GalaTime

Morgan Stanley: SOE Divestment Policy: Missing the Big Picture?

Our very broad estimate indicates that the total market value of government companies (including unlisted companies) is US$406 billion. The market value of 55 listed public sector companies is US$281 billion. The average government stake in these companies (listed) is 80%, and hence the government’s stake in these listed companies is worth US$224 billion.

We expect the government to collect proceeds of about US$4-5 billion by March 2010, which will be much larger than the amount collected in recent years.

The total workforce employed in quasi-government entities (including public sector undertakings) of the central government (excluding those working directly in administrative machinery) is 5.9 million, just 1.4% of the total workforce.We believe that the key policymakers in the new government appreciate the urgent need for investment in infrastructure but are strapped for funds, with the current national fiscal deficit of about 11.8% of GDP as of F2009. We believe that the government could easily provide for additional infrastructure funding of at least US$15-20 billion (1.2-1.6% of GDP) per annum for the next three to four years through divestment. Indeed, we believe that the private sector (including foreign investors) would be likely to invest a matching amount in manufacturing in response to these infrastructure investments.

The median age of the Indian population is currently 23.7 years, one of the lowest among large nations. India is likely to add 141 million to its current working age population of 750 million by 2018, according to estimates by the United Nations.

• Business Standard: TV news channels look for fresh capital

… broadcasters such as Times Global Broadcasting Co Ltd, Network 18 and UTV are looking to raise over Rs 600 crore to fund their growth plans.

Industry estimates show that the business news channels generate about Rs 300 crore a year in advertising. However, with the economic slowdown, ad revenue is expected to drop by about 15-20 per cent this year.

At UTVi, more money was needed to meet losses for the next two years, a source said. The channel, launched in April 2008, earns around Rs 2 crore a month and incurs an operating monthly expenditure of Rs 7.25 crore.

Stay short UTVi.

• Mint: Pre-IPO deals haunt companies

Companies owe their investors at least Rs4,000 crore for their inability to come out with IPOs within a specified time frame, a precondition for such investments.

This condition is built into share subscription agreements between promoters and shareholders, typically through put options, which give investors the right, but not the obligation, to sell back their shares in the company to its promoter if an IPO does not happen by a specified date.

“In some cases, the promoters are saying ‘take me to court, I’m not giving your money back’. But in most cases, the investor does not go for litigation because he does not want to be seen as hostile,”

“One form of ratchets allow for variable pricing determined by a multiple of net income from a few years ahead. If the income is lower than projected, the private equity investor could end up taking a much larger stake in the company than originally planned,”

Oh, those troublesome ratchets!

• DNA: Social networking sites find it tough to make money

… thanks to very low click rates, industry participants suspect the category accounted for just 5% or less of the total online ad spend in the country in the last 12 months.

Prasad Narasimhan, marketing head, Virgin Mobile, says, “We can talk about engagement and all that. But if I have to put in Rs 2 crore of my brand’s money, you need to find some mathematics to measure the impact.”

“The problem is that we are applying the metric of search advertising to social media,” says Mahesh Murthy, founder of the digital marketing agency Pinstorm. “How are you measuring the RoI when you advertise on TV? You are paying because people are spending time in front of your brand. They have to come back to the idea for social networks as well,”

Over hyped, over funded, no economic value added.

• Big Picture: Global Manufacturing Collapse

• Jayanth Varma: India in a ZIRP world

• NY Times: Risk Mismanagement

“Risk modeling didn’t help as much as it should have,” says Aaron Brown, a former risk manager at Morgan Stanley who now works at AQR, a big quant-oriented hedge fund. A risk consultant named Marc Groz says, “VaR is a very limited tool.” David Einhorn, who founded Greenlight Capital, a prominent hedge fund, wrote not long ago that VaR was “relatively useless as a risk-management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an air bag that works all the time, except when you have a car accident.” Nassim Nicholas Taleb, the best-selling author of “The Black Swan,” has crusaded against VaR for more than a decade. He calls it, flatly, “afraud.”

Long, good read.

• Wall Street Journal: The China Growth Fantasy

Ask a professional economist how many provinces China has and you are likely to draw a blank stare. But ask him what the GDP growth of China has been and he’ll quickly be able to tell you that China has grown at a double-digit rate for 30 years and that at this rate China will overtake the U.S. by 2035 (or some other date). GDP-centrism is endemic, and often comes at the expense of deeper analysis.

Fixed asset investment, heavily controlled by the government, has risen to nearly 45% today, from a level of 30-35% during the 1980s. Much of the GDP growth since the mid-1990s has been a result of government-organized massive investment drives — in infrastructure, urban construction and urbanization.

• DNA: Port cargo traffic fall continues in Nov

November was the second consecutive month where the 12 major ports of India, which handle 70% of the country’s import-export traffic, saw their cargo traffic drop and missed their targets. The ports handled 42.55 million tonne in November, which was 5.1% less compared with the same month last year.

Even Jawaharlal Nehru Port (JNP), which handles 60% of the country’s container traffic, saw volumes drop 4.38% against the targeted traffic.

Iron ore still remains the worst hit, being the only cargo to see a 6.62% decline y-o-y due to lower demand from China.

• Economic Times: MFs offer extra fee, upfront pay to lure agents

Among a host of measures adopted, fund marketers are promising higher commission on schemes sold. In addition to the 2.25% as entry load and 0.5% trail commission, distributors are being offered 0.5% extra commission for every tax saver fund sold. Instead of annual commission, which was the case until some time ago, fund houses are now offering an upfront commission of 1% for selling gilt and income funds.

“The mandate for us now is to make a killing with tax-saver schemes. Though our commission on gilt and income funds are higher, it’ll be easier for us to sell ELSS. We’re advising debt schemes to rich investors only,” the distributor said.  

Barrons: Forecast: A Long, Cold Winter

One thing at work right now is what I call the cattle prod — essentially the Fed poking people to take risk. They are taxing cash by having negative real returns on cash. At the same time, yields on investment-grade and junk bonds are incredibly alluring. You can pick up 15 percentage points over cash buying junk bonds. Or you can pick up 8.5 percentage points on investment-grade paper. At some point, the cattle prod will get people moving, as it did in March of ‘03 when the market turned.

If you want to get long socialism, one of the next segments of the market that will be given a guarantee will be municipal bonds. That’s because state and local governments are a huge share of total [gross domestic product] and employment, and we can’t afford to have them down for the count.

Mint: Tata Motors’ funding worries get worse

The $3 billion (nearly Rs15,000 crore) bridge loan it had taken to finance the acquisition of Jaguar-Land Rover (JLR) is due for repayment in less than seven months’ time, and the rights issue has helped the company raise less than 30% of its requirement.

Worse still, JLR would need a large, steady flow of capital to fund its research and development, which IIFL estimates at about $1 billion every year. Meanwhile, all this is happening at a time when the company’s domestic operations and cash flows are going through a severe downturn.

Indian companies have left their foreign currency denominated debt (including convertibles) unhedged for some years now, on the assumption that the rupee will always appreciate against the dollar. The sharp depreciation of the rupee this year has come as a rude awakening.

How many others are in the same boat?

• Frontline Thoughts: Some Things That Just Should Not Be

“Leveraged loans had a particularly rough month with the average senior secured loan losing over 20 points in value and now trading in the mid 60s. The sell-off was largely driven by forced liquidations as hedge funds face substantial redemptions in the run-in to New Year. This is how crazy the loan market is: The worst ever default rate for senior secured loans is about 8%. If you assume a 35% annual default rate and a 50% recovery rate, your IRR to maturity is now in excess of 22%, using no leverage whatsoever. Either this is the investment opportunity of the century, or equity markets have seriously underestimated the economic downturn, and things are likely to get a whole lot worse for equity investors.”

You can buy January 09 crude futures at a stunning 34.5% lower than January 2010. That means if you could find a place to store that oil, you could lock in a guaranteed 34% profit, less the cost of storage. Sounds like easy money. This is just something that shouldn’t be. But what this tells us is that storage for oil is very tight. Oil producers are leasing very large ships to store excess oil, as they cannot find places to store it on land. Storing oil on ships is expensive, so that cost of storage gets figured into the price of oil a year out.

• Business Standard: Few takers for highway projects

The government’s ambitious highway projects under the public-private partnership mode are in serious trouble. Construction companies have either not put in bids or have withdrawn from 20 such projects, which fall under the build, operate and transfer (BOT) scheme.

In the last two months, nearly five highway projects worth nearly Rs 3,000 crore could not find a single bidder.

“We have withdrawn from at least five highway packages after being qualified in the technical qualification stage in the last few months. Most of the highway projects on a BOT basis are not viable because of faulty traffic projections and high cost of construction,”

This is not good. It reduces long-term economic growth. Let’s hope the government gets its act together: Mint - Infrastructure projects may get loan relief

• Hindu Business Line: Goods carriers feel the heat of meltdown

. . . volumes for companies operating in the road logistics business have fallen by as much as 20-30 per cent in the last three months as movement of goods has slowed down.

“Currently, volumes from consumer durables industry are down about 20 per cent and automotive parts would be down 15 per cent.”

The impact of this meltdown is going to be felt more severely by the unorganised segment, which constitutes 85 per cent of the transportation industry.

• Mint: Iran says $22 billion deal to sell 5mtpa LNG to India is dead

Iran says it has scrapped a $22 billion deal to sell 5 million tonnes per annum (mtpa) of liquefied natural gas, or LNG, to India due to a dispute over prices and lack of required approvals. Iran later demanded a higher price than the $3.215 per million British thermal unit (mBtu), to which India raised objections.

The proposed $7.4 billion Iran-Pakistan-India pipeline project is also expected to fall through, even as Iran faces economic sanctions by the US and its allies over its nuclear programme.

India imports 7.5 mtpa of LNG in spot markets, which is sourced by Petronet LNG Ltd and Shell India Pvt. Ltd.

Good for RNRL?

• FT Alphaville: Goldman’s travails: Rumours and reality
  

Persistent rumours — and some more hard evidence - of deepening difficulties at Goldman Sachs are fuelling debate over whether the investment bank will attempt another fund raising ahead of its fourth quarter results next month. The shares hit a five-year low, down 8.5 per cent to $71.21, on Monday after analysts at Barclays became the latest to forecast a Q4 loss for Goldman, citing in part its exposure to private equity.

Reuters reports Tuesday that the axe has already begun falling in Tokyo, where the bank laid off 10 per cent of its investment bankers including 10 from its mergers and capital markets teams.

• Business Standard: India Inc goes slow on capex plans, suffers 30% cost overrun

A study by Credit Suisse estimated a month back that capital expenditure for a clutch of 34 projects with an investment of about $190 billion (around Rs 9.16 lakh crore) faced a 19-month delay on an average. The consequent cost overrun, it reckoned, would be about 30 per cent.

. . . projects planned and under execution over the past couple of years are estimated at $1.5 trillion (around Rs 72 lakh crore).

Reliance Industries is believed to be taking it easy with the Special Economic Zone(SEZ)  in Haryana because it anticipates less demand for such space.

• NY Post: Hedge Fund Chief Short & $weet

Chanos’ short-only fund, Ursus, is up 53.2 percent through the end of October, besting the 30 percent performance Chanos booked in 2007, when he was ranked one of the top 100 traders. For October alone, the $5 billion fund earned its investors a whopping 17.8 percent.

“We are short all of the satellite and most of the cable companies in the US,”.

He was short Moody’s too.