Saturday, March 30, 2013


A tweeter alerted me to this. Samruddha Jeevan. Has all the hallmarks of being a ponzi scheme. Do check it out and be cautious. Check out this webpage: Obviously a company that seems to be soliciting funds under different heads, with no details about numbers or economics but with a lot of beating round the bush. One sentence in the page makes me very very suspicious== Reads as: :”In some plans customers are provided with Banker's post dated cheques.” The whole page smells suspicious. Oblique references to begging for money, but no direct statement. Something is terribly wrong here. The business is described as : Agriculture, Sales/ Purchase of Goat & Buffalo, Milk products, Vermiculture, Bio-fertilizer, Bio-gas plant and other agricultural business. The future plans of the company is to come into Real Estate, Windmill and Insurance sector. Caution advised. Regulator will not do anything. See the ‘why join us” section.

Friday, March 29, 2013

From Savings to Investment- Financial Literacy

MONEY MATTERS- THE FIRST STEPS Managing money has been made in to a very complicated business. None of us seem to be able to agree upon either the path or even agree on common definitions. Words like savings and investments are used interchangeably and at the end of it all, the lay person is confused about the whole thing. Planning money for future has assumed greater importance with the breaking down of the joint family system. In the joint family system, one did not have to worry about life after employment. Today, with the families going nuclear (remarkable, that the word can be jumbled up to read as ‘unclear’) it is each one for oneself. Emotionally it may sound disturbing, but India is surely going the western way. Children want to migrate. Once having gone there, those who have spent formative years in India, wish to return at some point. Those who are born abroad and study out there, have no intention of even visiting India, forget relocation. With all this, the pressure on current earnings to provide for oneself and for one’s children becomes intense. Too many demands on current earnings do leave us without a sense of being in control and we tend to take hasty decisions. I would say that ‘savings’ are the amounts needed to meet fixed or known outgoings that are committed and deemed to be essential (as opposed to desirable. A car may be essential, but a Porsche is not). For these, we put aside money that we cannot afford to take risks with. I would call them as ‘savings’. Savings is money kept aside for spending at a later date. Typically savings are needed to meet inescapable milestones. So we cannot afford to risk our “principal’ amount. Savings can be put in to some form of interest bearing investment only. Whether it is a Liquid Fund of a mutual fund or a debenture or a PPF a/c depends on when one needs it and the tax situation. Unfortunately, savings have a tendency to give returns below inflation, unless one can avoid or minimise the tax outgo on that. Typically, we have to use a combination of ‘savings’ and borrowings (housing loans, vehicle loans, education loans) to meet most of our ‘needs’. As a rule, what amount is needed as ‘savings’ should never be put at risk. This money should not be in equities or real estate or commodities, since they suffer from problems of liquidity as well as market uncertainties. Even mutual funds that invest in equities are subject to the same vagaries. The key thing in savings is that you work on the power of compounding. At an eight percent annual return, your money doubles every nine years. If the economy does not get in to a hyper inflation, this rate might just about beat inflation. Once you fulfil all your basic needs, you can afford to take some chances. Some equity, some real estate or commodities can be considered. We are now entering the ‘investment’ zone. The key about an investment is that you cannot plan an exit in terms of value and time. You can fix one but not the other. Whilst your time objective is easily attained, it is possible that the value objective is never achieved. You principal can be at hundred percent risk. In logical order, my first building block would be the Public Provident Fund. This I would keep towards my retirement corpus. If I start off at age 25 and can invest a lakh every year, by the time I am sixty, the amount accumulated would be Rs.186 lakh!! The key is to start early. The more you delay, the worse off you are. For instance, starting five years late, would end up in your corpus at the age of sixty being just Rs.122 lakh. A five year delay has meant a Rs.64 lakh difference!! In addition to PPF, you may have your company provident fund / pension fund. This should form your first and most important building block in your financial planning. PPF is tax free. In fact, one of the best things you could do for your child is to have a PPF account opened for her/him at the first possible opportunity. Start with savings and graduate towards investment. That will leave you without stress about money. The main thing is to understand what each type of investment can do and how to use it effectively so that we can maximise our options, without too much risk. Of course, I am not talking to those who have all bases covered and simply need to dabble in money for the sake of it. For them, the prescriptions do not matter. In the next part, I will navigate through the various investment vehicles as we progress through life.

Sunday, March 24, 2013

Review- Patriots & Partisans- Ramachandra Guha

This review appears in the latest issue of BusinessWorld. Name: Patriots & Partisans Author: Ramachandra Guha Publisher: Penguin (Allen Lane) Price: Rs.699 Anatomical pieces on India Ramchandra Guha is a writer of amazing breadth and depth. He is much more than a pure historian. He writes not just with the eyes and the mind, but also with his heart. This book is a collection of various essays that appeared in several publications. The book is divided in to two parts- The first part deals with India- its problems and a brief capsule of the leaders who brought us out of English rule to self governance. Thanks to the overbearing media noise, today, we are eager and ready to pass judgement on so many things, without understanding the context, the background and the history. This collection of essays helps put in perspective many of the complexities facing India today. Whether it is one of political divergence, family domination in politics or divisive fundamentalism- there is a tale to it. Someone somewhere needs a reason to dominate or lead and a whole new ‘cause’ is born. History is important so that we understand the context and then form or express our opinions. I would urge everyone who is interested in politics and general issues facing the nation to read this book. Taking sides without knowing the facts is what many of us tend to do, when it comes to political matters. We hardly know the full history. This book is sure to help bring a proper perspective to a lot of things bothering us at this time. Whether it is the Nagaland problem, the China issue, the Nehru dynasty or the language issues, the essays give a good perspective. That he is a historian with a mind and a heart is very clear. Ramchandra Guha makes no bones about his lines of thinking and is not afraid to take sides. Each essay on a subject is complete with the events and the history that gives you the freedom to differ on the views of the writer. This is also a reflection of the writing style and the honesty of the writer. He does give his view, but leaves you free to form your own view. If you have not bothered to read up on Indian history post independence, this book is a must read. It gives you a snapshot of the birth, the growth and the problems that India is facing today. Maybe it will also help you get rid a proper picture of leaders from the pages of Indian independence. The author clearly shows his liking for Pandit Nehru. Thanks to the behaviour of the later generations of the family, the Nehru brand has taken a beating. The writer tries to give a full snapshot of Nehru, warts and all. At the end of it, whilst your opinion about the later generations will not change, you might take a more sympathetic view of Nehru. Since the book is a collection of previously published ‘essays’, this book will not count as ‘history’. However, the title “patriots and partisans” is the binding glue for the essays in the first part, that runs roughly two thirds of the volume. The title is relevant because patriotism without partisan behaviour seems to be one thread before independence and post independence, patriotism in India has been diluted by partisan attitudes- language, religion or economic principles. The title also signifies why India will never find peace. Partisan attitudes cannot jell with patriotism, especially in a country divided by languages, religion and economic disparities. The second part of the book is a collection of six random topics. One of them talks about the closing of the Bangalore book shop (Premier), one about the family interference in the Jawaharlal Nehru Memorial Museum & Library, one about writers in more than one language etc. There are no unifying threads here, but you could dip in to it anywhere you like. If you are one of those who went to college in the seventies, perhaps you will identify with four out of the six essays in the second part. If you do not have the patience or the inclination to go through lengthy history books on India of recent vintage, this book is recommended. Today’s history is going to be a collection of what the media thinks it wants to create. A 50,000 crowd can be hyped up as a ‘national’ event by today’s media. And you have the internet and social media to balance it out. I recommend this book for those who have an interest in present day politics, but do not have the knowledge of the past.

Thursday, March 21, 2013


When we invest in stocks, we are betting on the premise that we will be able to sell it to someone else at a price. This is the liquidity that stock exchanges provide. We make many assumptions in arriving at what price we are willing to pay. All of these basically boil down to what money (earnings) the company will make from its business. The other big investor (the promoter) also theoretically gets the same benefits, apart from other non financial benefits that may come his way. I am not talking about any money he may make other than the legitimate dividends and the management compensation he gets. His wealth is represented by his share in the market capitalization of the company. For the promoter, the company is a real asset and he is at full liberty to deal with the profits of the company. He can pay dividends, buy assets or simply keep cash. He can use funds from one company to promote another. In short, he is the absolute master of all the assets of the company. He has a high level of motivation in keeping the company as profitable as he can. The promoter also wants to own as much of the company as he can and he also has the freedom to take the company private by buying out all the shareholders. Other investors have the confidence that whatever happens to the shares held by the owner, the same fate awaits them. The promoter, within the framework of law, is the absolute master of the company. I wonder whether this premise can be applied to someone who sets up a commercial bank. A bank is not at all like other industries in respect of ownership. In fact, being an owner of a bank is very demanding and legally complex. Firstly, the Central Bank (RBI) puts a limit on the ownership in a Bank. The main promoter cannot have a clear majority. The day to day functioning, the deployment of the bank’s assets etc all are subjected to guidelines laid down by law. If the promoter has other industries, a bank owned by him cannot lend monies to it. The profits that a bank makes cannot be disposed at will. Dividend payments have to be approved by the regulator. The regulations cover virtually every aspect, including the remuneration that a CEO can draw. The promoter cannot use the bank’s money to do any single act that is not permitted by the regulator. And there are not many things that are permitted. A bank cannot promote a company n another industry. A banker cannot promote a car manufacturing business. Of course, instances abound of shady promoters who have bent the law to have higher ownership apart from diverting loans to friends and family. But these cannot be a goal on which one would like to buy shares in a bank as an investor. And of course, we have businessmen who have ‘used’ a bank to push business in other financial services like mutual funds, stock broking or wealth management. They have used banking clout to build and strengthen other businesses. However, in this, the bank shareholders may not be participants. To my mind, a bank is very much like a mutual fund. A mutual fund invests in shares and bonds of different companies and the unit value is computed every day. No one will ever pay a ‘premium’ to the NAV of a mutual fund. If I extend the same logic, a bank takes money from various people and lends it to different people for a fixed return. There is no upside on what it lends. If it lends a rupee, it will not get back anything more than a rupee. The book value of the share of a bank represents the value of all its assets (loans) less its liabilities (deposits, borrowings etc). The only difference between the mutual fund and the bank is the fact that a bank has ‘capital’ that is provided by the shareholders. In a mutual fund, there is no such thing. The argument is that a bank’s profits grow. So does the NAV of a mutual fund (the debt part surely). A bank has to provide for assets that are stressed. A mutual fund NAV rises or dips as per the market prices. So, if we are paying three times or five times the book value of a share of a bank, is it solely on account of the incremental profits that we expect the bank to show? And these profits are not available for disposal, except in liquidation. No bank will voluntarily liquidate when the going is good. When it liquidates, it is generally because it has blown away all the money in poor lending. An owner of any business can sell off the business to anyone at any point in time. A bank cannot do that. It can at best merge or sell itself to another bank. Again, we come to who can take the call. Typically, someone with no personal stake in the bank will take the call if it is ‘professionally’ managed or a PSU. Or someone who takes a decision would have reasons beyond the balance sheet to make the corporate event happen. All in all, buying or selling a bank is a cumbersome process and not very exciting. So why do we buy bank shares? And why do we pay so much?

Monday, March 11, 2013

Bartronics- Will co file for winding up??

What I had written about a company called Bartronics, in Oct 2007 in Moneylife: Today there is 'speculation' about co winding up.... Surprising the co stayed on for six years!! Numbers Game 0 Comments, Be the first to comment+ COMMENT 25/10/2007 12:00 AM | In a bull market nobody reads annual reports. If you do, you can come up with interesting stuff. Look at some details of a hot stock Bartronics In today’s world, it does not pay to read the balance sheets of companies. If you have that bad habit, you will not make money in the market. That was the quick lesson that came home to me very recently. I met someone who had purchased shares of a company called Bartronics India Ltd. and had received its annual report. Of course, he did not know anything about the company, except that he had made good money in a short time after buying the shares. Since he did not have any use for the balance sheet, I took it away for reading. I have great faith in annual reports and, to me, it is the first step to investing. It provides a window to the company. After some searching, I found that the company was in the business of providing “AIDC Solutions” and was expanding into a segment relating to “RFID solutions”. AIDC is not explained anywhere. Using the Internet, I found that essentially the company provides hardware/software solutions in the Automatic Identification and Data Capture domain. RFID uses electronic cards with data embedded in it. The company was now expanding into making “smart cards”. Further, I got information that the company has tied up 70% of its “smart card” manufacture with a global supplier. What I could gather was that the company was basically one of the many global players in the industry and had nothing unique to offer; its business can be replicated easily. Then, I started to go into the financials and this is where things got really scary. The company had gone on a capital-raising binge in the last year, through preferential offers to outsiders, warrants to promoters/ associates / others and some stock options to employees. However, at the end of the day, one does not know what the future capital is going to be. The annual report does not spell it out anywhere. As against the current capital of Rs17.82 crore, the fully diluted capital would stand at nearly Rs30 crore. The operational numbers are befuddling. Against total sales of around Rs64 crore in the full year, the year-end debtors stand at over Rs71 crore! And the balance sheet says that debtors’ outstanding for less than six months is Rs49 crore. Interestingly, by seeking its quarterly results for the full year, I find that in the last two quarters of the year, Bartronics had notched up sales of Rs35 crore. Against total sales of Rs35 crore in six months to March 07, the company’s debtors’ outstanding for less than six months is Rs49 crore. Funny arithmetic indeed! Apart from this, the company had nearly Rs17 crore of debtors, which it has classified as “other than own sales”. No explanations are available regarding who these debtors are. If the company indulges its customers with so much time for payment, the business cannot be great, was my thought. Further, the company seems to have slipped on its numbers somewhere, or presumed (maybe rightly so) that today’s investors do not read annual reports. I also found that suppliers to the company were also in no hurry to collect. Against full year purchases of Rs41 crore, the company was still to pay Rs29 crore at the end of the year. Bartronics proudly states that this is its 16th year of business. But I find that the cash flow of the company has been negative. I can also see no signs of any dividend payment which, to me, always looks fishy. For a reported profit of around Rs15 crore, the tax payout is just Rs90 lakh, which is another red flag. In one of the schedules where the company gives a break down of its turnover, etc., either the printer’s devil has got in or there is some other goof up. The break down of sales is not completely available. In the Directors’ Report, it is not clear at what price the warrants are issued. For instance, it says that it issued 4,630,000 convertible warrants of Rs10 each at a price of Rs1,210 per warrant. In the next para, it says that the aggregate amount of the issue is Rs6.02 crore. Try matching these figures. In another place, it talks about the same number of warrants at a price of Rs130 per warrant. You have to be either an insider or the company auditor to figure out what exactly has transpired. I do not know which equity research houses cover this stock. I am sure many do; among its last publicly reported list of shareholders, I see many FII’s holding a large number of shares. I am sure they have also read the annual report and hope that they have full answers to the questions that the annual report raises. Let me end by saying that I have no view about investing in shares of Bartronics. I am merely trying to put together some pieces from the published annual report. Maybe Bartronics is a great company, but after reading the annual report, it is hard to conclude this. This exercise illustrates that companies should make some effort in putting together their annual reports and answer as many questions as possible, without waiting for someone to ask. The annual report is not only a statutory document, but also an important communication to shareholders, existing as well as prospective. However, if my friend had read the annual report, he would have lost an opportunity to make easy money in this bull market! Against total sales of Rs35 crore in six months to March 07, the company’s debtors’ outstanding for less than six months is Rs49 crore. Funny arithmetic indeed!

The Mid Cap temptations...

TIME TO LOOK AT EQUITY? The budget has come and gone. It did not surprise anyone either way. On the positive side the budget has done enough to ensure that India is not downgraded by credit rating agencies in the near term. The fiscal deficit planned is a sign of fiscal consolidation and would have pleased the global investing communities. So it is back to basics. Investment should always be based on what we expect the investments to return and not on the basis of a budget action, unless it creates new breakthroughs which results in a paradigm shift for a sector or industry. The one significant impact of the budget is the change in the taxation on dividend distribution tax rates on mutual funds, which makes FMPs and Fixed Income investing under the ‘dividend’ option very unattractive. This effectively makes it more attractive to go in to ‘growth’ option of mutual funds rather than dividend option since the effective tax rate there would be lower. The move has been taken with a view to block the short term investments in liquid funds and FMPs through the dividend option with a view to reducing taxes. All of these make a good case for choosing equities as the asset class to create wealth and also protect wealth against inflation. Given the global economic weakness, a return to the days of high growth seems very distant. And virtually every stock market seems to have done extremely well in 2012, leaving little headroom for 2013. Our stock markets hit their past peak in 2008 when they traded at over twenty four times earnings. In relation to that, the index numbers are near that peak, but with valuations closer to seventeen times. This obviously is a result of some earnings growth. However, in four years, the earnings seem to have grown very modestly. Clearly, 2007-08 was a great year for corporate profits. The other point to note is that our markets are broken markets. Now they are predominantly driven by institutional investors, with the foreign ones dominating. Clearly, the smaller or the retail investor has either lost interest in the markets. As a result, we see a clear divide in the markets between large, medium and small companies. The institutional investors focus more on the large (let us say around 200 companies) and sometimes take a bite here and there from the medium (a universe of maybe another 200 companies). Outside of these 400 odd companies, the market is like an orphan. Promoters, speculators, operators and a few stray investors drive these stocks. Thus, our markets can see divergence that the index does not explain or disclose. We could have a rising index with mid cap stocks falling or vice versa. The recent couple of weeks have seen the mid cap stocks taking big hits. Clearly, the entire market (except for around fifty shares or so) is very illiquid. Small volumes are sufficient to drive prices either way. Also, the ‘impact’ costs of trading in these shares are very high. The difference between the prices one buys and the prices quoted on the screen vary when one actually buys or sells even small quantities. However, the silver lining for the investor is that times like these offer opportunities. In a general price correction, some would be with reason (failed expectations, doubts about promoters or some such factors) and some simply for the reason that there is not enough awareness. Also, when large investors want to play safe, the first exit often happens in mid cap stocks. At times like these, buying opportunities emerge. I am not advocating that one rushes in and buys every stock that has fallen. The important thing is to understand the business of the company and also some idea about the management. If both are satisfactory, there is an opportunity. One big caution though. Do not rush in to put all your money in the small cap or mid caps. Maybe twenty to thirty percent of one’s total exposure to equities could be in this bucket. Risks of further price correction, mistake in one’s judgement about a company cannot be ruled out. There are no guarantees. The only case for investing in these stocks is that some of these small and medium companies will go on to become large companies. Maybe just ten percent would succeed. So, there is a ninety percent chance that some of the small and medium companies would not make the grade. It is important that if one wishes to invest directly in to equities, a lot of time and effort is needed. Simply going by informal word of mouth recommendations is chancy. Take your time, make a list and buy gradually. And do not put everything in to one. Visualise the company’s future five or ten years down the road and see if their business can exist and grow. Understand trends. Do not buy if you cannot understand the business or cannot devote regular time. R. Balakrishnan