Taking Risk Off

Sep is here. The way Chinese markets are moving - it seems like bad news is going to come somewhere from there. And late Sep, early Oct - we will get concerns on holiday shopping sales in US. It is time to take risk off the table. If there is +10% move in the next 2 months, I don't mind not being a part of it.

I sold Nilkamal and Phoenix Mills last week after the stocks jumped 20%-30% within a couple of days I purchased them. Now it might turn out not to be the smartest thing that I have done if I am unable to re-enter at a lower price. But what is the harm in experimenting?

Disclosure: Positions might change at any time.

ET: Biscuit prices to rise by 10%

ET has an article today on biscuits. Note that Parle - the industry leader - is still not increasing prices. It is the second tier players that are increasing prices. This seems to be a replay of 2007 - when sugar and wheat prices spiraled up - and Britannia's margins halved in a year. You are in a bad industry if the industry leader is not driven by the profit motive. I wouldn't be surprised if Britannia stock takes a heavy knock after next qtr numbers.

Lightning impact on economy

This is very interesting from today's WSJ (sub reqd):

New research even suggests that lightning's effect on technology can shape the course of regional economies. After analyzing lightning data for the lower 48 states, four economists from the University of Copenhagen found that those states more prone to lightning strikes tended to see worker productivity grow more slowly than in states with very little lightning.

This held true when the economists controlled for a range of other factors, including hurricane frequency, urban density and the education, age and racial characteristics of local populations.

The economists concluded that the use of computers and the Internet spread more quickly in areas less prone to lightning strikes, boosting worker output there. This lightning effect didn't exist prior to the 1990s, say researchers Thomas Andersen, Jeanet Bentzen, Carl-Johan Dalgaard and Pablo Selaya, when the advent of the Internet led to the rapid adoption of information technology in the U.S. and an accompanying surge in productivity.

Adani Power

Adani Power traded flat on listing. Good that I did not invest in it, and got the 10% return instead by playing Torrent Power as a tangential bet on Adani Power.

We need a few successful IPO's to get people really excited. Adani Power unfortunately was not it. And NHPC is also not going to be it. The IPO market might take a back seat for a few months if NHPC doesn't do well. At that time, broking stocks like Kotak might crack up a bit. And then there might be a flood of IPO's. If things play out that way, there might be an entry point into brokerage stocks sometime around Oct-Nov.

ET reports that IPO financing is picking up again. NBFC's have raised almost 10K crore for it. Good for Crisil and ICRA. They need NBFC's.

Also, by the way, it has started raining again - at least in Mumbai. A couple of days it rains more like this, an article here and there that monsoons have picked up, and agri commodities (sugar) cool down a bit. I might get to re-enter Dhampur at lower levels. Nothing ever goes up in a straight line forever - though the stock markets are doing that right now.

Nilkamal Limited

Recently bought some of this stock. This company has 3 key businesses, from the company website here,

• Material handling crates, containers and bins. One will find Nilkamal plastic crates in vegetable markets, dustbins in cities etc
  
• Plastic Moulded furniture - chairs, tables etc. This is where the company started from. At a lot of weddings in India, one will notice that plastic chairs are Nilkamal.
  
• @Home - Home Store retail chain.

The company was initially into moulded plastic items. About 2-3 years back, it started this furniture retail chain called @Home. I have been to a couple of its stores, and my perception is that is amongst the better ones in India. They have put some thought in how the store is laid out. That doesn't mean it will succeed - furniture retailing is a very difficult biz. But there is an option value.

The retail chain is making losses. The moulded plastic items business is very profitable, and the company has done very well over the past decade to become a market leader. On a consolidated basis, the company is trading in mid single-digit PEs. If one does a SOTP and values the plastic biz and @Home separately, then the plastic biz is trading at low single digit PE. It is a levered company - market cap of 130 crore, debt of around 300 crore. Levered companies benefit when interest rates go low - as is the situation today - due to lower interest expense. The potential appreciation in a leveraged company's stock is higher than in an unleveraged one (so are the losses). On an asset value basis, the stock can easily be a double.

Risk with this stock is - it is a small cap. If markets start falling, these stocks just do not find any buyers.

Disclosure: Own Nilkamal. Positions might change at any time.

Phoenix Mills

I recently bought Phoenix Mills - a real estate company. Phoenix mill mall in Lower Parel is the biggest mall in Mumbai south of Bandra, and is becoming even bigger as new commercial space gets ready for occupancy over next 2 years. The value of just this mall is probably more than the market value of the entire company today - depending on the cap rate used. About 250 crore annual rent from the mall when completely developed in FY11, while the current market cap of the entire company is 1900 crore. Company has very little debt - though one can always doubt the veracity of a real estate management team in India. Considering the way the population of Mumbai is growing, and the time it takes to develop a mall here, I think it is a very long time before any serious competition to this mall emerges in the location where it operates.

So the other malls and hotels that Phoenix mill is developing and has already sunk capital into (including the other one in Kurla in Mumbai) are not being ascribed much value right now.

I like this statement by Atul Ruia (director of Phoenix Mills) in this interview with Mint earlier this year: "You raise capital in good times and build in the bad". Phoenix mills raised 980 crore through a QIP in Aug 2007. It is one of the few developers that hasn't yet diluted shareholders this year after stock fell 80% from their peak - unlike a DLF or Unitech.

The risk with this stock is - it is a real estate stock. In any market correction, real estate will fall the hardest, and this stock will fall accordingly. I have bought it with an intention of not looking at it till 2011.

Disclosure: Long Phoenix Mills

Dhampur Sugar

Sold out Dhampur today when it siked up. Last week I thought I will keep it. But it has already done so well compared to its peers as well as the broader market (it was up today when its peers were down 5% !!) that it makes sense to take money out. Shanghai is down 6% right now - that makes it down 15% in last 2 weeks.

Sugar stocks are favourites of the speculative crowd. So even if earnings are quadrupling next year, it wouldn't matter if people decide to rush to the exits en masse. But still, I think Dhampur hits 150 next year. So hopefully it falls some and a bit more.

Dhampur: Mkt Cap = 450 crore. Debt = 900 crore. EV= 1350 crore. Sep 09 EBITDA = 200 crore. EV/EBITDA = 7x. Debt/Mkt Cap = 2x

Shree Renuka Sugars: Mkt Cap = 4700 crore. Debt = 800 crore. EV= 5500 crore. Sep 09 EBITDA = 500 crore. EV/EBITDA = 11x. Debt/Mkt Cap < 0.2x

Balrampur Chini: Mkt Cap = 2900 crore. Debt = 800 crore. EV= 3700 crore. Sep 09 EBITDA = 375 crore. EV/EBITDA = 10x. Debt/Mkt Cap < 0.3x.

The EBITDA numbers are all approx. Still, the broad argument is - sugar is in a bull market. Dhampur is the most levered. So if these stocks go up - Dhampur will benefit the most. If one makes the argument that Dhampur is cheaper on EV/EBITDA and the gap should narrow, then we get a multi-bagger.

Disclosure: No position, positions might change at any time

Sugar, Inflation

WSJ has an article on spiralling sugar prices today - seems like there is a production drop expected in US too next year.

There is an inflation conundrum in the world today. Pessimists are wondering - how long is it before all the money printing causes prices to explode exponentially. Optimists point out to the excess production capacity in the world and are more worried about deflation. It seems for now that the optimists have the upper hand.

However, the argument of excess capacity is not true across all sectors, industries and countries. Right now in sugar, expected demand is exceeding excess supply. And it is probably in sectors like these that we will see significant price spikes caused by low interest rates and excess liquidity - much more beyond the 94% that sugar has gone up YTD. In other words, we will see very high inflation in areas where demand exceeds supply, and low inflation/deflation in sectors where supply exceeds demand - which is true for the majority of global economy. For commodities like sugar which are traded on exchanges, it is that much more easier for speculators to pile on.

This argument can be presented in another way too. If in commodities where there is a shortage don't see 2x-4x price spikes in record low interest rate environment, then the optimists on inflation are probably right - how will we get price increase in other areas with excess capacity? So more than anything else, I think sugar is a very important case study.

Disclosure: Long Dhampur Sugar

GSK Consumer, FMCG, Sugar, Tech

Got out of GSK Consumer, got some more into sugar (Dhampur). GSK at 20x can go to a Colgate at 25x, but 25x can also come down to 20x. Arguing that a stock at 20x becomes 25x is basically a play on momentum, and right now FMCG stocks in India have lost that momentum.

Monsoons are a big issue. Between 2002 and 2004, FMCG growth flattened out as monsoons failed successively. While we are far away from that possibility this time, markets will no longer price these stocks to perfection as it has been doing of late. For food companies (esp. Britannia, whose biggest competitor Parle hasn't raised prices in years) it is a double whammy - growth might slow while raw material costs (esp sugar) go up.

I have traded in and out of sugar over the past few months, this time I will let this one run. My thesis is - all sugar stocks are going to get priced at peak multiples on peak earnings in the next 6-9 months. I did some work on the Indian sugar companies two years back, and from what I recall Dhampur is the most levered on debt/market cap basis. Right now, Dhampur is not more than 8x '10EPS - some will argue it is at 4x-5x '10 EPS. So, there is a potential double here after the double that has already happened.

What I am not sure of is - is it Indian sugar companies or Brazilian sugar companies (Cosan) that benefit the most. The deficit is in India - so the exporters to India (Brazil) should benefit more. That is something we will figure out only as time passes.

If Indian FMCG stocks lose their safe haven status, where will the long-only funds park their money if markets tank? Last year, FMCG stocks had negative beta for a time with the Sensex. My suspicion is - this time it might be tech (Infosys). Again that is something we will figure out only as time passes.

Also got out of Torrent Power when it spiked today. This was an indirect play on Adani Power IPO. This company doesn't talk to investors at all, and its financials look suspiciously clean for a power company that is on a capex spree. Maybe it runs up another 20% if Adani Power opens up with a bang. But the way Adani Enterprises has traded in past 2 weeks, I am not that sure.

NHPC IPO

I am unable to understand the logic of the pricing of NHPC. It is planning to raise close to $1bn from the markets soon. 30x PE, 2x P/B for a govt run 6% ROE company is crazy - one might be better off in 2018 putting money in RPower at Jan 2008 valuations rather than putting money in NHPC at Aug 09 valuations.

I had first looked at this company in May 2007 - the last time it filed its DRHP in anticipation of an IPO. At that time, I thought this company would be a great short if it ever got listed, and I continue to believe so. Shorting this and going long NTPC (govt owned thermal power company) will likely make a lot of money if held over a long period of time.

The company's ROI is close to 5%, and it appears to have always been below 5%. The company survives on generous equity infusions by the government each year. What it means is that over the long run, the company will repeatedly dilute its equity holders to fund future mega-projects. The government of India has really sent taxpayer's money down the drain with this company.

Now the bulls might argue that the company has always been on a capex spree as it was developing new projects, so its important to ex Capital work in progress (CWIP) from the asset base to calculate ROI, as the CWIP doesn't generate earnings. But we can argue the same for NTPC. Like for like ROI for NHPC is substantially lower.

Developing a hydro project takes more time than thermal, so NTPC's capacity growth should be higher than NHPC. So not only will NTPC grow faster, but because of its higher ROI, it will need to dilute lesser to fund its growth. If the market gives NHPC a nice pop on the opening day so that its P/B discount to NTPC narrows, it might be a great time to put on the trade.

What I am not sure is of the funding cost of this trade. And whether one can really put on this trade considering the only way to short in India is through futures.

US markets rally, and so does dollar

Something different happened on Friday - dollar turned up even as markets rallied. For a long time now, markets and dollar were moving in the opposite direction. Last year, dollar went through the roof as the financial crises intensified. So this is probably significant if it is a break in a pattern, and is worth keeping a close eye on. Somewhere in the interest rate market (10Y approaches 4% - it is at 3.85% now) or the currency market will emerge the first signs of trouble. Dollar strength could signal US markets outperform emerging markets in dollar terms, especially commodity driven emerging markets as commodities are inversely related to dollar.

GSK Consumer

There was a good article on GSK Consumer two weeks back in Business Standard. 70% share in milk beverages market (50% Horlicks and 20% Boost) makes it a more dominant player in its category than even Colgate is in its category.

June qtr results were quite good for GSK, like for all other FMCG companies. GSK is at 20x and I have been thinking whether it is time to exit. The only reason not to sell is - Nestle, Colgate, HUVR are all trading in high 20x - low 30x. Even the mid-cap Indian FMCG companies like Godrej are now trading at 23x. GSK is one of the cheaper FMCG stocks around!!

Colgate has had the best growth numbers over last 3 years. GSK and Nestle growth has not been dramatically different over the past 3 years. Nestle has been trading at 25x levels for past 3 years. Is it very unreasonable to bet that GSK moves higher from here?

I am getting tempted to take money out of FMCG stocks and move into media stocks. I doubt there are positive earnings surprises left in FMCG, but it is possible that ad inflation pick up in India again later this year. India is a consumption growth story.

Cognizant vs Infy

Cognizant's reported very good results today. Seq revenue growth rate of 4%. Guidance of $800 mn rev for 3Q, implying a 3% seq rev growth rate. Infy on the other hand, had flat seq rev growth in June-09 qtr, and is guiding to flat rev growth seq for the Sep qtr.

This is why I went long CTSH, short Infy in early June - CTSH has a better growth profile than Infy. CTSH used to trade at a wide premium to Infy till a year ago - right now Infy trades at a premium to CTSH. Since I initiated the long-short, Infy's premium has grown a bit. As I had mentioned then, we will need at least two quarterly reports out of CTSH for markets to realize its superior growth profile. We got one today.

Shriram Transport Finance NCD Issue

This is a good issue. At 11% yield, spread is quite high over bank fixed deposits (7%-7.5% today) or G-secs for the premier commercial vehicle finance company in India. These NCD's will be listed on NSE, so it is possible to exit them at any time - no need to hold them till maturity.

There are 5 kind of NCD's. Option III is effectively a zero coupon bond, which would have the max capital appreciation if yields were to compress. I have applied for this one. Issue is open till 15th August.