Friday, January 21, 2011

Retail tales

Read this story about the erstwhile UTI Ventures (now called Ascent Capital)'writing off' and investment in KOUTONS RETAIL.

In informal circles, Koutons was considered to be one of the better retail plays, much like Vishal Retail was talked of as a focused and aware player. Both have fallen. This is the third large failure. The first to fall was SUBHIKSHA which had some high profile investors.Of course, the TVS Group had given up this sector after a very early try in 1990 or so.
Organised retail chains find it difficult to battle the local stores, which have upgraded themselves, have low costs, low rents and labour costs that are half or less.
Of course, there are scalable models like Star Bazar (do not know about their profitability). Real estate is one business. Retailing is another. Understanding both is key.
Clearly, the dice is loaded against the retail sector from an investment perspective. The rents kill. On top of that, Vishal and Koutons also had to face the problem of having their own brand in ready to wear garments. This is a foolish business to get in to, since the inventory risks are very high, given that both the retail cos did not have any brand worth a recall.
I am also amazed at the venture capitalists who put in money.
Or, maybe, the promoters are laughing their way to the banks (swiss or not, it does not matter).
A clear message that retail focused on the Bottom of the Pyramid (India's pyramid bottom is ninety percent of the population) is a dicey call.

Tuesday, January 18, 2011


(This appeared in the recent issue of MoneyLife)

The sun shone, having no alternative, on the nothing new. —Samuel Beckett, Murphy (1938)

By the time you read this, you may have read umpteen articles on ‘where to invest in 2011”. Of course, each one is a forward looking piece and the equity markets could promise anything from a modest fifteen percent return (for the year) to usual homilies like “equities are best for the long term “. None of us bother to read what we read last year this time and how much of the oracles’ prophecies came true. I am also guilty of indulging in star gazing and it is fun to carve out a slice in time and predict what the markets will do. There is a fifty percent probability that we are right. Of course, where we can all go horribly wrong is in our picking of stocks, sectors etc.,
The best way is not to look at the change in the calendar as anything spectacular. In the life of a company, dates come and go. If a company is doing well, its earnings grow and shareholders remain happy.
As we step in to 2011, we are more informed. We now know that our country is amongst the most corrupt nations in the world. No party is free of guilt, with each one having abused power for personal gains. The most dirt can be found where there is a ‘discretion’ given (often, taken) by an individual for dispensing favours. Corporate India is perhaps the source of all guilt. From the days of licensing to using corporate riches for personal gains, Corporate India has been treated like a punching bag by the captains of industry. I think in case of corporate and political India, it is safe to assume “Guilty until proven innocent”.
Domestic economy is on a tear so far as prices and demand goes. The key question is whether the rising prices will impact demand? Supply bottlenecks will take time to get resolved. Investments in infrastructure are happening, but at a pace that is snail like. The government is using capital receipts (sale of shares, sale of licenses etc) to fill revenue deficits, which is a disastrous thing. The current account deficit (imports minus exports) is running at nearly six billion dollars every month! This gap is getting narrowed by capital market inflows. Again, a structurally weak filler.
Domestic inflation, driven by high demand, slow catch up of supply is also driving the rupee down. 2011 is ominous. If the global economy recovers, India will face a problem of high prices in crude and commodities. This will weaken our rupee further. Global protectionism will also contract the margins of export oriented service industries.
So, the investment theme does not change at all, as far as I am concerned. Let us continue to do what we do, with more focus. Look out for value to preserve our wealth and look for growth to place our bets on higher return opportunities.
If the global economy is going to recover, I will perhaps make one big change in my investment strategy. I will look for some India based multi nationals that have made a base in India for some global products. And another thing to evaluate is whether one should invest in equities overseas. Of course, most of the global markets are at two year highs, but then the pump priming which the world has done, has resulted in almost all the money coming to the equity markets. Entities like Citibank have used the hiatus to revamp business, write down old sins and planning a return to old times. So, global stocks may actually head much higher if the world recovers. Maybe some of it is in the price already. Global interest rates are still soft and till consumer confidence (which is abysmally low worldwide and pump primed by monopoly money) is back, we cannot call it a recovery.
Yes, we will be closer to another election. Politics is getting murky day by day and with all parties being of the same shade, there is unlikely to be any difference irrespective of which one is in power. What is sad is that each political party is busy throwing apparent ‘freebies’ at the populace and in the process destroying the fiscal discipline for good. The combined fiscal deficit of the states and the centre is in double digits. And it is very likely that we may see one more state added to the Indian map by creating more division. All this will shift focus from growth and development. 2010 was the year of scandals and 2011 will be spent in cursing politicians and fixers. In all this hue and cry, companies will continue to make money. Inflation will be a constant worry. Hopefully, business will not be throttled by regulatory seizure.


(This appeared in the recent issue of MoneyLife)

My mutual fund distributor friend is very disturbed. He has carefully nurtured clients who are regular investors in to mutual funds. My friend has an insurance distribution business, but does not sell insurance investment products. Of late, he is extremely upset.
What is happening is that his customers are being poached by the insurance agents. The clients used to regularly invest moneys in Fixed Maturity Plans of mutual funds. Now, a few of them have used the money meant for that, to invest into ‘Single Premium” insurance (investment) product, which has a ‘guaranteed’ return. The effective returns work out to around four or five percent per annum! My friend tries to explain this to the clients, but in vain. The client has been bamboozled in to a five year insurance cover. The client has also not been told that there is a very high probability that any returns he gets from a single premium product would be subjected to income tax.
My friend explained the dynamics to me. Apparently, these single premium products are being sold by the come lately Certified Financial Planners masquerading as “Independent Financial Advisors”. The old insurance agents do not push this product since traditional ULIP’s give them a fatter income.
The insurance companies have been pushing their case with the IFA’s in the following manner:
“If you put the money in to mutual fund FMP’s your earnings are going to be not more than 0.40 percent per annum on the amount invested. And each year, you will have to live with the vagaries of the market, the customers’ preferences at varying point etc. Assuming you are able to convince the customer each year, you will make a total of two percent over five years. In other words, from a fifty lakh customer, you will make a lakh of rupees over five years. You have to live with the fund house performance, follow up each year and the other routine headaches.
Instead, you sell our single premium product. Firstly, there is a ‘guaranteed’ return. Your first effort is in convincing the client. Once you do that, look at what you make. You get a first year commission of around two to three percent and an annual commission of two percent. So, you make a total of at least twelve percent! In other words, you will make six lakh rupees! And once you have taken the cheque out of the customer, you can forget him. No servicing, no worrying about NAV, no after sales service. In fact, once he has given you the cheque, you do not even have to take his calls, unless he has more money to invest.
So now, you decide which you want to push.”
This argument is solid. The agent sees the light of the day. Where is a lakh of rupees as compared to ten or twelve lakh rupees?
Single premium products are absolutely useless. In the past, I remember having put money in to products like Bima Nivesh of LIC simply because it was a nine to ten percent post tax return. Now, unless the premium is not over twenty percent of amount insured, the tax man is going to chase you. And no one gives this out as a risk. All the agent says is ‘tax benefits” as per law. This is highly ambiguous and will easily fool someone. And insurance agents, being what they are, will shove in their body if you give them an inch.
If an IFA has to be a genuine one, there cannot be any product in insurance other than a Term Policy that will be sold. All the other products are investment products, which pick the pockets of an investor. And for Term policies, you get a fantastic price if you go online and take it directly, without an agent. Of course, the agent will scare you. He will say that in case of a claim, there will be no one to help you. Think. It is very likely that you may live longer than the agent. And in any case, after a few years, the agent vanishes. You have to, in any case, run to make the payment yourself. I had a running exchange of mails with Metlife telling them to send an agent to give service. I told them that I am unhappy with the agent and to stop paying his commission. No use. For them, the agent is God. The agent stopped servicing me inspite of reminders and requests. In spite of this, Metlife continues to pay commission (I presume) to the agent. In no other profession (maybe some government jobs are like this) can you earn without doing anything for it. What a shame!

Tuesday, January 4, 2011

Fixing share prices- Mumbai Ishtyle

(This appeared in the recent issue of Moneylife)

In the recent fall in prices of small and mid cap stocks, we all have a big lesson to learn. A friend of mine sent me a list that had the names, prices etc of around 350 stocks that had touched their 52 week lows. I glanced through the list to see if there is anything interesting in them.
My first reaction was that this list had a major proportion of stocks that were ‘operated’. What are the typical characteristics? For one, they have limited retail interest. Less than fifty thousand shareholders are typical of most Indian companies. And average retail holding tends to be a hundred to five hundred shares. There is no reason for the stock to churn up large volumes on the bourses, unless there is a clear manipulative activity which gives an illusion of liquidity and also is part of a larger exercise by the promoters to rig the price. Why do the promoters rig prices? One reason is to keep trading and making money on the ‘unofficial’ promoter holdings. The other reason is to create an illusion of liquidity as well as pushing the prices higher, with a view to enable a ‘Qualified Institutional Placement’ with Institutional investors.
For most Indian companies with low market cap (say less than Rs.500 crore) there is hardly any institutional demand. And surely, the retail shareholders hardly trade their holding every day. Most retail investors tend to either hold on for long or sell on listing.
To create an illusion, the promoter approaches a few ‘operators’. Many times, some broking houses approach companies saying that they will ensure ‘interest’ in the company stock by writing research reports, road shows etc. Once all arrangements are in place, there are a few entities which will keep buying and selling the shares on a daily basis. Most of them will have a ‘Loan Against Shares’ facility from a NBFC. There can be up to twenty or more corporate entities involved in this activity. Essentially, circular trading happens in a way that it creates an impression of volumes as well as help to move the price up. A few stray retail investors participate. In a vicious market, they are like the victims of stray bullets!
The one classic symptom which most of these stocks displayed was their getting locked on the lower circuit for several days in a row. This can happen when the operator ceases his activity. The recent cessation was perhaps due to some of them getting scared of regulatory action or the NBFC’s pulling the plug. Regulators can easily catch these operators if they want to. The trail is open enough. The other sign is the percentage of ‘deliveries’ to the total traded volume. In these kinds of counters, it is rare that anyone other than an operator would indulge in ‘intra day’ activity. The first smell of suspicion is the breakdown of the volumes traded. The lower the delivery volumes in these small stocks, the greater are the probability of manipulative trading.
The other is to look at the pattern of ‘block’ trades. Most times, you will see names of a few investment companies repeating. If you track the data on a yearly basis, some names seem to be present in a group of stocks. Whilst it may not be conclusive evidence, it surely smells.
Look at the number of shareholders. Look at the institutional investors’ breadth. Domestic institutional investor presence is easily ‘bought’ by many promoters through brokers who ‘fix’ the fund managers. If you look at the list of investments of most domestic institutions, it would have such obscure companies, that you cannot but doubt the integrity of the institution.
So, what did the list tell me? Yes. If one wants to be focused on integrity and transparency, the universe of listed stock shrinks by as much as ninety to ninety five percent. The second thing is one has to keep track of operators if you want to get in to the second rung companies. In the small companies, the main issue is also that without an ‘operator’ it would be almost impossible to buy and sell shares.
I have gradually seen promoters using the operator route to make money on the side and when they are able to ramp up the prices to very high levels, even by their own yardsticks, they sell part of their holdings. Then over time, they bring the prices down and then use the QIP route to allot themselves warrants to shore up the holding.
So, if I have to take a chance, I will perhaps make a list of five or ten of these companies and place a few bets. These bets would hinge on whether and how soon the concerned promoters get back to action. Of course, you can exercise some extra checks by looking at numbers (often pointless because when the promoter can rig share prices, he can rig anything) and taking a view on whether the stock is such that sooner or later one can find an institutional buyer.
This is the cycle that most Indian stocks go through. Understand it and gain from it.