It appears that erstwhile Satyam (now Mahindra Satyam) still has a lot of lies veiled in its accounts. According to the latest charge sheet issued by the CBI, the total financial toll of the scam can be as huge as Rs 140 bn. This is nearly double the amount (Rs 78 bn) confessed by the disgraced former owner Ramalinga Raju. Triggering new round of uncertainty, the CBI had now charged Raju for illegal diversion of funds and fraud in filing of income tax returns. This is in addition to a plethora of charges related to deflated liabilities and inflated revenues. What is more, the fudged accounts also reported fake customers and ghost employees.
The wrongdoers left no stone unturned in perpetrating India's biggest accounting fraud. I hope that the miscreants will be duly punished (moreover I know that this hope will only remain a HOPE and nothing more). However, the innocent investors have no way of recouping their huge losses. Another instance that shows that investors have to do a very careful study of companies and their managements before taking any investment decision. One must not blame the regulator but do the due diligence himself to remain on the safe side! (Comparing the company performance with its peers on a quarterly basis is one small way of doing it.)
Wednesday, November 25, 2009
Saturday, September 26, 2009
The genius of Warren Buffett
Everyone was surprised a year ago, when Buffett bought US$ 5 bn of Goldman Sachs preferred stock. This is after Lehman Brothers had just collapsed and Wall Street was yet to recover from the shocks. Moreover, Buffett's past involvement with bankers like Salomon Brothers had turned out to be time consuming affair.
But then, he rarely misses on a good deal, even if there is a tsunami of bad news all around! The next day Buffett had said, "The price was right, the terms were right, and the people were right." He also secured a margin of safety from the terms of contract - a 10% dividend and also the right to buy US$ 5 bn of common stock at a strike price of US$ 115 per share.
A year later, his decision has turned out be correct! Investment in Goldman has made Buffett's Berkshire Hathaway richer by US$ 3 bn in twelve months! Given the current share price of Goldman Sachs at US$ 183, the warrants alone are worth US$ 3 bn ((US$ 183 - US$115)*45 m warrants). Of course, the warrants were not available to the ordinary investor in the US. But then, all he needed to do was buy the common stock to comfortably outperform the broader market. Easier said than done! Don't you wish that there is a Buffett in everyone of us?
But then, he rarely misses on a good deal, even if there is a tsunami of bad news all around! The next day Buffett had said, "The price was right, the terms were right, and the people were right." He also secured a margin of safety from the terms of contract - a 10% dividend and also the right to buy US$ 5 bn of common stock at a strike price of US$ 115 per share.
A year later, his decision has turned out be correct! Investment in Goldman has made Buffett's Berkshire Hathaway richer by US$ 3 bn in twelve months! Given the current share price of Goldman Sachs at US$ 183, the warrants alone are worth US$ 3 bn ((US$ 183 - US$115)*45 m warrants). Of course, the warrants were not available to the ordinary investor in the US. But then, all he needed to do was buy the common stock to comfortably outperform the broader market. Easier said than done! Don't you wish that there is a Buffett in everyone of us?
Monday, September 14, 2009
Everyone wants that extra source of INCOME, but...
The usual brainstorming over coffee inspired me to write this post, hence I dedicate it to my colleagues Aadith and Gurminder!
Who does not want that extra source of income? Now if you think that you don’t want to indulge in this ‘game' of extra source, then you might be joking to yourself! In India, masses has this trend to try and copy what others do. When we come to know that our colleagues at work are generating that extra bit of income, and that too, by investing in Stock Market, we also want to go that way! The thirst keeps on building when our colleague tells us more and more about how much he/she gained from today’s trade. We think that’s it- I don’t want to be left behind and that’s when Tsunami says Hi!
The disaster:
I will call this a rippling effect. Interestingly, while the numbers remained near to the ground throughout the last few years, it has been noticed that the share of households’ money that go into stock markets tend to mount just before a bubble is about to reach its peak (now this is what is the I call the nastiest part)
Who does not want that extra source of income? Now if you think that you don’t want to indulge in this ‘game' of extra source, then you might be joking to yourself! In India, masses has this trend to try and copy what others do. When we come to know that our colleagues at work are generating that extra bit of income, and that too, by investing in Stock Market, we also want to go that way! The thirst keeps on building when our colleague tells us more and more about how much he/she gained from today’s trade. We think that’s it- I don’t want to be left behind and that’s when Tsunami says Hi!
The disaster:
I will call this a rippling effect. Interestingly, while the numbers remained near to the ground throughout the last few years, it has been noticed that the share of households’ money that go into stock markets tend to mount just before a bubble is about to reach its peak (now this is what is the I call the nastiest part)
Source: RBI
The moral: While investing in Stock Market, don’t just go with the wave. Use your own Datacenter to judge or should I say “Dimag ke batti jalao, Apni akal lagao”???
Friday, August 28, 2009
Who says companies are spending more on salaries?
Employee costs to sales is a metric which gives an idea of how much a company spends in terms of salaries when compared to the generated sales. For Indian companies, over the last ten years, employee costs have been quite range bound, and even as it seemed like payrolls had risen quite rapidly during the boom years of FY05 to FY08, as can be seen, sales of companies in general had risen even faster, thus keeping the ratio low even during those years!
* Represented by 274 of BSE-500 companies that have released their FY09 annual reports so far
Now do you realize, why do coffee vending machines keep on buzzing till late at night?
* Represented by 274 of BSE-500 companies that have released their FY09 annual reports so far
Now do you realize, why do coffee vending machines keep on buzzing till late at night?
Thursday, August 27, 2009
How does the INDIA story look [from a Debt-Equity angle]
The debt-equity ratio, is one of the key metrics which is used to get a snapshot of the riskiness of a business. The fixed charges in terms of servicing high debt obligations can be extremely burdensome, especially when business is down. History is full of examples of otherwise good businesses getting overwhelmed by the excessive weight.
The chart below shows that companies in India have made the smart move of taking advantage of the upturn in the business cycle to increase the amount of equity financing in their business, thus lowering their D/E ratios from a high of 1.4 at the end of FY03 to 0.8 at the end of FY09. Though FY09 has seen a slight increase when compared to FY08, the long term trend should thus indeed inspire confidence in FIIs.
The chart below shows that companies in India have made the smart move of taking advantage of the upturn in the business cycle to increase the amount of equity financing in their business, thus lowering their D/E ratios from a high of 1.4 at the end of FY03 to 0.8 at the end of FY09. Though FY09 has seen a slight increase when compared to FY08, the long term trend should thus indeed inspire confidence in FIIs.
Tuesday, August 25, 2009
ROE for Indian Stocks…
Return on Equity is considered as one of the key metrics for identifying a good or a bad stock. A constant and high ROE denotes high quality and a unstable or low ROE rings warning bells. One of the foremost reasons of stocks in India been given high valuation during the boom years of FY04 to FY07 was that Indian companies were earning the best RoE among their emerging market peers.
As of date the average ROE has fallen significantly (to 17.3% in FY09) from a peak of 24.1% in FY07. With profitability remaining under pressure for at least FY10, one should not expect the ROE to rise again. This should also keep under pressure, the valuation that investors assign to Indian stocks in general.
As of date the average ROE has fallen significantly (to 17.3% in FY09) from a peak of 24.1% in FY07. With profitability remaining under pressure for at least FY10, one should not expect the ROE to rise again. This should also keep under pressure, the valuation that investors assign to Indian stocks in general.
Monday, August 24, 2009
Real Estate on FIRE, yet again!
Real Estate sector was riding the market wave yet again, today. Just like the arrival of tiny birds called 'swallows' marks the beginning of summer, the arrival of a phenomenon in the Indian real estate market is also known to signal the beginning of a season. The season of a rise in property prices that is. And what is this phenomenon? Well, it's nothing but the tendency of brokers to start underwriting more and more properties so that a perception of scarcity can be created.
As per a leading daily, the nexus between the builder and the broker, which pushed property prices to record highs in 2006 and 2007 in the NCR (National Capital Region) is back in business and hence, buyers better watch out.
How has Reality stocks performed in the stock markets? After a quick analysis this is what I found…
The below chart shows the degree of speculation that has led to the rise of realty stocks since the broader rally began on 9th March 2009. While the realty index has surged by around 187% since then, the average P/E multiple of the index has risen by almost 423%[oops!!!], or a multiple of 5 times the P/E that these stock were trading at in March! Thus to conclude, it's entirely the case of P/E expansion that has caused the rise in realty stocks while corporate earnings have remained under pressure. The same conclusion, though to a lesser degree, also applies to metal, power, pharma, and small-cap stocks. Is this sheer speculation or the undervaluation correcting itself? More a case of the former than latter is what I think.
As per a leading daily, the nexus between the builder and the broker, which pushed property prices to record highs in 2006 and 2007 in the NCR (National Capital Region) is back in business and hence, buyers better watch out.
How has Reality stocks performed in the stock markets? After a quick analysis this is what I found…
The below chart shows the degree of speculation that has led to the rise of realty stocks since the broader rally began on 9th March 2009. While the realty index has surged by around 187% since then, the average P/E multiple of the index has risen by almost 423%[oops!!!], or a multiple of 5 times the P/E that these stock were trading at in March! Thus to conclude, it's entirely the case of P/E expansion that has caused the rise in realty stocks while corporate earnings have remained under pressure. The same conclusion, though to a lesser degree, also applies to metal, power, pharma, and small-cap stocks. Is this sheer speculation or the undervaluation correcting itself? More a case of the former than latter is what I think.
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