Oil trading and refining Companies- Darkhorses

With the idea of  doing away with Diesel subsidy gathering momentum, Oil refining and trading Companies like HPCL, BPCL and IOC could have a spurt in performance and prices of their shares could see significant rise once the subsdiy is reduced substantially or done away with

Of course subsidy is a sensitive thing next only to Reservations. One can take a chance. Everything reaches a tipping point  and that time in case of diesel might be coming quite close.Fiscal deficit is threatening, inflation high, low growth rates, industrial confidence low, could just  be the confluence of all negatives to necessitate change.

It is a risk but worth taking. HPCL with a market cap of around Rs 10,000 crs , could easily go up by 3-4 times if things fall in place.Downside risk at this point appears low.

US Debt

Read a very interesting piece by Satyajit das on US Debt. It is around $ 16 Trillion. It is a known fact that US has been living on borrowed funds, in fact borrowing by all accounts is for consumption and not for investment in Capital goods.

The author quotes Keynes on debt. When someone takes $ 1000 , and is not able to repay, it is his problem , when someone takes $ 1 Bio or some such huge amount and is not be to repay , it becomes the Bank's problem.

This is exactly what appears to be happening with US. Other countries can't even let US currency depreciate, or like Germany of post WW I, US can easily resort to pumping in money , let the currency depreciate and pay back cheap USD.

US may not come down to doing that but countries like China can't afford to cut out supplies nor can they afford to let the USD depreciate.

At some stage, it has to reach the stage of the final straw which breaks the system.

Investments in Holding Companies selling at discount

A portfolio for Rs 5 lacs Investing in Holding Companies which are selling at a discount Vis a Vis their quoted subsidiary companies or have investments in  unquoted businesses whose embedded value appear much more valuable than the overall Enterprise value of the Holding Company is given .

Market price 27- Dec-2012  (around 10:50 am). There could be intra day variations, anyway this investment is proposed as a medium term investment , such variations should hardly make a difference.

Investments in Holding Companies priced at a discount
Description	No of shares	Price	Invtmnt Rs
Aditya Birla Nuvo	100	1,082	108,200
Sund Clayton	400	321	128,400
Bajaj Holding	100	971	97,100
Bajaj Finserve	100	920	92,000
Rane Holdings	400	198	79,200
Total			504,900

Let us see after a year, may be after a couple of years. Expect a post tax return of atleast 15%
I have not invested in these so far , but plan to do so once I have some investible funds.Rationale and discount given in earlier postings for some of the cases. But similar analysis done for the abovementioned Companies.

Arbitrage opportunities in Holding Companies Vis a Vis direct investment in Subsidaries

This is the general trend. Of course this no new discovery or finding by me. Most of the Holding Companies quote at varying discounts to the subsidiary Companies. Not sure as to the reasons.Atleast if there was Dividend distribution tax on dividends paid by Subsdiaries to Holding Company , I would think that there is some reason and rationale. Now that Income tax Act gives waiver on double taxation on DDT ,( Dividends declared by the Holding Company out of the dividends it receives is exempt , provided DDT has already been paid.... or something to that effect) the discount can not be justified.

There is always the question mark as to whether the Holding Company can come out with a schemen of arrangement and have the shares swapped at less than favourable rate to the Holders of shares in Holding Company . The people affected are the "other shareholders", that is the ones other than the promoters group.

If the group is transparent, the discount is not justified.

Another Holding Company , I was looking at was Grasim. Grasim holds 60% of Ultratech shares.

Ultratech sells at Rs 1960 per share, a market cap of Rs 53,000 Crs .

Grasim shares sell at Rs 3200 per share, a market cap of Rs 29,000 Crs and an enterprise value ( adding the loans) of around Rs 36,000 Crs

Grasim's share in Ultratech  alone is worth Rs 32,000 Crs giving a value of around Rs 4,000 as value of other Grasim businesses.

Grasim's other business , namely VSF make around Rs 1,000 profit.

Good value for another Holding Company.

Similar is the case with Adity Biral Nuvo. Will have a seperate post for the same

INR-USD could there be twist ?

Rupee has been steadily depreciating against USD . From a high of Rs 45 to a dollar , it is now around Rs 55 to a dollar.

I recall my working days  in APC , between 2000-05, the rate was around Rs 42-45 to a dollar , in fact, it had appreciated  from a low of Rs 49 or so in between. Once rupee started moving up , in fact , I recall it ( may be after 2005) had gone to a high of Rs 40 , the self proclaimed experts started coming out with theories of how rupee could appreciate further.This did not happen .

Between India and USA , there are probably  more negatives in US economy than in the Indian economy. While that may not be enough reason for INR to appreciate, the state of economies is definitely not such that INR should depreciate as badly as it had done in the past year or so.

It may be a good idea to invest in Import heavy Industries . There is a very good chance of the rupee appreciating going forward. Of course there is always an element of risk but at this point of time, it appears a reasonable guess . IT Industry could struggle , could in fact see negative growth numbers. Inspite of such a strong depreciation of INR and the fact that IT Companies still have earnings in USD and significant part of expenses in INR, the last few quarters have hardly seen a growth even in INR.