On IT companies…
India imports a lot of oil, $61 billion of it to be precise. This adds majorly to our current account deficit. However, with all the gas being found on the coast and since gas and oil are fungible, gas usage is set to rise. This would help save on subsidies and lead to the imports coming down, as a result of which, the current account deficit will come down and the rupee appreciate further.
In addition, the staff cost of IT companies is huge. Tax sops are about to vanish in 2010. With global firms also playing the ‘labour arbitrage game’, things really do not look good for IT companies.
In the last few quarters, they have been able to protect their margins by entering into more fixed price contracts and doing more work offshore as against onsite, besides reducing bench strength and emphasising on recruitments at the lowest level.
However, most of these companies would like to move up the value chain by getting into consulting. Now, consulting requires more employees onsite and that too senior, highly experienced ones. So, they are in a Catch-22 situation. If they want to go up the value chain, they have to have more employees onsite. If they do that, their margins take a beating, and if they don’t, they do not move up the value chain.
On telecom companies…
The low-hanging fruits have already been plucked. New customers are coming in at lower margins and that explains why the average revenue per user has been coming down. A large chunk of new business is expected to come from rural locations spread across a huge geographical area.
In order to service them, companies will need to put up more towers. Now, putting up a single new tower costs around $65,000. Hence, companies will have to make a whole lot of capital expenditure and this in turn will impact the margins. Number portability remains a major issue, too.
On state-owned refiners…
These companies, for no fault of theirs, have ended up developing a unique business model. The more they sell, the more losses they make. Also, with privatisation of these companies nowhere in sight, there is deep value that cannot be realised.
On interest rate-sensitive sectors…
These sectors do well when the interest rates are low and vice-versa. We believe that interest rates have peaked. We believe over the next 12-18 months, interest rates will come down again and consumption will take charge. This will benefit banks, which are major players in the retail segment.
Growth rates of both home loans and demand for homes have slowed because supply is there only in the super luxury segment. However, there is tremendous demand in the middle market segment. Real estate companies have woken up to that. Once supply in this segment starts hitting the market, the growth of home loans will take off again.
We are neutral on the auto sector. Competition is intense, so steep festival discounts continue and margins will continue to hurt.
On steel companies…
Indian companies in this sector are fully backward-integrated. Therefore, even though iron ore has gone up from $40 a tonne to $160 a tonne in the last few months, they have not felt the impact. Since the price of the steel is going up globally, Indian companies can hike their price as well.
On power companies…
In the XIth Five Year Plan, the outlay for the power sector is $250 billion. This will benefit companies that produce boilers and turbines for power plants. The earnings visibility of most of these companies is currently 2-3 years. There is a huge demand-supply gap. Given this, margins on incremental orders have been a lot better. Companies across the value chain benefit, including those that supply switch gears, transformers, cables and transmission towers, etc.
On air-conditioning companies…
The new civil aviation policy is expected to result in 35-40 new airports. Many real estate companies have made public their plans to make five star hotels. They are talking about supply levels in the next three years that have not been built in the last 30 years. Many corporate hospitals are coming up all over the country. All this tells me is there will be a lot of central air-conditioning needed.
On Sensex valuations…
At the beginning of the year, analysts expected earnings of Sensex companies to grow by around 18% from Rs 720. Now, two quarters down, Sensex earnings have grown by around 25%.
This has led to analysts upgrading Sensex valuations to around Rs 900 for this fiscal and Rs 1,080 for the next. Based on a level of 20,000, the Sensex is quoting at 22.2 times FY’08 earnings and 18.5 times FY’09 earnings. Is this expensive? No, if we look at other comparable emerging markets. Chinese markets are currently quoting at 45 times one-year forward earnings.
Brazil and Russia are quoting lower, but that’s because indices in both these markets have a huge weightage of commodity companies, which quote at lower multiples. Further, even if there is no further rerating in PE ratios, sustained earnings growth of 20-25% will ensure that Sensex keeps growing at a similar rate.
Source: DNA
Sunday, December 23, 2007
Monday, December 17, 2007
Citigroup Venture Capital Investments
These are the investments made by Citigroup Venture Capital International in listed and unlisted entities. Stakes are as on 30th September,2007 and press releases.
Spentex Industries - 26.94% stake for Rs.81crs
KS Oils - 11.98% stake
Centurion Bank of Punjab - 2.63%
Himadri Chemicals - 14.23%
Jindal Drilling & Industries Ltd - 10.5% stake for Rs.154 crs
Shiv-vani Oil and Gas Exploration - 7% stake for Rs.100 crs.
Indu Projects - undisclosed stake for Rs.150 crs.
Sharekhan - 75% stake for $175mn.
Unimark Remedies - 27% stake for $28.25mn.
SVIL Mines Ltd - undisclosed stake for Rs.150 crs.
BGR Energy Systems - 4% stake for Rs.130 crs.
Anand Rathi Securities - 19.9% stake for Rs.100 crs.
Spentex Industries - 26.94% stake for Rs.81crs
KS Oils - 11.98% stake
Centurion Bank of Punjab - 2.63%
Himadri Chemicals - 14.23%
Jindal Drilling & Industries Ltd - 10.5% stake for Rs.154 crs
Shiv-vani Oil and Gas Exploration - 7% stake for Rs.100 crs.
Indu Projects - undisclosed stake for Rs.150 crs.
Sharekhan - 75% stake for $175mn.
Unimark Remedies - 27% stake for $28.25mn.
SVIL Mines Ltd - undisclosed stake for Rs.150 crs.
BGR Energy Systems - 4% stake for Rs.130 crs.
Anand Rathi Securities - 19.9% stake for Rs.100 crs.
Tuesday, December 11, 2007
How to build One's Portfolio !
I am posting some links/articles which will help one to build a portfolio. Here goes :
Diversification and the Circle of Competence
How to (Actually) Invest Like Warren Buffett… and Charlie Munger
An Investment Framework
Simplicity and Focusing on the Big Picture
Holding Cash
Charlie Munger's Investing Principles Checklist
Diversification and the Circle of Competence
How to (Actually) Invest Like Warren Buffett… and Charlie Munger
An Investment Framework
Simplicity and Focusing on the Big Picture
Holding Cash
Charlie Munger's Investing Principles Checklist
Monday, December 3, 2007
Fund Managers Investment Strategy
Chirag Setalvad
Senior Fund Manager, HDFC MF
He is a bottom-up stock picker. Meeting the company management before he invests in a new company is a must for him. Further, Setalvad also insists on meeting junior-level people and people surrounding the business. "Typically, a junior-level employee will give you a more honest opinion of the company; leaders give visionary thoughts," he says. Well-maintained factories are a turn-on for this cleanliness freak. Best part of his job? Learning, he says, by getting to read and meeting various people. "In 99 out of 100 meetings, the fund manager is the dumbest guy in the room."
Sandip Sabharwal
CIO, JM Mutual Fund
His checklist includes the company's business, management and the management's ability to handle the business. "I don't focus too much on spreadsheets and am not driven by all numbers that the company reports; their long-term growth path is what interests me more," he says. He loves to see the cash flows that companies generate and typically avoids event-based companies—those that realise their value based on events like sale of real estate.
Madhusudan Kela,Head Equity,Reliance Capital
First is management. Second is, when you look at the opportunity, is it really scalable? If the management is able to capture the opportunity, can it be really scalable over a period of two-three-five or 10 years? Also, whether the opportunity is scalable enough in the stock market. So, you don’t bet on a small business.
Third is you look at the competitiveness of the business, as well as of the company in which you are investing. Can it be a cost leader? Can it be a price leader and can it be a profit leader? Fourth of course, you look at all the financial parameters, which everyone else looks at in the industry and finally you want to buy all this at a particular price.
Ajay Bodke, Fund Manager, Standard Chartered Mutual Fund
We follow two strategies - theme selection and sector rotation. If the theme identified is Indian capital expenditure, then you identify sub-sectors within that sector. Sector rotation is when you take a call that, say,interest rates are likely to move downward, and you reallocate your portfolio towards interest-rate sensitive stocks. Once the theme is identified, we look at competitive intensity in the industry and the pricing power players enjoy.
Quantitatively, we look at EBIDTA margins, financial leverage ratios,asset turnover ratios, working capital management and ROE. Then we look at valuations. Along with PE ratio, we also place emphasis on PEG ratios of the company in relation to its competitors. We also look at the fair value using DCF method and compare it with EV. If we feel the stock is undervalued, we see whether it is liquid. Lastly we see what kind of institutional coverage it has - the less the coverage, the more the potential to appreciate. Then we decide whether to buy.
Senior Fund Manager, HDFC MF
He is a bottom-up stock picker. Meeting the company management before he invests in a new company is a must for him. Further, Setalvad also insists on meeting junior-level people and people surrounding the business. "Typically, a junior-level employee will give you a more honest opinion of the company; leaders give visionary thoughts," he says. Well-maintained factories are a turn-on for this cleanliness freak. Best part of his job? Learning, he says, by getting to read and meeting various people. "In 99 out of 100 meetings, the fund manager is the dumbest guy in the room."
Sandip Sabharwal
CIO, JM Mutual Fund
His checklist includes the company's business, management and the management's ability to handle the business. "I don't focus too much on spreadsheets and am not driven by all numbers that the company reports; their long-term growth path is what interests me more," he says. He loves to see the cash flows that companies generate and typically avoids event-based companies—those that realise their value based on events like sale of real estate.
Madhusudan Kela,Head Equity,Reliance Capital
First is management. Second is, when you look at the opportunity, is it really scalable? If the management is able to capture the opportunity, can it be really scalable over a period of two-three-five or 10 years? Also, whether the opportunity is scalable enough in the stock market. So, you don’t bet on a small business.
Third is you look at the competitiveness of the business, as well as of the company in which you are investing. Can it be a cost leader? Can it be a price leader and can it be a profit leader? Fourth of course, you look at all the financial parameters, which everyone else looks at in the industry and finally you want to buy all this at a particular price.
Ajay Bodke, Fund Manager, Standard Chartered Mutual Fund
We follow two strategies - theme selection and sector rotation. If the theme identified is Indian capital expenditure, then you identify sub-sectors within that sector. Sector rotation is when you take a call that, say,interest rates are likely to move downward, and you reallocate your portfolio towards interest-rate sensitive stocks. Once the theme is identified, we look at competitive intensity in the industry and the pricing power players enjoy.
Quantitatively, we look at EBIDTA margins, financial leverage ratios,asset turnover ratios, working capital management and ROE. Then we look at valuations. Along with PE ratio, we also place emphasis on PEG ratios of the company in relation to its competitors. We also look at the fair value using DCF method and compare it with EV. If we feel the stock is undervalued, we see whether it is liquid. Lastly we see what kind of institutional coverage it has - the less the coverage, the more the potential to appreciate. Then we decide whether to buy.
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