Patience pays big time to BT Group

Yesterday, the BT Group sold its remaining 9.1% stake in Tech Mahindra Limited for a little over Rs. 1000 crores, marking its complete exit from the technology major. With this, the British company ended its two decade association with its Indian joint venture partner Mahindra and Mahindra.

The newspapers came flushed with comments that the shareholding of BT Group was an overhang on Tech Mahindra’s stock, and the exit was a positive development. I don’t know how correct that is since I was more interested in finding out how much IRR did the BT Group make through its investment in Tech Mahindra? An IRR of 29%, excluding the dividend income, indicate my calculations.

The BT Group sold its 43% stake in four tranches – 10.5% stake at the time of IPO in August 2006, 6.9% in November 2010, 14.1% in August 2012 and the remaining 9.1% in December 2012 – earning a handsome Rs. 3,150 crores on its Rs. 14 crore investment done in March 1990. (Write to me to get the excel sheet showing calculations for IRR).

Someone rightly said... patience pays big time!

PVR Bijlis pay Rs. 5 crore per screen to buy out Cinemax Kanakia’s

Last week PVR announced the acquisition of Cinemax India. As per the company release, PVR would buy the 69.3% stake of Kanakia family in Cinemax India for Rs. 394 crores. It would also make the mandatory open offer to buy an additional 26% stake in the company for Rs. 148 crores.

PVR has been eyeing an acquisition for a very long time and Cinemax suited it perfectly. PVR was strong, particularly in North India, while Cinemax held a good stand in Western India, including the premium Mumbai market. The promoters of Cinemax are basically real estate developers with a good name in the Mumbai suburbs and the cinema exhibition business was sort of an offshoot for them, though it earned good money in the cinema exhibition business compared to its peers.

PVR had previously sewn a deal to acquire the cinema exhibition business of real estate giant DLF, however the deal could not go through for unknown reasons. PVR, which is targeting 500 screens by 2015, urgently needed that real big push which only an acquisition could provide. In Cinemax, PVR got 138 screens, which would take the total screens count for the company to 351, making it the single largest cinema chain in India.

PVR needed Cinemax more than Cinemax needed PVR.

Coming to valuations, PVR is paying an Enterprise Value (EV) of Rs 682 crores for Cinemax, resulting in an EV per screen of Rs. 4.9 crores. The capital expenditure on one screen in a metro is usually in the range of Rs. 2.0 - 2.5 crores. PVR paid higher as it got good locations and a ready to use facility. However, the premium Kanakia’s received was way too high and a valuation of Rs. 4 crores per screen seems justifiable to me. One may argue that Cinemax earned about 2-3% higher EBITDA margins compared to PVR and this should also be taken into account for the deal premium. Then there is the question of brand value associated with “Cinemax”, though I am not sure whether PVR got to retain the new brand. Anyway, I don’t think PVR needs another brand.

PVR did its homework proper this time as the Bijlis did not want to let this go away or embroil in a legal tussle like the one INOX and BIG Cinemas had for Fame India. PVR needed Rs. 542 crores in total, Rs. 394 crores to buy out the Kanakia family and Rs. 148 crores for the subsequent open offer to general shareholders. The Bijlis raised Rs. 260 crores through preferential allotment and Rs. 280 crores by way of debt. The preferential allotment was subscribed to by the original promoters and two private equities, namely Renuka Ramnath’s Multiples and LVMH’s L Capital. The debt money came from Indostar Capital Finance, L&T Finance and GE Capital.

Markets have given thumbs up to the deal; PVR is up 27% since it announced the acquisition. Investors seem to be happy over the fact that two large private equities have shown faith in PVR.

Four IIT pass outs make a killing in their six year old education venture

Earlier this week, Mumbai-based MT Educare (formerly Mahesh Tutorials) announced that it has acquired a 51% stake in an IIT coaching institute named Lakshya Forum for Competitions for an undisclosed amount.

The founders of Lakshya – Vamsi Krishna and his team of four IITans – would be a happy lot today since getting to a Rs. 100 crore top line and competing with Kota-based big shots like Resonance and Career Point would have been a difficult task for them.

Anyway let’s get to the moot point regarding the valuations they probably received for their six year old venture. Rough calculations indicate that the young entrepreneurs pulled off an enterprise value of USD10 million (Rs. 44 crores) for their coaching facility, resulting in net receipt of USD5 million (Rs. 22 crores) cash from MT Educare for the 51% stake sold.

This I would say is no small money.

Lakshya Forum for Competitions, which runs four centers at Patiala, Bathinda, Chandigarh and Panchkula, has about 2500 students. Assuming an annual average fee of Rs. 35,000 per student, Lakshya is likely to have raked in about Rs. 9 crores in fee this year. Considering that EBITDA margins for IIT coaching institutes is in the range of 40-50%, I assume Lakshya would be making a minimum Rs. 3.6 crores at the EBITDA level.

The two listed companies in the coaching space: Career Point and MT Educare are available at around 3.5x their revenues and 14x EBITDA. Placing these multiples for Lakshya results in an enterprise value of USD10 million (Rs. 44 crores).

Given the poor market conditions and small scale of operations, the founders of Lakshya probably could not get a higher valuation for their business. Any buyer seeking a majority stake in a company usually pays a premium for the purchase. Moreover, Lakshya earns much higher profit margins than MT Educare. It also provides MT Educare a ready presence in North India.

My best wishes to Vamsi Krishna and his team for their future ventures.

Gym business...does it make sense?

Mahendra Singh Dhoni has started a new venture – SportsFit World Private Limited – suggested the Economic Times copy of the last week. The company, which MSD has formed along with his business partner and manager Arun Pandey, would be opening a chain of fitness centers (or gyms) across India. The new partners plan to open 200 gyms across the country over the next five years. Options for going alone or through franchisees is still in the works. With this, MSD would join the league of Talwalkars, Gold's Gym, Fitness One and Snap Fitness.

I shall here try to explore the gym business for the readers of this blog.

For the sake of understanding, let’s assume that we have taken the franchise of Gold’s Gym on April 1 2012. Establishing a fully-loaded Gold’s gym can cost anything between Rs. 3 crores to Rs. 5 crores, assuming that the land/building is not owned but taken on lease. A reasonable size would be say 7,500 sq ft of area. Similar to most master franchisees, Gold’s Gym would require that we buy the fitness equipment from them or their subsidiaries. They would also have their say in the choice of interiors and related infrastructure. So, it’s better, we assume this to be a sunk cost with no options of saving even a penny.

Assuming that we already have a location in mind, it is generally said that the fitness center can be expected to kick-start operations in about three months. Taking into consideration that all goes well, our cash outflow till the date of inauguration – i.e. July 1 2012 – would stand at Rs. 5.37 crores (including Rs. 18.75 lacs as interest and Rs. 15.75 lacs as rent). I assume that the investment amount has been taken as loan from friends who seek 15% pa interest; while the rent is Rs. 70 per sq ft. In other words, we are down Rs. 5.35 crores on the date of opening.

Let’s focus now on the cash inflows for the year ending March 31, 2013. Say the membership fee to our gym costs Rs. 25,000 per annum (which are very much premium charges) and the total memberships sold averaged 600 for the first year of operations. This means that during the period July 1 2012 to March 31 2013, we generate cash inflows to the tune of Rs. 1.5 crores. After adjusting for the franchisee royalty of Rs. 11.25 lacs (i.e. 7.5% of revenue), we are left with net cash inflows of Rs. 1.39 crores.

Coming to the operational costs, we now focus on the rentals, staff salaries, electricity charges, and other administrative costs payable during the year. Rent payments of our gym come at Rs. 47.25 lacs (nine months only), staff salaries are Rs 20.0 lacs (Manager, Trainer, Junior Trainer, others), electricity charges are Rs. 9.0 lacs (Rs. 1 lac per month), while administrative costs are Rs. 2 lacs. All this adds up to Rs. 76 lacs and results in an Ebitda margin of 40%, which is very much the industry norm. Seems good until now, right!

Having paid the operational costs and royalties, we now need to pay Rs. 56.25 lacs as finance charges for the loan taken from friends for the nine months, as we have already added the interest for three months in sunk costs. Amortization of the pre-operative expenses of Rs. 35 lacs over the next ten years would mean a deduction of Rs 3.5 lacs from the P&L account this year. Taking these into consideration, we arrive at a profit before tax of just Rs. 1.75 lacs for the first year. Hold on, as we are yet to pay a corporate tax of 30% on this amounting to Rs. 52,500 to the government. At the end of March 31 2013, we end our first year with a net profit of 1.22 lacs.

Good luck MSD!

Mad Over Donuts...seriously

Last week, my sister called me up while returning from work, asking me to get her “Double Trouble”, a popular donut (doughnut) flavor available at the Mad Over Donuts (MOD) outlet near my office. She asked me to buy two donuts after having eaten one at the Juhu outlet the very same evening.

I have seen the MOD outlet several times while going to / returning from my office, but never in my two years have I felt the urge to even visit the orange-colored place to buy anything. You can blame it on my traditional/conservative thinking because I usually stay away from such firangi places which are frequented by the new generation of Indians these days.

Anyway, since the request for donuts had come from my little angel (who is also my life), I finally made it to the MOD outlet that evening for the first time and bought two pieces of Double Trouble. I also bought two espresso coffees which I shared along with my friend accompanying me that day and paid Rs. 185 for all the things. I guess the donuts came for about Rs. 50/- each, which I thought were quite reasonably priced.

The person serving me at the outlet informed that it was a franchisee store; which tinkled the businessman in me. Few days later, I started to research about MOD. And guess what did I find? I found that MOD is not an international brand like Dominos, Mc Donalds, or Pizza Hut, but a home grown one. This came as a real surprise to me since I always thought MOD was an up market (premium) foreign brand.

So, who are the people behind MOD – India’s first donut chain? Well, it all started when a young man named Lokesh Bharwani (probably a sindhi, suggests the surname), who was working in Singapore, thought of an opportunity to serve donuts to Indians. Lokesh roped in Kishi Arora (a beautiful chef) and took the plunge after spending one full year to research and develop the product with a team of food science specialists.

The start may have been slow, since the first MOD outlet opened its doors only in March 2008. The reason could also be that Lokesh wanted to play all his cards right and avoid failure. The gameplan worked and MOD expanded really fast. The company is now present through 35 stores across Delhi, Mumbai and Pune. According to media reports, Mirah Group (owner of Rajdhani and Falafels) was quick to spot the opportunity to invest in the craze for donuts and picked up one-third stake in MOD in 2010.

Now, comes another good piece of information. Last week, I had this guest at my place (an Indian, residing in Dubai) and he happened to visit the neighborhood MOD store yesterday with his friend. While casually chatting up with him last night, we engaged in discussing the donuts served at MOD and what he thought about them. Well, he had an interesting thing to share with me. My friend told me that MOD is costlier than Dunkin Donuts and Krispy Kreme, the international favorites for donuts. Moreover, he said that the donuts served by MOD good, but, not as soft and creamy as the ones he eats at Dunkin Donuts and Krispy Kreme in Dubai. Which means that Lokesh could be generating better profit margins than the international players. Anyway, whatever be the case, I know one thing. Lokesh is presently doing a roaring business and his MOD has a great fan following, including my little princess.

I wish him and Kishi all the luck.

Logistic companies Arshiya and Gateway Distriparks generate investor interest

The last week of this financial year witnessed a lot of bulk deals. I, therefore, would only be discussing selective candidates here at my discretion.

Credit Suisse Singapore was seen picking-up shares worth Rs. 12.5 crores in Arshiya International, a supply chain and logistic company, which has made it to the Ceejay House of Worli from an unknown office building in Marol, Andheri. Seller here was Citigroup.

Buying interest was seen in another company named Gateway Distriparks, which operates in similar space as Arshiya International. Morgan Stanley and Indea Absolute Return Fund were the buyers here, picking shares worth Rs. 37.7 crores and Rs. 8.3 crores each.

ICICI Prudential Mutual Fund bought shares worth Rs. 12.2 crores in Career Point, a tutorial company, from HDFC Mutual Fund. Few interesting things about Career Point: 1) the stock is available at 52-week low and could make for a good investment, 2) expected IPO of Mahesh Tutorials could be seen lifting investor interest, and 3) the company has some really strong backing of institutional investors.

However, ICICI Prudential Mutual Fund was seen selling shares in Shilpa Medicare. The fund house sold shares worth Rs. 7.9 crores to TANO Mauritius India. Shilpa Medicare counts Baring India and Pivotal Securities among its shareholders.

During the week, New York Life Investment Management India Fund bought shares worth Rs. 6 crores in Jabalpur-based Commercial Engineers & Body Builders. Since, they already own 12% outstanding shares in the company, the additional buying of shares indicate confidence among the existing investors.

Asian Satellite Broadcast (a Subhash Chandra company) was seen buying into IVRCL. Asian Satellite Broadcast acquired a total of 13 million shares at an average price of Rs. 60.44 per share, this week.

And lastly, my all-time favorite Supreme Infrastructure is again back in the list since Kitara Capital bought additional shares worth Rs. 2.9 crores at an average price of Rs. 288 in the company.

The week of big exits and the budget

The eleventh trading week of 2012 witnessed good amount of activity in the bulk deals section. It ended with the presentation of the union budget from Pranab Mukherjee.

Talking about bulk deals, on March 12 2012, Rupert Murdoch sold his entire stake in Hathway Cable to Providence Equity Advisors and Macquarie Bank for Rs. 358 crores. The deal was closed at an average price of Rs. 145/- per share. My calculations indicate that Rupert Murdoch made a mere 5% gain on his original investment in Hathway. Further, the huge 18% discount to the market price indicates that Rupert was finding it really hard to offload his stake in the company.

On March 14 2012, Kitara Capital (managed in India by Amitabh Chakraborty) bought shares worth Rs. 23.80 crores in Mumbai-based Supreme Infrastructure from Reliance Mutual Fund and the promoters of the company. Supreme Infrastructure (an entity of the Sharma family which owns large chunks of real estate in Powai) is involved in road projects across India. Kitara Capital is part of the Sultanate of Oman-based Ajit Khimji Group.

On the same date, V P Nandakumar of Manappuram Finance sold shares worth Rs. 144.65 crores in his company to investors like Baring India, Sequoia Capital and Siguler Guff. The shares were sold at an average price of Rs. 40/- per share.

Ashish Dhawan’s ChrysCapital was also seen buying 4.2 million shares of Karur Vysya Bank at an average price of Rs. 380/- through their fund Warhol Limited on March 16 2012. The seller here was India Max Investment Fund Limited.

Further, ICICI Emerging Sectors Fund continued to exit MCX India. On March 12 2012, the fund sold shares worth Rs. 31.7 crores in the company. This is in addition to the share sales of Rs. 56 crores done last week by ICICI Emerging Sectors Fund.

UK-based Coronation Investment Management Company, too, has been offloading shares in Educomp Solutions. The company sold shares worth Rs. 73 crores during the week. Malaysia’s SWF Khazanah also sold its entire stake of 4.17% in Yes Bank for Rs. 531 crores after holding it for five years.

Crisil should acquire a smaller player rather than splurge on buybacks

Well. Let me first clarify that this is purely my thought and therefore the analysis carried-out in the article need not have had the desired impact as proposed.

Here are some data points to begin with. Crisil India, a subsidiary of S&P, has a market capitalization of Rs. 6,700 crores or US$1.3 billion. During the last year, Crisil made a net profit of Rs. 206 crores on operating revenues of Rs. 807 crores, on a consolidated basis. Its latest balance sheet suggests that the company is debt-free and has cash and cash equivalents worth Rs. 258 crores.

Crisil has done well for itself as well as for its shareholders. Over 2007-11, Crisil’s revenue and net profit recorded a CAGR of 19% and 25% respectively. If one had bought shares worth Rs 1 lac in Crisil in Dec 2007, the shares would be worth more than Rs 2.5 lacs as of date with some extra earnings in the form of dividends.

Crisil has managed this feat through both organic as well as inorganic growth. Crisil acquired Pipal Research in October 2010 for US$12.75 million, paying 1.6x sales for the same. Crisil had acquired another research firm named Irevna few years back for US$12.0 million, paying 2.2x sales. It is easy to conclude that both these acquisitions have been very fruitful for Crisil because research division is now the single largest contributor to the overall revenue of Crisil. Last year, the research division contributed 52.5% to the overall revenue, followed by Ratings (40.4%) and Advisory (7.1%).

Now, let me change the track to what I wish to communicate. The legendary investor Warren Buffett had recently announced a stock buyback, the first by Berkshire. Stock/Share buybacks are usually considered as a means to return excess money to shareholders. They also indicate that the company is not finding any other attractive investment opportunity for the cash it holds. Simply put, if Berkshire is doing a stock buyback, the management probably thinks that the best investment option (given the current market conditions) is to invest in its own stock.

Crisil too has engaged in quite a few stock buybacks. It recently closed a buyback program, purchasing shares worth Rs. 80 crores (USD16 million) from the open market. My moot point here is: Crisil could actually have put this money to better use, than do buybacks.

My theory behind this reasoning is simple.

With a M-cap of Rs 6700 crores, Crisil is currently trading at 8 times its sales, and 32 times its earnings. During the last five years, it traded at an average sales and earning multiples of 6x and 23x. In other words, this means that the market usually values Crisil at 6 times sales and/or 23 times earnings. ICRA, which is in similar business as Crisil, also trades at 8x sales.

Now assume that Crisil had actually used the money spent on last stock buyback to acquire another company similar to Irevna or Pipal and strengthened its research division further. In fact, a company in similar business is actually located in the vicinity of their Mumbai headquarters and clocks annual revenues of USD10 million. Taking cue from earlier acquisitions of Pipal and Irevna, we can safely assume that they could have scooped-up this company for anything between USD16-USD22 million.

The new acquisition could have added USD10 mn to the topline and USD60 mn to the market capitalization of Crisil.

I hope someone in Mape Advisory, which advised Crisil in previous acquisitions, reads this and helps Crisil become a Rs. 10,000 crore M-cap company soon.

MCX makes its debut; markets’ not surprised with listing gains

The tenth trading week of 2012 witnessed the first IPO listing for the year. On March 9 2012, MCX finally made its debut on the Indian bourses’, closing the day with gains of nearly 26% based on the issue price of Rs. 1032/- per share. This wasn’t of much cheer to the retail investors who ended up making between Rs 2100 to Rs 3100 on their investment of 2 lac rupees.

Data from Bulk deals sections indicates that Copthall Mauritius Investment Ltd. bought shares worth Rs. 56 crore in MCX at an average price of Rs. 1333/- per share. The seller was ICICI Emerging Sectors Fund.

Hyderabad-based Nava Bharat Ventures Ltd. also witnessed good deal activity this week. On March 9 2012, Kingfisher Capital CLO Limited (a subsidiary of Lehman Brothers Holdings) sold shares worth Rs. 60 crores in the company via bulk deals. Nearly 82% of these shares were bought by the promoters of Nava Bharat Ventures Ltd. through A N Investments Pvt Ltd, Nav Developers Limited, and Nava Bharat Ventures Employee Welfare Trust. Post this deal, Kingfisher Capital CLO Limited has cut down its stake in the company to 11.2% from 14.5%.

Other bulk deals for the week included companies like HDIL, Sintex, Core Projects and NCC.

On March 6 2012, Merill Lynch bought shares worth Rs. 25.4 crores in Mumbai-based real estate developer HDIL Limited. My earlier posts would inform that Goldman Sachs had also bought shares in HDIL Limited on Feb 14 2012. On the same date, Morgan Stanley scooped-up shares worth Rs. 14.9 crores in plastic products company Sintex Industries.

On March 7 2012, Goldman Sachs bought shares worth Rs. 18.2 crores in education service provider Core Projects, while Reliance Life Insurance Company bought shares worth Rs. 7.4 crores in infrastructure firm NCC Limited. My earlier posts would inform that Baer Capital had also bought shares worth Rs. 22 crores in NCC Limited on Feb 6 2012.

The week of Ambani bros

Bulk deals during the ninth trading week of 2012 belonged to the Ambani bros. Large buying from firms belonging to both Mukesh Ambani as well as Anil Ambani took place during the week.

Reliance Industries’ buyout of Analjit Singh’s stake in EIH (Oberoi Hotels) for Rs. 192 crores was the highlight deal of the week. On March 2, 2012, Reliance Industries Investment and Holding Limited bought 21.3 million shares of EIH Limited from Pivet Finances Limited and Gaylord Impex Limited (both belonging to Analjit Singh) at an average price of Rs. 90/- per share. Do recall that Mukesh came as a white knight for Bikki Oberoi in Aug 2010, buying close to 15% stake in the hotel company for Rs. 1,000 crores, to ensure that ITC did not become a threat to the current management. The deal marks the complete exit of Analjit Singh from EIH.

The younger Ambani – whose firms are usually quite active in the bulk deals section – was seen lapping up shares in Intel-backed Persistent Systems Limited. As per the data available on NSE and BSE, Reliance Capital bought a little less than one million shares of the pune-based IT firm at an average price of Rs. 305/- per share. Reliance Capital now owns 6.5% in Persistent Systems. US-based Capital Group Companies, Inc. was the seller in Persistent Systems.

Two more companies which saw some buying were: Talwalkar Fitness and ABG Shipyard. An entity named American Funds Insurance bought 2.5 lac shares in Talwalkar Fitness at an average price of Rs. 160/- while Deutsche Securities Mauritius was the buyer in ABG Shipyard, taking up 5.0 lac shares for Rs. 20.4 crores. Do remember that last week some shares of ABG Shipyard were picked up by Australia-based Macquarie Bank too.

Mostly infrastructure firms in this week’s bulk deals

Infrastructure firm IVRCL Limited witnessed good amount of activity in the bulk deals section this week. Australia-based Macquarie Bank along with a few Indian brokerages bought shares worth Rs. 25 crores in the firm on Feb 22 2012 and Feb 24 2012. Macquarie already holds shares worth Rs. 24 crores in IVRCL, which after this would now increase to Rs. 32 crores.

The Australian bank was a big buyer in ABG Shipyard too. On Feb 24 2012, Macquarie added shares worth Rs. 12.40 crores in the company at an average price of Rs. 423/-

On Feb 23 2012, Kotak Mahindra bought 6 lac shares worth Rs. 9.60 crores in APL Apollo Tubes (formerly Bihar Tubes), a manufacturer of steel pipes. APL Apollo Tubes, which was a small player a few years back, has been growing fast; the company shot into limelight after it acquired Mumbai-based Lloyd Line Pipes in 2010.

UK-based hedge fund Spinakker continued to cut its stake in Sanghi Industries, selling shares worth Rs. 9.90 crores this week. With this, Spinakker has now sold a total of Rs. 27 crores worth shares in the cement company. A recent filing on the BSE states that Motilal Oswal has increased its stake in Sanghi to 15.78%, as a result of share pledge.

Should you have invested in the MCX IPO?

The initial public offering of MCX India closed yesterday. Edelweiss Capital, which was the lead manager to the issue, would be more than happy to have brought a successful close (oversubscription of 54 times) to one of the most delayed IPOs in India. Yes, this was probably the third attempt from MCX India to go public. Jignesh Shah, founder of MCX India, would be a much relieved man today. His ability to hold ground against all odds to delay the IPO is highly commendable.

Let me give you a small brief before starting this discussion. MCX or Multi Commodity Exchange is the largest commodity exchange in India. MCX allows one to trade everything from precious metals and base metals to agri commodities and likes. Based on my findings, which date about two years back, MCX handled more than 75% of all organized commodity trades in India. NCDEX, its nearest rival, was nowhere close to the business done at MCX. The situation remains the same till date. In fact, my HT Mint copy informs that it is c.87% for the MCX now. No wonder, the head honchos of MCX and NSE (of NCDEX) do not see eye to eye.

I clearly remember the year 2003. I would pass a red building built by the Silver Group in Andheri East, while traveling in a BEST bus from my uncle’s place to college. The red building housed the headquarters of MCX India. I would always wonder why I didn’t see much activity around the exchange. Coming from a small town, I carried this notion that an exchange (be it a stock exchange or a commodity exchange) would be similar to a mandi (anaj mandi or sabji mandi) with much noise and human activity. For me, an exchange was supposed to be a marketplace, full of commotion, due to a large number of buyers and sellers and the intermediaries involved. When I visited the NSE to write the derivatives exam the same year, I found that the NSE at Bandra Kurla Complex was an even calmer place. Anyway, that’s a different story, and I guess I am moving away from the topic I am trying to discuss here. The listing of MCX india.

MCX came to the market to raise Rs. 663 crores (based on the upper price band). A retail investor was allowed to bid in lots of 6 shares. Which meant that if Mr. A wanted to place his bet in the IPO, he would need to allocate Rs. 1,98,144/- and bid for 32 lots of six shares each. Lets assume, Mr. A was advised by his neighborhood broker to apply because buyers in the grey market were willing to pay Rs. 3,500/- per application, provided you transfer all the shares allocated to your demat account to them on the day of listing. Assuming that the process would take 21 days from the day of application to the day of listing, it meant a clean profit of 1.8% in 21 days or 30.7% annualized returns.

For the sake of our understanding, let us assume that Mr. A applied but does not trade his shares in the grey market. He feels that the company will have a good listing and he will exit making a higher profit. Based on the bids data pulled from the NSE, it seems that Mr. A now has chances of getting as many as eight shares against his application of 192 shares. The retail portion was oversubscribed 24.1 times. But was he better off than having sold his shares in the grey market? Let’s try and work this out.

If buyers in the grey market were willing to pay Rs. 3,500/- for a full application; they were basically quoting a premium of Rs. 438/- for one share of MCX. This is based on the assumption that the issue price would be set at the higher band of Rs. 1,032 per share. So, Mr. A would do well only if MCX manages to list above Rs. 1470/- per share.

Here pops the next question. What would be a reasonable listing price/fair price for MCX? Let me be frank here. I haven’t done much homework here but according to what I have read in the papers, MCX is already available at 18x its TTM earnings, which is at par with international exchanges like CME Group and CBOE. Considering that MCX would continue to grow at the same pace it has been historically clocking – 50% revenue growth and 22% income growth over 2009 to 2012 – its earnings could expand at anything between 22% to 50% next year. Using next years projected earnings with a P/E of 18x, MCX should command a fair value of Rs. 1260/- or at max Rs. 1550/- .

To conclude, Mr. A might manage to make at most Rs. 80/- (or a total of Rs 640/-) more than what was being promised by the buyers in grey market.

Mid week update: Is New Vernon exiting Setco Automotive?

Well. I must admit I shouldn’t have written-off this Gujarat-based auto ancillary company while screening out the weekly bulk deals last week.

On Feb 17 2012, Morgan Stanley had bought 1 lac shares of Setco Automotive at an average price of Rs. 174/- from an unknown entity. Finding the deal to be worth just Rs. 1.7 crore, I deleted it from the list of candidates for discussion.

However, I again chanced to find the name in the list of bulk deals for the day, today.

On Feb 21 2012, Morgan Stanley bought an additional 3 lac shares of Setco Automotive at an average price of Rs. 174/- from an unknown entity. Apart from the promoters, New Vernon Private Equity, Ares Diversified and Reliance Mutual Fund are the other large shareholders in Setco Automotive. But who could be the seller?

I zero-in on New Vernon due to several reasons. First, Setco Automotive is doing well and the stock price has appreciated. Therefore, the promoters probably will not like to cut their stake at this time. Second, Ares Diversified does not have 4 lac shares to sell to Morgan Stanley. Third, Reliance Mutual Fund does not like to do shady deals. It always rings the bell and wants others to know that it is buying/selling into a particular company.

New Vernon makes a perfect choice because being a private equity it needs to exit investments within a limited horizon of 5-7 years; the PE firm holds much more than 4 lac shares in Setco Automotive; the stock price of Setco Automotive has appreciated well to deliver good returns; and New Vernon has offloaded stake previously.

Mumbai-based real estate firms witness buying

The Indian stock market continued its good roll during the seventh week of 2012. The BSE Sensex is now up a huge 18% year to date. Wow! Maybe, someone should check if any of the thousands of schemes run by 40+ mutual funds in the country has outperformed the index.

Let’s look at bulk deals for the week that could be of interest to fellow investors:

On Feb 14 2012, Goldman Sachs bought over two million shares in Mumbai-based realty firm HDIL at an average price of Rs. 97.80/- per share. And guess what, their investment of Rs. 21.7 crores in the firm is already worth Rs. 27.2 crores. HDIL has literally been on fire and has zoomed 130% this year.

On Feb 14 2012, Reliance Life Insurance bought shares worth Rs. 27.8 crores in Radico Khaitan at an average price of Rs.111/- per share. The seller was Venus Infosoft. The investment in 8PM whisky maker (which is available at 20 times its trailing earnings) seems to be a fundamental and safe bet for Reliance Life.

On Feb 15 2012, Tree Line Asia bought shares worth Rs. 24.7 crores in Mumbai-based Sunteck Realty at an average price of Rs. 353/- per share from Kotak Alternate Opportunities India Fund. Considering the profile of Kotak as an investor and business associations with Ajay Piramal, the buy in Sunteck Realty could be fruitful for Tree Line Asia.

On Feb 15 2012, Samruddhi Investors Services bought over ten million shares of Sanghi Industries at Rs. 17.50/- per share from Spinnaker Global Opportunity Fund. Spinnaker, a UK based hedge fund, is believed to have burnt its hands by investing in this company.

Baer puts money in NCC; Infrastructure Fund of India adds more of Gati

Apologies for delay in the posts; finding time during the weekends is getting difficult due to increased workload, thanks to my middle-east clients’. However, leaving that aside, it seems that 2012 is proving to be quite a year for the stock markets. On a year to date basis, the Indian stock market index is up 15%. Good stuff..Right!

Anyway, let’s focus on the bulk deals that took place during the sixth week of 2012.

On Feb 6 2012, Baer Capital bought shares worth Rs. 22 crores in NCC Limited at an average price of Rs. 62.70/- per share. The selling entity here was Norges Bank. It is interesting to note that Rakesh Jhunjhunwala has a little more than 5% stake in this Hyderabad based infrastructure company.

On the same day, the Infrastructure Fund of India bought nearly 7 lac shares in logistics firm GATI Limited at an average price of Rs. 34/- per share. The fund bought an additional 5 lac shares in GATI Limited during the week. The stock price of GATI has moved up really well; it was up 35% during the week.

The other deal which must be mentioned about is the purchase of 20 lac shares in Shasun Pharma (at an average price of Rs. 75/- each) by star-investor Shivanand Mankekar. The sellers here were Om Kedar Investments and Privat Bank IHAG Zurich AG. The ownership of Om Kedar Investments is difficult to ascertain, but it seems that this is a shell company of Mr Mankekar himself. The stock price of Shasun Pharma was up 27% during the week.

Reliance Mutual, Amansa, Beacon India hog limelight

The second trading week of January 2012 witnessed a few important bulk deals. Companies which received attention were: ICRA Limited, Mahindra Lifespace, Akzo Nobel, Sterling Holidays and Borosil Glass.

Reliance Mutual Fund bought shares worth Rs 16 crores in ICRA Limited, a credit rating agency. The seller was IDFC Mutual Fund. Reliance Mutual already owns 1.5% of all outstanding shares of ICRA.

Amansa Investments bought shares worth Rs 9.25 crores in Mahindra Lifespace, the real estate arm of Mahindra Group. Amansa already holds 4.60% stake in Mahindra Lifespace, and the increase in stake could be to average out its holding price.

During the week, Akzo Nobel’s shares worth Rs 100 crores were bought by ICICI (ICICI Brokerage Services Limited and ICICI Securities Limited). One of the major sellers here was Bajaj Allianz. The insurance company is believed to have expressed concerns about Akzo Nobel buying its unlisted subsidiaries at unreasonable price. Reports suggest that ICICI bought shares on behalf of Akzo Nobel to pacify the dissenting shareholder.

In Sterling Resorts, shares worth Rs 4.60 crores were bought by Beacon India Private Equity Fund. Sterling Resorts counts R Jhunjhunwala, R Damani, and Pivotal Securities (Shivanand Mankekar) as its shareholders. The Chennai based company is engaged in the business of vacation ownership with 14 resorts across India.

Borosil continued to see action in the bulk deals segment due to its stock buy back. The company bought shares worth Rs 6.30 crores at an average price of Rs 850/-.

Tracking the first week of January 2012

Wish you all a very happy new year. I recommence this blog in 2012. However, due to time constraints, I plan to make it a weekly update from now onwards. Hope the ideas/information shared is useful to you all.

2011 was pretty bad. Both Sensex and Nifty were down about 25 percent each during the year. I suppose all our Indian Warren Buffets’ too couldn’t manage to generate a positive return on their portfolios in 2011.

Anyway, it is time keep the past aside and think of the year ahead. Lets start by tracking the bulk deals for the first week of January 2012. So, here it is.

On Jan 2, 2012, Swati Rajesh Shah bought shares worth Rs 4.25 crores of Varun Industries. The person does not seem to be among the promoters, but the purchase seemed substantial. Please note that Varun Industries had recently announced sale of its 51% stake in an oil block to their JV for over Rs 750 crores. The company’s market capitalization is approx. Rs 720 crores.

On Jan 3, 2012, KBS Properties Private Limited bought shares worth Rs 5.15 crores of AP Paper from Trinity Infratech Private Limited. This paper company was sold off to an American paper manufacturer last year. The current market price is just 25% of the open offer price.

On the same day, shares worth Rs 3 crores were bought back by the management of Borosil Glass Works. Borosil has shifted off its manufacturing plant from Mumbai to Gujarat. Last year, the Mumbai factory land was sold off to Sheth developers for over Rs 800 crores.

On Jan 4, 2012, Macquarie Bank bought shares worth Rs 12 crores in Standard Chartered Plc, the first IDR. Australia-based Macquarie Bank has its own equity research team in Mumbai, and this purchase signals that they are quite bullish on Stan Chart.

On Jan 6, 2012, ICICI Prudential Life Insurance bought shares worth Rs 8.60 crores in Orient Paper & Industries Ltd. The fund house already holds 7.0% of all outstanding shares of the company.

Happy investing!