Markets have been gaining from strength to strength and the one big trigger has been the higher than expected rate cut of 50 basis points by RBI governor RR or Raghuram Rajan. Since the rate cut on Tuesday the 29th of September, the BSESENSEX is up 1,500 points, no mean gain. The BSESENSEX closed higher than 27K after the 21st of August 2015. It’s not only in India that we are seeing the markets becoming so buoyant but elsewhere as well. In the US, Dow Jones closed above 17K after the 19th of August and gained a staggering 612.12 points or 3.71% to close at 17,084.49 points. So two markets the Dow and the Indian markets have regained important levels after a gap of over six weeks. The time and the levels are uncanny. The similarity doesn’t end here with the Fed deciding not to increase rates while in India RBI cut rates at 50 basis points which clearly was higher than expectation.
The rally has happened and expectations always rise with a rally. It has happened on the eve of quarterly results for the July-September quarter where apparently not much has happened on the corporate front. Infosys kicks of the season with results tomorrow morning and in the previous quarter the stock performance saw a high of Rs 1197 and a low of Rs 934, with the closing price on Friday being Rs 1168. The high was made on the 1st of October which effectively means that the closing price is less than 3% from the high. The rupee has been under pressure in the quarter gone by and that could be a redeeming feature for software and pharma companies who are net exporters.
The first phase of polling for Bihar elections would happen this week and the election has assumed epic proportion as far as a battle royal is concerned. Both sides are leaving no stone unturned and the campaign is a learning curve for citizens like us. The election campaign has become dirty and not one which would be remembered for any standards set. The outcome would charge Parliament when it meets for the winter session.
The IPO season begins again with the mega issue from the owners of CCD or Café Coffee Day. The holding company of the same Coffee Day Enterprises is tapping the capital markets to raise Rs 1,150 crs in a price band of Rs 316-328. The issue opens on Wednesday the 16th October and closes on Friday the 18th October. The consolidated entity is currently loss making and of the pre-issue market cap of about Rs 5,500 crs, roughly 45% is from investments in two listed entities of Sical Logistics and Mindtree. The company has a huge burden of debt on its books and as much as Rs 632 crs or 55% of the issue amount would go towards debt repayment. Secondly though the IT Park is a profit making company it certainly cannot command the same valuations as a FMCG business or as CCD would.
Holding companies trade at a discount to the NAV and well known marquee names like Tata Investment Corporation and Pilani Investments are no exception. The discount varies from around 40% to 50% and is by and large a norm. Secondly such holding companies which also house operating companies are valued at sum of parts basis and the sum of parts never equals one. It is a decimal of one and could vary anywhere from 0.65 to 0.80 depending upon case to case. Coffee Day Enterprises has a pre-issue market cap of about Rs 5,500 crs of which roughly 45% or Rs 2,500 crs is from investments in two listed entities of Sical Logistics and Mindtree. The discount of this at 45% would reduce the value to Rs 1375 crs while a 50% discount would value it at Rs 1250 crs. Then one has to consider the fact that the company reported a consolidated loss of Rs 87 crs for the year ended March 2015.
The promoter has given a very strong and forceful interview in ET–Panache which is an advertorial or effectively a paid for interview where he emphasises that he is willing to sell the house he lives in or sell his wife’s jewellery to invest in the brand. Such a thing happens in either of two conditions namely one where this is the last recourse or two where one is more than 100% sure of the success. We mere mortals are more than happy if instead of doing all this he just sells the investment in Sical Logistics and Mindtree. The company going public would get not only a better valuation but make all investors happy. Currently the only one who is happy is probably the promoter of the company.
A point to be noted is that though the promoter says he will not invest any more money in the non-coffee business over the next five years, on day one he is investing some Rs 550 crs towards repayment of debt of non-coffee business. This is by itself more than enough investment in those businesses. Why not just sell Mind Tree which would give you Rs 2000 crs, roughly twice the IPO amount and 3.8 times the debt that you are currently repaying?
The issue and its objects do not give comfort to the prospective investor and the valuation leaves a lot to be desired. One final thought on the ET-Panache interview is that did the promoter feel that his road show did not go off well enough and he wanted a second attempt at wooing the investor?
More of this on the issue analysis on Wednesday post the anchor allotment.
Markets will be driven by cues from results and global cues. The mood seems to have turned bullish and optimistic. Let’s hope it remains so.
