Friday, September 30, 2005

Resources for Research on Indian stocks

India Research sites:

Regulatory sites:
1. SEC: For Indian ADR's like Infosys, Tata Motors, Rediff - searh for Form 20F (Annual filings), 424B4 (prospectus), etc.
2. Bombay Stock Exchange Website - get annuals, quarterly filings of companies.
3. National Stock Exchange Website

News sites:
1. Hindu Business Line - the best one in this writer's opinion.
2. Business Standard - the second best
3. Financial Express
4. Economic times

Finanace web sites:
1. Message board section gives rumuor mill on a company. Also there is a section where one can see the block trades for any stock.
2. Some of the company information is often outdated.
3. Good source of corporate information - use with care.

1. For daily commentary on the market.
2. The most widely read blog in India, though it is not entirely on the financial markets.
3. Blog from the "Seeking Alpha" network".

Sunday, September 25, 2005

Oil, and The Impact of the Dollar Yuan Peg.

The other day I had the fortune of hearing P.Chidambaram speak at the India Investment Forum in New York. He briefly touched upon oil, and said that the every $10 rise in oil prices curtails the growth rate of India by roughly 0.5%. So I thought it would be relevant to understand the oil debate – the rapidly increasingly oil demand that threatens to overcome constrained supplies - and the role the dollar-yuan peg has played in making the problem worse.

Oil prices have risen sharply in the past couple of years after the US invaded Iraq, after having remained below $20 per barrel for most of the 90’s. In the wake of Hurricane Katrina, oil futures rose close to $70, their highest level ever, on the New York Mercantile Exchange, which on an inflation adjusted basis is still below the $104 peak that oil prices touched during the oil shock of the 1970s. While so far, the impact of high oil prices on global growth has been minor, it looks that $3/gallon oil might have started impacting consumer demand – at least in the US.

Oil demand has risen sharply in the past few years, while supply has remained stable. The current demand for oil is approximately 82 million barrels/day, and the total crude-oil producing capacity does not exceed it by much – just 1.5 million barrels/day, according to the Wall Street Journal. A more normal cushion is of the order of 4% of demand or 4.5 million barrels/day. The International Energy Outlook forecasts demand to rise sharply by 2 million barrels/day over the next decade, while supply will increase by only 1.5 million barrels/day. The supply remains constrained due to low levels of capital expenditures by the oil companies in new exploration and refining over most of the 1990s, when oil prices were in the low $20s. As such, there is not enough of spare capacity left, and demand can easily overwhelm supply if there was a shock to the oil production and refining infrastructure, which can take the form of Hurricane Katrina and Rita hitting the US Gulf Coast, or a political disruption in any of the oil producing nations.

There are three countries whose dynamics impact the demand side of the oil equation – US, China and India. US is the largest consumer of oil in the world– this country that accounts for 4% of the world population consumes 25% of its oil. On the other hand, China and India have been amongst the fastest growing consumers, and have helped push oil demand threatening close to supply.

The US consumes 25% of total worldwide oil, of which more than half is consumed by cars and trucks. US consumers have continued buying gas (petrol)-guzzling SUVs in the past couple of years, even as oil prices have shot up from $1/gallon to $3/gallon. US consumer demand has remained strong due to a sharp increase in wealth brought on by high real-estate prices and good returns from the stock market in the last two years. This has primarily been the result of low-interest rates. If interest rates went up slightly to calm down the real estate market and also make car financing less attractive, consumers would cut down on oil consumption.

But why have the interest rates in the US been so low? The Fed has tightened short-term interest rates from 1% to 3.75% in the last year and half, but the yield on the ten-year bond – the bond yield more relevant to the long-term house mortgages - has refused to move upward. If anything – at 4.24% currently, it is actually lower than when the Fed first raised interest rates in mid 2004.

Bond bulls say that even though US interest are low compared to historical standards, they are higher than what exist in the rest of the world currently. And so bond investors outside are investing in US treasuries to take advantage of their relatively high yields. Add to that the current uncertainty in the Euro area (Germany, the biggest Euro economy, has had a hung election), and that makes US Treasuries even more attractive.

The biggest buyer of US treasuries these days is China, besides Japan and Korea. China enjoys a huge trade surplus with US, and it needs to put this extra money somewhere outside the country, for otherwise it would fuel inflation within. That place is the US. There is no other place to invest. If EU had been growing faster, then some investments might have gone in Euro zone. That, unfortunately, is not the case. So why does China enjoy this huge trade surplus?

That is because of the yuan-dollar peg. Till before this year, yuan was pegged to the dollar at 8.28 yuans per dollar. This year, under pressure from its trading partners like US and Japan, the Chinese government changed the peg to 8.11 yuans per dollar, and also allowed Yuan to float in a very narrow the trading band of approximately 0.3% against the US dollar, which is too small to cause a meaningful revaluation. As such, Chinese goods remain very cheap in US dollars, and so WalMart, Dell and other US companies continue sourcing from China. So, the trade surplus that China enjoys vis-à-vis the US continues to exist and keep on growing.

If Yuan were to float freely, it would appreciate and dollar would depreciate. Chinese exports to the US would slow down, narrowing the US trade deficit that stands at around $55 billion/month. This would mitigate China’s problem of investing its trade surplus, which it currently does in US treasuries. As such, the demand of the US treasury bonds would decline and the US bond yields would inch up.

This would also help curtail Chinese oil demand. A stronger yuan would lower Chinese exports, and lower the growth rate of this export driven economy, curtailing demand in the world's fastest growing economy and car market.

India has contributed its small might in keeping domestic oil demand high. By keeping the lid on retail oil prices, Indian government has not allowed the oil demand to trend down, commensurate with the increase in global oil prices. HPCL, BPCL and other oil companies are incurring significant losses by selling oil to consumers at below the cost at which they purchase globally, and are on budgetary support.

One should remember that the oil price increase this time is different from the 1970's: then it was a supply side shock with a cartel of Middle East countries suddenly raising prices. This time it is demand driven - a demand that is inflated in US, China and India due to distorted macroeconomic policies. While correcting these policies might temper demand and economic growth in China and India in the short run, it would be healthier in the long-run as it would prevent unsustainable economic forces from building up in the global economy.

What Alan Greenspan has aimed to achieve by increasing the interest rates in the last year and half is to have a soft-landing in home and other asset prices in the US, without pushing the world’s largest economy into a recession. High oil prices have the potential to thwart his aim. The global economy has become more energy efficient in the last 30 years, which is the primary reason why oil price rise hasn’t had an impact on growth so far – however, there is a limit to which energy prices can rise without pushing the globe in recession and stagflation.

Friday, September 23, 2005

HPCL and BPCL - a long dated call option?

Investors in oil over the last year have had a great bull run worldwide. There has been no such luck for investors in HPCL, BPCL and the other public sector oil companies in India. With the government not allowing the retail prices of oil to rise to levels commensurate with the worldwide prices of oil, it is these oil marketing companies that have been taking all the hit between the price they pay to buy oil and the price at which they sell it to retail consumers.

So how much are HPCL and BPCL worth? I think that at some point over the next year, Indian retail oil prices will slowly catch up with global oil prices. And if global oil prices slip down below the retail price point - which they will, because current prices of $68 per barrel are not substainable (see below) - then the government will not reduce the retail oil prices. They will let both HPCL and BPCL get whole on the losses. And their stock prices will shoot up at that time. One should recall that it is dividends from these companies that had helped the central government keep its finances in shape in the last few years - and so the losses at these companies are very painful for the budget.

In the meantime, how low can HPCL and BPCL go? Clearly there is a value to the assets - the companies own oil refineries and petroleum distribution points across the country. I dont know what the value of these assets is - but it looks increasingly that this is as bad as it can get for both these companies. HPCL has consistently found support around Rs 285-Rs 290 levels. I think that the risk-reward in both these stocks is skewed heavily towards upside. But it might take a long time for this to play out - one year, maybe two - and so you have a long-dated call option will these stocks.

What is the story with oil? I had written earlier on how low interest rates in the US are continuing to fuel the housing boom and the consumer demand which is keeping oil demand high, and also the role China is playing by keeping its currency pegged to the dollar: One should remember that the oil price increase this time is different from the 1970's: then it was a supply side shock with a cartel of Middle East countries suddenly raising prices. This time it is demand driven, and there are some indications that at $3/gallon of gasoline, even the crazy US consumers start feeling the pinch. If Hurricane Rita takes out the oil refining capacity in Texas, and gasoline shoots up to $4/gallon, we won't have a merry Thanksgiving and Christmas in the US. Demand of oil will go down as economy hits a soft patch, and so will the prices.

Wednesday, September 21, 2005

Markets down after another 25 bps rate hike

The markets lost another 80 odd points today, after having lost 100 yesterday. The indices had been in the positive till Fed came out with its statement at 2:15 pm. While investors had been prepared for a 25 bps hike, I guess they were expecting some signs that the Fed would halt its tightening campaign soon. That did not happen, and the market tanked.

There is no shortage of jokers in financial markets. One of them is the CEO and chairman of - Patrick Bryne. In the last few months, he has used terms like Al Qaeeda, terrorists, druggists, addicts, school kids in a bus et. al to describe the short sellers that are killing his stock. See Jeff Mathews blog for more on Overstock:

Equally hilarious is Steve Ballmer's interview in Businessweek: The magnitude of management jargon sprout in this interview defies logic. I counted innovation mentioned 24 times - now that is a quality which consumers stopped associating with Microsoft after it came out with Windows 95. Earlier, I used to think that this is a very attractive utility stock for someone seeking to retire and get a nice dividend payout. Now, I think that Microsoft is in serious trouble, unless Bill Gates fires Steve Ballmer in the next couple of years, and bring in someone who can make the stock run. MSFT has remained flat in the last five years..

Monday, September 19, 2005

The Fed after Katrina and the woes of US airline industry

The Fed Reserve meets tomorrow to decide on interest rates. In the past week, market participants have been split as to whether Fed would pause rate hike in the wake of Katrina, or will it continue to push to nip any signs of incipient inflation. Inflation has so far been contained in oil, but inflation ex oil might now start creeping up as the federal government starts spending billion of dollars to clean up the Gulf. The stock indices moved up nicely over the past week, on the theory that spending to clean up the mess would benefit businesses.

Airline industry has been in perpetual turmoil since 1978, after deregulation. This is what Warren Buffet told his shareholders at their 2003 annual meeting -"A great management in that business will not necessarily get a great result. In the airlines, you have a huge amount of capacity...something close to a commodity product with high fixed costs and no marginal costs.
That extra seat doesn't cost you anything, so the temptation to sell that at a terrible price is

This is what I though of the other day, when I wrote on fixed costs and variable costs:

Thursday, September 15, 2005

Resources for research

Slowly and slowly I have become very efficient at searching for abstruse information and pulling it all together - at least that is what my last performance review reads. While I cannot help with analysis, I can certainly compile the list of sites to get useful information.

1. SEC: - the place to start any kind of corporate research. Search for a company, read its 10-K and 10-Q filings.
2. Yahoo Finance: For up to minute news, consensus estimates, message boards. Create virtual portfolios.
3. The best up-to-minute commentary of what is happening in the markets.
4. Technorati: And other blog search engines. Unfortunately google doesnt search blogs currently (or more precisely, doesnt give an option to search blogs only - which might be more current than the mainstream media outlets, which would appear first if you type, say MTV 2005 awards).

India Research sites:
1. SEC: For Indian ADR's like Infosys, Tata Motors, Rediff - searh for Form 20F (Annual filings), 424B4 (prospectus), etc.
2. Bombay stock exchange website.
3.. Message board section gives rumuor mill on a company.
4. Hindu Business Line is the most unbiased financial newspaper in the country.
5. Blog from the "Seeking Alpha" network - this network ranked highest on Businessweek's list of top rated financial blogs.

1. To buy goverment bonds. 2 yr is yielding 4%.

Tuesday, September 13, 2005

Steel stocks and Tisco

There were reports in WSJ and other publications over the last month that steel prices would go up in the coming months, and hence the outlook for steel stocks is positive. Morgan Stanley upgraded its weighting on steel to attractive from neutral. Goldman however maintained that steel stocks were significantly overbought, having risen 30% from mid-April lows. Turns out that Hurricane Katrina, which stuck Gulf coast late last month, has helped the bulls - with the supply of a few key inputs to the steel production process dislocated, Mittal and Nucor raised prices.

Japanese steel producers like Nippon steel have also raised their prices, but the Chinese producers, who are suffering from significant overcapacity have not. Tisco in India has also raised prices.

I guess the key question for Tisco and other Indian steel producers is - how easy is it to import steel from China? If it is not, and Indian producers go on an expansion spree as Tisco is planning to - they would get hammered if demand turns down. They can definitely accuse Chinese steel producers of dumping and the Chinese government of subsidizing the steel mills through cheap loans (while Tisco pays market prices for its debt), and thus get the Indian government to impose some tarriffs and anti-dumping duties. But Tisco is planning to expand aboard - it bought a steel mill in Singapore and is planning to buy one more. 20% of its revenues now come from abroad. These revenues wouldn't be protected by Indian government tarrifs.

Sunday, September 11, 2005

Long-Short pair and Residual Reversion: Tata Motors and Maruti

Many hedge funds run long-short equity portfolio, i.e. they go long one stock and short another to make money on the valuation spread. There are two key questions in analyzing a long-short pair: (a) Is there a valuation difference between two stocks which would converge over a period of time? (b) What is the return from the long-short pair on a risk-adjusted basis?

How should risk be thought of in the long-short world? We can measure the beta of the long-short portfolio to get a handle of the risk. Remember that beta is the square root of covariance of the two-stock portfolio, which in this case would be {Variance-1 + Variance-2 + 2sqrt(variance-1*variance-2)}. The lower the beta, the better it is.

If the two stocks have the same beta, then the beta of the long-short portfolio is 0. This is intuitive - if one stock goes up by x% and the second falls by the same, then the total return from the portfolio is 0, assuming equal weight of both stocks in the portfolio.

However, if between the two stocks that had historically had the same beta, one stock has fallen (or risen) more than the other recently, then the other stock would fall (or rise) more than the first over the coming time period - provided nothing changed fundamentally between the two stocks, and there is reason to believe that the historical relationship would hold in the future. This is what some analysts define as Residual Reversion.

Over the past year, I have become convinced that residual reversion exists between the stocks of Tata Motors and Maruti. Again and again, there share prices have diverged, and again and again they have converged. The stocks have similar betas, they operate in the same industry - Maruti holds 50% share in the Indian passenger market segment, while Tata Motors enjoys a 17% share.

One should however remember that Maruti shareholders might not enjoy the full benefit of Maruti's growth in the future as the Indian middle class expands - the new car plant proposed by Maruti is a 50-50 JV between Maruti and Suzuki, Japan. As such, Maruti's shareholders will get only half the growth from new car sales. So, TAMO might be a better buy in the long run.

Thursday, September 08, 2005

Media business - sources of revenue

What are the various sources of revenue for a media/communications company? Most of the revenues of these companies are driven by consumer spend and corporate ad spend. They can fall in one of the following categories:

a) Subscription: Magazine subscription, pay channel (HBO, Cinemax, Showtime) etc, cable tv - satellite - telephone subscription.

b) Single-item purchase: Consumers buying (a) books (b) park entrance tickets, say to Disneyworld (c) Movie tickets (d) DVDs (e) Music sales (f) Other consumer product purchases, like kids buying Mickie mouse toys or sports apparel from ESPN.

c) Advertising (corporate): Biggest source of media revenues - on television, radio, magazines, outdoor advertising

d) Affiliate fees and other content fees: Fees charged by content companies from distributors (cable companies and satellite companies) to make their fare available. Cable networks charge affiliate fees, while programmers (and Hollywood) charges various networks for making their content available.

The movie and television business would be amongst the most complex businesses of all, with bizzare value flows amongst lot of players. The hit-driven nature of the business make it all the more difficuult to predict. Pixar and Dreamworks are prime examples. With just one movie release per year, their entire share price is based on expectations of how their next movie will do - which as any moviegoer in the world knows - is difficult to predict till one has seen the movie. Analysts for these companies are really throwing random darts in the air - but then, so are the investors in these companies.