Keep away from high debt companies

Conventional finance teaches that leverage is good when the overall return on capital employed is more than the cost of debt plus when you are making profits, interest cost gives you tax cover. Effectively you get the double advantage of additional return on a post tax basis.

Of course conventional finance also teaches that this could work to the Company's disadvantage if the return on capital employed is less than the debt cost and tax cover is a non issue if one does not make profits.

My personal experience even as recent as a couple of years , is that , if you are not a trader or a speculator , it pays to keep away from leveraged companies. If the expectations are 12-15% post tax, one will be surprised how good such a return is when you see the impact of such a return on a compunded basis , especially in the light of actual and empirical data of how the returns have been

Just to give a simple example, Rs 100 invested at 15% compounded in 5 years would be Rs 201 and at 12% the same would be Rs 176, quite a tidy sum.In the Indian market , there are shares where one can invest safely and expect that kind of returns without a perception of any serious risk.

Another caveat , even if one is ivesting in fundamentally good shares with very little downside risk is, do not invest on leveraged funds. Whether corporate or personal , Investment from borrowed funds is dangerous and puts you in a time bind. You may be right in the investment target but the point is you may prove to be right in the long term when in the short term you run out of money. You would be forced to take sub optimal decison on divestments

My favourite quote in this is of the economist Keynes.... " The markets cam remain irrational longer than you can remain solvent"........ 

Have seen shares like Shree Renuka. Geodesic, Subex reeling under debt. 

Oil refining and marketing Companies- Subsidy news

Appears to be a case of Government realising that Diesel subsidy can not continue for long. In recent times the subsidy has got availed more by the middle class which obviously was not the intention. We are closer to the "tipping point" now than anytime earlier. Even at the current market price of Rs 380 per share ( HPCL ) it makes sense

Mraket Cap is just around Rs 11-12,000 Crs , together with the debts the overall Enterprice value could be around Rs 50,000 Crs. Even a trebling of price, the overall EV could just be around Rs 70,000 Crs, well within a reasonable valuation for a 1,88,000 Crs turnover Company with refining capacities of around 15 Mn T and excellent network in place

I just wish I had accumulated a bit. The price could well touch Rs 2,000 in a few years time. Taking off Government subsidy is always fraught with uncertainties.

Need to tabulate all the refining Companies capacities, Mkt cap and other qualitative factors

Private sector companies can  benefit immensely once the price cap is taken off

Interesting piece on Japan Economy by Satyajit Das

An interesting piece on Japanese economy in ET . Some very interesting facts

1. The population is ageing so much so that the workforce to retired drawing pensions is low
2. Japan Real estate has been stuck at 1989 levels or so
3. Japan stock markets are at around 20-30% of their prices as of 1981 or 89.. , this was a bit of shock
4. With currency appreciation, their exports have become uncompetitive and stagnating
5. With theprevalence of Zero Interest rates ,savings are down
6. Debt as % age of GDP is around 150%
7 Servicing debt could be a problem the moment the interest rates go to say 2-3%

Just this much I can recall. Appears to be in some kind of vicious bind

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