GalaTime

Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com. Do check out his 5L Virtual Portfolio.

On this platform, I do not wish to burden the reader with information about the company like its financial statements, shareholding pattern, corporate announcements etc which should be easily available from the company’s or NSE/BSE website. I assume the reader has already read and understood the annual report of the company along with the quarterly results and has preliminary information about the company that can be easily obtained from the company website/ annual reports.

I would only discuss my views on certain aspects, which I feel are important.

The best information about any listed company is all publicly available on its website, annual reports, stock exchange filings etc. That is all one needs to make a reasonably informed investment decision.

My outlook for Parekh Aluminex

Optimism

• The product range of the company (ie aluminum foil containers) is gaining widespread usage as mobility of people increases and also due to changing lifestyles.
• The valuations of the company are attractive with a Price-Earnings ratio of less than 3 at the current market price of ~ Rs.68.
• The company has a low debt equity ratio of 0.33 as at 31st March 08.
• The company seems to have expanded capacity over the years in a prudent manner and utilisation of installed capacity has improved over the past 3 years. In my view, the increase in installed capacity and sales which was achieved while keeping the debt equity ratio low is commendable.

Caution

• A prolonged recession could mean lower sales for the industry if railways, airlines, takeaway restaurants witness a further slump in passengers and patrons respectively.
• The capex plans of the company need to execute smoothly in terms of getting operational and witnessing optimum utilisation. The low debt equity ratio would enhance margin of safety in this regard.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

[Kaushik Gala: To add to Arjun's disclaimer above, this is not a recommendation to buy or sell. Moreover, given that this stock is relatively illiquid, extra caution is necessary.]

Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com. Do check out his 5L Virtual Portfolio.

The prevailing wisdom last year was that the year 2008 was going to be a year of high input prices resulting in a slowdown and 2009 would be a year witnessing an acute slowdown in demand due to the sordid money market conditions of 2008.

In this context, it is interesting to note the performance of Indian steel, auto and cement sectors so far in 2009. All three sectors are simultaneously doing well in 2009. Just look around your surroundings, what do you observe first hand? In my part of Mumbai, I see roads being repaired at a hectic pace before the upcoming elections.

Real estate construction for residential buildings is being carried out at a furious pace. Of course these real estate projects are not one of the fancy ‘a swimming pool in every house’ kind, which were the children of the 2007 boom. The people who are going to buy these apartments in my area are middle and upper middle class folk who will be investing their savings built over a life time. In a city like Mumbai, there are enough people for whom moving into a 2 or 3 bedroom flat from their modest current accommodation is a life long dream for which they prudently saved throughout their lives, come recession or boom. They will lap up their dream home once it fits their budget, since their budgeted allocation for this house is accumulated over many years.

The larger point here is the Indian consumer psyche. This needs to be understood first, and understood very well before even remotely trying to gauge the future outlook for capital markets.

I think it is a great time to do business in India from an operational point of view. The four factors of production (and service) are land, labour, capital, enterprise. The first two are getting cheaper and availability of human resources would be greater than what it was two years ago. It is heartening to see newspaper headlines where many IIM grads are now going to work for public sector units and private sector companies in the real economy are also able to afford their services. Atleast this would end the silly obsession of MBA grads with capital markets. When every bright MBA, CA, engineer of a country wants to be an i-banker or allocate capital in private equity, then who will do the real work of running the companies. I love the positive realignment of human resources that is taking place over the past one year. Jim Rogers is bang on when he says that in future, farmers will be driving Lamborghinis and not brokers.

An IIT grad spends four years in his chosen field of engineering, his IIT stint being subsidized in large part by Indian tax payers, and then after 2 years of graduating he flies to US to run a hedge fund. It was absurd, where was the talent on the shop floor??? Look at the all the great scientists who work for ISRO putting spacecrafts on moon, hardly any of them have the fancy IITian tag. They come from humbler colleges.

Anyway, after land ‘n labour, we come to capital. It is scarce and expensive. Mukesh Ambani rightly said at a recent forum, that at the right risk-reward ratio, capital finds its way to deserving places. I would take him at face value. Look at the oversubscribed Tata Capital debenture issue, Reliance has raised Rs.10,000 from LIC recently. If you have a good business, capital finds you eventually.

Enterprise is a function of many factors and people who run businesses have better things to do than get bogged down by armchair economists, analysts and statisticians who keep chronicling and predicting various things for a living.

In India, a miniscule section of population is affected by stock markets unlike US where everyone has seen their 401k diminish. Plus, we don’t have that mortgage problem. The average size of an HDFC home loan is a mere Rs. 15 lakh which is payable over many years. A large part of our population is engaged in farming and government is a large employer. A person in rural India is more concerned about monsoons than what Roubini says every week and a PSU employee has got problems figuring out how to spend his windfall salary raise, and by the way, his job is secure.

So our demand has picked up January ‘09 onwards and could continue. People who are financially conservative don’t consume something just because they can. They do it when they really need something. Indian demographic composition would mean that people need clothes, food grains, electricity, education, healthcare, basic entertainment, telephony, maybe even cheap cars. Recession or no recession, coaching classes in India remain a roaring business. Just think of all the stuff you have consumed in your life since the day you were born, you were going to need most of that stuff anyway. As an average Indian, you have always lived within your means and consumed only what you needed and could afford. With cheaper input costs of fuel, land, human resources being made available at the right places, India at the moment, as you read this, is sowing the seeds of the next sustainable boom.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com. Do check out his 5L Virtual Portfolio.

CHI Investments Limited

Please check the above link which gives out the information about this company. The information memorandum therein contains very important information about this company.

Identified below are the some of the factors which influence the inclusion of this stock in the virtual portfolio:

1. The market capitalization of this stock as compared to the quoted market value of some of the investments held by Chi.
2. The dividend income that might be received by Chi in the future from the investments held by it.

The information memorandum also gives details about certain investments of Chi which are pledged to financial institutions and about non disposal undertaking given to certain financial institutions for certain investments held by Chi.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com. Do check out his 5L Virtual Portfolio.

On this platform, I do not wish to burden the reader with information about the company like its financial statements, shareholding pattern, corporate announcements etc which should be easily available from the company’s or NSE/BSE website. I assume the reader has already read the annual report of the company along with the quarterly results and has preliminary information about the company that can be easily obtained from the company website/ annual reports.

I would only discuss my views on certain aspects, which I feel are important.

The best information about any listed company is all publicly available on its website, annual reports, stock exchange filings etc. That is all one needs to make a reasonably informed investment decision.

My Outlook for PNB Gilts

Optimism

• Stock trading at a price which is substantially less than its book value.
• Its less levered as compared to a PSU bank like PNB or SBI (as on 31st March 2008, as per its annual report for FY 2007-08).
• It may benefit in a scenario of interest rates being lowered, though it may also mean lower yields in the future.
• Its CMP is Rs. 20.9. It last declared a dividend of Rs.1.5 per share. Look at the dividend yield and compare it to a post tax return on an FD. I am NOT comparing this stock to a Fixed Deposit. Both are very different in terms of risks involved and nature of returns.

Caution

• It may suffer losses incase of an unlikely scenario of rise in interest rates (why rule that possibility out).
• Exposure to derivatives.
• Need for greater voluntary disclosure of information on a quarterly basis in addition to current quarterly disclosure on derivatives that is being made in segment results.

Though the company does disclose information on interest rate swaps in its annual report, a similar periodic quarterly disclosure of such activities/positions on the derivatives front would go a long way in terms of better standards of transparency. It would be great if information like the one disclosed on page 46 of FY08 Annual report (notes to accounts) is also disclosed on quarterly basis.

Read below the excerpt from the MD&A section on page 9 of the company’s 2007-08 annual report:

During the year, company significantly trimmed exposure in the interest rate derivatives. The gross outstanding in interest rate swap contracts declined from Rs. 9550 crore to Rs. 7200 crore.

Also read pages 42 and 46 of the annual report for FY 2007 08 for better understanding of certain derivative positions as at 31st March 2008.

Indifference

There seems to be some tomfoolery going on for a long time regarding hiving off PNB Gilts to an interested buyer or merging it with PNB. But at present, one would dismiss all this as mere speculation which has been going on for a long time anyway. This should not play a significant role in influencing assessment of this stock.

What appeals to me regarding PNB Gilts is the steep discount in the stocks market price as compared to its book value and the expected dividend yield in the future considering its last dividend, its recent financial performance as per quarterly disclosures and the current trend in interest rate movements.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com.

On this platform, I do not wish to burden the reader with information about the company like its financial statements, shareholding pattern, corporate announcements etc which should be easily available from the company’s or NSE/BSE website. I assume the reader has already read the annual report of the company along with the quarterly results and has preliminary information about the company that can be easily obtained from the company website/ annual reports.

I would only discuss my views on certain aspects, which I feel are important concerning the company, the industry it belongs to, and its stakeholders.

The best information about any listed company is all publicly available on its website, annual reports, stock exchange filings etc. That is all one needs to make a reasonably informed investment decision. I am amused by the so-called research reports, which merely reproduce publicly available financial statements of the company and bamboozle the reader with fancy charts, diagrams etc. Amidst this entire information overload, one hardly finds any non-obvious observations. Investment is as much about prose as math.

My outlook for Apollo Hospitals

Optimism

• Read my recent article on Indian Healthcare. I have covered therein, points like medical tourism, health insurance, PPP etc that affect the healthcare industry.
• The franchise model could be another interesting avenue that could be explored by hospital chains going forward. Your neighbourhood polyclinic or nursing home could soon be a franchise of a major hospital chain in India. It is not entirely outside the realm of possibility. A deeply personalized service like stock broking has adopted a franchisee model.
• From 1996 to 2006, Indian private sector banks and cellular telephony companies like ICICI bank, HDFC bank, Bharti Airtel, Reliance Communication benefited immensely by meeting the massive demand for cheap and good quality services in their respective fields. Similar situation can be witnessed currently in the hospital space in India. Existing government run hospitals are not known for high quality services and the privately run hospitals are few and expensive, just like poor quality of service at PSU banks and high cellular phone call rates prior to the year 2000. A healthcare player focused on filling this demand supply gap will take the cake in the next 5 to 10 years.
• It is a relatively recession proof industry. I am also fascinated by the wedding-related services business in a young country like India.
• The stock price of this company has been relatively less volatile amidst all the market mayhem in 2008.
• Updates for new initiatives by Apollo Hospitals with regard to medical tourism, health insurance etc shall be posted by me on Twitter.

Caution

• Outsourcing of healthcare to India might slow down in the unlikely scenario that US under Obama makes peace with Cuba and removes the sanctions. Cuban healthcare facilities are said to be very good (remember Diego Maradonna’s rehab / recuperating sting in Cuba in the recent past). Such reconciliation between USA and Cuba as a part of Obama’s New Deal initiatives is not outside the realm of possibility. Just because something has not happened till now doesn’t mean it cant happen in the future.
• This stock‘s price could be vulnerable to a large scale sell off in the markets as it has a relatively higher PE ratio. It has not fallen in proportion with the markets in 2008 but one never knows when the next bout of forced liquidation (marketwide) is triggered off in the current market conditions.
• The company will need to be in a constant expansion mode in the next few years in order to tap the existing opportunity. This throws up as many risks as opportunities for any business enterprise.
• Investors need to have a lot of patience. It is not a negative per se. The industry could have very bright prospects over the next 8 to 10 years. One needs to appreciate the steady manner in which value addition happens in any company/industry.

If one needs instant gratification, there are many other scrips available in the market apart from Apollo.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

Posted by guest blogger Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com.

The genesis of India’s successful IT story was laid in early 1990’s when its early stakeholders capitalized on the low cost arbitrage model by taking advantage of India’s multitude of software engineers and they framed an efficient offshore delivery platform. Another such opportunity for the coming decade lies in the Healthcare sector in India. Indian healthcare in the 1990s grew at a compound annual rate of 16 per cent. Currently, the total value of the sector is more than 34 billion dollars. As per government estimates, by 2012 India’s healthcare sector is projected to grow to nearly 40 billion dollars. The full potential of this sector would be realized by adopting Public Private Partnership (PPP) model. Unlike Indian IT/ITES, which succeeded inspite of the lack of government support, healthcare in India needs a government umbrella due to sheer size of the number of people it seeks to serve. Only then, can one tap the mega opportunity that lies at our doorstep.PPP would involve synchronizing efforts of the central/state governments with that of the private sector enterprises towards achieving the broad public healthcare goals, which successive governments have not achieved in terms of coverage and quality of healthcare in public hospitals/clinics across India.

As witnessed in case of Special Economic Zones in India, the PPP model does not come without its share of challenges. Some of the key issues in this context would be equitable distribution of the burden of service delivery and costs, in a manner where the parties’ best equipped to meet the same are empowered to meet their responsibilities. For example, a blanket policy measure like universal free basic healthcare may be suitably altered to include universal free health insurance, partly subsidized by the government but wherein the policy obligations are shared with the providers of healthcare services.

At large, a PPP model demands a large dose of maturity from the public, the governments they elect, along with the responsibility to be borne by the private sector. Only then, can a sustainable alternative emerge to the current healthcare model in India.

Post liberalization, the share of health sector in India’s GDP has been at a level of 4 to 6 %. The central and state governments in India currently spend a meager one percent of the GDP on health sector. The private sector accounts for rest of the outlay. By 2011-12, at the end of the 11th Five Year Plan, the government outlay is expected to rise to two percent with the overall share of the entire health sector rising to 8.5% of GDP. As per current estimates, the total expenditure on healthcare in most developed countries is 8 % and upwards, with US spending a whopping 16 % of its GDP in 2007 on healthcare. The prevailing health expenditure outlay in India could undergo a massive transformation if the government and private players form a mutually rewarding partnership in a manner where interests of all stakeholders are considered. This contention is largely based on the premise that healthcare in India is largely under serviced as compared to developed nations. In sectors like telecom, Indian entrepreneurs have displayed a flair for exponential growth through use of technology. They catered to a large chunk of the one billion customer opportunity which was largely under serviced till the late 1990’s. The lessons learnt from telecom can be suitably replicated in healthcare, in terms of meeting the massive demand for basic affordable services.

Another interesting facet of Indian healthcare is that medical tourism is taking off in a big way, again, borrowing from the low-cost business model pioneered by ITES sector in India. At the 4th India Health Summit organized by CII in November 2007, Minister of Commerce and Industry Kamal Nath stated that medical tourism in India that was estimated at US $350 million in 2006, has the potential to grow into a US $2 billion industry by 2012.At the summit, India’s Minister for Tourism Ambika Soni stated that a total investment of US $6.5 billion was in the pipeline for setting up affordable hospitals and budget hotels for medical tourism. One additional feature is that medical tourism in real sense combines medical treatment with tourism. After all, it makes a lot of sense for a foreigner in India to spend another 300 USD for a round trip to Taj Mahal, since she has already saved a couple of thousand dollars on that Lasik Operation in say, Chennai. An entire additional eco system of hotels, airlines, tour operators also benefit. Some existing hospital chains have already smartened up to this opportunity by tapping additional revenue streams via innovative tie-ups with the hospitality and aviation sector. Fly to India with the preferred airline partner and get an additional discount on hospital room charges! Makes a lot of sense..

One needs to balance the moral hazard of treating foreigners at the cost of ignoring Indian patients by investing greatly in hospital bed capacity, which again would be simpler by having a PPP model. In this aspect, the idea of free universal health insurance needs to be further explored. The insurance premiums could be paid directly by government to medical insurance firms for all Indian citizens. In return, the risk would be borne by reputed private insurance firms. This would mitigate the risk of leakages which arise from having the government responsible for insurance risk. Instead we should adopt a model where the government just pays the medical insurance premium for over a billion Indians to select reputed firms. In turn, those insurance firms would bear the obligations of meeting the healthcare bills of all Indian citizens in need of healthcare. The government would recover its premium costs by more than commensurate savings in running government aided hospitals, since the cost of treatment would now be borne by insurance companies, who themselves have received huge premiums from the government for a billion plus Indian citizens. This model is unlike the present American healthcare model of steep costs, the burden of which for a large part remains, on the US citizen.

At present, the hospital segment in India is primarily dominated by a few hospital chains like Apollo, Fortis, Wockhardt along with government aided hospitals. Additionally, there are various non profit trusts managing major hospitals in India. At the unorganized level, there are numerous nursing homes and polyclinics. This fragmented structure in a large country like India, offers a huge opportunity for a mega corporate to deploy its ample financial and managerial resources and offer a consistent and high standard healthcare delivery model to the Indian masses.

Apart from large business houses and existing players, this sector has also recently witnessed the interest of private equity firms. In their search for the next 100 bagger from India, these fund houses have supplanted their understanding of the global healthcare industry into the Indian context. It is painfully obvious that the developed world has its advanced healthcare facilities which come at a very high cost even by first world standards, whereas the under developed nations have deplorable healthcare infrastructure. India is a uniquely positioned between the two extremes. The millions of doctors and paramedics in India can be a plausible solution to the world’s healthcare challenges and this opportunity is not to be missed by any of the stakeholders.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

As mentioned earlier, I’m kicking off a new section at GalaTime called Virtual Portfolios - the idea is to manage virtual capital of Rs 500,000 by investing/trading in Indian markets.

One of the Portfolio Managers will be Arjun Ashar; below is a summary of how he intends to manage the capital.

I seek to share my current outlook on the upcoming 2009 notional portfolio at Galatime.

1. Focus on building a portfolio that has high earnings potential relative to the amount of money invested in the portfolio. It’s the job of the market to assign a Price Earning multiple to various stocks in the portfolio. I shall focus on picking stocks that maximize the earnings power of the portfolio

• Earnings of the stock in portfolio = Trailing12 months EPS x (Number of shares held of that particular stock)
• Earnings of the portfolio = Total earnings of all stocks in the portfolio

If one invests Rs.5, 00,000 in a 9% Fixed deposit, the earnings on the same are going to be Rs. 45, 000. Now this entails limited risk as compared to putting the same amount of money in the stock market. Thus, it is necessary that if one puts a similar amount in shares, then the earnings of those shares (not valuations) be at least more than Rs.45, 000 p.a. over a longer time frame. It must be remembered that the earnings of a share and its price may not have any co relation in the short term. However in the long term, one may expect the fundamentals to be reflected in the share prices. However, even that is not guaranteed so it is very essential to understand the risks associated with investing in stock markets.

2. Considering the ample opportunity available in the current (Dec 08 / Jan 09) markets to find cheaply valued stocks, it shall be a good idea to book profits aggressively whenever one gets a decent profit on a particular stock. This shall be carried out if I am not anticipating any major change in the sentiment and markets continue to remain range bound. In such scenario there should be no dearth of cheaply valued stocks even if one prematurely sells a particular stock at a lower valuation. Similarly, one hopes to re enter the stocks sold, if they are available at a later date at reasonable price levels.

3. It is essential to be prepared to see massive notional losses on stocks held. This scenario may possibly materialize on stocks having double digit PE’s in the portfolio. The purpose of holding such stocks in the portfolio may prima facie seem a contradiction of point 1 above, if one only considers the historical financial data. However, one also needs to consider the possibility of a higher earnings growth that may not have been factored into the present valuations, which may be the reason why the stock has been included in the portfolio in the first place.

4. It shall be endeavored to identify stocks that may witness negative investor sentiment in the near future. Attempts shall be made to benefit from such anticipated price corrections by including put options of such stocks in the notional portfolio. It is in the healthy interest of financial markets and the overall economy, that only companies with credible earnings potential enjoy high valuations and thus easy access to funds. Less than ideal companies enjoying higher valuations, that are not in tune with the underlying fundamentals, ruin the chances of deserving companies of raising capital at reasonable valuation premiums, which the latter rightly deserve. Shorting unreasonably valued stocks is a social service and one should seek to participate in such opportunities whenever it is prudent to do so.