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

 

May 182011
 

2011-09 of 18 May, 2011   Click here for PDF Download

The difference between a government and private enterprise is that the former looks for the “votes” whereas latter goes for “notes.”

 

The Ministry of Petroleum & Natural Gas (Let us say, Oil Ministry) being a section of the government obviously go for the votes. Inflation is rising, GDP is rising, interest rate is rising, budget deficit is rising, subsidies are rising, oil prices and petrol pump prices are rising, but the gas output of Reliance Industries Ltd. major off shore facility in KG Basin is falling.

Reliance Industries Ltd. who owns the licensed facility in Krishna-Godavri Basin is dilly dallying in raising the production. Reason – final product price Gas Prices are not allowed to rise by the government. RIL who opened hundreds of pumps a few years ago shut them down without any ceremony because it could not sell the petrol at subsidized rates and lose money. Same thing is happening in gas produced at KG Basin. Reliance being a public listed company loyal to shareholders and their purses, looks for notes (Rupee) because it can not sell more and more gas at less and less prices.

Reliance is telling the oil ministry – look you want votes, so you are subsidizing but we are not in business of getting votes. We need hard currency notes when we produce and sell the gas from KG Basin. This is why we obtained the license from you and found the huge gas reserve spending thousands of crores of rupees. We are answerable to our shareholders, and look at our stock price which is not rising for over two years in a row. Only due to your policy of containment of the gas prices.

Government of India is taking the matter seriously. It wants to keep the inflation in control, and since it can not control the overseas oil prices and does not want to let the Rupee appreciate either to blunt the effect of the inflation, it has picked up cudgel with the Reliance to up lift the gas production. If gas is produced more domestically, it could cost less, and it could be sold cheaper to the common people by not raising the prices, and also save on extra budget deficits.

However, RIL is not ONGC or Oil Marketing Companies like ONGC, IOC, BPCL, HPCL or MRPL who shoulder part of subsidy by themselves and also ask the government 10 times before raising prices. RIL means business, and just as it shutter down all petrol pump due to its inability to pass on the extra costs to the consumers under prohibitive price control, it would shut down the Gas Platform or rigs or wells in KG Basin if it can not raise the price in conformity with the market prices.

Now, the Government says – Do it and RIL says it can’t (= won’t). It plays up the technical and feasibility studies in its defense and says that drilling more wells will not be technically feasible. If that was so, why did British Petroleum agree to pay US$ 9 billions only two months back to take stake in those very ventures RIL says are not profitable or technically not feasible?

What RIL is telling the Government that – Look, We are not ONGC or IOC. You allow us to raise the gas prices, we will drill more. If you say No, then we may not say “No” but we can say “We can’t”. After all you are a government, and like King, the government “Does No Wrong”.

The government is in fix. They can armtwist Anil Agarwal or some other telco company, but here they are fighting a muted war with Mukesh Ambani of RIL who lives in US$ 1 Billion bungalow, and where he has spent more money in guest toilet than what Government spent on whole floor or block on the parliament street housing the Petroleum and Gas Ministry (oil ministry).

What could happen if both sides remain adamant. Would the ministry cancel the license or permission to extract the gas in the name of protecting or efficiently utilizing the national resources in best national interest and force “RIL to do it or abandon it”

RIL, if government orders it as above, would go to the Supreme Court and assert the right to dictate the free market prices under the law and in order to protect the best interests of its shareholders. The Supreme Court will be in dilemma and will have to chose lesser devil. If RIL succeeds in imposing free market prices, almost all State Owned Refineries such as ONGC, MRPL, IOC, BPCL and HPCL too will benefit.

So it is a battle royal. It will be a important battle reminiscent of Napoleon or Sikander. This will make it interesting to watch.

Kalidas (Anil Selarka)

Ref: 2011-09 of 2011-05-18