Same shares same advise- TNPL, Seshsayee paper

Have been holding on to these shares for quite sometime, have been recommending investment in to these shares at varying rates. I myself bought some 1500 shares of TNPL in the mid 60 s range.

Today I saw a research report from Karvy recommenidng TNPL for a tagrget price of Rs 96 by 2011. What a turnaround in analysts's expectations or rather their courage in prediction

Justa year back, with the kind of figures which are quoted in the research report as possible financial results of this company, they would have recommended a price of atleast Rs 200.

They are targeting Rs 96 for an EPS of Rs 24 and PE of 4.

Once the interest rates come down, PE expectations will go up.

This Comapny , is a Rs 200 candidate as long as one can wait for a year. Their full expansion is likely to get completed by 2010.

In fact, I think , this Company could easily be a Rs 350 candidate once the entire benefot starts pouring in. Of course there is this small matter of , most of the Companies in Paper Industry going in for expansion. But India being India, additional capacity will get absorbed with higher local consumption and increased share in markets abroad. US & Europe are bringing down the shutters on all these Chemical consuming Companies

This Company will have cement clinker unit. power generation of close to 85 MW , IT development park of 60 acres

Seshasayee paper has got affected due to its dependence on Imported raw materials and rupee depreciation. This could settle down a bit , now that rupee is expected to settle at around Rs 45 to a USD

Link to the research report
http://news.moneycontrol.com/india/news/recommendations/buy-tamil-newsprint-targetrs-96-karvy/372330

Investment in low geared Companies

With so much uncertainty in the interest rates and notwithstanding the fact that RBI has loosened the purse strings in terms of lowering CRR ( Cash reserve ratio) , lower repo rate ( lending from RBI to Banks ) , thus releasing a huge amount of money ( I think CRR lowering has been of the order of 200 BPS in the last few months) around Rs 1 lac Crs and more, Banks are not too keen on increasing their loan portfolio. Availability of funds is one thing, lending the same is another.
Banks are keeping the taps closed for now.
Companies which were dependent for expansions on borrowed capital are going to be in some kind of trouble for the next year or so, I would think. Also Companies with a high Debt equity ratio are likely to witness a period of high interest costs. One hears from the market that , Banks are chosing to increase interest rates even on existing loans to weed out slightly higher risk customers. They are all looking to upgrade their risk profile

This being the case, it makes more sense to invest in Companies with a low debt equity ratio, relatively less expansions planned for the immediate future, low working capital .
While I am expressing an opinion as to choice of Companies, the bottomline is that this is a good time to start doing a staggerred investment

Had recommended Seshasayee paper along with a few other Companies in one of my earlier blogs. i still think, at Rs 70 it is a good investment. Their profits are down from Rs 14 Crs per quarter to Rs 4.5 Crs per quarter. Primary reason for this is the fact that they import 75-90% of their raw materials . Rupee having depreciated, by almost 20 % in the last year , this has had an impact . Expectations are that rupee is likely to settle down at 10 % higher ( appreciation)
With the US economy being what it is, this seems to be a reasonable assumption. This company could get back to an EPS of Rs 30 . Market cap is around Rs 75 Crs for a capacity of 1.2 lacs Ton paper.

Worth adding to the portfolio in small numbers. There is an element of risk , albeit a low one

Stock markets in India hit a new two year low

Seems to be a free fall. Bottom has gone out of the market.It has been a free fall for some time now. None of the analysts are able to predict the bottom. Most of them of course have started advocating gradual buying. While people talk of PE compression , lack of liquidity , panic selling etc, they have started advocating staggered buying.

Sensex hit 8500 on 27 th Oct 2008 and most of the A group shares are down by 60-70 % of their year highs. Midcap shares , the situation is worse. Quite a number of them are 20% of their yearly highs.

In this situation, people who are looking for decent gains , would do well to invest in A group shares.

Mid cap shares carry a larger risk, of course greater upside possibility is also there. A certain 40 % gain is always better than an uncertain 70%

Financial sector bloodbath-Fall of Washington Mutual

One more bites the dust. Root cause is the same . The real estate bubble in US and the sub prime mess. WaMu as they call it had deposits of $ 307 Bn and several Billion USD junk assets.
JP Morgan is planning to buy the Company after Federal Bank (Fed)took over the Bank and its assets forcibly. This is supposed to be the 7 th largest bank in USA. To get a perspective, this is like one of our large PSU Banks in India, may be a Corporation Bank or Union Bank or something going down.Just imagine the kind of commotion that will cause.

USA is a country which has the knack of having such major scams inspite of all this talk of great regulations , but they also seem to have the resilience to deal with it with a lot less damage than others would do. No running away from the fact that the damage is extensive, but only thing is they do damage control better than others. That is no consolation. One can always ask, as to why they let things get to that stage.
It appears the first ball park figure of overall loss of around $ 500 bn is right or atleast the figure will be therabouts.
While a lot of shares in the Indian markets are hitting their lows of last one year and in some cases last 2-3 years, quite a lot of shares are holding up also. I don't see a great fall in the US Markets. It has fallen from 13 k or therabouts to around 11k. One would have expected worse fall. You never know, there can be more fall.

But on the Indian markets, one finds that a number of good shares have come down substantially.
Almost everybody knows that this is not going to last forever. Inspite of that, how many have the guts to go out and buy shares now. I think the people who brave it out are in for a windfall at the end of 2 years may be.
Till date, I have not been one of the brave ones, partly because one wants to pay off loan committments and partly because one is also not certain.

One can be very objective when giving advise . I just wish, I can be as detached as I am in taking my own advise as I am when giving advise. I would most probably stand to gain .
Market Cap of good companies are selling at below their book value and quite a few are selling at 1/3 rd their topline and at PE s of 4-5

Of course , PE s can change quickly if profits come down next quarter, but will it be an everlasting phenomenon. Definitely not .

What would be the best strategy. Best would be to invest in good shares and not in risky ones since even the good ones are selling at attractive prices .
Oil marketing Companies are a real wonder. The market cap is all around 7000 Crs or therabouts both HPCL and BPCL. The facilities ,refining etc, land , etc would be worth 4-5 times that

Govt's bull headedness in making them bear the subsidy burden is keeping them low.

They will be worth atleast 6-7 times the current market value if the market is freed or atleast the Marketing Companies are not asked to bear the burden.

Indian temples,Indian small towns

It is always a great pleasure getting in to History , going around places in India ( not that I have done much ), especially the temples, after all India of the past, social activities were centred around the temple.Spending time inside a large temple especially the ones down south is almost therapeutic.

Most fascinating thing is that most of the reasearch on India's past seems to have been done by the Europeans. Just have a look at the programmes on Discovery.

One of course has this bias, having spent the earliest part of one's life in a small temple town in south India.

If one had had a nice childhood with good things to remember, you naturally have good memories of the place and everything about the place is good.

The big courtyards in the temple, the high ceilings inside the temple, the big mantaps , especially the peripheral ones which are not that much frequented by the tourists are all great, serene, peaceful .

Once you get in to that, you get in to a state where you don't want things to change. You want that to be never ending . Some kind of eternity. I don't have a great felicity with words and may be not quite able to capture the feeling in words.
Such small temple towns are almost ambitionless. People move around , carry out their daily chores which are quite simple, go to the temple as a matter of daily routine. Do something for a living but life is woven around simple things.
The general millieu makes one ambitionless, but one questions oneself as to what is the big deal. No ambition, so be it ? Ambition for what ? Fame, money and power ?

For an individual this is okay, but for a society to move forward , of course you need ambition.
There are not too many great leaders people who move things without the prospect of making a name for themselves.Benefit to the society is a major by product , in fact it is bigger than the the intended product , that is fame and name for oneself.

From a societal point of view, ambition does help. I have always admired industrialists , great educationists ,builders of instituitions and organisations.

Pursuit of searching for truth and men of science whose only motivation is that , are a minority.
Their findings have possibly benefited society to a great extent. But for conversion of these people's ideas in to commercial reality you need selfish and ambitious people and leaders who are looking for riches and fame etc

Good times and bad times, never last forever- Markets

Good times do not last all through and by the same token nor do bad times last forever.
History has a strange way of bringing us back to our feet. In good times, a peek in to the past, tells us that good times are not going to last forever.It helps bring some balance in to our actions. It could be continuous buying in anticipation of the stocks rising on a continuous basis.

As is the case , generally, people go long in a bull market. Dud shares also go up along with the good ones. Dud shares , because of the low base prices , promise a much higher rise . Most fall for that. In a bull market which goes bust, one generally finds that there are more people loosing money than the numbers who have made money.Total money gained should equal total money lost in a short period, but the no of people who have gained are much less ( per capita money made is more ) compared to the number of people who lose money ( per capita loss is less ).

Still the people who lose are the ones who are least prepared and least capable of taking that kind of loss .

Reverse is true in a bear market. Even stars get hammered. Very few have the guts to pick even good shares ( including yours truly). Nobody knwos the bottom. There are two factors which play out.

One is the desire to buy at the lowest price, nobody wants to be told that that they could have bought something at a lower price than what they have bought it for

Second is fear. When very few are buying shares, going against the tide is diificult. The comfort of a crowd and being part of several is not there. This requires a lot of courage.

The shares are bound to go up after a few months or a few years.

I am directing this write up only at long /medium term buyers. Short term is a completely different game ( if some one happens to drop in)

In a bear market majority of the crowd sell out before the market bottoms out. In this case also , the number of sellers are generally more than the number of buyers.

Rest in next or sometime later

Financial derivatives muddle

To most, these words, Financial derivative is associated with High Finance, meaning something very few understand. The people associated are viewed with awe. These people are paid high salaries. Show huge profits, the organisations are high profit earners and they go bust once in 10-20 years and bring down a lot of people once in 30-40 years. The experts who were running the show , atleast the top brass walk away with huge money . The whole exercise is front ended, first profits, then tank and run away. It is not that this is intentionally done. The business model ( see earlier post) is skewed in favour of initial success ( apparent not real) and later burst.


What is in it apart from the incentive to take high risks . Direct invetsments are very few. The investment is an investment on an investment on an investment of ......... It is derived several several setps down so much so that the original invetsment is forgottten or hardly undertsood.



If A is dependent on B which is dependent on C , which is dependent on D and so on, the investor in A will hardly get down to D to assess the true worth of D before investing in A. He will possible try , but visibility gets poorer and poorer.

May be I will give an example in a future post to bring out the point. I am sure one will get the drift of the argument

You can go back to Long Term capital Management ( LTCM ) which was promoted by 2 Nobel Laureates in Economics , Scholes and Merton amongst others.

The business model was to borrow heavily and use the money to bet on arbitrage opportunities. In simple terms if A has a certain definite relationship to B and due to imperfect market conditions at play, the relationship gets skewed in the short term, bet on the market and put your money till the relationship is restored.

Theoretically it is very good and one has unlimited time and money ,one can bet this way and make money. The limiting factor is that sometimes such imperfect conditions prevail any length of time and money to support that and the time to support that may be exhausted. One may have to square off the positions.
This was what happened in LTCM. They bet on Interest arbitrage and currency arbitrage and in a lot of cases a combination of both.
Just to illustrate the point. let us assume that I keep buying share A or Commodity X in anticipation of a price increase . Let us also assume that I have borrowed the money for a short time. If I have bought at Rs 100 and can hold on to a maximum period of 1 month. At the end of 1 month, I have to sell the share to realise the money and pay back my loan. The share price could have come down to Rs 95. This means that I end up losing money. If I had indefinite time limit, I can carry on till the price reaches a level where I could make profit. This could be my conviction and could turn out to be true.
They were so highly leveraged that they not only lost their own Capital but also lost their neighbour's and neighbour's neighbour's

Business Model of Investment bankers

Read an interesting piece by TT Rammohan on the flawed business model of the Investment bankers.

Three out of the five have folded up or sold out

Bear sterns
Merryl Lynch
Lehmann Bros
Morgan Stanley ( still alive and kicking )
Goldman Sachs ( still alive )
He makes a forceful point as to how the model is skewed towards high risk. Employees have a incentive to take high risk , show money in the short term, make their bonuses and scoot off

If there had been an investment forthe medium or long term, by the time the true colors of the Investment shows off, the employee would have eaten up his bonus or in a lot of cases moved on

There is no carry over of Bonus to offset against possible negative bomus in future .

I think the genesis was Sub prime in the present instance. One would think that this is the last leg. Indian markets can possibly go down to 9000. Of course I am no expert. Only thing I can see is that there are quite a lot of shares going at theire three year lows. Market Caps of a quite a few good companies are abysmally low. As is the general case, in a bull market duds also get overpriced and in a bear market, even stars get underpriced.

Unfortunately, I don't have surplus money to invest. Have to sit on existing investments and hops things will turn around

They are all down in the dumps.

Oh mann,financial markets lynched

Quite dramatic, Lehmann Bros filing for Bankruptcy, Merryl Lynch being bought over by Bank of America and AIG ( American International Group -AIG ) seeking some $ 40 Bn assistance form the Govrenment

Dow went down by 500 points , around 4.5 %. On the brighter side, crude pries have cooled off to a saner $ 93 , USD has been appreciating against all currencies
US Financial markets regulatory authorities are supposed to be the most organised and one of the best. Notwithstanding that, most of the large scale financial disasters keep happening without apparent warning in the US Markets

The recent one , of course appears to be the delayed fallout of Sub prime crisis. Merryl Lynch in fact was one of the first to come out with that , a few months back. Lehmann was a bit of a surprise.

Sad part is, that each time this kind of thing happens in the US Markets, it takes a huge personal toll, in terms of people losing their savings, their pension plans, people losing jobs in plenty
In India, atleast , we still are not supposed to invest the PF ( Provident fund which is the equivalent of pension in US ) in the stock markets. While the returns have been depressed, it atleast did not shock people on the verge of retirement. If and when the Govt gives the go ahead to invest in stock markets, they should have strict norms and also , some part of it should be to towards some kind of an Insurance to prevent erosion of Capital .
I am not sure how the Govt will handle this .

On a different but slightly related topic, now that Crude has slipped down, most of the so called experts have started predicting $ 80 per barrel. Similar thing is happening with INR USD
When USD was going down to INR 40, experts predicted INR 35, now that the trend has reversed and the USD is ruling at INR 45, experts will start predicting INR 50

Value buy- TVS Companies , Wheels India, Sundram Fasteners and Sundaram Finance

The above three appear to be value buys from the TVS stable. Only question mark could be on the depth of management and succession planning in the case of Fasteners and Wheels India.

Wheels India with a turnover of over Rs 1200 Crs, net profit of Rs 27 Crs, EPS of around Rs 30 has a marekt capitalisation of Rs 180 Crs. In fact the share price is slightly lower than the book value. With a slight imcrease in margins , which is bound to happen once the sector shows some improvement, EPS on a low equity base of Rs 9.87 Crs is bound to gallop. If some one gets an option to buy this Company at a price of Rs 180 Crs, which is the market cap, I think they would be most willing
This caters to quite a number of domestic auto giants

So is the case with Sundaram Fasteners. This had in the past been a Company which caught the market fancy , being an approved supplier to GM etc. In the nxt 1-2 years, once the auto market improves, this is bound to fetch a good return. The current price is just above the book value. Market cap is around Rs 400 Crs, I think

Sundaram finance, a typically good Franchise model , with very good customer depth, branch network etc , market cap of Rs 1600 Crs. Holds a littler over 50% in Royal Sundaram which has started making profits.

Can easily become a bank and a successful one at that. Has the best management depth amongst the three mentioned above
Current prices of these shares
Wheels India - Rs 180 per share
Sundram Fasteners- Rs 28
Sundaram Finance - Rs 590

FCCB ( Foreign Currency convertible Bonds ) the debate- Basics of the instrument

The debate has gathered momentum that is the debate on advisability of this financing mode. What is this FCCB ? Foreign currency convertible bonds
This is a hybrid instrument where the borrower takes money in Foreign currency , has interest denominated in Foreign currency , which is much lower than the Indian Interest rates, but also gives an opportunity for the Investor to convert at a certain rate in the future the investment in to equity. In a way , the investor has an option to buy the Equity at a certain rate at a future date but has no obligation to subscribe if the equity rate goes below that.

The borrower has the obligation to redeem in case the investor opts not to convert

This was quite popular when the share prices were zooming and there appeared to be no downward movement at all.

It also appeared very good at a stage when the Foreign currency interest rate was low and the rupee appeared to have stabilised and not depreciating . Ususally , that is in a classic case, the ruppee depreciation would should have equalled the lower interest that one enjoys in Foreign currency loans. This also appears to have vanished. Ruppee has been depreciating , increasing the interest as well as the loan liability. The upside for the investor also appears to be out since the share market is in in the dumps

There are of course accounting implications which will be discusssed in a future post

Intellectual subsidy ,a fact of life

Subsidy is something that most hate. It is something that the performance driven Capitalist societies abhor. There is sound reasoning and historical evidence as to the ineffectual nature of subsidies. Of course , the whole thing boils down to an argument of , most effective use of resources and diversion of the economic resources to the most cost effective areas.


Subsidies have varying connotations. One is that , able bodied and competent and capable people have to work hard to provide for others. If one does not reap the benefit of one's work, there is no incentive for the competent ones to stretch themselves.

This argument is sound and not without substance and reason. Socialistic system has failed

People get altruistic once they get a lot of fame and wealth. If one steals the thunder , even before they get to that kind of a position, they don;t get so generous. they feel deprived and do not see the need to stretch themselves.


It is rooted in the selfish nature of people. There is nothing wrong. It is an extension of the survival instinct.

Let us just take another look at the subsidies. We keep talking of subsidies in use of economic resources which are tangible and immediately perceived as having some commercial value. Commercial value is a function of the supply and demand disparity or parity as you may call it.

In fact human beings have gone to the extent of ensuring that Intellectual theft is also minimised by enacting Patent laws. That is only for 15 years. After that it is free.


Most of the founding fathers of science, did not enjoy commercial success, they never could exploit some of the ideas commercially. In fact in pure and basic sciences, there may not be any tangible application which can be exploited.


Does that mean that their ideas are not being used. They are very much used and some of them quite extensively. We are able to get patents for specific applications or scientific findings which finds application to something which is easily identifiable to that finding

Something which has a derived use, an application of an application of an application of a basic idea , may never get a patent.

Leave that alone, many of the basic science findings, it could be in the area of Quantun phsyics, it could be development of Periodic table, it could have been deciphering the atomic structure, it could be in genetics,these have had far more impact on our life than a specific application.

All of us are recipients of intellectual subsidy. Few extraordinary able brained people have lifted the condition of the entire humanity. What do you call that ? It is a kind of intellectual subsidy. The men who indulged in such scientific pursuits had just one thing in mind, they were trying to unravel patterns, they were trying to unravel the traits/charecteristics of nature and various aspects around us.

They were not aiming for commercial exploitation. In most of the cases, they were not even looking for fame. That came much later

Let us salute those giants, on whose ideas and findings we have built our word but keep thumping our chests, claiming great achievements

The world runs on subsidy. It runs on the efforts/ideas of a few people to a great extent. We foregt that. I am not for a moment suggesting going back to a socialistic type of economy. I am sure that will not work. All that I am saying is that even now, commercial value attributed to a person and the actual benefit derived by the world out of that person's work or idea , there are vast disparities. Level of subsidy varies from generation to generation and from person to person and vocation to vocation.
Just some initial thoughts on this subject.

TN Newsprint - Strong buy, Sundaram Brake linings- Options mess

TN Newsprint has come out with its qtr results. Not earth shaking, but clear signs of better things to come. Expansion plans are on target. Mill development plan is completed ,pulp production is higher. They have expanded cultivation for wood through contract farming. They have taken several long term measures. In my view, this is a clear Rs 250-300 share in 2-3 years, that is trebling in years, uncertainty being low

Had a look at Sundaram Brake linings Financials. Was quite shocked as to how they got in to this options mess. The company ' networth is Rs 70 + crores and the worst case liability on this options is Rs 110 Crs. Appears that they writtem options contract, where one collects a preimum and extends an unlimited risk or fairly large risk. They have filed a case against the banks involved, Kotak and Yes. Can't understand how they got hoodwinked. Apparently, the management did not undertstand and the bankers would not have educated them. Also do not understand how , couple of people have carried out the transaction without management concurrence
More questions than answers of both, the Company as well as the banks involved.
This could wipe out the Company. I am sure they willc ome to some kind of a compromise

A bank always has a back to back risk cover, but a Company can not. Inspite of that , how they have taken this is a big question

Impact of Repo rate hike and CRR hike on specific sectors

RBI as expected has raised repo rate ( their lending rate to banks ) by 50 basis points and CRR by 25 basis points


What does this do ? CRR , Cash reserve ratio is the % age of cash that has to be maintained by the banks out of their total demand and time liabilities

This effectively eats in to the total lendable amount. Sucks out credit form the system. Making money a bot more difficult. Inflation countering measure


Repo rate , which is RBI lending rate to Banks, also makes cost of funds ( partly) of the banks more. banks will have to lend also at a slightly higher rate in the market

Imapct of this amongst the Banking Companies and real estate companies. This state of affairs can not be everlasting. Things have to change, may be after a year or two.

Bank and real estate stocks may recede and take a huge beating in fact. Buying in these shares after a few months may benefit one in the long run, say 2-3 years.As i am writing this, contrary to my expectations the Bank and realty stocks have gone up. May recede in a few days

They will turn out to be good buys for the medium term , that is 2-3 years





Markets generally take a short term view and react based on this kind of short or medium term factors. In fact when the tide turns around, market again reacts to favourable factors also the same way.



Wait and start accumulating bank and realty stocks. I don;t claim myself to be some kind of a bi

Sonata software a good buy

This is further to my earlier recommendastion on this share. Quarterly result for the Qtr ended 30 th Jun 2008 has been announced. Standalone profit is Rs 1.2 per share of Rs 1. Profits have gone up to Rs 13.3 Crs from I think Rs 10.5 Crs

Consoldiated revenues at Rs 456 Crs and net profiT of around Rs 18 Crs , EPS of almost Rs 1.8 per share, PE is around 4.5.

This share could give a decent return over a 2 years [eriod. I anticipate atleast 20-25 % compounded . They had taken over the travel back office ( for software and management of back office facilities and software ) of a German company TUI. The companty is diversified in terms of the currency exposure. They have USD as well as Euro exposures

Good buy in my view. I have some shares bought at Rs 35 a year back , I think. I though it hel value at that point of time. I think, it holds better value now

Does one go for it -Sharing information on stocks

The markets bounced back , going up almost 1500 points after the steep fall for several days.There has been consecutive rise for the last 3 days except today when it has receded

One of the reasons , of course was the Government in India staying put, after winning the trust vote .
But have all the macro factors cleared, a firm no is the answer.The government staying put , fall in crude prices all gathered to give some hope to the market. It looks like it is one of those passing sparks in a depressed market.

To me it looks like that the market will stay put in these lower regions for some more time.

One funny thing is , some of the shares whose cause I have been espousing , are all moving ( not much of a trade ) in a narrow range.

If the prices come down further, I still feel it would be a good opportunity to buy some of the shares that I had earlier recommended and also stocking up on A Group shares would be good.
Macro condition is likely to improve in the next 1/2 years.

One should make staggered buying to average out and make the buying closer to the bottom.

Economy like India, with the kind of consumption possibilities , the local industries can not be struggling for growth. One thing that is bound to happen is that, the super profts that the early starters made could be a thing of the past. More competition will kick in and profits could get nromalised. Under these circumtances, one should look for Companies which have high internal competencies , rather than companies which have shown good results being early starter.
One idea before signing off, this could be way off the mark, but worth investing a small amount

Tyre companies are all quoting at very low PE s. They have hardly been trail blazing notwithstanding the fact that the Indian auto industry has been doing well

Some of them are quoting at abysmal Market Capitalisation. With the high crude prices , could hardly considered the future.

Fresh sale of vehicles may not come down much , there would be substantial replacements coming in another few years. This , notwithstanding the fact that the road condition has improved etc. With the increase in GDP , transportation has to atleast keep pace with the GDP growth .

I think a JK Industries with a market cap of Rs 290 Crs , about 1/10 th its turnover could have a good upside with minimal downside. As of date , I don't have that in my portfolio, but am planning to do some buying.Safe buy would be TVS SriChakra

GDP growth- Mirage or real reflection of economic welfare

GDP, Gross domestic product is conventionally defined as the aggregate of goods /services produced over a period of one year. It is in a way the value of all consumption less the imported consumption plus the value of exports. The way this is calculated is at constant currency and constant prices rate to take out the changing value of money aspect.This is what is termd as Nominal GDP

GNP, Gross national product includes the income arising from investments abroad . It concerms itself with goods/ services produced by the country's nationals across the world

For now, we will worry about GDP

Growth in GDP obviously means greater commercial activity . This also means greater consumption. Obvious conclusion is that there is greater welfare. There are a couple of other things, overall consumption increasing,esepcially in the Indian context could be due to higher per capita consumption or just an increased consumption due to increase in population. Per Capita GDP reflects in better measure the effectiveness of the economy an also is a better reflection of the welfare of the Individual.

This of course does not reflect truly the pattern of welfare or consumption. Greater disparity in Income will mean greater overall consumption but not quite well distributed consumption.

At a slightly philosophical level, can' we restrict consumption . After all, most of the consumption is of products on which there is some amount of value add on a naturally occurring mineral or substance.

When carefully looks around , there are so many areas of consumption which do not necessarily lead to higher satisfaction or convenience. Buying, using something and throwing after some use as against using the same longer , does not change the degree of enjoyment. While it increases overall consumption, increases production , it does that necessarily mean incremental consumption to cater to a genuine requirement of unfulfilled or incrementally satisfying need.Not in most cases. On a macro level may be 60 % of the increased production leads to possibly higher satisfaction. The balance could be wastefule consumption. Classic case is the automobile industry and public transportation. Private transportation, obviously means greater production of cars and greater economic activity. It also means high consumption of oil.

As against this, we go for more public transporation, the economic activity will be less. Oil cosnumption will be less. The functional aspect of transporting people from one place to another gets fulfilled. The intangible of comfort in travelling in one's own car is there, but may be for people going on a holiday. Not for daily office transportation.

Carrying on the argument of greater economic activity , production of cars means putting more income in to the hands of a certain number of people.This is by transfer of income from some people to others who are involved in car production. The some people who have parted with money obviously will have less disposable income and possibly less savings in hands.This will deprive them of other comforts that they may have otherwise utilised this money for.

On the one side, we have GDP going up, both overall and per capital GDP also going up. We have transfer of income from set of people to partially other set of people .
On the other side , we have huge use of natural , non renewable resources like, Metals , oil etc.

Effectively we have on one side transfer of income within people, use of resourcses and on the whole very little additional comfort or satisfaction

We have a classic case of GDP growth with not significant incremental satisfaction and use of huge non renewable resources
If the trade off is using up of natural resources but substantial additional comfort or satisfaction to the consumers, it is understandable.

Economic activity which involves human effort and use of natural resources should result in additional satisfaction or comfort to the consumers.

Feeling of plenty gives rise to waste.

Point is , production/services should not merely be transfers of income, but should give rise to products /services which give rise to fulfilling genuine consumption requirements .

The write up is for one to get the general drift of the argument. May require some refining at a future date.

So to conclude for now,GDP growth may sometime be a mirage and sometimes be a real welfare measure

Very usefule link to Eco definitions.

www.financial-guide.net/glossary.php

Is it the right time to invest

People keep asking each other as well as themselves whether this is the right time to invest in stock markets. I am not sure whether it is the right time to put in all your money one shot in to stock markets, but I do think , it is time to start making staggered buys in good shares. Why buy risky ones, whene there is value buying possibility in good shares. Of course one needs one share /stock of luck .

When all over people are debating whether we have reacjed the bottom or is there some way to still go, the best would be to make staggered buys.This will protect you from getting in before the bottom at the sasme time give you a bit of saving in case bottom has already reached. It is a bit of a risk managment aspect .
It appears that the trend and the momnetum will carry it all the way down to may be 10k. Bernanke's none too optimistic, projections on inflation etc add credence to this

Sub prime crisis, CDO et al

I am no expert by any stretch of imagination. I am just trying to capture the very basic and my understanding of the sub prime crisis ,CDO etc

Prime means the best. In Financial circles, this is nothing but the best credit risk is the prime customer. Sub prime as the name suggests is below par credit rating or high credit risk

There were few aspects of this. One was the loanee were all slightly high risk and the properties based on the backing of which the loans were given were valued at high rates , probably at the highest in the last several years. Property prices had reached new highs .

On top of it, I understand that the loans were extended at a low or no margin. Margin means fgetting some part of the cost met by the buyer ( loanee ) of the property.This acts as a kind of buffer or margin for the banker in terms of the security

The banks or mortgage companies which lent had in a number of cases bundled this is to a security, what is generally known as Collatterelised debt obligation (CDO) and sold it to in some cases banks and in some cases derivative investors like Goldman, Lehmann etc. They would have sold it a disocunt to the final maturity , that is , there would be an underlying interest.
The debt being high risk, the interest component also would have been high.

One also presumes that the risk would also have been substantiall passed to the buyer of CDO
The holder of CDO will be entitled to the maturity amount , worked out either in the form of a the monthly collections or a variation of it ( repayments from the loanees )

The bubble burst due to following reasons

1. US Economy floundered , due to high oil prices, high trade deficit , higher unemployments rates etc
2. Job losses were more. Ability of the loanees to repay was badly hit. Defaults started
3. Quite a few of the banks/ loan extenders would have tried closing the loan by trying to sell off the property. Quite a few would have come to the market around the same time leading to sharp decline in prices , to such an extent that the realisation would have been lower than the loan principal outstanding. Some of them could have taken interest income also, in which that also has ben written off

You have the sub prime crisis

I would be thankful and welcome refinement of my understanding in any way whatsover

He(a)rd mentality to the fore-Sock markets

Remember reading somewhere about how people react to what they hear in the stock market. It is both a herd as well as a heard mentality.It is a well established fact that , as far as the stock markets are concerned , periods of lucidity or reasonableness are lesser than periods of insanity. When the market is up everyone (not that yours truly is an exception ) look to catch the rally, anxious not to miss out . People can;t see a trace of negativity at all. There is talk of ,demographic dividend, large middle class market, unexplored and unexploited market, low per capita consumption which indicate that there is a huge untapped potentiel . lowe cost structure etc. Comparisons are drawn to the process and path taken by other Developed countries ,from the humble beginnings to stardom. People feel that India is in the early stages of take off. Experts make it sound that , investing in Indian markets is a no brainer. The general environment and arguments, news items are all so geared up that one easily gets trapped in the optimism to the extent that negative factors are almost invisible

I still feel that most of the factors hold good even now. For once most of the experts also feel so. Only exception is that most of these guys who struck their neck out and recommended buying of shares at rates almost twice the current prices are all advising investors to stay away from the maket. They feel that market has not bottomed out. All negative factors like high oil prices, high commodity prices, low growth rates of the developed economies have all taken the front pages of the newspapers. There is very little encouraging talk.While I don't claim to be an expert, what I still can't understand is inability of most experts to predict the reason for high commodity prices and also come out with a prognosis on the long term trend of commodity prices.
With the kind of data available on Mineral respurces available, projected population, experts did not have a clue just a few months back of the suddent spurt in commodity prices
Most of the retail investors go either towards follow the crowd either buying as if there is scarcity of shares and buying before inventory of shares vanishes or selling in panic. Typically maximum buying happens when there is maximum optimistic noise and maximum selling happens when there is pessimism all around.
In terms of the sheer number of Retail investtos , most of them land up with investments at the highest level and sell at the lowest level. Most affected are the retail investors. They get in quite late in to the market and get out almost the last.

They always take refuge under the relative , perceived safety of a crowd. Three reasons work, one is , our need to keep with the peers, when everyone is in the market , we also need to get in so that we are of part of the gang
Another one and more powerful, when so many people are optimistic and taking the plunge it has to be correct.
Third is that , we always feel safe when we move along with the crowd on the way up or down.

I am quite optimistic and would still recommend purchase of the shars that I have been recommending. A good option would be make gradual buying , almost structure it like a SIP ( Systematic Investment Planning ). By investing equal amounts one will get the advantage of keeping the weighted average prices closer to the lower end of the band

These are for medium term which in my lexicon is 2-3 years.

Some of the Realty sector shares also make sense like DLF. They are at a discount of more than 50 % to the issue price and are at sane levels now , I think around Rs 390

TN Newsprint ( Rs 88)
Seshasayee Paper( 148)
Sonata software (25)
HUL (196)
SBI(1110)
Union Bank of India(108)
Sundaram Finance(580)
Some sugar Companies
Some commodity sectors like Coffee /Tea could be a long shot- Personally I dn't have any tea/coffee company shares at this point of time.

Vardhman Textiles (98)
Kitex Garments ( long shot - Low priced , higher than normal risk being engaged in Garment exports , but have been continously reporting good profits, low PE.) (6.5)
Trent ( Retail sector, Tatas management,clean management and has shops on relatively low rentals )
Look for good logistics Companies

If one is averse to direct investment in shares, go fo equity oriented Mutual funds from Franklin Templeton , HDFC, Sundaram
I have investment in some of the above shares and hoping to accumulate more provided I have investible surplus

If the shares you are holding are good and you are not in a hurry, panic selling now is not recommended at all.

Today the BSE Index was 13 k , revisting after 6-12 months would be interesting

The seven year itch of stock markets

I have been tracking the stock markets (the broad indices ) for close to 25 years. People talk of 7 year business cycles, seven year itch etc. One could see that in the case of stock markets , give or take 6-9 months

I remember ,the peaks of I think around 1985/86 , driven by Reliance, 1992-93 the peak driven by Harshad Mehta and subsquent burst of the bubble, peak of 2000-01 driven by tech stocks and subsequent burst. Now again after around 7 years, you have the 2008 downhill ride.

The only difference this time was that the ride up was not as mad as the last two occassions. The last two occassions were quite steep and brought down a lot of retail investors. Tales of huge riches and tales of huge losses were broader on the earlier occassions. This time, the impact sems to have touched a fewer people , an indication that the retail participation in the ride up was not quite wide.

Earlier occassions , it was a contagious virus infection , which spread across quickly. Man on the street and quite a number of retail investors rushed in the final stages , that is closer to the top not wanting to be left out of the gold rush. This time, the downhill ride has played out better.



May be this depression will last a year, but this is bound to be followed by a decent period of reasonable pricing . In the immediate aftermath of a burst, there is always a sane period, bear run being fresh in the memory. Madness usually sets in 4-5 years after the bottom

I am not sure whether in the current run down from 21 k to the present 12.9 k, whether bottom has been hit. It is quite possible that bottom is still some distance away.But one thing , atleast in the Indian market is that every subsequent bottom from 1985 and every subsequent peak has been higher than the earlier bottom and peak. Of course , to some extent , inflation would account for that. While I have not exactly calculated, I would think that even if one were to neutralise inflation, the tops and bottoms would be slightly higher. Being stock specific would make sense. Buying has to be gradual . Follow the system that one follows in a Systematic investment planning. With equal amounts of investment , at lower prices , the weighted average of per share cost will always be closer to the lower band rather than the top band of buying.

One other major difference could be that , this bear market seems to be driven by Global factors like Oil prices, high commodity prices across , lower employment rates in US & Europe.

I don;t have much knowledge of the Commodities market. One thing which is disturbing is that , the same mineral wealth has to be shared by more number of people. World popultaion has gone up by almost 5 times in the last 100 years, I understand. That is a bit worrying. Of course one does not know whethere all the mineral sources have been located .

May be some other day and some other time to dwell upon the concept and need for Economic growth . After all grwoth is a function of consumption. Where do we draw the line ? Rest in next.

Time to start gradually buying shares

I still feel that one should start making selective shares buying. Unforunately, I don't have much investible surplus. I still maintain that people should either go for predominatly equity based funds or make selective buying of good companies. Some of the companies, I am reasonably convinced are
Current sensex level is a bit leass than 14k. It is quite possible that the sensex could go down to 12k

TN Newsprint,
Sundaram Finance
Seshsayee paper
Sonata Software

Some A group shares like, ITC,HLL can also be accumulated in small numbers .
Oil trading Companies would be a long and risky shot

Some of he Banks like SBI, Union Bank could still make sense.

Investing in Debt fund is also not a bad idea . From the current interest rate, any lowering of interest rates would mean Bond prices would go up , leading to higher NAV

Intelligent Design Vs Evolution etc

Before getting in to ID (Intelligent Design - As if God is looking for an Identity) Vs Evolution, just briefly delving in to this concept of personal God.

Concept of a personal God Who metes out rewards/ punishments or listens to the prayers is quite difficult to digest.Sheer size of the universe and the life forms make it unthinkable for us that there could be someone tracking each lifeform.Of course one also realises how limited our thinking can be. It is in fact limited to what we perceive with the 5 senses. People with great imagination have gone beyond that , and found things which exist which we can't feel/see.
This , in fact is one of the biggest arguments that believers put across. One can not conclude that what is not seen/heard does not mean it does not exist. Existence can not be a function of what we with our physical powers see/ hear. Science which encourages conclusions based on estbalished facts is nothing but establishment of facts which can be seen/heard.Various gadgets /aids have expanded this, but still may not be sufficient for us to see all ,hear all and feel all.Scienctifically established facts of a period can not be limiting factor for new scientific findings nor should it limit the realms of imagination.After all Giants of Science, when they did discover things did not always have the means and wherewithal to have the same validated physically. Quite a lot of the theories got validated much later and that too with the help of additional aids/instruments and in some cases actual happening of an event.
What is relevant is also the fact that in a number of cases, the Scientists were rejected, ridiculed ( a Copernicus and Galileo are cases in point) and in some cases excommunicated.History of scientific findings can in fact be held in support of the fact that establishable science facts are not the only true ones. There is a whole lot of truth lying to be discovered.Non discovery of some at a certain point can not render the same as Unscientific or fiction.

Digressing again in to Concept of personal god,doubts about a personal God does not however mean that one questions the concept of God . One can accept the concept without accepting the concept of a personal God.

As we gain more knowledge , there is this one set of people who are in raptures wondering and appreciating the phenomenal structure,design and mechanism in the living organisms . What is being generally termed as the Intelligent Design. This group sees a grand and great structure and a intricate and complex and perfect design in living organsism and the Universe around us and find it to hard to digest that this could be a chance mechanism and call themselves the Intelligent Design group. It responds to reason that living structure and the balance in the world could not be an accident . That kind of accident where conditions for basic life formation , their structure, sustenance and proliferation could have happened by chance is 1 in a ......trillion , the probability is so low that it is impossible. Conclusion is that , once we recognise this impossibility of chance element , one veers towards an Intelligent design with the underlying assumption that there is someone behind that

The other group , who are the Evolutionists, say that Darwin's theory is not just about chance , it is case of the current state of things being evolved over several years. What is suitable to the particular environment is the one which survives. The one which survives proliferates and evolves to be more suitable to the environment. Progressively the survivors are the best specimens of any species or variety .Progressively there are variations which make the survivors more suitable to the environment.The cause and effect is, that the ones which adapt and change well to the particular rigours of the environment are the ones which will survive and thrive in the long run . The concept of evolution , is some kind of continuous adaptation and continuous improvement ( by the Creator ? Ha ha, pulling evolutionist leg ).While on the one hand , I am tempted to buy Richard Dawkins book on this ( he is a confirmed Evolutionist and Anti Intelligent Design ), I am also a bit apprehensive about the possible impact it may have on my current beliefs. One hates confrontation even if it means with one's existing thoughts/beliefs which are rooted in belief in Higher power.

This debate could be never ending for the simple reason that it could never possibly be established one way or other.

Whenever we see structure and perfection, we always attribute it to a designer or a creator.Similar reasoning and logic is extended to the Universe/life forms.

Interesting , but beyond my limited thinking prowess .Sometimes need to think out things itself may be a limiting factor. Faith is a lot more comfortable and a cure. Such a great leveller. It is such a big comfort to the less fortunate ( materially and psychologically ) that all are equal beyond the material world. I am not sure whether most of the less fortunate readily embrace religion,faith due to this, that is something which gives them a feeling of equality or it is just a case of genuine faith and hope.

One is of course humbled by what is around one. The sheer complexity and at the same time, a beautiful and all the time evolving structure and forms, it makes you feel the futility of your actions and efforts and at the same time encourages you to search for more knowledge and information
I don't consider myself as one of those who is among the very few, seeking a higher meaning, I think most ,if not all, of us do in varying degrees. Saints and Savants find that , we havn't.

One also wonders whether , it would be better to concentrate on what is on hand and what is doable by us and do it well like most of the successful people do rather than keep looking for the ever elusive higher meaning in life. That , in some could be a sign of failure to cope up with the immediate environment and and a bit of escapism. Lack of ability to achieve in normal walks of life could push one to this kind of a seach for an illusive ( mostly elusive anyway) higher meaning, which is nothing but an escape route. Um, treading on dangerous ground.Just thinking aloud.

PS: Happen to come across this site which is quite elaborate on the subject.

http://theory-of-evolution.net/

Good time to start buying shares

While each one has to make his/her own judgement, as a general advise , I would think that the markets have come down to an extent where buying select shares is safe and could provide good return in the medium to long term. Index may come down a bit further but even at this level , I think there is value in the following shares in the small number of Companies that I follow. These are Cmpanmies I am invested in or planning to invest
1. TN Newsprint- EPS around Rs 16, PE at a price of Rs 96, just 6 with very good visibility of atleast sustatining the earnings. Have consdierarble windpower capacity ( 30 plus MW), are commissioning a Cement clinker plant, expanding the paper and pulp capacity
Low marker capitalisation of around Rs 700 Crs . Pay dividend of Rs 4 per share
2. Seshasayee paper- Qtr 4 appears a bit lower. Reasons not ascertainable at this point of time. Even discounting that, EPS of a minimum of Rs 30 next year is easy, PE at current price of Rs 170 would be less than 6. Pulp expansion plan underway.
Low marke capoitalisationb of around Rs 240 Crs
Paper Industry has been a low profile Industry. This is one of the reasons why the PE s are low.
You go back, you will find that very few well run paper Companies have ever made loss in the past in India.
3. Sonata software- At Rs 31 with EPS of Rs 3.5 ( Consolidated EPS Rs 5.8 including their European subsidiary ) could turn out to be a good acquisition target. Market cap of only Rs 35o Crs
Current management is too conservative and have not expanded business much. The Company , however has enough reserve strength and intrinsic value to get to Rs 75-100
4. Sundaram Brake linings - EPS should be around Rs 35, PE of around 7, market cap of Rs 70 Crs. Could give 25-30% Compounded for the next 3 years.
5. Dark horses- Oil trading Companies HPCL, BPCL
Market caps are low, below Rs 10 k Crs. Oil can not be traded at these levels. TRhe moment it comes down to below $ 100, these can turn out to be multi baggers. Of course this is a bit risky, personally though I see greater opporunity than risk in this proposition
6. Zensar Technologies- At Rs 137 is down from Rs 350 a year back. PE of 13. Part of HV Goenka group
7. Most of the A Group shares which have fallen by more than 50 % in the last 6 months could hold value
May be a chance to spread portfolio across sectors being stock specific across sectors.
Some construction Companies which have not caught market fancy like JMC projects. Of course , in this case onw is not too sure about the management part. One has to do some research

Sundaram Finance- Holds more than 50 % in Royal Sundaram Insurance .By itself has a fantastic network and has been a consistent performer , very disciplined management
Has the potentiel to double in a year or two
Sugar Companies- Most of the commodities are up and hyped except a few like Sugar. Government can not let this Industry die. Cane prices are fixed , sugar prices are down. Situation can not continue like this. Bit of a risk, but worth taking the same

Textiles- Vardhman. Low PE. Last quarter profit was low, but at a market cap of Rs 600 Crs with a turnover of Rs 2000 Crs plus , with impact of recent expansions to come through n the curent year, appears to be a value buy. Current aset managemnt is the only blot. Most of the negatives have been deeply discounted like

Rupee appreciation
Low demand from export markets especially US
This Company depends a lot on doemstic market, performance should be reasonable. hey pay a consistent dividend of Rs 4, yeild of around 4%

Should be worth the risk

Could catch up on some reading

Could catch up reading quite a few books in the break between jobs ( April & May 08). Apart from ,Built to last, Good to great by Jim Collins did some reading on Forex and derivatives by AV Rajwade , caught up the following PG Wodehouse books

The old reliable
Much Obliged Jeeves
The world of Psmith- Omnibus which had
Psmith the Journalist
Psmith in the City
Leave it to Psmith
Uncle Fredan Omnibus which had
Uncle Fred in the springtime
Cocktail time ( read for the first time)
Left out Uncle Dynamite ( read earlier twice and that too not too far back)

It is always a pleasure reading Wodehouse . One is very clear that the novels are a complete departure from the real world and far from reality, so what ?, so are most of the novels. While other novelists make a pretense of narrating something close to real life , Wodehouse is quite clear that he delves in to realms of fancy , imagination . Sole purpose is to give some ( an understatement ) harmless pleasure to the readers. In fact it gives one enormous pleasure. The languageis great, the supercomical and contrived situations are, to put it mildly , hilarious . Exaggerated similies , giving exanple of a highly exaggerated parallel to describe some simple situation or expression by the characters is hilarious.

When one of the characters breathed heavily …”Panting like a buffalo in the mating season, describing one of the characters with a below avereage IQ, ……. so and so is not exactly the person who would be approached when one seeks explanation for Einstein’s theory etc and several more.

News on a dear friend of mine

Very saddened to hear about the news of death of J. Parthasarathy ( small pacha as we used to call him,must have been around 46 ). Though I have not been in touch with him for several years, more than 20 years, was pretty close when we did our CA togther way back in 1981-84. Was my batchmate. Was a very lively person . Quite intelligent. Undertsand that he was with American Express Bank after a some years with Corporation Bank. This was a news conveyed by Lakshmi ( Lakshminarasimhan) who got to know about this from Jayadevan, both CA batch mates.

Remember being with him for AV Thomas audit, then outstation in Vellor for CMC audit.Had great fun, what with ADA ( AD Anathnakrishnan, I , Pacha and Lakshmi around )
Incidentally Ananthakrushnan died a few years back.He was a bit older , was I think around 55 when he died but still young enough.

Pacha was an entreprising person in his own way. I just pray and hope that his family , his wife and kids get the mental strength to go through this.
Have very fond memories of interactions with him. Belonged to a, would think a reasonably orthodox madhwa family from Dharmapuri. His father was in TNEB.
He had good felicity in Tamil .

Very sad. How one wishes that one was in touch with people ?. After all he was in Chennai, not too far from Bangalore. With some effort , one could have easily been in touch with him.

We take things for granted when they are there and available.

May his soul rest in peace and God give his family strength to bear the loss.

Good to Great by Jim Collins- A simple synopsis

Good to Great by Jim Collins- A simple synopsis

This was written by the same author who had co authored Built to last. The attempt here is to identify Companies which were average performers for quite sometime , turning around and being consistently successful over the next 15 years. The author looks at the factors which have contributed to that . Very well researched book. In fact as per the author, research was done over a period of 5 years. The author and his team of researchers have confined themselves to publicly traded companies in USA. This was, in his own words due to reasons of comparability and ease of availabilit data for research They had put some serious filters in terms of the number of years the Company should have been an average performer and a certain point of turnaround and continuous great performanace over the next 15 years. To put in perspective they have benchmarked with the market , neutralised the Industry specific factots and made comparisons with Companies of the same vintage and size to bring out the qualitative variations which contributed to the quantitavie variations in the long run

The cut off for the book one understands was 1996 and the research went on till 2000 when the book was published.

The Companies which make the cut are as follows

Abbott
Circuit City
Fannie Mae
Gillette
Kimberly Clark
Kroger
Nucor
Philip Morris
Pitney Bowes
Walgreens
Wells Fargo

The author has a habit of summarising the concepts very well and reiterating and reemphsising the concepts or the conclusions they arrived at based on research, with live examples from the Companies that made the cut.

Briefly the author and his team have come out with the following differentiators which contributed to these Good Companies becoming great.

Level 5 leadership
This is a term coined by the author ,that is Level 5 leadership. The author defines 5 level hierarchy of leadership , namely,
i)Highly capable Individividual
ii)Contributing team member
iii)Competent manager
iv)Effective leader and
v)Level 5 executive, that is somebody who builds enduring greatness through a paradoxical blend of personal hunility and professional will.

He backs the above with live examples of how self effacing the leaders of these Companies were , at the same time they were extremely focussed. They made one thing sure , that the attention never got diverted to themsleves and it was rivetted at all times on the job on hand.This is quite fascinating. The author backs this with an example where a leader starts as a level 5 and degenerates later. He takes the example of Lee Iacocca , how he turned around Chrysler and did well for around 5 years, lost focus on the job on hand and started projecting himself , raised to the status of a rock star. Later part of his tenure in Chrysler , he did not produce the same kind of results, in fact the decline started and the Company was ultimately sold to Daimler. This was a case of a attention of self and ego over the Company and job on hand.

Examples of some of the leaders like Darwin Smith of Kimberly Clarke who was self effacing and humility personified , at the same time extraordinarily courageous in as much as he ran the Company in the midst of a personal crisis ( he was detected with cancer, was given a year, but lived for 25 years ) and had the great courage to sell the then focus area of the Company , Paper mills.

Then there is Cork Walgreen of Walgreens,Ken Iverson of Nucor who had the courage of conviction to drive the Company in to a completely different area of business,Alan Wurtzel of Circuit City , Colman Mockler of Gillette, David Maxwell of Fannie Mae and so on.

These leaders also had the courage to attribute success to factors other than themselves but own up failures as their own.
Since we are talking of turnarounds, one would be tempted to conclude that the turnaround artist must have been an outside leader. Contrary to popular perception, most of these leaders who initiated the turnaround and set the Company on its course to sustained turnaround and great results were insiders.

First who …. Then what

Again contrary to what could be the most expected sequence, one would think that in such turnaround cases one would have thought that the management would have thought of the specific business or area of operation and then select people around that.What has happened in most of the cases ( of course this selection of people we are talking about are all the top management who are more general managers and not so much technical) was that these Companies focussed on getting the right people and decided on the area or course of business later. The focus was also on a good management team and not so much on selecting extraordinary individuals. Extraoridnary individuals seldom build great teams. In author’s own words, these Companies decided first of all as to who to have on the bus ( the Company ) and decided later as to where the bus will proceed.

While one broadly agrees with the philosophy of getting a good team which can deliver, one has to obviously take in to consideration the fact that the Companies would need Industry experts and knowledge. My personal take on this is that the author has slightly overemphasised this bit about who first and then what later to put across the point forcefully.

The author amd his team had done extensive research on Executive compensation to look for link between compensation and motivation and did not find one.

The author goes to conclude that it is not people who are assets , only the right people can be assets.

Confront the brutal facts ( yet never lose faith)

Almost all these Companies confronted the path of greatness by first having a honest and brutal fact at the current reality of their businesses.The author comes out with telling example of how grocery chain store Kroger did a complete make over of their stores. Inelegant and purely functional grocery stores were the order of the day and in fact did make sense in the early 20 th Century with the US and European economies being ravaged by two wars and a depression in the early 30 s to boot. With an improving economy and desire on the part of the customers to have greater variety and greater desire for consumption, the need was for bigger , nicer stores with a greater choice.. Kroger was almost 80 years old and the Comparison Company A& P was around 110 years.Kroger faced the brutal reality and made a complete make over. They either eliminated, changed or replaced the entire chain of 400 stores and came out very successful. A& P stuck to their old format and soon dwindled in size and revenues.
The author puts forward a strong case for an enabling environment where truth is heard and brutal facts faced

He talks of four basic practices

i.)Lead with questions not answers. I think this means a very open and evolved leader who listens and has an open mind
ii)Engage in dialogue and debate and not coercion
iii)Conduct autopsies without blame
iv)Build red flag mechanisms that turn information in to information that can not be ignored


The Hedgehog Concept ( Simplicity within the three Circles)
The author brings in this concept of a Fox or a hedgehog.Hedghog is something close to a porcupine . Fox keeps looking for a myriad ways of attacking and making a meal of the hedgehog whereas hedgehog masters a certain type of defense which involves making itself in to a ball and making sure that its sharp spikes all point out in such a way that the fog is not in a position to get close to it.
While Fox is extraordinarily cunning and smart , the hedgehog is smart but makes its defense a simple task. It does not cloud its mind with various forms of defense, it has developed a certain defense which is very simple and effective against the fox
The author elaborates further and talks about three circles of the hedgehog concept.
i) What you can be the best in the world
ii) What you are deeply passionate about ?
iii) What drives your economic engine

He talks of settling for something which is an intersection of these three concepts
Just because somethig is your core buisness and just because you have been doing something for years does not necessarily mean that you can be the best at it.
To get insight in to the drivers of one’s economic engine , one has to search for the one denominator , could be profit per employee, cash flow per etc , that is something which has the maximum impact.


A culture of discipline

The author talksof the discipline in thought , action , sticking to a certain course of action with fanatical adherence to the hedgehog concept and the willingness to shun opportunities that fall outisde the three circles.Not falling for the fad of the month/year etc.
Technology accelerators
Good to great Companies always use technology as an accelerator and not as a creator of it.They may not have begun with pioneering technology but become pioneers in application of technology

The flywheel and the doomloop

The author tries to bring in the concept that none of the Companies had some kind of an “Aha” moment. The great results were a culmination of years of effort. He takes the example of a flywheel. You have identified the direction and start pushing hard, still it is one hell of an effort to start the thing going. Once the activoity gets started, it picks up momentum and the incremental effort put in gives rise to better results

Sustainable transformations follow a predictable pattern of build up and breakthrough.The flywheel builds momentum eventually hitting a point of breakthrough
Comparison companies look for a break through skipping the build up and on most occassions this leads to disappointing results

The author talks of this book and the concepts as a prequel to “Built to last” rather than as a sequel. Apply the findings in this Company to create sustained great results, as a start up or an established organisation and then apply the findings in Built to last to go from great results to an enduring great company.

For those of you who are interested in a more elbaorate and more structured synopsis ( it looks so on the face of it ), here is a link

http://www.jnorth.net/mindmaps/business/business%20management/good%20to%20great/index.html

Built to last by Jim Collins and Jerry Porras- Just a simple synopsis

Just finished reading one of the very old bestselling management books, Built to last ,successful habits of visionary companies by Jim Collins and Jerry Porras. This was written sometime in 1994 and there have been a few reprints and editions. Essentiel part of the contents are the same from 1994. Quite interesting that the Companies that they had identified continue to be either top performers or atleast there somewhere close to the top. Their purpose was to identify and bring out the factors/ingredients which run across these companies. One thing is the promoters of these Companies either at the very begiining or somehwere quite close to the founding year , have had clear intentions of building enduring and great companies.The authors talk of the founders of these Companies as Clock builders as against clock readers. In simple terms they built a structure and enabling factors where there was continuity in the functioning of the Company the way it was envisaged and it continued to do perform great well after the time of the founders as against may be some technocrats who built a company around himself/herself and his/her capabilites and could never get the same replicated in others.

Companies which have made the cut are as follows

1.3M
2.American express
3.Boeing
4.Citicorp
5.Ford
6.GE
7.HP
8.IBM
9.Johnson& Johnson
10.Marriott
11.Merck
12.Motorola
13.Nordstrom
14.Philip Morris
15.Procter & Gamble
16.Sony
17.Wal mart
18.Walt disney

The authors have Compared these Companies to some very successful Companies of the same vintage and ried to bring out the reasons for success of the above Companies Vis a Vis the Comparison Companies. Most the Comparison Compaines were also very successful Companies but did not quite make the cut either because thet they did not succeed in the long run or had disappared , being sold out etc or have been left way behind by the Visionary Companies over the long haul.

Some of the key attributes they found are

Almost all these Companies had a core ideology which keep getting talked of day in day out internally and the actions of the Company are aligned to such Core ideology.The Core ideologies vary from Company to Company ,ranging from Customer focus, in the case of Norstrom, alleviating human diseases in the case of Merck, Technolgy driver products to make life easy for mankind and also remove the notion of bad quality associated with Jaanese products in the case of Sony,high technology based products and value for employees in the case of HP and so on.

There is evidence of what the authors call as BHAG s( Big Hairy audacious goals) which in simple terms traslates to betting your last rupee or dollar on some huge innovation and earth shaking project.They look for such path breaking products/p[rocesses on these lines repeatedly. This of course by their own admission has a huge downside. Some of the Companies that try this out could go down in the process. Risk factor is high. For every successful Company that has survived and come out successfully out of a gamble on such huge project , they themselves admit that there would be atleast 3 times the number of Companies that would have failed.They consider this as a test for greatness.It is a choice between a grand gamble in line with your core ideology and consequent huge beenfits as against an average growth on less risky projects. This is one point, I am not sure that I agree with the authors. On the one hand they talk of Built to last and in the current day context when we talk of Risk management etc, betting your last rupee/dollar does not quite cut ice. Of course repetitive risks on new technology etc of a certain quantum which does not bring in to question the very survival of the Company is definitey needed to retain the cutting edge.The broad concept of need for risk taking and path breaking attempts is definitely laudable but betting your last rupee/dollar does not quite sound right.


The authors talk of certain cultism.They are looking at creation of an intense sense of loyalty and dedication to influence the behaviour of those inside the Company to be consistent with the Company’s ideology.This takes various forms, including training , orientation programs,on the job ideological socialisation within the Company, making pledges ,corporate songs etc.The authors are also looking at a certain sense of elitism , that is some kind of a pride in belonging to the Company which is something special and superior, calling themselves Motorolans,Nordies etc.

Next major point the authors talk of is evidence of purposeful evolution to stimulate progress.They have in fact borrowed freely from Charles Darwin’s concept of evolution and survival of the fittest. They are looking at Companies which try out various things and settling down to the ones which have the highest success and dropping the ones which turn out to be failures . The authors look at Operational autonomy as one of the constituents of variations being tried out and follow up with selection of the best product/process/people. Of course they are also looking at various methods which foster creativity,new ideas, etc.

Another factor the authors have looked at is the Management continuity. They looked at Internal versus External CEO s. They look at this more as a test to see whether the Company has well developed formal management development programs, careful succession planning etc.This could be quite vital when one looks at the other factors like Core ideology, cultism etc. This can come about only when you have an internal candidate slipping in to leadership roles.

Another critical factor the authors have looked at is the evidence of self improvement. What the authors are trying to bring out is whether the management invests sufficienlty for the future in R & D, people, new technoligies etc to have a built in improvement mechanism. One interesting point that the authors make is the fact that there has to be at all times elements of discomfort that impel change and improvement before the external environment forces the same.

The authors have laid a great emphasis on the fact that none of the Visionary companies had Profit as the core ideology. It was one of the requirements but never the goal of the organisation. These Organisations all realised that Profit was necessary to achieve their main objective of say alleviating pain from diseases to the human race ( Merck ) etc.That is very interesting .They establish with figures that in almost all the visionary Companies , the financial results/ prifts have been consistently higher in the longer run notwithstanding the fact that profit was not their primary motive or a core ideology.

One thing which may add a new dimension is to look at evidence of these factors in some of the failed Companies. It is quite possible a few of the failed Companies also did possess quite a lot of the above ingredients but failed may be due to absence of one of the key ones.That may be worth the research .

On the whole a very interesting and useful book. The book also by and large has stood the test of time considering the fact that Management theories have been more fads for the month /year and have been written , rewritten etc.Somewhere down the line the authors also bring out the fact that what works for one Company does not necessarily work for another. They have laid great emphasis on the activities of the Company being aligned to the core ideology at all times. They mention this as a kind of universal concept.
They have done a huge amount of research and have deployed a fairly large team.

The authors have summarised the books very nicely to refresh the concepts and drill in again and again unlike some authors who skim over points never to revisit again.

Debt Funding-Double edged sword

Debt Funding-Double edged sword


Debt is not a four letter word when the going is good for the Corporates and can be the worst of the four letter words when the going gets bad for Companies

Let us just have a peek in to the kind of impact Debt has on Coporate net earnings.Most obvious advantges of debt are that one needs to pay a fixed interest irrespective of how much one earns deploying the funds. This can work to the detriment of the Corporates when the actual return on overall capital deployed is lower than the fixed interest commitment. The other advantage is that Interest in debt is tax deductible. This has a major presumption that the Company is making profits and can in fact take advantage of interest deduction

The commitment to pay interest is fixed and has nothing to do with the kind of productive use the money has been put to. Most obvious advantage will be when you use the capital to earn high returns and have to pay for use a much lower interest.
Let us illustrate with a simple example with different sets of assumptions on the overall earnings and tax

Assume that we have deployed Rs 200 , 50 % of which , that is Rs 100 being own ( equity ) and the balance Rs 100 borrowed. On the borrowed, let us assume interest commitment of Rs 10 PA. Let us also assume that we have a total earning on the total capital deployed at 15%, that is we have earnings of Rs 30 PA.Take out the interest of Rs 10, leaves us Rs 20 on which let us assume tax at the rate 30% is payable.This leaves Rs 20 minus Rs 6 being tax , that is Rs 14 in the hands of the equity holders. This effectively gives a Post tax return of 14% , that is Rs 14/Rs 100 ( being equity)

In the same example , the higher the leverage, that is , higher portion of debt would increase the earnings of the Equity holders.

Let us assume that the Company is making a return of 8% on capital deployed. Earnings before interest would be Rs 200* 8%= Rs 16. Interest of Rs 10 to be paid. This leaves a net post interest profit of Rs 6. On this tax of Rs 1.8 to be paid leaving Post tax and interest return of Rs 4.2. This effectively is a 4.2 % return on the Equity holder’s funds. Not a favourable situation for the equity holders . They get 4.2% notwithstanding the fact that the funds were deployed to earn 8 %. Impact of gearing ( higher debt).

Return on equity in a situation where the interest commitment is higher than the earnings on the funds depoloyed will get worse with higher gearing ( thet is use of higher debt Vis a Vis Equity)

Good Companies prefer to have a low gearing as a matter of conservative financing policy.One can see the trend across all well managed and regular profit making companies.

Forex rate movements-Interest rate differentiel

Forex rates movement-Classical Interest rate differentiel theory

Let me start with a warning note, reason for Forex movements, that is movements between currencies and the premia or discount that one currency commands over a period depend on various factors.Just to list a few, the reasons range from Interest rates,short term availaibility and requirement of the currency, Balance of payments of trade movement in the short term between two countries ,and of course the most important , Government regulations and restrictions .

Discussion is on forex movements and not on the base rate itself. The base currency rate between two or more currencies depend on factors starting from Purchase power parity , Balance of payments of trde as of a certain date and various other factors which is possibly a subject for discussion for another day.

This piece is only on movement of Forex rates .

While the actual reason is quite complex and is driven by various factors which affect the market including imperfect market, restriction on currency movements, restrictions on trade and short term imbalances between supply and demand for currencies, the one compelling theory and what could be termed as a classical one on forex movement is the one with reference to Interest rate differentiel between currencies. This is the simplest , most logical and something which should work if the market is perfect and there are no restrictions on currency movement, investment or borrowing in the currencies under study.

Let us do a simple one between USD and INR. Let us assume a base rate of INR 40 to a 1 USD. Let us assume prevailing interest rates of 10 % PA in the case of INR and 5% PA in the case of USD. For the sake of simplicity we will have to assume no interest rate differentiel between borrowing and Investing .This is to make the example easier . INR 40 at the end of one year will be equivalent to INR 44 and the in the case of USD, $ 1 at the end of one year at an interest rate of 5% be $1.05. Equilibrium forward rate of USD to INR for one year period should be 44/1.05 , that is INR 41.9048 to1 USD. If the rate is anything other than this , there arises an opportunity to make riskless profit.

Normally the currency on which interest rate is lower will be at a premium and the one whose interest rate is higher will be at a discount.

Let us assume that at the interest levels specified, the actual forward rate quoted at the end of one year is at INR 40 to a USD.

Easy way to make profit is

- borrow in USD,
- convert to INR immediately,
- deposit in INR ,
- simultaneously take a forward cover to buy USD at INR 40.


Let us calcuate the flows .

Since you have borrowed in USD , you will have to pay $ 1.05 with interest at the end of one year.

USD converted to INR 40 and deposited would become INR 44 at the end of one year since INR deposit attracts 10 % interest.

Since a forward cover has been taken , you would be in a position to buy USD of 1.05 for a total outflow of INR 1.05*40= 42. This leaves you Rs 2 as riskless profit.

In the same case, if at the same interest rates, INR forward rate had been 46 to USD, we will be doing the borrowing in INR, depositing in USD, forward cover to sell USD .

Let us work out the simple math in this sequence.
You had borrowed INR 40 at the end of one year , to be returned is Rs 44 .
INR borrowed was converted to USD at the beginning has been deposited as USD deposit .At the end of one year we get USD 1.05.
Since we had a cover to sell USD at the rate of INR 46 to a USD, we will sell the $ 1.05 at INR 46 to a USD and get on hand INR 48.03. We pay off the INR 44 and left with INR 4.03 rsikless

We have assumed no difference in interest rates between borrowing and investing and also no difference between buying and selling of currency. Margins between these two will make a slight difference in the calculations but the theory holds good.

As a thumb rule,arbitrage opportunity will arise when the currency forward rate is different from the interest rate differentiel. Normally in such situations the demand/supply for the currencies adjusts in such a way that the interest rates move and nullify the advantage. If this kind of anamoly were to persist , every one will be doing this set of transaction and the interest rates and the demand for the currency will drastically undergo a change till such time equilibrium is attained.
This is theory and will continue to be theory till such time, we have free currency movements and unrestricted deposit and borrowings in any currency in any country or atleast in the countries of the currencies in question/discussion.

Impact of interest rates on Share prices

What kind of an impact does interest rate have on stock prices ? What factors influence interest is a discussion for another day. It is a lot more complex .Let us get back to the subject of Interest and Stock prices.

In simple terms, prevailing riskless interest earning, as they term it, is the first point to start ( let us say from investment in RBI(Reserve Bank of India bonds or an equivalent sovereign guranteed bond, where there is no risk at all) . This could be , say Rs 5 for every Rs 100 invested. Any investment involving slightly higher risk would make the depositor/lender expect better return, that is higher interest rate. This is what the classical Finance theorists call the risk -return matrix. Shares, being a lot riskier, expectations would be for a higher return.

In the current context where ,say the , prevailing riskless interest rate is 5%, expectations from shares could be may be around 8-10%. That being the case, other things being equal , in the case of a Company which has a earnings per share of Rs 5, the price could be anything between Rs 62.5 ( 8% return ) and Rs 50 (10% return). This could further get affected by other factors , like degree of certainty in the EPS ( Earnings per share) , past growth in EPS demonstrated by the Company etc.

Other things being equal, higher prevailing riskless interest rate means lower share prices for a given EPS and lower riskless interest rates mean higher share prices for a given EPS. In the above example , if the riskless interest rate was 10 %, expectations of return on shares would be closer to 12-15 % and the share prices of a Company with EPS of Rs 5 would be between Rs 41.67 (12% return) and Rs 33.33 (15% return )

Market Yo Yo

What is the latest ?
Experts advise investors to keep 50 % cash and expect further fall. Experts see better value but are apprehensive of a downside .Panic grips the market.
Index of Industrial production showing weakness ( don't remember the exact figure )
Just watch this space may be 6-12 months from now, the same people may do a turnaround
Physically we evolved from and are close to Apes , mentally I think we evolved from Goats . We move together , get influenced by others. Psycholgists have to necessarily go through a crash course ( pun intended )in stock markets and human behaviour if they want to get a good understanding of people. I am talking about 90 % of the popluation who are materialistic to some extent or other and are never averse to some money, easier the better.

In fact the latest is Behavioural economics.

Stockastics

Stockastics

To those who hold in awe the experts who make frequent appearances on CNBC and who keep dropping words of wisdom, what follows may not make a great read .

In fact , I had typed in a quite a long piece post the boom and subsequent semi bust of the infotech stocks some 4/5 years back. I lost the piece somewhere down the line ( change of desktops at home…)

The central theme is , that there are not too many real and genuine experts , of course there are some ,but most are followers . There have been very instances of one of these high finance experts who have predicted something huge or a major trend .Most of them start mumbling when they see the signs of a trend, then half way through it gets louder. They feed on each other and feed on their own rhetoric and keep pushing the prices up.

You see a typical case of cause and effect played out exactly in the reverse order. You see the effect and start filling in the most plausible theories as to the reasons.

Few for reference

Replacement cost theory

This was started by our great Harshad mehta. What was the theory ? In simple terms, cost of replacement of some of assets of some of the Companies was much more than the market capitalisation. Simple and plain inflation added credence to the theory.You hold on to machineries long enough and at the end of it all, may be 15 years, you have a pot of gold.Good for a laugh. What was conveniently forgotten was the fact that the machineries built later and with more modern functions had the inherent capability to ensure production at lower cost. Still everyone fell for Harshad Mehta’s theory, long enough for most of the retail investors to loose their shirt , pant and in some cases still more.

PEG,price earnings growth.

There was this new theory that PE ( Price earnings is a post mortem ) is based on past results and PEG (Price earnings growth) is more tuned to factor in the future. This has a growth multiple added in. On paper , a good theory, but the excesses played out in the market with this theory was for all to see. Wipro, no doubt a good company, was selling at a market capitalisation of INR 1000,000 Mio when the profit was something close to Rs 5000 Mio. It was an enormous show of faith that people predicted Wipro to continue to grow , god knows at may be 50 % for the next several decades. The price anyway would not have been justified if the underlying assumption of growth had been just for a few years.

To restate a basic economic principle ,.... when you have super profits, the business attracts more people till you get in to normal profits period...... May be unlike commodities and industries which have linkgaes to commodities, get to that stage earlier and Tech Companies do and have in fact maintained leadership position for longer periods,but it can not be forever. People who are the cutting edge of such "Technology Companies" can and in fact moved, taking out that edge.

Some of the so called advantages that we had, Labour cost arbitrage , Currency advantage etc have all diminshed significantly

Cost advantages in Export market,in the fields of IT and textiles post MFA scrapping

First one , IT Industry is still okay, the latter one, textile never really took off . China stole a march. Government machinery kept talking of a brigh future and the potentiel etc in this Industry , but never really prepared themselves in terms of modernising and providing the support structure to the Industry ( Subsidised loans from Textile fund was a small feed for the huge hunger )
Of course this MFA was not overplayed by the Experts. An exception which proves the rule.

Invest in Domestic driven Industries

Volte face , export focus to Domestic market. What was a problem ( Population ) few years back has suddenly become a virtue, demographic dividend they call it.This will continue to play out for sometime.

Asset play

With increased disposable income, you have the real estate prices skyroceting and Companies mismanaged for years and holding on to lands in prime locations, suddenly became darlings. Pure luck. People who caught this slightly earlier made tons of money.Why is it that this was never brought out 3-4 years back, is it that no one predicted the real estate boom ?

People have made money and have made good recommendations but the genuinely great ones are very few.Most of the money is by people who are in the market , who get inside information and these people make money at the cost of gullible investors who are old timers and who have been holding on for sometime and who sell out at the first sign of a rally. They don’t have inside information.

More to follow

Tamilnadu newsprint analysis of financials

I have been trying to track this Company. Generally one is against this kind of State run Companies, but this one is an exception. It is very well run . There is also an inherent asset play. Broad financials are as follows

EPS Rs 18 approx for 2007-08
Book value Rs 100 per share by end of the year
Paper capacity 220 k mt and going up to 400 in 1.5 years
Power generation capacity 63 mw going up to 86 mw soon
Has a 63 acres land in the outskirts of Chennai which it proposes to convert in to an IT Park
Is setting up a cement clinker unit with 400 tpd capacity to use the flyash from the paper mill.

Well run company, makes mid course corrections. Started as newsprint manufacturer , but shifted tracks to other forms of paper when newsprint prices came down .
Has poineered cooperaive effort with farmers for land development for trees
Increasing pulp capacity

If one is looking for a steady 20-25 % return in the next 3 years with a potentiel upside of 50 % and with very little downside, this is it
Genuine solid value proposition at the current market rate of Rs 106 and will continue to be so till Rs 140

PS: This is just my view . People are at liberty to have a look , take the recommendation but check up with other sources or do your own due diligence before taking the plunge. I have knowleldge but do not claim great predictive capabilities especially stock prices. Success /gain is a function of your focus and the time frame on top of the Company performance

Dance of the bourses

This is great. I mean starting to put some nonsense in to the wide and far reaching webworld. Now let me get cracking.
If you are looking at how consistent and constant human beings are , you don't have to go too far ,all that you need to do is to look at the stock markets. As fickle as an exposed candle light on wildly windy day is.Burns but never gives the confidence that it will survive.

Few months back, India was the ultimate darling, the ultimate growth story , now suddenly getting pushed in to pariahdom

All the self proclaimed experts, have retreated . If somebodty has the patience to chronolgically list out the utterances of the bulls ( mostly bullshit), you can see the consistency." At PE ( Price earnings of 16-18), a growth market like India is a steal. India is not dependent on US. Sub prime has no impact on India, in fact if anything , it may have a beneficial impact.........Markets may touch 25 k in a few months.............. "

Next scene, the same folks

"........market valuations are rich, considering the fact that there have been some interlinkages in the Borrowings , risk swaps etc ( ICICI writing off something ), there is a possibility of the market touching 12k
Growth is stuttering, markets overbought,heated up,retail investors advised to stay out,.................................... "

I have been watching the the Forex markets for quite sometime . Most of the experts start commenting after the trend is truly in to its mid stage.They see the graph and start shouting. I remember when the Dollar was appreciating , they all did some semi intelligent extrapolation and said it would appreciate further. Nobody predicted ( or very few did ) the reversal, the moment it started and lasted for a few months, our experts were all over the channels uttering words of wisdom expressing exactky opposite views.

To be continued