out of debt trouble at Tisco and Tata Motor. In any case, even without NTT bid, TTML would have come to profit in 12 months. It would earn about Rs 0.90. If NTT cash is infused proportionately, it could earn Rs 3.90 per share. Its EPS could rise to Rs 10.70 in 3 years based on 40% compounded growth. If credit crisis is settled by then, the stock at could command modest 12x multiples  It can have following target depending on whether the parent pass on cash to TTML to the extent of its contribution to overall business: 

The purchasing price of Rupee will go higher (don’t look at $ vs. Rupee) domestically. (If property prices go down by 40%, it means that Rupee’s purchasing power has gone up by 40%)

 

Strategy

I have mentioned on MMB that when the parents are in trouble, they sell their children. Ratan Tata made blunder of his life when he bought Corus and then Jaguar just to prove others wrong,. He is in serious trouble now, so he has no choice but to sell his prized companies. TTML was his least priority. He will have to sell VSNL also soon. Even if he wants to sell Corus, he will find no buyers. When I mentioned on MMB 10 months ago that Ratan Tata has made mistake so fatal he will have to sell his Jamshedpur, It was a satirical comment, which was laughed at. And now, I leave it to you.

 

I have much higher upside for TTML now. Even so, my target is as per above table. It is safe to buy. It will be tomorrow’s blue chip. I take the view that the share of Reliance Communication and Idea will go down relatively more.

 

I will therefore buy the stock up to Rs 20. There will not be any counterbid I am sure – no one has money now, even Rs 100 crores, forget 12000 crores. Ask Mukesh and Anil Ambani, they will agree. So will be Kumarmangalam Birla of Hindalco and Jindal. They are all hanging over the fire with heads down. They are crying in wilderness. 

Following is my strategy:

1.      Buy and accumulate TTML up to Rs 20 for 2 months and Rs 16 after the completion of offer.

2.      Also Buy stocks like GTL Infrastructure Ltd who makes telephone towers. I was negative on that stock, but the things have changed. I will post my recommendation later in Stock Watch.

3.      Swap from high debt telecom players. I would sell part of every other telecom stock (15%) and swap them into this one. If TTML is receiving more cash from its parent, then I will sell more of other telecom players (50%) and swap them into TTML.

4.      Since the market is uncertain and heading towards complete liquidation ( it will be apocalypse) in a few days, book the gain periodically and buy back in steep correction (over 500 points or more)

5.      For the time being, it is better to swap less than Rs 40 stocks into this one immediately. Ride the rally, book the gain and go back to your counter if still good.

6.      The stock is not going beyond Rs 20 today – the offer is only for 20% and there is no guarantee that your share will be bought by TTML. It may therefore trade at discount of 10% to 20% from Bid Price or Rs 24.20. It is possible that it may go to max Rs 22 before the close of the offer.

7.      Caution: there could be “reverse split” later on the stock.  It could be 5:1 later because company like NTT does not like penny stock. 5:1 will reduce the number of shares by 80% to 38 cr shares (380 Millions against 1,900 Millions now) . With supply side less, and Fund Managers demand more for this potential Blue Chip, the price rise could be sharper than above target.

 

ACTIONS 

1.    Buy first some small quantity. Be aggressive if the stock goes to Rs 16 or so
2.      I would buy up to 10,000 shares at current prices (Rs 18 or so)

3.      Swap from other telecom counters which are slow movers or have too much of debt. I would avoid Rcom and Idea only due to high level debt. Both promoters are less liquid.

4.      In 3 years time, this stock could possibly go up 4 to 6 times.

5.      The market overall worsening. It is coming close to total liquidation. So start booking profit if you get opportunity.

Kalidas, Hong Kong

12-Nov-2008

Ref: 0811-014-Tata Tele sells 26% to NTT DoCoMo for US$ 2.6 Billions

 

© 2008 Anil Selarka (Kalidas)