Govt. is to blame for bad corporate governance

india Inc. in recent times has received a lot of flak for dubious corporate governance practices adopted by certain companies. The Satyam scandal and the 2G scam are prime examples in this regard. But while fingers continue to point towards corporate India, can one say with certainty that the Indian government is above water in this matter? Not really.

Take the case of the Coal Minister. In a scenario where the government finances are in disarray , his solution to this was apparent in the following statement, "Cash-rich companies like Coal India Ltd can lend to the government whenever the government is in need of funds. For example, enactment of the Food Security Bill would require huge funds. Coal India belongs to the people of this country and an amount of Rs 250 bn can easily be given to the government for implementing social schemes". So the obvious question is, what has Coal India got to do with the Food Security Bill? The Coal Minister appears to have forgotten the simple fact of taking into consideration the interests of the minority shareholders and believes that funds can simply be diverted from public sector enterprises to meet government needs at the drop of a hat. Coal India for its part may not lend money unless it gets interest payments for the same. But again, can the government afford this when its finances are already stretched?

In a country where the government has failed to meet its target as far as power generation is concerned, surely the focus should be on how to improve the availability of coal. It should be noted that despite being home to one of the world's largest coal reserves, the Government has revised upwards its estimated coal shortage for FY12. The same will now stand at 112 m tonnes, up from 83 m tonnes forecasted in December 2010. The entire shortfall is likely to be met by imports.

Hence, it only makes sense that any funds that Coal India has should be utilized towards improving coal productivity and the prospects of the company and shareholders rather than for meeting some government agenda. There is no doubt that government needs to keep an arm's length distance from the way public sector enterprises are run. The management of these companies need to focus on growing and enhancing the overall growth of the economy rather than bowing down to the whims and fancies of the government. And the government for its part needs to seriously take a long and hard look at its corporate governance practices and go in for a big overhaul of the same.

Important Dates for Markets

Important Dates for Markets

15th Dec. Advanced Tax Announcement
16th Dec. RBI Meeting

Research Reports

 Asahi Songwon Colors Ltd. : LKP

http://www.mediafire.com/?5n4ktdbjkka0t1v


INDIAN PHARMA : CITI

http://www.mediafire.com/file/lxkb3ehylk22rbh/indianpharma+citi+24062011.pdf


BERGER PAINTS : EMKAY

http://www.mediafire.com/?8w389vr72vat63d

The stock markets - and Pawar - get a slap in the face

The stock markets, meanwhile, are hostage to bad news and have remained under pressure because:

1. Inflation within India remains at 9% and the government keeps on saying that it should decline. And, logically, it should. The global economy is not in good shape and demand for raw materials in general should decline. This means that the prices of many products - including oil - should decline. The increase in prices of food products in India is being attributed to a change in consumption habits. As people get wealthier, they want to eat more proteins (meats and pulses) and fruits. The prices of these products will continue to increase till the farmers respond by producing more. Or systems and infrastructure is in place to make perishable products last longer. No one knows when that is likely to happen.
   
2. With high inflation comes the persistent increase in interest rates. Seeing the government sleeping at the wheel (no reforms to increase the supply side for any product or service, including agriculture), the RBI has been left the single-handed task of trying to curb demand. Hence, the persistent increase in interest rates. So there is a slow-down in demand for cars, homes, and consumer goods - much of which tends to be financed by loans. But talk to companies in the 2-wheeler, soaps, shampoos, and clothing businesses and they don't see demand declining. In fact, rural India is buzzing.
   
3. The revelation of the corruption scandals since July 2010 - Adarsh, 2G spectrum, Commonwealth Games, coal mines, gas fields, iron ore - has slowed down decision making. With the practice of granting of wealth to a few at the cost of the national exchequer increasingly under scrutiny via some courageous RTI filings, the investment by companies has slowed down. If the hard-working industrialists don't get the iron ore mines they want for free based on a few phone calls - how can they invest in all the machinery and trucks to dig out the iron ore! So, the capex numbers are down and everyone is worried. They need not be. Theft is decreasing and the country will be richer for it - the industrialist who wants the iron ore mine will now have to pay a higher price for it. And there will need to be a greater sensitivity for displaced labourers or messing around with the environment. Meanwhile, there are companies who are investing to meet the growing consumer demand. Even the small retailers, faced with a change in the FDI rules, are upgrading their stores and their services.
   
4. And politics is looking a little messy again. The Congress is leaderless and rudderless. Worse, the Congress remains arrogant in its dealing with any differing view. The BJP. Meanwhile, is running out of ideas and unable to provide a credible alternative - burning an FDI compliant shop will not help India and rath yatras are merely symbolic of the dark ages. Till the anger against corruption is taken seriously and Anna Hazare is not seen as a proxy of the RSS, slapping politicians may become a national habit. And for those in Congress who blamed the Sharad Power Slap on the BJP, it showed - once more - how disconnected the Congress is from reality. There are enough "fans of Congress" who would like to take the corrupt to task - irrespective of party lines.
   
5. Globally, the US and European economies are a write-off for the next 5 years. The willingness to take on excessive debt to satisfy current consumption (or military adventures) has been the main reason for the decline of the western economies. The cost of honouring the promises of good medical benefits and a comfortable life to retired employees cannot be met (Table 1). While the US government debt is pegged at some USD 14 trillion, private estimates put the total liabilities (including the pensioners) at over USD 40 trillion. With a GDP of USD 15 trillion and a savings rate that is less than 5% even in these distressed times, and assuming an ability to repay USD 750 billion every year with their savings of 5%, the US will take decades to pay down its debt. There is no way that the US can make good on its promises. Neither can Portugal, Ireland, Italy, Greece, or Spain (the PIIGS). That is why a "strong US Dollar" and a "weak INR" is absurd and flies against the face of rational thinking. For now, the ability of the US government to print more notes that the world wishes to buy will save it. That may change tomorrow. The buyers of US government bonds and currency notes know that they are buying a product with suspect inherent value. 

For those worried that the Indian stock markets are in a meltdown, to really understand what a meltdown is, look at what has happened to stock markets in the PIIGS (Table 2). India has had a relatively small "correction" because, as listed above, things have certainly been tough within India - and the uncertain global environment has not helped. But India is not in any sort of crisis.  

For investors, building a portfolio, my recommendation remains to keep buying - recognising the impact of weak inflows on the prices of Indian shares. Please remember that markets can turn on a dime. Sentiment - for better or for worse - can change overnight. Fear can quickly turn into greed. On March 6, 2009 the world went into a "green shoots" mode and everyone suddenly turned bullish on stock markets globally. That was only 6 months after the bankruptcy of Lehman. True, we have not yet seen the declared bankruptcy of the PIIGS or of the US as yet. So there may still be the torture of uncertainty ahead. But that is something for the trader to worry about, not the investor.

There is no fundamental change in the earnings direction of Indian companies as a universe. There is no flaw in the argument that foreign money will come into India - the unknown is the timing. There needs to be a clear understanding that the trigger of any share price movement is a function of foreign flows.

Accepting this fact, in the final analysis, every investor must identify his or her risk taking ability: a portfolio allocation decision - how much money to invest in the stock markets and how much "downside" pain can they endure by seeing all the gloom and doom and red numbers on the business TV channels (my solution: switch off the TV channels). There will be - and there has been - downside pain. Markets can fall suddenly - it is not easy to see your initial investment of Rs 100,000 in a mutual fund lose 25% of its value in a year! But an investor would not panic and would check the facts: on earnings and on flows. These are the reasons behind any potential rise in share prices.  

NILE Ltd ( BUY AT CMP 170 Rs)

• Infrastructure

  Nile's Glass Lining and pressure vessel division is located at Nacharam Industrial estate, Hyderabad, with a covered area of 8700 sq.m. The totally integrated fabrication, machining and glass lining facilities ensure timely delivery of quality products
• .Nile has two non-ferrous plants, located at Choutuppal, near Hyderabad and Tirupathi. The combined capacity of these two plants is 32000 tons per annum.
• Nile's 2 MW Wind Farm is located at Ramagiri, Ananthapur district.

STORY:The entire business encompassing the Glass Lined Equipment and Pressure Vessels Division (Business)along withallfixedassets,ovableassets,otherassets,intellectualproperty includingthetrademarks,liabilitiesincludingcontracts,licences, permits, consents and approvals, whatsoever, relating tothe Business, as a “going concern” on a slump sale basis, to DeDietrich Process Systems India Private Limited for a considerationof ` 58.50 Crores

Major turnover& profit comes from lead business last year it has posted 300cr turnover and 7cr profit on 3 cr equity

for last six months posted 176cr turnover   vs 129 cr last year and posted profit of 5.45 cr vs loss of 4 cr  last year second half profit is at 11cr if they post same profit also total cpmes to 16.5 cr (55 eps) expecting 65 eps full year.when company sold glass line  div for 58.5 cr total market cap of the company now at 50 cr . 

why no one is buying ?

people have simple and silly answers ....one its in a commodity business ..two ....differences between management team.

 http://www.bseindia.com/xml-data/corpfiling/AttachHis/Nile_Ltd_141111_Rst.pdf

http://cmlinks.com/moneypore/profilenew/financial.asp?mainopt=8&cocode=4861 

 

Rule of '9-9-9' to make you rich

US Presidential nominate, Herman Cain, had come up with a program titled '9-9-9' aimed at reforming the US tax system. The program was proposed to help the US economy out of its financial troubles. In essence, it proposed to have a 9% income tax, 9% business transaction tax and a 9% federal sales tax. Hence the connotation 9-9-9. Whether the program gets approved or not, the connotation can actually be used in another way. As proposed by Forbes magazine, the rule of 9-9-9 can be used by people like us to increase our wealth. True, it is written keeping the people of America in mind, but we feel that if tweaked a bit, it is something that each of us can adopt in our lives.

How does it work?

Well it works in 3 steps. It helps to reduce your personal debt burden, reduces spending and increasing your saving. In short, it is the recipe of becoming richer.

Let's take a look at the 3 steps involved.

Step 1: Pay off all debts that have an interest rate of 9% or more.

You may read this and go "Ha! With the increasing interest rates ALL the debts would fall in this category". Well that is actually true. So we are going to tweak this rule a bit. Pay off all debt that has an interest rate higher than what you can earn by investing in a relatively risk-free investment. We are referring to the returns on the investment which is what you earn by holding on to the investment over a period of time.

The way this works is that suppose a relatively risk free investment gives you 12% returns (note we are talking of returns not the face value interest rate). And you have a loan on which you pay 11% interest. So it would be better for you to invest your money in the investment and use the interest income received to pay off the interest on the loan. Any loan that has a higher interest rate deserves to be paid back. Otherwise the interest liability just keeps on growing and your debt burden goes up over time (using compounding power of money ).

So once you have identified the loans that need to be paid off first, the next question is how much money should you put aside to pay off such loans? This is where steps 2 and 3 come in.

Step 2: Have at least 9 months of necessary expenses in savings

Everyone has their monthly expenses. This includes basics like food, travel, clothing, housing, etc. Excluding expenses on luxury, it would be a good idea to work out how much you need each month. At any point of time, it is necessary to put at least 9 months of necessary expenses in savings. These should ideally be completely risk free and easy to get. A savings bank account or a fixed deposit are usually good places to park these savings.

But here one may ask, with expenses going up almost daily, how does one set aside this huge quantum of savings?

Well the idea is no different from what economists and experts prescribe for the countries. You have to adopt austerity measures. Prioritize your expenses and cut back on anything and everything that you may regard as unnecessary and wasteful. True it would mean that you like in a frugal manner for sometime but at the end if you are able to build up more funds, then the whole process is totally worth it. Initially it may seem difficult but saving at least 2 -3 months of expenses is doable to start with. As you move higher in life and continue following these rules in a disciplined manner, even the 9 months' savings become achievable.

Step 3: Save 9% of your income each year for retirement

So once you are done with saving up to meet your expenses, you should be saving at least 9% of your total annual income for retirement. Again, this looks like a low savings rate for us Indians. But this is the bare minimum that one should try to achieve. These funds should ideally be parked in long term investment options depending on your risk taking appetite. And these should be kept for a long period of time. Imagine the kind of funds you would have at the end of 10 years or 15 or even 20. The power of compounding comes in and the funds multiply over the time period.

The balance that is left over is used to pay off your debt burden, which you have sorted out on the basis of the interest rates.

Following these steps may seem difficult. But followed diligently and with discipline, it does become possible. And with these steps, you would soon be debt free and have sustained savings. This in turn can compound over time leading to larger wealth for you.

Mahindra & Mahindra Ltd

An ace up its sleeve in a competitive industry: In a highly competitive industry such as automobiles, having an advantage that differentiates a player from the rest of the pack translates into a strong business model that can reward investors in the long run. And in the auto space, we believe that M&M fits the bill quite well. The company is a very strong player in the tractor industry enjoying a market share of 42%. Rural markets, where tractors are largely sold, are highly price sensitive but over the years M&M has established a good brand name and a robust distribution network and these have been the company's core strengths. Indeed, given that M&M's expertise in the rural market is not easily replicable, this gives the company an edge over many other players in the auto space. And we believe that this dominance should continue in the future as well. To put things into perspective, M&M's tractor sales in volume and value terms have grown at compounded rates of 20% and 27% respectively for the past 5 years and this healthy performance is expected to continue going forward. Not just tractors, but M&M has established a strong presence in the UV (utility vehicles) segment as well with strong brands such as 'Bolero', 'Scorpio' and 'Xylo'. The company has been continuously looking to launch new products and one such new product notable 'Maxximo' has established itself quite well in the highly competitive 4-wheeler cargo segment with a market share of 19%.

The auto industry in recent times has been facing many headwinds in the form of rising fuel prices and interest rates which have dampened demand and consequently led to lower sales for many players in this space. But this has not deterred M&M's performance. Besides logging in strong growth rates in FY10 and FY11 in tandem with the buoyancy in the industry, the company put up a healthy show in 1HFY12 as well with sales growing by 33% YoY. This was led by impressive growth logged in by both the automotive as well as the farm equipment businesses (both grew at 30% plus). Having said that, the company has been facing pressure on operating margins on account of rising raw material costs and we have factored this in our estimates going forward.

Valuations are also attractive and provide a good entry point to investors. After valuing the core business and taking into account M&M's investments in its subsidiaries, we arrive at a target price of Rs 1,010 from a 2-3 years perspective and hence we recommend investors to BUY this stock at the current price levels.

Strengths in the UV and tractor segments: As mentioned earlier, the core strengths of M&M are its distribution network and an established brand name in the price-sensitive rural markets. The company's commanding 61% market share in the utility vehicle (UV) segment that derives almost 60% of industry sales from rural market,is a clear vindication. The company has been able to maintain such a strong market share despite competition increasing in the UV segment. Although the company's strength lies in the rural markets, in the last few years, M&M has been concentrating on urban demand with the launch of 'Bolero', 'Scorpio' and 'Xylo' all of which have enjoyed good success. Given these inherent advantages and a strong product pipeline, we expect the company to grow more or less in line with the industry growth rate.

M&M has a commanding 42% share in the tractor industry. Given the company's strong rural network and brand equity, we expect it to command a strong market share in the future as well. The acquisition of Punjab Tractors, which was one of India's leading tractor manufacturers and a very well respected brand in the Northern markets of the country, has also bolstered the fortunes of M&M as the business was complementary to M&M's geographical spread, had a stronger bargaining power vis-�-vis vendors and also helped increase the dealer network. This helped M&M further fortify the wall around its already dominant market position.

Exports thrust: Earlier, M&M had been dependent on a single region i.e., India. This exposed it to the vagaries of monsoon, as M&M's key segments are largely rural driven. However, over the last few years, the management has been working on a strategy to increase its geographical spread. Apart from developing its base in the US and SAARC regions, the company also entered into the South African, Uruguayan, Chinese, Australian and Russian markets as a part of the strategy with others like East Europe in the fray. Having said that, while exports are not necessarily highly profitable, these will enable the company to diversify into untapped markets and benefit from economies of scale due to better capacity utilisation.

The deal with Ssangyong: 2010, M&M announced its acquisition of a controlling stake in Korean SUV (sports utility vehicle) maker Ssangyong Motor Company (SMC). SMC has a strong presence in markets outside of Korea and exports vehicles to geographies such as Europe, Russia, South America, the Middle East, Africa and Asia. It is believed that SMC has a market share of about 14% in the Korean SUV market. This acquisition gives M&M a strong leap in terms of expanding its distribution network globally. The auto sector in India is witnessing strong competition. Several international players have entered the market in recent times, thereby giving the old timers something to worry about. As such, SMC's acquisition will give the company a fillip in terms of boosting its export volumes as well as diversifying to newer geographies. Another reason for the acquisition was that M&M wanted to bridge its product gap as it did not have a presence in the premium SUV category, something that SMC manufactures. Although SMC's performance had deteriorated in recent times, one of M&M's strategies is to revive sales by launching SMC's products in emerging markets, especially India. Thus, if M&M is able to bolster the fortunes of SMC, it will be an added advantage to the former's performance in the long term. 

Investment Concerns

Raw material prices remain a concern: M&M's operating margins have been quite volatile in the past. Before FY09, margins averaged at around 11% before the subprime crisis and the global economic slowdown brought these down to 7% in FY09. As India's economy recovered from the crisis, M&M also saw its operating margins expand to more than 14.5% in the last couple of years as commodity prices remained benign and demand for vehicles surged. That said, input costs have again been inching up and M&M has not been immune from the same. This is evident from its 1HFY12 results, wherein operating margins fell from 15.8% in 1HFY11 to 12.6% in 1HFY12. While we have assumed operating margins to be lower going forward, the possibility of any adverse event bringing margins down further cannot be entirely ruled out.

Too many moving parts: As of September 2011, the company had 130 subsidiaries, 6 JVs and 13 associates engaged in various activities. While it is a good thing to diversify in an attempt to suppress the cyclicality of the auto business, we believe that the company has spread itself too thin, thus making it difficult to undertake a reasonable assessment of the company's intrinsic value. Also, conglomerates are not viewed to be the most efficient corporate structure when it comes to valuations as markets almost always value them at a significant discount than what would have been the case had they all been separate companies. M&M is no exception to this trend, thus hurting the returns prospects of the shareholder of the company.

Risk Analysis

Sector:The growth of the auto industry is directly linked to the growth in per capita income levels, which in turn is a function of domestic GDP growth. Given the projected strong economic growth in the country, the auto sector is likely to witness robust growth rate in the long term. However, with the arrival of new players, the competition will only get intense from here on. Further, demand is also inherently cyclical in nature. We thus assign a medium risk rating to the stock on this parameter.

Company standing: With M&M having an industry leading market share in most of the segments that it is present in, we assign a strong rating to the company on this parameter.

Sales: M&M generated average revenues to the tune of Rs 152 bn (US$ 3 bn) in the last five years and we expect sales to grow at a CAGR of 10% between FY11 and FY14. Consequently, we assign a low risk rating of 9 to the stock.

Operating margin: Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as raw materials, wages, and sales and marketing costs. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. The higher the margin, the better it is for the company as it indicates its operating efficiency. M&M's average operating margins for the past five years has been 12.4% and we expect the same to be at an average of 13.2% going forward. As such, we assign a medium risk rating of 4 to the stock on this parameter.

Long term EPS growth: We expect M&M's net profits to grow by around 3% CAGR during the period FY11-FY14 (growth of 25% during FY06-FY11). Based on a normal scenario, we consider a compounded growth of over 20% in net profits in the last 5 years as healthy for a company. As such, the rating assigned to the stock on this factor is 4.

Return on capital invested (ROIC): ROIC is an important tool to assess a company's potential to be a quality investment by determining how well the management is able to allocate capital into its operations for future growth. A ROIC of above 15% is considered decent for companies that are in an expansionary phase. Considering M&M's last five years' average ROIC of around 65%, we have assigned a low-risk rating of 10 to the stock on this parameter.

Dividend payout: A stable dividend history inspires confidence in the management's intentions of rewarding shareholders. M&M's average payout ratio was around 27% in the last five years, which is healthy. Thus, we have assigned a low risk rating of 7 to the stock on this parameter.

Promoter holding: A larger share of promoter holding indicates the confidence of the people who run it. We believe that a greater than 40% promoter holding indicates safety for retail investors. At the end of September 2011, the promoter holding in M&M stood at 25.2%, which is reasonably healthy. We have, thus, assigned a medium risk rating of 4 to the stock.

FII holding: We believe that FII holding of greater than 25% can lead to high volatility in the stock price. At the end of September 2011, FII holding in M&M stood at around 26%, which is on the higher side. Based on our parameters, the rating assigned is 3.

Liquidity: The average daily trading volumes of M&M's stock over the past 52 weeks stand at above 200,700 shares, which is reasonably higher. Hence, we assign a low risk rating of 7.

Current ratio: M&M's average current ratio during the period FY07 to FY11 has been 1.1 times, indicating the company's ability to pay up short-term obligations. A ratio under 1 suggests that the company is unable, at that point, to pay off its obligations if they came due. We assign a medium-risk rating of 4 to the stock on this parameter.

Debt to equity ratio: A highly leveraged business is the first to get hit during times of economic downturn, as companies have to consistently pay interest costs, despite lower profitability. We believe that a debt to equity ratio of greater than 1 is a high-risk proposition. Given the fact that M&M's average debt equity ratio in the last five years has been 0.5, we have assigned a medium-risk rating of 6 to the stock.

Interest coverage ratio: It is used to determine how comfortably a company is placed in terms of payment of interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense for a given period. The lower the ratio, the greater are the risks. Since M&M's interest coverage ratio for the past five years has been 42, we have accorded a low risk rating of 10 to the stock on this parameter.

P/E Ratio: The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the per share income or profit earned by the company. This is one of the important metrics to judge the attractiveness of a stock, and thus gets the highest weightage in our risk matrix. M&M's P/E on its trailing twelve months earnings (standalone) stands at 17.2 times. As such, we have assigned a medium risk rating of 4 to the stock on this parameter.

Considering the above analysis, the total ranking assigned to the company is 72 that, on a weighted basis, stands at 5.8. This makes the stock a medium-risk investment from a long-term perspective.

 Valuations

The stock has fallen around 27% since then and is currently available at attractive valuations. We have used sum of the parts method to arrive at the intrinsic value of M&M from an FY14 perspective. We have valued the company's core business using an EV/EBIT multiple of 15 times. Using this multiple and after allowing for net debt, we arrive at an intrinsic value of Rs 849 per share for the core business from an FY14 perspective.

Furthermore, we have valued the company's subsidiaries at Rs 162 per share, with a contribution of Rs 59.5 from Tech Mahindra, Rs 35.8 from Mahindra Holidays and Rs 29.6 from Ssangyong Motor Company. It should be noted that we have also taken into account a margin of safety of 20% when trying to value the various subsidiaries. Thus, adding this all together, we arrive at a total value of Rs 1,010 per share on the basis of FY14 estimates. Considering the current price of Rs 748, this translates into a CAGR of around 14% from an FY14 perspective. We thus recommend a BUY on the stock.

source: Equitymaster Agora Research Private Limited