15 May 08 GAIL India seems to be a Good Buy
GAIL India announced its financial results last week and the results have surprised the market. The market was bearish on GAIL’s performance since it anticipated a fall in margins of its LPG transmission business. However, GAIL’s net profit rose by over 6% quarter on quarter to Rs. 720.5 crores. At the current market price GAIL trades at 11.5 times estimated financial year 2009 earnings. The forward PE of 11.5 is extremely attractive. However, the government regulations are a bit of a concern. GAIL has been asked to share a part of the subsidy burden faced by oil marketing companies like HPCL, BPCL and IOC. The exact amount of subsidy burden that GAIL is expected to share is not clear at the moment. This subsidy burden might adversely affect GAIL’s FY09 estimated earnings.
11 Mar 08 Closed a nice deal in L&T today
As many of you know, L&T got hammered yesterday for no reason at all. It all started with a brokerage house leaking a discussion with the L&T CFO, who mentioned that one of L&T’s subsidiaries is likely to face a 150 to 200 crore hedging loss this year. The market blindly hammered L&T shares yesterday without properly analysing the effects of this hedging loss. This is the sequence of events that happened
L&T, as a business practice, hedged against currency fluctuations in the forex derivatives market and also certain commodities which are essential for its business through the commodities derivatives market. Lets say L&T hedged Steel, which is an important raw material used for construction purposes. The purpose of hedging was to prevent its core business margins from taking a hit in case prices of steel went up drastically or there was an unfavourable movement in the currency market. L&T has been doing this for the past 3 years.
For the past 2 years, the prices of steel were on the rise and hence L&T would have taken a hit on its margins which would have been compensated by the profits made by buying steel forward in the commodities market.
This year metal prices including steel prices have taken a hit and hence obviously L&T and for that matter, all other companies which have hedged, would make a hedging loss. The market was short-sighted and only saw this hedging loss.
What the market ignored is the fact that this loss would be compensated in terms of increase in margins in their core business (which is construction and not commodity trading). Today the market realised that and the shares prices of larsen and toubro have bounced back today.
How I made Money
Yesterday 30 minutes before the closing bell, I checked the performance of my portfolio of which L&T has a weightage of about 45%. I was shocked to see the share prices of L&T down over 7% especially when the broader market was in the positive territory. When searching for the reason for this steep fall, I saw a news report saying L&T was likely to make 200 crore hedging loss this year. Since I’ve well researched L&T, I knew that it had been hedging for the pass 3 years and the reason for hedging. I knew the market would realise this fact in a short while and the share prices of L&T would bounce back soon. Since I was short of cash, I bought 5 lots L&T futures yesterday. I sold all the 5 lots today for a profit of close to Rs 40,000 which I’ve used to buy L&T shares in the spot (cash) market. My target (fair price) for L&T is Rs. 4600 per share which I’ve arrived at using a combination of DCF, SOTP and book value (investments) valuation methods.
Note : L&T has recently issued a clarification that the hedging loss has been through forex derivatives and not commodity derivatives. But the concept is similar. You hedge to protect your profit margins. So, if there is a hedging loss, higher business margins will offset it. Similarly if there is a hedging profit, lower business margins will offset this hedging profit.
18 Oct 07 P-Notes – Participatory Notes or Panic Notes?
After the market turmoil that it caused, it is appropriate that the term P-Notes, which is an abbrevation for Participatory Notes, be renamed as Panic Notes. Participatory Notes have caused so much Panic even though no drastic action was taken by SEBI yesterday against P-Notes. After all, P-Notes have not been banned by SEBI. P-Notes, which are offshore derivative instruments issued by FII’s or FII sub accounts which are registered with SEBI, have certain inherent benefits attached with them. The primary benefit of using P-Note is that, the entity or organisation using P-Note need not get registered with SEBI. The only necessity for using a PNote is that the entity should be registered with the registrar of companies or an equivalent body / organisation in the country of its orgin. The second advantage of using Participatory Notes lies in the tax front. Presently, the tax authorities can open the files of FII’s even after a period of 5 years after the date on which the actual transaction took place and penalise them. However, in the case of P-Notes, this is not possible. Also, registering as an FII is a tedious and time consuming process. Getting approval is very tough. Hence many foreign institutions take the PNote route to invest in India. The only argument going in favour of the Government and SEBI in particular, in regulating P-Notes is that it can potentially prove to be a serious threat to the country, both politically and economically. For ex: terrorists are said to be using Participatory Notes to pump in money into India to profit from the strong bull run that Indian stock markets are witnessing. The money thus made is likely to be used for financing terrorist activities. Since the origin of the investments is unknown, if P-Notes are used, it is difficult to trace who is investing and how much is being invested. Another reason for SEBI and the finance ministry to come down heavily on Participatory Notes is because SEBI suspects that certain institutions use the Participatory Notes way to artificially rig the share prices. The Indian stock market is likely to be extremely volatile until the dust settles on the Participatory Notes a.k.a Panic Notes issue.
01 Aug 07 Indian Stock Markets Crash : SENSEX and NIFTY tumble
Today, August 01, 2007 will be remembered by most investors investing in the stock markets in India, for a long time,  as the day on which the leading indices, SENSEX and NIFTY recorded their third largest intraday fall in the history of the Indian stock markets. Today, the Sensex crashed by about 616 points. In terms of number of points, today’s stock market crash will fall third in the list of the biggest single day falls in the history of the Indian stock markets, falling just behind the fall of 826 points on 18 May 2006 and the 617 point (missed by 1 point) fall on April 02, 2007. The crash was broadbased involving almost all the sectors. ICICI Bank fell below the IPO issue price of Rs. 890 (for retail investors). However it ended the day at Rs. 891 just above the IPO issue price. L&T and BHEL, which were having a dream run till now, also fell by about 4% each. Nice opportunity to start acumulating quality stocks?
31 May 07 Vijay Mallya to acquire Deccan Aviation?
There are rumours that Vijay Mallya, founder of Kingfisher airlines, is planning to takeover Air Deccan (Deccan Aviation). Because of these rumours, Deccan Aviation spurted 14% in mid day trading to Rs. 150. If kingfisher airlines is merged with Air Deccan (Deccan Aviation), it would argur well for the shareholders of both airlines.
30 May 07 Patel Engineering
Sources say that an agent of a leading brokerage house is recommending Patel Engineering to clients because of expectations of a price surge on rumours of Patel Engineering bagging a huge new order. I’m not sure how far these rumours can be beleived but as the old wall street adage goes, buy on rumours, sell on news! There is a good buying interest building up in the Patel Engineering counter for the past few days. Patel Engineering is certainly in my radar now.
