All but one BSE sectoral indices in red, in SENSEX 26 losers

The year 2011 has been one which investors would like to forget in a hurry. In terms of percentage fall it has been less than what we saw in 2008 when the SENSEX fell from 20,286.99to a low of 7,697.39 and closed the year at 9,647.31 points. The loss in point’s term that year was 10,639.68 points or 52.44%. This year the fall has been much less but the damage it has done to the markets, the confidence of investors appears to be more severe. The fall in 2011 has been from 20,561.05 points to 15,454.92 points, a fall of 5,106.13 points or 24.83%.

Given below is the performance of the constituents of the BSE SENSEX which has 30 stocks.

Of the 30 stocks in the SENSEX the top performer has been Hind Unilever which has gained Rs 95.50 or 30.58% to close at Rs 407.80. Incidentally earlier in the week the stock had made its lifetime high of Rs 420. The second best performer is ITC with a gain of 15.36%. Two other stocks Bajaj Auto and Sun Pharma managed small gains of 3.33% and 2.52% respectively.

The remaining lost with the metals trio of Hindalco, Sterlite Industries and Tata Steel losing 52.95%, 51.98% and 50.63% respectively. If one were to do a breakup of the BSESENSEX the same would be as follows: -

The BSE SENSEX lost 24.83% which means that 14 stocks have underperformed the SENSEX losing more than the benchmark.

This year of the 17 sectoral indices which excludes the SENSEX, 16 have closed the year in negative territory. The only gainer was the BSEFMCG where the two top performers Hind Unilever and ITC carried the index to a yearly gain of 9.53%. The worst performer was the BSEREALTY which lost 51.84% closely led by BSEMETAL which lost 47.19%.

From the above table if we were to do a breakup it would be as follows: -

Here again one can see that of the 17 indices as many as 10 have underperformed the benchmark. Clearly the year 2011 was one which should best be forgotten. One hopes that the year ahead would be better and more cheerful than the one gone by. One thing should however be borne in mind that things will not change overnight. We have more pain ahead of us before things stabilise and then an upward climb to being neutral for the year and then entering positive territory. Probably the first half of the year or thereabouts would be spent in this exercise.

Wishing all readers a happy and prosperous New Year 2012.

Divestment is a key method of raising resources for the Government and the target for the current year is Rs 40,000 crs. The amount raised so far is just about Rs 1,150 crs and the shortfall of Rs 38,850 crs is yet to be raised. The statements coming from the ministry is that the divestment programme is on track and the finance ministry is confident that the target would be met.

Recent reports in the media and statements from some of the PSU’s talk of various options by which the money would be raised. The preferred way so far was by way of public issue or by way of an FPO (Follow on Public Offer) where the company was already listed. The government to induce retail investors to participate gave a discount to retail applicants and employees of roughly 5%.

Things started going wrong when on the eve of the ONGC issue the same was deferred. ONGC was to have its roadshow from Monday the 19th of September 2011 and the issue was to open on Tuesday the 20th of September. Late on Thursday the 15th of September evening, the divestment ministry decided to defer the issue and the reason cited subsequently was poor market conditions. The BSESENSEX at that time was around the 17,000 mark and if one were to ignore the sharp upmove last week we would be around the 16,000 mark.(Last week markets gained 1,151 points to close at 16,846 points)

This move was a big setback and people started wondering whether any further divestment would happen. One then heard of various ways of raising money such as buyback of shares by cash rich PSU’s and the possibility of whether only the promoter’s shares could be bought back. No such provision exists but things can be conveniently modified. Even if it’s a general buyback the same would be on a pro-rata basis and with the government holding the majority, more shares of the government would be accepted than any other category. Secondly existing shareholders would not like to sell at current rates which are quite depressed. The next suggestion being talked about is cross holding of shares where one company buys shares of another company. We already have examples in the oil companies where IOC holds shares of ONGC and vice versa. In this case these shares would be bought by these companies from the government and the surplus cash of these companies would turn into investments. Once such a move is done, valuations of these companies would take a beating as the performance ratios would deteriorate and there would be de-rating of these stocks by financial analysts and would therefore become a self-defeating purpose.

In the past the government has fallen time and again on cash rich LIC for support of its divestment programme. One is worried that this year once again in the last fortnight of March 2012 one would find that the government turns to LIC for help and support. All this is fine for discussion but is there a solution?

This writer proposes a solution that when LIC is to turn a saviour in any case why not make it an underwriter of the shares to be offered at a floor price and do an auction of shares on the exchange. My proposal is simple, virtually instantaneous and to a large extent does not destabilise the share price. Let us for example take the case of ONGC. The closing price of the stock is Rs 268 on the BSE as of Friday the 2nd of December. The government decides to sell say 40 crs shares with the floor price as Rs 260. There would be an advertisement in the papers on Monday morning that on Tuesday the government will sell through LIC 4 cr shares at a floor price of Rs 260. This assures the following. The government will receive come what may Rs 260 x 40 cr shares or Rs 10,400 crs. On Tuesday all those interested in buying the shares would queue up on the special window on the exchanges and bid for the shares which would be in the public domain. At the decision of LIC, the people in the queue and at a cut off that LIC would decide would sell the shares. Profit or loss would be on account of LIC. The government would receive its money without burdening LIC unnecessarily. The time element would be cut to the bare minimum and the sale for one companies share could happen every day and the total proceeds proposed to be raised in a week’s time. All the issues about costs, market conditions, global conditions could all be resolved in a short time and without impacting markets.

Certainly there would be pros and cons for every issue and there would be issues even in this proposal. Merchant bankers have been quoting fees of Rs 1 for managing issues of the Government, hence there should be no issue on that count. The Government could still have advisors to the issue and take the expert advice of such people. A mechanism for offering discount if any to retail and employees may have to be worked out if the selling shareholder so decides.

I believe looking at the tight situation where a mere three months remain in the current year and the target outstanding is almost 97%, this maybe a workable solution with fine tuning. This may also take care of the feeling that once the issue is announced of an existing company, the price tends to move down and gets hammered. Looking at the current circumstances this may be a possible solution and deserves attention.

Indian markets have been falling since we had a fiery and festive Diwali week. It was surprising that all the festivities happened before and after Diwali, but it has been three weeks of fall thereafter. The fall in the week just ended has been quite severe and the markets have taken a big beating. The list of stocks which are at their 52 week low seems to be getting bigger by the minute. Stocks like SBI, ICICI, Tata Steel, PSU stocks like IOC, BPCL, HPCL, SAIL, National Aluminium, BHEL, SAIL, Larsen & Toubro andJSW Steel are all at 52 week lows. The benchmark indices like the SENSEX and NIFTY have lost 20% in the current year as of date and are most likely to lose more in the remaining period of the year. The question on everyone’s mind is why this fall and when would it stop? Also is it a good time to start buying?

Let us look at some of the reasons for the fall. The easier part is to blame it on the global scenario. Europe and the US seem to be going nowhere. One used to hear an acronym like “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) and now a new one has emerged in “FIGS” (France, Italy, Greece and Spain). It is this second one which is really dangerous and anything happening here could rock global economies. Last week one also heard of a comment being talked about Italy that it was too big to bail and too big to fail. The biggest concern in Europe is who would fund the deficit of the countries and what happens once Italy is bailed out when Spain and other countries suffer the same fate. Secondly the existence of the EURO as a currency is at stake. Bond yield rates in Italy have already touched the 7% mark and refuse to come down. It’s a tall order and there would probably be some clarity at the end of the week after some crucial meetings scheduled midweek.

The global crisis was not enough and we have enough problems in India as well. Some of these are a general slowdown which is being witnessed in the economy. The GDP number keeps being changed around as it suits people and the figure being talked about now is clearly sub 7%. Auto sector which has been doing extremely well has taken a severe beating in October and sales have slumped. The Indian Rupee which was holding quite well has fallen very sharply from around the Rs 44.50 level to almost Rs 51.50 level a depreciation of over 15% in just over 2 months. This depreciation has hit the oil import bill very sharply.

The fiscal deficit is all set to rise very sharply on two counts. The estimated revenue is likely to fall because of direct tax collections which would decrease with corporate India’s profits slowing down quite substantially in the September quarter and also on the indirect tax front where there is a slowdown on sales visible and anticipated growth is unlikely to happen. On the expenditure front there is an increased expenditure on account of the rising crude oil prices and the sudden depreciation of the rupee which would increase the budgetary gap by about 1.5-2 lac crs. There is a third front as well where the estimated collection from divestment proceeds was supposed to fetch the Government about Rs 40,000 crs. So far with almost eight months of the current year over the collection is yet to cross the Rs 1200 crs. All this is leading to instability in the money markets where out of the last five auctions by the Government, four have devolved.

Is there a way out of these problems is the moot point. Parliament begins its winter session from the 22nd of November and there are quite a few bills which are likely to be introduced in this session. It would be interesting to see the intent of the government to push reforms, contain the fiscal deficit, tame inflation and still steer the country from the slowdown and the global crisis looming large.

Our markets are close to its lows of the year and we are within striking distance of the same. Results for the quarter have not been too good and there is a definite slowdown visible. We are seeing FII’s quite neutral to negative on their view on the country. The banking sector has seen a sharp increase in NPA’s on account of the introduction of system driven NPA’s and also the relentless rate hikes that have been happening at regular intervals. All this does not augur well for our secondary markets and amidst falling volumes our markets are slowly but steadily slipping and slipping towards new lows for the year.

The primary market had the huge rise in offerings in the week of September where nine issues opened. The fate of most of these issues was a foregone conclusion and they are where they were expected to trade post their listing. The current scenario for new issues is fraught with danger and one needs a brave heart to enter the markets with an issue at this time. There are likely to be bond issues happening in the week ahead and many of those who came last year with such issues under the tax benefit of Rs 20,000 last year would be opening again this year as well. There was a new provision under the budget where the FM had said that Rs 30,000 would be raised for infrastructure as tax free bonds as well. I believe there would be an offering of the same likely by the end of the month. As far as equity issues are concerned there are many in the pipeline that are waiting and waiting for the right time. Will the same come!

What should an investor do in the secondary market at this time is the last question that needs to be addressed. I believe the time to buy has not come and there is more pain yet to be borne by the markets. One needs to be patient and play the waiting game. Patience will certainly be rewarded. There is uncertainty ahead of us on many factors and it makes sense not to be brave, foolish or simply jump the gun. Technically people are talking of various levels but the immediate level of significance on the benchmark indices which is likely to be broken is the low of 15,750 on the SENSEX and 4,720 on the NIFTY. These levels are almost like staring u in the face and may happen faster than one can imagine.

In conclusion, let’s wait for the time being with simply too much happening in the next few days. It makes sense to sit out and avoid getting hurt.

SEBI on Friday the 23rd of September has notified the new takeover code and informed that the same would become effective from the 22nd of October 2011.

There are three major changes in the takeover code which are different from the earlier takeover code. These changes are as follows: -

The offer price shall be the highest of the four prices. The four prices would be the negotiated price, volume weighted average price over the last 52 weeks prior to the public announcement, the highest price payable or paid in the last 26 weeks before the public announcement, or the volume weighted average price of 60 trading days prior to the public announcement.

The takeover code also specifies that companies cannot breach the maximum promoter shareholding limit of 75%. In case it happens, the acquirer has to shed the portion that is above 75%. If one were to take the theoretical example of a company where the promoter holds 51% and sells 25% to another person. The combined holding of the new promoter and the erstwhile promoter would be 51% with an open offer of 26%, which if fully subscribed would make the promoter holding 77%. The excess holding of 2% would have to be divested by the new promoter.

SEBI has alos disallowed automatic delisting and acquirers whose stake exceeds 75% are ineligible to voluntarily delist before 12 months of completion of the open offer.

The takeover code has also defined indirect acquisition or control. This is defined as the ability to exercise or direct the exercise of voting rights which would otherwise attract the obligation of making a public announcement of an open offer. The threshold point for this control or ability is 80% of assets or net sales or market capitalization of the target company, it would be deemed to be a direct acquisition.

SEBI has also clarified that any open offer for which a public announcement has already been made would be governed by the old regulations and would be completed under the earlier norms.

This last point means that the public announcement made by Varkey to acquire 20% in Everonn would continue under the old norms and as per the announcement would open on the 16th of November and close on the 5th of December.

The USA debt rating has been downgraded from AAA (triple A) to AA+ (double A plus). This downgrade has happened after 1917, an event which has taken 94 years. I believe to understand the complexity of ratings, economy, stock markets, currencies and commodities one needs to be of a minimum age of 16 years, which means that unless somebody who is 110 years old and active would have been witness to such an event in 1917 and would have experienced the same. Very clearly many such people would certainly not be there in the world as of now.

The effect of this downgrade would have a different effect on stocks, currencies, commodities, bond yields and so on. It would also matter on which side of the table you are and what your economic balance with the USA exists. A country like China which is the world’s largest investor in US treasury bills of 1.1 trillion US $ will be affected in a different manner than other economies.

Trading would begin in Australia and Japan in the morning followed by Hong Kong, China, Singapore and other Asian economies followed by India and then onto Europe. Trading in the US would begin a good 12-14 hours after the whole world has reacted to an event which has happened in the US. There will be uncertain markets, and it appears that the US dollar could depreciate against many other currencies. The knee-jerk reaction would be panic, mayhem and blood on the streets.

Coming to the Indian markets, a selling on the dollar is good news for importers and a fall in commodity prices excellent news for consumption economies like China and India. If commodity prices fall and this would include crude oil, our government would heave a sigh of relief as the current unabated rise in inflation would shoe a declining trend and also the fall in commodity prices would be beneficial to the manufacturing sector. Similarly the loss to exporters particularly the IT sector could be made up to some extent by higher outsourcing as US cuts costs.

There is a saying in the English language that one man’s food is another man’s poison and the world markets is one great place to use and experience it. The US would have to cut costs to rein in the deficit and it is widely expected that the government is likely to raise the retirement age by 2 years so that pension liabilities get deferred by two years straight away. There is also an expectation that in the cost cuts needed there could be changes in the healthcare bill and this could be negative news for the sector.

The effect of this downgrade means that the country would have a negative effect on the economy and would increase the interest payments on account of higher rate of interest and also an increase in borrowings by roughly 100 billion $. The other risk is that after a downgrade, the ratings are put on a watch and the US cannot afford the ignominy of a second downgrade. The US Senate would have to set aside its differences and work towards resolution of this crisis which is large enough to eat them up if not resolved speedily.

What should we do in India when the markets open tomorrow? Buy the markets if they fall, sell the markets if they rally. I believe neither of the above two are a solution. There are plenty of combinations and permutations possible and the markets are going to remain choppy, extremely volatile and more important dangerous. The whole day people who have no experience of such an event in their lifetime will be advising what to do. Why not observe the market carefully and see developments and let the American market trade before forming a view. The markets which have been extremely nervous and weak over the last 10 trading sessions are not going to suddenly shoot up and nothing would be lost if we are cautious and staying away from the market for a couple of days. We need clarity, stability and the markets are far away from it.

The markets need to consolidate, trade freely, understand various implications, combinations and permutations before they stabilise. The world will not come to an end if you do not trade tomorrow. Trade cautiously once you have some clarity on the events.

Walt Disney Corporation who is the majority shareholder plans to acquire the shares and delist the company from the Stock exchanges where it is listed. The share has been rising steadily and the price has risen sharply from a level of Rs 386 on the 10th of February to a high of Rs 1050 on the 26th of July and a close of Rs 962.15. All this has happened when the benchmark indices have remained fairly flat. The corresponding level for the BSESENSEX on the 10th of February was 17,463.04 points which has moved up and closed at 18,197.20 points, a gain of a mere 4.20%. The scrip UTV Soft in the similar period has gained Rs 576.15 or a staggering 149.26%.

Walt Disney has informed the company and the company has informed the stock exchange of the decision to delist the company and the said notice is attached. Click here to read the notice to the stock Exchanges.

The delisting norms in India are very clear and a company has to make an offer with a floor price which is based on the weighted average of 2 weeks and 26 weeks and this becomes the minimum price to be offered for delisting. The delisting norms stipulate that the company will undertake a reverse book building and the discovered price may or may not be accepted by the company.

It appears that Walt Disney and its advisors believe that the floor price and ceiling price are the same. The company has mentioned in the letter to the exchanges under point 4 (iii) a commitment by the acquirer that the acquirer will acquire equity shares of the company at a price of Rs 1000 (Rupees one thousand only) per equity share despite the discovered price being less than Rs 1000 (Rupees One Thousand Only) per share; or and under point 4 (iv) a restriction on the board of directors of the Acquirer to subsequently approve an acquisition of shares from the public shareholders at a price in excess of Rs 1000 (Rupees one thousand only ) per equity share.

The important point to be noted is that Walt Disney is offering not only a floor price but also a ceiling price and implying that this is a price at which it will acquire any number of shares like is done in the case of an open offer. The whole deal looks again the interest of minority shareholders and SEBI the regulator should ask the company to explain its stand at the earliest.

Reverse book building implies that once the price is discovered, it is upto the company/acquirer to accept or reject the discovered price and at hat discovered price he has to accept all shares which have been tendered at or lower than that price at the discovered price. The acquirer also has to keep the discovered price open thereafter for all shareholders who have not tendered their shares.

Walt Disney appears to be circumventing the law by mixing an open offer with delisting and confusing minority shareholders. One hopes the regulator SEBI will step in and address the issue at the earliest.

ICICI Bank is now the single largest shareholder ahead of promoter Manoj Tirodkar after it assumed a 29.3% stake in the debt laden company GTL. The shares were acquired at a value of Rs 68.2 and at this price the bank has been able to recover Rs 194 crs of the Rs 500 crs that GTL owes it. The total number of shares acquired were28.5 million shares. The promoters’ Global Holding Corp has pledged 99.1% of its 52.18% stake or 50.75 million shares in the company and it would be a matter of time before other bankers would also exercise their lien and take over the shares pledged with them.

This brings us to the question as to what would happen next. Would there be a need for any open offer to be made as in the case of Great Offshore. The happening of Satyam changed the way the Indian Companies Act functions and it make became mandatory to disclose the pledge of shares on a regular basis. In the case of GTL the management control does not change because ICICI Bank has not acquired shares of GTL but they have come to it by default on account of the inability of the borrower GTL to return the money. There would be no need whatsoever to make any sort of open offer by any party now or later if more pledged shares are transferred.

The next course of action would be taken by a consortium of banks. The major liability is on the books of GTL Infra which is a subsidiary of the parent GTL Limited. This company is in the business of owning telecom towers and the lender consortium would now expedite a “slump sale” of the tower business which would reduce the debt on the books and therefore the interest outgo of the company. Currently the company is bleeding very heavily and GTL Infra made a net loss of Rs 139.29 crs for the year ended March 2011.

The share price of the company fell dramatically from Friday the 27th of June from a close of Rs 406.95 to Rs 90.75 on the 30th of June. In a mere 10 trading sessions the share price had fallen Rs 316.20 and become a mere 22.3% of its original price. The market sure punished the stock and one is not sure where the pledged shares have gone and whosoever sold them, how come the shareholding pattern does not reflect the same.

Very clearly corporate governance even post Satyam continues to be pathetic and it appears management just does not want to become transparent come what may. They still believe they can run things any which way they like and they are accountable to none.

What should shareholders expect from these companies going forward?

One should expect that there will be urgency in finding a buyer for the tower business and transferring the assets and liabilities of the company to the buyer. As the company has already filed for a CDR (corporate debt restructuring) package, it would make things easier for the restructuring and the sale. Investors should expect the share price to recover from these levels but they should understand that at the end of the day the company is a loss making company and effectively has no promoter who could bring in the money to help in the restructuring of the company. Secondly all the promoter shareholding is pledged and there is no way that there can be redemption or the lien on the pledged shares can be removed.

In conclusion the counters of these two shares would continue to be volatile, news driven but there is no way that any open offer of any sort can come in the near future.

The much awaited and debated SEBI Takeover Code was finally announced at the SEBI Board meet in Mumbai on Thursday the 28th of July. The Code has three major changes which are as follows: -

• The trigger point or threshold limit has been changed from 15% to 25%. This means that if the person/entity or persons acting in concert acquire shares of 25% of the company, the open offer would have to be made.
• The size of the open offer has been increased from 20% to 26%. The earlier limit of offer has been changed as the threshold limit has been changed and it makes sense that the size of the open offer should be bigger than the threshold limit.
• The contentious issue of non-compete fee has been abolished. This is a demand which has been made by minority shareholders and it has been finally accepted.

What is important to note is that the recommendations of the committee were submitted a long time ago and they have been finally accepted though in parts only. This would have been a good opportunity to lay down the roadmap for how and when the rule from 26% size of open offer would be extended and become 75% (effectively all the shares).

There were other issues also discussed and the full press release is attached for your ready reference.
Please click here for SEBI Press Release.

SEBI has also decided that track record of merchant bankers would be disclosed in future IPO’s and the application form would be made smaller, simpler and space for filling of data be increased to facilitate ease of filling the same.

SEBI has one week before the IDR could be technically offered for conversion into the underlying shares changed the rules completely. It has effectively barred the conversion into underlying except in a case where the trading quantum of the IDR becomes infrequent.

The SEBI definition is reproduced below: -

After the completion of one year from the date of issuance of IDRs, redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India.

Explanation- For this purpose, IDRs shall be deemed to be “infrequently traded” if the annualized trading turnover in IDRs during the six calendar months immediately preceding the month of redemption is less than five percent of the listed IDRs.

b. The issuer company shall test the frequency of trading of IDRs on a half yearly basis ending on June and December of every year.

Standard Chartered IDR trading price chart

From the above price chart it appears that the share/idr has done nothing much in the past 51 weeks. With this new announcement by SEBI, investors who were hoping that they would be able to convert and make some profit would be in for a major disappointment.

VMS Industries Limited is tapping the capital markets with an issue to Raise Rs 2575 lacs in a price band of Rs 36-40. The issue has opened on Monday the 30th of May and closes on Thursday the 2nd of June.

Business
The company is in the business of being a 25% partner in M/s Eternal Automobiles which is a 2 wheeler dealer of Honda motor cycle in Bhavnagar. The company is in the business of ship breaking at Bhavnagar and has also purchased one tug which is currently being operated on spot basis. The company believes its core business id ship breaking and offshore activities.

If one were to go into the history of the company it was incorporated in the year 1991 and was started with the object of providing consulting and information technology services. During the period 1992-1994 it was involved with computerisation of land revenue records. It then was involved in computerisation of ration cards. In 1994 it acquired a company Varun Gases involved with producing Oxygen. This plant was closed in 1997. The track record leaves a lot to be desired and this small company is yet to settle down into a steady business stream.

Objects of the Issue
The objects of the issue are as follows: -

Financials
The company has reported a revenue of Rs 143.67 lacs for the year ended March 2009, Rs 2911.94 lacs for March 2010 and Rs 4988.87 lacs for the nine months ended December 2010. The margins were 7.22% in 2010 which are at 2.45% in the nine months ended December 2010.

Comparison
The company has chosen to compare itself with Inducto Steel Limited and Hariyana Ship breakers Limited in the ship breaking industry. In the offshore activity it has compared itself with unlisted entities Global Cambay Marine Services Pvt Ltd and Polestar Maritime Limited.

The segment income from offshore activity is Rs 325.04 lacs in March 2010 and Rs 241.65 lacs in the nine months ended December 2010. I believe this turnover is two small and with a single tug and no objects of the issue talking of expanding this segment to warrant any valuation benefits.

Valuations
The company is asking for a post issue market capitalisation of Rs 61.87 crs at the lower end of the price band and Rs 65.89 crs at the upper band. The net profit in the nine months ended December 2010 was Rs 250.03 lacs and on an annualised basis was Rs 333.37 implying a price earnings multiple of 18.55 times at the lower end and 19.76 times at the upper end of the price band.

Conclusion
The company is very small and does not have a track record in terms of execution or time. The scale of operations is small and it has been changing its core business time and again. The present business is less than three years old and is yet to stabilise. The margins are fairly low and returns for investors in the company seem to be a long time away.

The small cap issues which have come in the last few months have left a lot to be desired post listing. There is no reason why VMS would be an exception and post listing would be available at a substantial discount to the issue price.

As of the end of the penultimate day there is no QIB bid.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.