RBI's latest measures to stimulate growth

A quick take on the current events including the RBI's latest move today to cut CRR, SLR and repo rates.

It is now very well known that there is a real threat of recession in the world economy. At least its biggest component is facing that. The United States' economy contracted by 0.3% in 3Q2008. Officially, it has another quarter to post negative growth to qualify as a recession. But, that is only a technicality. With the world financial markets already in their worst crisis in ages, it is only a matter of when, not if, it will happen. Though it is much more complex, to summarize - the world financial turmoil initially led to a liquidity crisis. Liquidity crisis (will lead) to less spending. Less spending to (an eventual) recession. The recession (threat has already) led to unwinding of bullish positions in commodities (all types - agricultural, metals, and crude oil). Unwinding has in turn led to crash in prices. Though some may say the bubble has burst there, the stocks of commodities even after their discounted prices are quoting at extremely low valuations (this can be taken as a separate blog topic later).

Now coming back to India, the inflation which had shot up to over 12% in late September / early October is now easing a bit. It is thanks to the substantial softening of global commodities that the inflation has eased. With the industrial output now almost kissing the zero growth mark due to the hard stance taken by the RBI in the past 1 year to choke liquidity in order to rein in its biggest enemy at that time - inflation. Having realized its goal, the RBI is now simply reversing the process to stimulate growth, though the magnitude of measures taken can definitely be called 'historic'. In a span of 20 days, the CRR was cut by 350 basis points to 5.5%, the SLR by 250 basis points to 24%, and lately the repo rate by 150 basis points to 7.5%. This has lead to a release of 270,000 crore rupees to banks to lend. Such a measure is unprecedented. Business Standard says that previous biggest move was a 2% CRR cut way back in 1974. Though the inflation is in double digits currently, the RBI seems to be pretty confidant that it will ease considerably as inflation follows price patterns (not lead). The soft commodities, especially crude oil, is not factored in yet. Of course, it is the government that takes the pricing decisions there - but the petroleum minister, Murli Deora, left no time to announce a price cut if crude oil falls below 61 USD a barrel (when it was still hovering above 70 USD to a barrel). Crude oil price have a chain effect. So, that gives the RBI a cushion in the coming weeks with regard to inflation. The extra liquidity released today is expected to ease the pressure in the call money markets immediately where nobody seems to trust everybody else and hence the high rates being quoted (as high as 21%). In the medium-term, this measure and the reduced repo rate signal reducing interest rate environment. Though the real interest rates are still in the negative, this move will be welcomed by all the bold folks out there hunting for new homes, cars, holidays, etc. in these testing times. However, this is subject to the bankers having mercy on them and passing on the benefits.

JLR Effect: funding plan spooks Tata Motors' stock

Tata Motors (TM) has announced a three tier approach to financing the JLR acquisition. According to Business Line, this involves raising money through issue of shares to existing share holders (rights shares) with differential voting rights and convertible preference shares. In all, the exercise is expected to raise around Rs. 7,200 crore (around $1.7 bn) for the company. This move alone would represent an earnings dilution of 23% due to the increased capital base. A further amount of $500 mn is expected to be raised in the form of ECBs, which increases the interest burden further. As expected, the share price tanked 8% on the news and is currently trading further lower by another 10% now (see chart below), which is a 2-year low for the stock.

Chart 1: 1 year graph


Chart 2: 2 year graph

What was initially expected to be an LBO is turning out to be a vastly different one. Equity dilution was forced upon TM thanks to the credit market turmoil. What is interesting to know is how TM is going to tie-up funds for the Nano project. Going by this article, this doesn't seem to have been done yet.

Financial diffiulties apart, the increased fuel prices and the already high inflation are going to make matters worse for TM. With the ever-increasing input costs, the worsening market conditions will squeeze margins further. This also threatens the ambitious Nano project. Tata Motors is trying all options to keep the price at the promised 'one lakh', but may also give in to component suppliers' demands. The Nano & JLR may be good for the marketing guys at Tata Motors for they give the company free press mileage, but for the finance guys they seem like a hole in the pocket. By extension, same is true for the shareholders too.

KGN: A tale of a relisting

KGN Industries was a little known company before May 21, 2008. On this day, it got re-listed with a big bang and promptly came under regulators' surveillance. It listed at less than Rs.100, went up to a high of...hold your breath...Rs.55,000. Nope, it's not a typo. By midday trading that day, it was under the regulators' wrong-doing radar. BSE said that it was verifying the trades carefully to find out any hints of manipulation, but also added that it would not nullify the trades and indeed would honour them. On May 22, it closed at a little over Rs.5,000. That price gave the company a market capitalization of well over Rs.9,000 crore or $2.3 billion and took the company in the top 100 companies list in the country. All this for a company that is into some sort of trading commodities and has a total turnover of about Rs.1 crore, forget the net income. To put things in perspective, even some of our friendly neighborhood kiranawalas have more turnover than that. Anyway, it made the promoters billionaires overnight! Ironically, it was delisted from the exchange for not paying the listing fees!! Ever since the re-listing day, it is on a lower circuit. Have a look at the trade data for June 3, 2008 on the following JPG ..



A few things worth noting here are Bid Qty/Price which are obviously zero as the stock is on a lower circuit, and the LTQ which is 1 share. What is surprising is the total traded quantities traded for the day, which is only 2 shares. There were buyers at Rs.55,000 but not at a price that is under Rs.4,000. Nobody wants to buy it now! Apparently, it was driven by 'operators' - over-ambitious ones at that. Now, since the whole episode is under lens, and with electronic holdings, it is easier for the regulators to track who the buyers/sellers are for a stock, especially for one that trades in single digit quantities. So, all those operators who jacked up the price all the way to Rs,50k (I am getting tired of typing so many zeros now), went into hiding and are holding onto their shares reluctantly.

Now take a look at the following graph which shows trading data till June 3 (need to click on it to get a proper view)




I didn't keep May 21, 2008 trades as that would make other days' volumes invisible. Look at them, on one occasion (May 28), the lone share was bought at the close of market hours. There was no trading on June 2 (one thing that I discovered/realised out of this is if there's no trade, then the price remains at the previous day's level even if it is on a continuous lower circuit - there has to be a buyer for a trade to take place, isn't it!) , and today (June 3) 2 shares were traded. The question that arises now is...who are these buyers? and why are they buying in lower single digit quantities. There's no doubt, these guys are linked to the old set that drove the price upwards. Now, they have realised the grave error they committed of shooting it up beyond the skies. If they don't keep buying now, the price will stay there (as technically it has to trade to either move up or down) and come under missile attack from the regulator. With a circuit filter of 5% in place, it has a long journey to go travel to reach its destination of the sub - Rs. 100 per share. Till then, then the promoters of this company are paper billionaires, and can do nothing but keep watching as the billions evaporate!

Kya aap paanchvi pass se tez hai?

Literally translated into english, it means 'are you brighter than a 5th standard (grade) kid? Let me rephrase that question for you....do you want to buy a lottery ticket? Confused? Here's the explanation.....This program from 'Star Plus' is yet another reality show where people call in or send SMSs to participate. This is to a special number that charges s special price (usually 5 times the regular call/SMS charges), the revenue from which is split between the telecom operator and the television channel. Sony's 'Indian Idol 3' reportedly brought in excess of 70 million votes. That meant Rs. 35 crore in SMS revenue alone. Taking out revenue sharing between telecom operators and 50% of the net proceeds as the sponsoring telecom operator's (Airtel) share, that still left Sony with atleast Rs.10 crore. No wonder Hussain and Mini Mathur kept asking us to vote repeatedly!!

Anyway, back to 'Kya aap...?', Star Plus is the pioneer of SMS voting/participation when it started KBC. They surely are going to make lots of money with this show as well. They keep the entry question so simple that it tempts even the most resistant critic. For example, the latest question for which call-in lines are still open as I write this post, which of the following capital cities is on the sea coast - Hyderabad, ____ (forgot the option) or Chennai. Choose your pick. For such a question, surely there'll be thousands of SMSes. In such a case, there's a very low probability of selection of a candidate. Something like one in a lakh or a million. So, how different is a lottery ticket from this now??

JLR Effect: The inevitable happens to Tata Motors

Tata Motors (TM), which agreed to acquire Jaguar-Land Rover (JLR) combine from Ford Motor Company for $2.3 billion, was downgraded today by Crisil. This was inevitable. TTM already had a huge drain in the form of the Nano, and now it bought a bigger one in JLR. It plans to raise over $4 billion in additional capital, most of it debt, to fund these projects. That would surely hurt the balance sheet. If all that figure is in debt, then @5% interest rates, it'll reduce the net income of the company by almost half. That means, lower EPS. That means, lower share price. With this kind of risk, investors don't give a good PE multiple. That finally results in the stock getting hammered on the bourses.

Here's the TM stock price chart after the JLR deal was announced. Not a spectacular fall (on 27th March) as the news was already priced in during the run-up to the announcement, but a fall nevertheless.


A one year chart in comparison with the Nifty.

A one year price chart. No great rallies in the stock even when the Nifty touched new all-time highs every other day during the course. Currently, it is above a crucial support level (620).


The JLR deal is the biggest challenge TM has undertaken in its lifetime so far, definitely bigger than when it plunged into the passenger car market in 1998 with the Indica. As the TM management talks, it is not looking at 3-4 quarters, but 3-4 decades, by when, India (and China) is expected to be a sufficiently large market for such cars, and Tata wants TM to be the Ford Motor Co. of India. Tata know it'll be difficult for it to develop such brands. Hence, this acquisition. Hmm, a really long-term thinking.

Tata Group: A tale of two acquisitions

Well, a short take on them actually. But, here's the news first. Tata Motors acquires Jaguar and Land Rover. This is another big acquisition for a Tata group company. The figure of $2.3 billion may not be as big as $11 billion (approximately) that Tata Steel spent to buy corus. Remember that Jaguar has the capacity to drain resources. A case in point is Ford spending over $10 billion in all (including the purchase price of about $2.5 billion), to try to rejuvinate them. So, $2.3 billion is just the acquisition cost. The cost of turning around the company is certain to go higher. Tata Motors (and the group as a whole) may be well funded. But, can they afford to spend something like Ford did. Ford, itself being a deep-pocketed company, is finding it tough to run the companies. May be because of tough conditions at home, Ford is disposing-off its non core assets even though they are no longer making losses.

There are some similarities in the two Tata deals. Both the targets are based in the UK. Both are highly leveraged deals. Both are struggling legacy companies of the erstwhile famed British manufacturing sector. But the similarities end there. Tata Steel, which eventually paid a higher price for Corus in the bidding war with the Brazilian company, CSN, had a near-perfect timing with the deal. They saw the future that steel prices knew only one direction from now on - northwards. They were not wrong but that couldn't have been the only reason. With the industry getting consolidated and big M&As becoming the norm, they probably felt threatened they may be the next acquisition target of Mittal Steel(Arcelor Mittal now). In order to survive, they needed size of operations to be in their favor. With the industry consolidated, steel producers have pricing power which had eluded them so far. Hence this daring acquisition which was many times the size of Tata Steel itself. But, steel is a commodity at the end of the day. Buyers don't necessarily go by which brand of steel they buy. Big buyers like the automobile industry may look at the sustainability and quality of suppliers. That would have been easier for Tata Steel to convince Corus' buyers. With steel prices going through the roof, the going has not been that difficult for Tata Steel. But Jaguar and Land Rover are brands. Big ones at that. Moreover, they sell at retail level. So, it'll be a lot more difficult for Tata Motors to convince its customers. It is easier for Tata Steel to convince XYZ Manufacturing Co. to buy Corus steel than for Tata Motors to convince the same company's executives to buy Jaguars or Land Rovers. Consumers associate brands with a certain image. They pay premiums for brands that give them the feeling of royalty. JLR are certainly in that exclusive club. But, right now, that may have taken a small beating. Or atleast till the time the consumers come to terms with it. Dealers of the brands, who ew-ed at the thought of the deal going in Tata's favor in the initial stages of bidding, are now welcoming it. They may not have any other option but to welcome the deal. But buyers do. If they feel a Jaguar or a Land Rover doesn't give them the kind of image they want, they may easily go for a BMW or a Merc. Tata Motors executives know that. They have said that they don't intend to interfere with the plans these two companies currently have. That their management has freedom to implement them. There may be spill-over benefits to Tata Motors like technology-transfer. Tata Motors may not have had the best technology used in its cars. With JLR deal, they can now certainly say so.

A big question that only time will tell is, when a pioneer like Ford struggled to turn them around, can Tata Motors achieve that?

Realty stocks get re-rated after DLF bags mega project

The announcement regarding awarding of a project worth Rs. 60,000 crore to a DLF joint venture to develop an integrated township containing offices, housing and recreation facilities for about 750,000 people in Bidadi near Bangalore on the Bangalore-Mysore highway had a significant effect on the stock. DLF gained a superb 17% to close at Rs. 892.8 on October 3, 2007, the first trading day after the announcement was made on October 1st, since October 2nd was a holiday on account of Gandhi Jayanti. This took DLF's market capitalisation to over Rs.150,000 crore or about $37.5 billion (at $1=Rs. 40 exchange rate). That's a gain of over Rs.21,000 crore in terms of market cap. just for this one particular news. Theoretically, this kind of pricing can only be justified if DLF earns a net income which is over this figure, and that too after considering the time value of money since the project will be executed over several years. This looks highly improbable since accruals to DLF will be only half of what the project earns since it is a 50-50 joint venture with a foreign partner (Limitless Group, Dubai). It'll be interesting to see how the sector analysts read into this development. Now, is this price appreciation a re-rating of the stock or plain irrational exuberance?. Only the coming days will tell that. By the way, the stock lost about 3.3% today. It may be noted that it was around this price band of Rs. 850 to 900 that DLF was planning to launch its IPO initially. But, due to adverse market conditions, they were forced to lower the band to 500 - 550, and finally priced it at Rs. 525 instead. The stock listed at Rs.575 and has since moved more than 50% to reach the current levels.

The news also had a rub-off on other select stocks too...Unitech gained 12%, Orbit Corp 7%, Akruti 13%, HDIL 9%, since that news broke. See the chart below (click on it to see an enlarged view) ...

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