Shocking PE of Kotak Mahindra and fallacy of Dividend Pundits in India

Castles in air are not built over night. It seems that the story around Kotak has taken a bit of time to build.

There is no denial to the fact that Kotak is perhaps best bank in India. They are also well placed to grow faster than almost everyone.

But then a PE of 60+ does not stand the test of reasonableness.

Another BS which one hears a lot now a day is the "Dividend should guide your stock selection". YES, this is correct, but not in India

Consider this, imagine EBIDTA of 100, then 33 as profit tax (assuming no depreciation), to declare dividend the company pays, 17% DDT
PAT = 67
CF to shareholder after Div = .83*67 = 55 (approx)

So, effectively the company is destroying value by declaring dividends, it is literally handing over the money to the "Government of India" not to the shareholders.

So, in a country like India, declaring dividends is not very wise steps. Then there are companies, which have found ways around. I have identified couple of these small and mid caps. 

BOB ( Bank of Baroda) - Over hyped or Justified

BoB is trading at PE of 16, while the other PSU banks are trading at mean PE of around 5-6. So, what explains this difference. Market (read analysts of big funds) say
1. They have done full provisioning of losses
2. Legacy - have no more losses to declare

This can justify a PE premium of say 20-30% but not 100%.

But perhaps markets are ignoring a fundamental issue. Have the current processes streamlined to get bank tame future NPA's. The plain answer is NO. BoB like other PSU operate by the same standards. Hence they are bound to get the same pace of NPA's again (even if we discount the UPA/NDA interference in bank operations). T

So, there seems to be bit of mis-information, which is being sold, instead of focusing on fundamentals. Correction is bound to occur. Waiting for trigger.

Petrol Pump - Is it a good business now

It was 2006, Reliance literally slaughtered the market share of PSU. A company which has just 1-2 years of track record, took 13% market share in 1 year of full fledged operations. PSU were clueless what to do. Thank god, that the PSU got a ventilator time when the price again zoomed and subsidy kicked in. With subsidy the kick backs again started in this dirty sector. The inefficiency and corruption within Oil PSU is none of a secret.

Now the wheel has turned again, prices are down for atleast next 5 years (and may be more if Elon Musk got the new Teslas firing). Private players are again pushing up their game

1. Essar is focusing on low volume outlets
2. Reliance on high volume

So, in a place like Rewari, where Essar has got 20 pumps in recent time, it hardly left anything for the new commissioning by PSU's. So, the market is getting crowded and competition is increasing. This will introduce margins squeeze for the PSU's which will squeeze the margins for the dealers also. In such a scenario, Petrol pump does not seems to a good business. 

World War 3 - Will it start from Alepo

I am keeping my fingers crossed but will take 3-4 days to announce if things are that bad.

Assad - Will not back out
Soleman - Shia need it back

Saudi/Qatar - Want to kill Shia hegemony
Turkey - after the kurds

Kurds has secret support from Israel and may be US

OMG...we forgot the ISIS.........so the war is going to be for display not for ISIS

Anna hazare / Kejriwal - Real Swaraj - Economics first politics later

It was 2011, when the whole of India was stuck to TV sets and the place called Ramlila Maidan. A new Mahabharat was fought. Finally Congress has to bite the dust in 2014 elections. Anyway, it was not Modi, who was winner, it was common people like Hazare, Prashant Bhusan, Yogender Yadav, Arvind Kejriwal, who were the real winner. They floated AAP and rest is history. Anyway, the key motivation was to get justice, equity in political powers. Part of it was achieved but what people forgot was Political power is of no use if they dont have parity and equity in Economic Power.

Unfortunately, in a country like India, Risk Rewards are not matched in economy. Take banking sector. I have been writing time and again that, NPA's are deep problems for the whole economy and not just one sector. Think from point of view of retail investor.

Retail investor ->Bank->Allocation to projects -> Return->Bank->Retail Investor gets share back

Now, this seems like very simple, but that is where simplicity ends. The risk rewards are unmatched here. Like any bottlenecks, this positive feedback loop has Projects as one of the bottleneck in the whole value chain. One likes it or not, the Projects in Emerging Markets are going to have inherent risks and hence require higher payoff say 15% (for the project to be viable). Now, the retail investor is getting only 10%. The 5% is risk premium. The promoter gets rewarded by by 5% differential (and then worked on his part of equity) for this risk.

But that is where the story become complex. The promoter only has rewards but no risks as normally what he does is use "Negative Equity"

"Project of 150 quoted as 100, and then 70% loan taken, finally pockets the 5 as negative equity"

When the balance sheets of banks are full of such loans, then does it make sense for retail investors to put their money with banks - No.

Though Marx said, Inequality in economic status (proletariat v/s Bourgeoisie) will lead to political revolution, I believe it be economic revolution instead of political revolution, as under

1. People will stop doing FD's in bank
2. People will stop investing in leveraged companies
3. People will stop following business news channels (hilarious it might seem but they also serve to the interests of institutional investors only and not retail investors as they always try to fool retail investors)
4. One of the extremes can be people can start their own lending clubs. I am not sure how but something similar to chit clubs or say bitcoin exchange enabled lending. Something which will use technology to remove banks as intermediaries

But these seems like Utopian luxuries as Parliament is full of Vijaya Mallaya and their cronies. Why will someone like Vijaya Mallaya be interested in curtailing role of banks.  

Leaders of Modern India - Please look into the issue and the solution for economy Swaraj

Future of Transportation

Saw 2 companies on CNN

1. Sabre - Is this improved Concord jets. No, it is totally new tech with something which I think is close to impossible.

They will cool down the air from 1000 dec celcius to -150deg cel in milliseconds. I am a mechanical engineer but this seems like impossible to me. If it is done then we will have our 15th anniversary on moon


2. Subtrans - Well i have been excited about my Maglev travels in Shanghai. But that is very costly and one of the white elephant of China with low ROI of economy. But this subtrans works without power.

What it does is very simple in terms of technology but difficult to implement in mass scale. They are basically using superconducting technology to create uniform distance. (they used liquid nitrogen for this)

Question - How will they implement this on a track which is not in Scandinavian / Seberian Terrain.


I personally believe that there has been no new tech in Transportation in last 100 years and something is about to come. Such as AI driver got driving licensce in US............

Positively Boring - Muted Market proves that it is bound for 8000

The market bounced back today, It will keep on tossing here and there but finally it had to settle at NIFTY 8000 levels.


Till then, just wait and watch, but keep on evaluating fundamental of companies. Stay invested and stay tight.

Finally! - The day has arrived

Today was special day for me. I have been trying to convince my people that we are looming for a recession from last 1 year. On 26th December, when I convinced one of my friend that we have to go neutral, if not short, on Indian NIFTY, but the market started bouncing in late January.

Everything apart, the fundamentals have started to kick in. People are starting to note the insanity in the markets. Heads will roll for sure.

For the moment the most exciting thing to plan for are

1. How can hedge fund short stocks of Indian companies. Someone need to take strong enough stand on some of these hidden companies. Say someone need to pledge around $50 m to short the listed bonds or ETF of any of the big Indian companies on markets outside 
2. Which are the firms which will get bankrupt in next 3-6 months period
3. How long will it take for the market to bottom out. 
1. Market still seems to be bit costly at PE of 19 for a conservative person like as I don't think markets can go to 25 or stay at 25 for long. I think anything 18-20, is worth investing on sector specific market, for 20+, it has to be stock selection only
2. Market should come in the range of a PE of 16-18, for investors like me to go full thrust. In other words, i am still waiting for 6500 level for NIFTY

So, I am keeping my fingers crossed for 6500 PE below 18-19, if it bounce more than 8500 (PE above 24), I will close everything and cry in corner and analyse, why and how I was wrong 

In between 6500-7500, will depend on lot of cues both domestic and global and new offerings. 

I will personally never invest anything above this level of PE. My ceiling is 20, for someone else, it might be 22 or 24

Are people misleading or being mislead

Some 6 months ago, I used to hear a lot of chatter from my friends, who had invested into
1. Apple Stock
2. Chinese IPO's

They used to sound as if they have gone through an epic story and they have had the treasure hunt. Whenever, we used to argue the fundamentals, they used to put flimsy stories. Something similar to

http://davidstockmanscontracorner.com/shanghai-composite-pe-ratio-reaches-44x-the-price-to-whatever-bubble/

But then most of the people, I see shouting from the top of the TV studios are no different. Invest in SIP...Invest in MF.........are some of the misleading and deliberate sermons beamed full day in and out on business channels, business columns and magazines. The common fact, which every investment professional knows is that when the market is trading above PE of 18, it is not a good time to invest for a retail investor.

Europe is gonna pay for this - Sexual Emergency of migrants

About an year ago, I saw some placards such as "Mama Mia Merkel" and they multiplied with Germany been advocate (if i can discount the local opposition within germany). I was very disappointed by the idiotic step of taking refugees. It was bound to give cultural mismatch issues

Now here is the result

Cologne New year assault
Pool Etiquette notice in Germany

and now the worst, a kid was raped because the rapist from Syria felt, it was his sexual emergency

And the biggest thing is the Muslim country media is giving 2 arguments.

1. Its OK, he was having psychological issues
2. Its OK, he had sex with an under-puberty age.

That is the biggest problem. This is just starting - Europe is going to pay for this deeply. No wonder Donald Trump is the new sensation in US.

Watch out for this space - Big predictions coming up soon

Well! since the time, i wrote last time, i was wondering why people are taking so long to understand the basics of distressed finance. I see the TV anchors of business channels shouting over the roof to buy this and that stock, with logic as funny as this is V shaped, this is W shaped.

I am seriously at loss of understanding, why there is no "NO NONE SENSE BUSINESS NEWS CHANNEL".


Anyway, there is something exciting happening in other part of the world

Venezuala gold reserves are down by $3bn and it is being rumored that they are going to pay of the Deutsche Bank with the gold swap. What we might see is a situation similar to India in 1991, when gold was sent in plane. But with Venezuala, the situation is different as this gold was never with them. Chavez struggled hard to protect this gold from bankers and he was quite successful, but his successor Mudro, lost it all.

What will be implications on Canadian Dollar ? Watchout

One more exciting thing is Allepo fall to the Assad. This is hinted by rumors of "Ballon drops practice for ground drops" by Qatar and Saudi. This is exciting as US has raised its hands way back in October, when it was rumored that Kerry has conveyed to Assad - "boy u can stay, but give me some face saving story".

What will be the implications on Oil? OPEC is no longer there, everyone is on their own

Scenario 1 - Shia v/s Sunni - Competition for gaining market share increase, which means Iran gets the Euro payments, it has been shouting for.

Strategy - Simply short oil again but not below $20 as they can't sustain this for long.


Scenario 2 - Shia v/s Sunni - Saudi takes the nonsense step of blocking some Iranian tankers or Persian Gulf traffic. This will temporary lead to increase in prices as signal of conflict but then "Big Daddy is not stupid". They increase flows from Africa and the inventories again will pile up. So, such an event can't sustain prices for more than 6 months.

Strategy - Long for 3/6 months and then again start shorting by taking into account the inventory levels

Scenario 3 - US/EU plays a foul - stops Euro settlement or SWIFT access by using some alibi or sanctions clause or highlight Iran-North Korea link. This can either lead to a arm-twisting scenario or a full blown out war. This will be a really dangerous scenario.

Strategy - Long

Keynes Baba - What to do now?

John Maynard Keynes professed something 80 years ago that made government justification of spending hell to stave of the recession. This is exactly what the governments across the world did after 2009. 

But wait a minutes, these spending increased the government debt and then we had Greece, potugals.....PIGS.

Solution - Again give a shot -> Again increase spending -> Again defeat the recessionary forces

No, thats an idiotic solution as the world is at the highest leverage where it is too difficult for the government to increase it further.

One of the solution can be to increase the innovation and remove barriers in economy to increase the velocity of money instead of real money itself. But governments are bad at this. 

Exciting time for a derivatives trader in Indian market

"Ha!, this is the time, we had been waiting for long" - said one of my friend, who is a trader, trying to do a STRADDLE.

Lot of monkeys were jumping in the Indian stock market. These so called "Self proclaimed gurus" of Indian Stock market were with projections of 35k / 40k and some even 50k for census. Some of them are treated as gods or projected as gods by the media, such as Ashwani Gujaral, Jhunjunwala. All of them were proven wrong. They made lot of sound on CCD (Cafe Coffee Day) IPO, where I reiterated that the price is way higher than the inherent valuations and the assumptions are wrong. Anyway, the market is back to 25k.

This was bound to happen as the underlying health of companies have not improved. The  market pundits have again got it wrong and here is the myth v/s reality

Myth : Pundits say India withered the market storm due
Reality : India benefited from the EM flows which happened when job growth did not doomed in US as investors deemed it as confidence in "No increment scenario of US treasury rates"

Myth : Foreign Investors lost confidence in Modi Government
Reality : Investor never came due to Modi Government. They knew very well, system can not be corrected very soon. The real sell off has already started in May-June, when China showed early signals of a balloon, as things did not picked up after Chinese new year.

Myth : Indian Equities have moved into attractive state
Reality :  There is still lot of room to go down. There is still an inherent difference between the Equity and Debt market. The credit growth rate is less than 10%. Also, the debt market is showing lot of weakness, WHICH IS LOWEST IN 20 YEAR. Most of the Indian companies are highly leveraged. I have written about them in the past. "THE BIGGEST THREAT TO INDIAN ECONOMY IS THE HIGH LEVERAGE OF THE CONGLOMERATES IN INDIA." This implies that Indian companies dont have bankable projects. India seems to emulating the Indonesian model of cronyism led growth.

Myth : Lot of money is going in Startups and will increase exponentially
Reality : I would say these were the second set of the monkeys, who threw good money after bad. Just hold your breathe and you will see that investors will demand results and valuations will nose dive in some of these startups.
(Just a word of caveat/caution, some of the startups

Next Events to be watched

Myth : Fed rate decision
Reality : It will not have major impact as most of the equity will be battered down by that time. The real events to be watched are the yields on the debt of some of the conglomerates and companies, which are going to list their bonds. Airtel today announced they will raise in Pound for first time. These yields will decide fate of these big companies, who have lot of weightage on SENSEX.

The market has gone into a limbo, where it is "Party Time" for the Derivatives Traders and people who suffered the most are the

1. Retail Traders/Investors who followed the so called Gurus
2. SIP/MF Investors as most of funds flowed through these routes in past

I am personally very sorrow for the 2nd category as they were being misled into the rally by the reputed media/newspaper to invest into SIP/MF when market was on a high. 

Bunch of IAS opportunists

This is in reference to many media news articles and the letters of bunch of IAS cadre people, which has been floating in the social media.

Background
There are 10-15 odd Group A services such as IAS, IPS, IRS, IDAS, IRTS, ICLS.etc...Due to some urgency, some privileges were granted as temporary measures to IAS cadres

What is written in these letters
Some IAS people have declared that
"Privileges are our birth right and no one can part that away from us" in the same manner as Bal Gangadhar Tilak declared 100 years ago
"Freedom is my birth right and no one can part that away from me"

Words are similar but spirits are totally opposite - one is full of fear and the other is fearless declaration of the great freedom fighter.

Is everyone writing this
Personally, I have deep respect for some of bureaucrats of all cadres. Many of them are IAS also such as T N Seshan, Ashok Khemka etc. They have exemplied "True service to the nation" without looking for personal benefits like promotions etc.

These set of people writing these letters are also from IAS cadre but with a different spirit "Incentives of faster promotion and higher salaries are needed for any service to the nation". I wonder if they declared the same in their interviews.

Flawed reasoning in letters

1. Border/Naxal Areas - Armed forces/CISF/CRPF and yes, IDAS also do the same
2. Multiple Responsibilities / Negotiations with MP/MLA's - Every Civil services has the same burden of responsibilities and in similar volume and intensity. IDAS also negotiates with a Lt. General, who has 1 lack people under him ready to kill and die themselves on his one order and the Lt. General has grown up 30 years gradually in a system which promotes seniority ethos. Imagine a 35 year old negotiating with him. MP/MLA's are far easier to handle. 
3. Rank in UPSC - Come on, that is morons logic especially after 2013, in 1 optional and 4 GS scenario, UPSC has become a dart ball game. The difference between Rank 1 and 1000 is mostly luck and some rote learning. Also, there are many in IFS, IPS, IRS and even lesser known services, who dropped IAS in favor of other cadres.

Solution

1. These people are opportunistic and there are high correlation between opportunism and corruption. So, these people should be put on "Vigilance alert" for their future actions. 
2. System itself is flawed. Group A was designed for britishers and should be abolished
3. Common training for all cadres and then service allocation on basis on performance in training, of 2 years, which gives higher chances of correct allocation, than existing "Rote and Quote" UPSC exams..   

Axis bank share price dropped, so will the rest

Last time, I wrote about Sindicate bank

http://indiatoday.intoday.in/story/syndicate-bank-scam-cbi-pawan-bansal/1/376615.html

Again, same thing happened, Axis tried to hide some details in a clandestine manner and market punished it for this.

But about the rest, most of the Indian banks are bankcrupt and the deposits of taxpayers are at risk. I have written extensively about this NPA fraud. Recent comments of Transport Secretary, Mr. Chibber proved the same

1. Most of the Indian infra companies work on negative equity
2. All the credit have been sapped out by the infra/real estate companies and little is left for manufacturing. This pushes up the interest rates.

I found a question on UPSC mains examination on why Indian could not have a booming secondary economy and why tertiary zoomed ahead.

One of the reason was the credit squeeze, most of the banking credit was siphoned off by nexus of politicians and businessman and little was left for capital intensive secondary economy.

Wait and Watch !  - Major bankruptcies will emerge in the following sectors

1. Infra
2. Real Estate
3. Banking

It is prudent for retail investors to stay away from such companies even on stock market. Stock market has already punished the like of JP, Unitech etc for multiple reasons and debt overhang is one of these.

Next Big Scam - Bank NPA Scam

This is going to be next big scam to be unearthed. This will open the eyes of common man of how the inequality is increasing in this country and how the rich are siphoning off the money of the poor by unfair means.

This is the ugly face of crony capitalism, unleased in mainly the UPA tenure, but even NDA is not doing anything worthwhile on this.

God save this country.


https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CBwQFjAAahUKEwjGgPazrr7IAhVHao4KHaPIABc&url=http%3A%2F%2Feconomictimes.indiatimes.com%2Fnews%2Feconomy%2Finfrastructure%2Fbanks-over-financed-road-projects-now-crying-foul-vijay-chhibber-transport-and-highways-secretary%2Farticleshow%2F49310166.cms&usg=AFQjCNHCWbb1FN3pKK9_R2DEA9aAczuFpA&sig2=DN4j3I8uEdwX1zF7rE6jow&bvm=bv.104819420,d.c2E


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https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&uact=8&ved=0CEIQFjAGahUKEwjGgPazrr7IAhVHao4KHaPIABc&url=http%3A%2F%2Fmedhajnews.in%2Fnews.php%2Fmultiprongedapproachisrequiredtotackletheissueofroadsafetynitisngadkari--24975--en&usg=AFQjCNGYbj1L0esRbAtYESepOh0T8W1BGg&sig2=EoFdWWoV7BVAdPYF0EwS4Q&bvm=bv.104819420,d.c2E

Hitler (aka Aurangzeb) Road, New Delhi

An year ago, I wrote about the Aurangzeb road.

http://luckylehana.blogspot.in/2014/09/hitler-road-new-delhi-change-in-address.html

and then after 1 year, finally sanity prevails. Surely, it was not due to my comment/blog post, it was the national outpouring after the demise of the great nationalist APJ Abdul Kalam

APJ was above religion and other none-sense, whatever way the Owaisi or Swami project it. I have heard that he is treated as god by some of the hindus, that is the spirit of Hinduism and Sufism which this country has forgotten for long and has to be revived.


(I don't claim to predict future, I only reflect on the opinion of the nationalists in our nation)

Note - There is non-secular, religious bias or any other kind of malicious intention behind this step. In fact, it is only those pseudo - secularists, who are showing crocodiles tears again. That politics of appeasement has been rejected by the electorates.

A P J No More

Rare breed of politician in Inida

Abdul kalam was a great source of inspiration

NYSE suspended trading

NYSE suspended trading