Eros International Media: Avoid this Seducing Vamp... UFO Moviez: Have faith in the Alien

Last day one reader put a query on Eros International Media and asked me to further my views as it was recommended at this blog also (Click here).

First of all i am really sorry for not posting an update on Eros after the news breakout of its doubtful accounting practices in its International parent Eros Plc as i exited from it around 200 (My avg was 140) soon after the news after some analysis. I sold some of my shares around 425 before the news breakout ( It touched 600 after that) as i was getting doubtful due to bad state of cash flows and no dividend policy in spite of showing huge profits year after year but still i tried to keep the faith thinking it is early time. But when the news came...i got the clue and sold my shares after some time.

It is having some real lousy accounting standards...all the profit is just on the surface. Its assets base has been increased to 1300 cr in 2016 from 500 cr in 2012 but its turnover is just at 1500 cr from 940 cr. It is showing 1300 cr under capital work in progress. Now i'll tell you the real mystery....Amortization.

Mortality of its accounting Treatment of Amortization

 Let me further explain to you...it has mostly films distribution rights and movie produced by it as its assets. So when it is buying the movie rights and producing the movie…all the related costs are capitalized and after movie is released the costs are amortized over the LIFE PERIOD of Movie...and it just used this to its benefit to show higher profits yet it never paid any dividends. I always take dividend policy as the first management test. As per FASB/USA, ASC 926 requires that film costs be amortized under the individual film forecast method using the ratio of current period revenue to expected unrecognized ultimate revenue at the beginning of the year. Although Revenue streams are a subjective phenomenon but subjectivity scope is not that high with regard to the timing/period of the revenue and one has to follow the industry practices at the end of the day. So in Hollywood, as per industry practices by major studios like Disney, Dreamworks, MGM, they amortize around 50% of costs in first year of release and then up to some 90% by third year...very logical. But let me tell you, in Piracy full country like India the value of movie should be amortized even faster and Eros flops here. I even feel that for flop movies much shorter time period should be used....i am not sure about the standards of neither Hollywood nor Bollywood here. But in my view, flop films should be written down to fair market value instead of expected net realizable value. I am pasting below the amortization policy of Eros from their latest annual report (2015-16):

(d) Intangible assets and amortisation Investment in film and associated rights are recorded at their acquisition costs less accumulated amortisation and impairment losses, if any. Cost includes acquisition\and production cost, direct overhead cost, capitalized foreign currency exchange differences and capitalized interest. When ready for exploitation, advances granted to secure rights are transferred to film rights. These rights are amortised over the estimated useful lives, writing off more in year one which recognises initial income flows and then the balance over a period of up to nine years, or the remaining life of the content rights, whichever is less.

You can see that they are using 9 years to amortize dumb (Sorry! But most are) Indian Movies. So if in a year they are showing 100 cr as amortization cost the same cost as per more reliable accounting will be around 300 cr (I am leaving first year movies). You can see here that all the profit is just a melodrama…just like a Vamp seducing our Hero. Also, most of the Hollywood studios revise their expected revenues from a movie time to time in line with the economic realities. They provide a detail of all the movies in their portfolio (finished, under progress) and their expected revenue and life span. All these details are missing from the Annual report of Eros International.

When I first bought it in 2013…I didn’t do that much study…I just bought it as I want to buy something related to Indian movie business which I think will see high growth with huge demand for content post digital dawn. So it was the first choice...but i left the management part due to its name. But i was surprised due to no dividend policy and cash flows as higher and higher amount was getting blocked in Assets...i am sure most of these assets were created with related party transactions. So promoters got the dividends from related party transactions.

They have big related party transactions. Now I am coming to their international movie business. They are selling International movie rights of Hindi movies to its holding company at very low prices. Their International parent EROS Plc pays them the 30% of the cost of Movie right/Production and gets the international rights (so cheap). But Eros International gets to share just 30% of profits only after EROS PLC recovers its cost (30%) first!!! Analysts say that this is safe model for Eros Inter...but they are fooling us as we can see safety is with EROS PLC. Like for a 100 cr movie, Eros International spends 70 cr and EROS PLC 30 cr. So if EROS PLC earns 70 cr from global markets then Eros International will get 30% of 40 cr ( 70-30) i.e 12 cr as its share of revenues. However global market is a huge growing market for Indian movies...and selling movies this cheap (Eros Plc has revenues of around 2000 cr; higher than indian arm!!!) just shows the cheapness of Promoters to grow at the cost of shareholders.

So don’t book any ticket here. There is no merit in taking chances with doubtful promoters. So if you are already having it then just sell it and buy UFO Moviez.

UFO Moviez (CMP 455): UFO Moviez was recommended around 550 at this blog (Click here). I have used the recent fall to 400/- to buy major quantity. Results for this quarter can be bad due to demonetization…although I feel at 455/- the negative is already prized.

Apart from Digital cinema distributorship and exhibition business; it is venturing into new territories to be more relevant and diverse.

Caravan Talkies: It has carved out “Caravan Talkies” to provide movie screening in the media dark hinterlands of India free of cost through Vans. The revenues are earned through advertisements. Just imagine the scale of advertisement revenues from captive audiences. Rural India is always a challenge for advertisers due to lower penetration of digital TV and radio. UFO can use its huge client list of around 2500 advertisers (up from 500 in 2013) to use Caravan Talkies for their advertisements in rural India. Rural India is the next big consumption story which nobody can afford to lose.

Nova Cinema: It has just launched its new business under Nova cinemas which is a franchisee based digitized single screens cinemas targeted at small cities...a natural expansion from its movie distribution business. Under this initiative, UFO will provide support in converting the analogues single screens in small cities into top class digital theatre equipped with best in class technology from UFO. But costs related to setting up of theatre and day to day expenditure will be borne by the owner. Multiplexes with huge overheads and big capacities can't survive in small cities. Small digital cinemas with one or two screens are the way to go. UFO is early into the game. Opened one in Moga, Punjab. Distributors don’t feel comfortable in licensing the newly launched movies to these small analogues screens due to piracy issues. But the UFO brand and top class provides the high level of credibility. Advertisers can monitor the use of advertising from their consoles.

 India has just one screen per 1 lakh residents, while USA has 1 for 7800 and China has one for 40000. So movies (made at hefty costs) do not reach the maximum possible scale resulting in revenue loss to all the stakeholders including Government. Moreover number of Indians in big cities watching movies are falling consistently; from 8.2 cr to 7.8 cr. This, I feel, is due to other entertainment options available with urban customers. I also feel that high food/beverage costs in multiplexes are a big deterrent…and watching movie with empty stomach significantly reduce the experience. This has resulted into low occupancy levels of just 30% in Indian Multiplexes!! So multiplexes need to grow these numbers before they invest further in small cities. Multiplexes (90%) are opened in Malls due to costly real estate in cities. Multiplexes has high technology costs as compared to in-house technology of UFO limiting their capacity to offer lower ticket prices without food and beverages as in small cities F&B revenues are very low. With all these high overheads, multiplexes gain in metros due to showing of a number of films at same time with common fixed overheads leading to better margins. Indian movie industry is regional as in place of one language movies are made in around 15-20 language leading to very high marketing and distribution costs and so lower profits. So addition of more cinemas into the engine is the best preferred mode of action and Nova will do just that. 

Also, at present Movies pay both the taxes; service tax and high entertainment tax. So our top class public servants with high level of intellect need to use high end of their brains to understand either something is a service (due to necessity) or a frivolous/luxury activity. But I can understand their mental block as they have been shown Cane crushing machine as brand image of taxation departments in their training days, so they see common man as cane. I hope GST will change this and technology enablers like UFO will see an increase in their margins as they’ll be able to claim input for CST/VAT paid on equipment purchase which under current regime is not available to them (Will explain Input and GST to non financial background people in some other post). I haven’t made a calculation for this but this should be good.

So Nova cinema can be a great addition to the UFO portfolio.

It also has other initiatives, Club cinema and UFO framez. Club cinema deals in screening of newly launched movies to premium clients in their place/Home theatre/Clubs. This can be a good vertical catering to niche portion of population. UFO framez is a hyper local advertising platform enabling local small city businessmen to use UFO platform to advertise on UFO enabled digital cinemas. This is just in the starting phase…so will explain these better in some other time.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

BSE IPO: Avoid counting Fruits as Seed is becoming a Tree

BSE has become the world’s fastest Stock Exchange with an order response time of 6 microseconds and the largest exchange in the world in terms of number of companies listed. It is the first Asian Stock exchange dating back to 1875. These are the things which shouldn’t be ignored especially when we are talking about an Indian Stock Exchange as we Indians just invest around 3-4% of our financial savings in equities as compared to 15% in China and 40% in USA. Most other developed/developing countries have ratios in the range of 10-15%. We never realized the potential of equity markets. I remember one fine day when I visited one of my friend and one Insurance adviser was trying to sell him a very high valued Insurance policy. My friend introduced me as a share market investor. But the adviser assured my friend that Stock markets were risky but their Debt bond based Insurance policies were safe. I simply asked him that the Bonds his insurance company were investing were issued by large listed companies and if they couldn’t make profits and couldn’t grow then who would pay us the high interest rates on bonds and bank FD’s. Banks can pay us high interest rates on Fixed deposits as they are earning higher from borrowers who are investing for economic growth.

Nothing is safe here. Even Bank FD’s (including Interest) are only secured up to 100000/- per bank. So if a Bank goes down, you’ll only get 1 lakh rupee for all of your FD’s. In fact few years back, it has happened in reality.  The Cyprus Govt decided to use the bank deposits of people in the banks above Euro 100000 to pay off its debts as bank deposits only up to Euro 100000 were insured.
So we are misguided regarding safety. We don’t know that Insurance is never about investment but it is for safety…so instead of buying term Insurance we go for low valued endowment plans. We go for FD’s for returns while they are just for safety; to beat the inflation rate to keep the purchasing power of our money secure. We aren’t earning anything from FD’s…it is not capital formation. We are illiterate when it is about investing and returns.

So I see things changing big time in India. Real estate prices are saturated, one can’t earn now by investing in Real estate. Gold is losing its shine also….although as I shared in my earlier post on Gold (Click here) that Gold is also for safety. So we can see high activity in Equity investments in the future. Earlier we used to invest just 1% in equities which has been grown to 3% now in recent times. So we are growing.

But most of the market is not positive about BSE IPO due to low equity trading share of around 15% as compared to Big brother NSE. Nothing share in equity derivatives. But still I see value in this due to high growth in equity markets and it’ll have its share anyhow. But I think BSE is doing some things right now and is focusing big on some emerging trends. It is investing big in Equity derivatives, commodity Exchange and Bond exchange.

I have talked enough about need to grow commodity trading in India (Click here). MCX is an emerging giant and I am heavily invested in this. World over, Commodity trading is way bigger than equity trading. Just for a perspective; U.S. daily commodity turnover, it is about Rs. 1,64,40,000 cr while daily turnover of equity market is 25,00,000 cr. i.e. commodity turnover is about 6 times the equity turnover. Now if we take chinese equity market daily turnover it is about Rs. 8,00,000 cr while that of commodity exchange is of Rs. 16,50,000 cr which is near about 2 times its equity turnover. Now if you take India where daily equity market ranges from 300,000 cr to 4,00,000 cr while that of commodity market daily turnover is about 25,000 to 30,000 cr which is 1/10th of equities. So we’ll see high growth in commodity exchange as SEBI is very serious about this. Our metal giants like Hindalco and HZL do not hedge their exposure at Indian Commodity exchanges but at Global due to low liquidity in India. 

Just look at the daily Equity turnover of India at Rs. 3 lac cr with China at 8 Lakh cr!! USA is like a Sun at 25 Lakh cr. And people are comparing the market share of both NSE and BSE!! This figure of 3 lakh crore is also superficial as FII's are still the major players of Indian market. They are responsible for around 60-70% of the market (if i am right). They are holding around 40% of free float, retail investors in India hold just 33% which is very low as compared to global markets. Domestic institutional players like MF hold 20%. So Indian markets are heavily impacted by the choice of FII's. Indian retail investors aren't well researched when it comes to investing; they invest when markets are at top (due to short term focus) and then they leave when market falls (due to fear and short term focus).

But India has huge capital requirements (Trillion Dollars) to finance its infrastructure. But here people are wasting their money in unproductive real estate and Gold investments. This is going to stop eventually due to falling returns in real estate/Gold. This money will come to equity market.  We need to see the vast sky. BSE and NSE won't compete with each other for market share but they will share the incremental growth. It is not like Indian telecom market which is mature and everybody is fighting for market share...eating the share of others...just like JIO. It is just like the initial Indian telecom market a decade back which had enough for everybody.

Same is the case for Currency Derivatives where RBI and SEBI are trying to grow the liquidity and lowering the speculation opportunities due to timing issues. They are going for extending trading time in synch with global exchanges. BSE is already a big player in Currency derivatives. It is having around 37% share. Actually Commodity and currency trading is highly inter connected as commodity players are also required to hedge their currency exposure also. So with the growth of Commodity trading currency trading will also see higher growth.

Next big thing will be the growth of Bond market in India. As shared in the post related to CARE Ltd (Click here). Indian Bond market will see high growth from now on. Even RBI has put the limits on banks in giving loan to big corporates. So Big corporates are going for Bonds now. We picked AK Capital services, which is a big bond player in India, at 280 and it has already run up to 440 today. Bond issuance has been increased from Rs. 174781 cr in 2008-09 to 413879 cr in 2014-15. This year figures could be way higher. RBI and SEBI are trying to get more people invest in Bonds along with Govt bonds in order to have more liquidity and to have more diverse holding to address the price volatility issues. BSE has a fairly developed Bond trading platform and Bond trading can be a big surprise factor. I am betting on the growth of bond trading big time.

So market may have its own views about the growth prospectus of BSE but I am seeing high growth in its business fortunes. It is also available at cheap valuations of below 20 which provide the margin of safety. So just sense the growth opportunities and exchange your money with it. No need for doing a comparison and an evaluation as seed is just becoming a tree. Avoid counting Fruits. I am going for it and will be holding for long term.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and applied for the IPO of the share discussed in this Post)

General Insurance sector-2nd Part: Nothing General about it. Stocks Covered: Tube Investments of India, Sundaram Finance, Bajaj Finserv, Max India, Future Enterprises

In my earlier post about general insurance (Click here), I mentioned about the rerating prospectus of general insurance companies once the IPO’s of these would come. SEBI was also pressing General Insurance companies for IPO. So today Govt has approved plans for divesting 25% in 5 public sector General insurance companies. This is as per my expectation and will surely make our Stock market better understand the valuation of General Insurance companies. General insurance sector is way underpenetrated in India with around 28 players fighting for small scale of business available. Everybody is fighting with low prices to lure customers making us think that General insurance is useless low cost phenomenon mostly forced upon us. However it is ,in fact, a specialized service which can save us from unforeseeable costly accidents. So quality of service is very important. But as most of the players are busy in the price war so nowhere focus is on to improve the customer experience and service quality. They need to make themselves more relevant so that more people understand the value of insurance. But I find it hard to understand what growth they can achieve with low prices and with even low quality services.

WHY IPO IS RELEVANT

IPO is all about getting the most for your equity stake. For this, we need better business model with quality balance sheet. But at present, PSU General insurance companies have dismal balance sheets and operating model. Four public-sector giants had massive underwriting losses for the half year — New India's underwriting loss was Rs 1,803 crore, followed by United at Rs 1,533 crore, Oriental at Rs 1,465 crore and National at Rs 991 crore.

But Insurance business is very different from other businesses where incremental revenue brings more profits. But in Insurance, in quest for growth, one can underwrite riskier insurance case which can destruct even the profitability of 10-20 earlier cases. So growth is never a blind game for Insurance sector.

IPO will make these General insurers to put profits into perspective and to focus on repairing their dismal balance sheets. So I see an end to price war and more focus on profits with high levels of service with more innovative plans.

Second; as explained in my previous post that in spite of making underwriting losses General Insurance companies are still profitable due to Investment income. Insurance companies receive premiums and pay the claims against premiums received. But there is a time Gap between these two events…they are not paying claims immediately…there is always a time gap between premium period and claim period during which Insurance companies can use this float to earn investment income from the premium amount. Float is the money that doesn’t belong to Insurance companies but which they temporarily hold. So Insurance companies invest this float money into so many investment options like Bonds etc. and earn investment income. Indian general Insurance companies are profitable only due to this investment income.

But this investment income will fall due to falling interest rates. Interest rates are falling due to low inflation (RBI cutting Repo rates) but the rates will fall even more due to high bank deposits courtesy Demonetization. So this falling investment income will put more pressure on General Insurers to focus on profits at underwriting levels. Although I think they will post high profits this quarter due to rise in Bond prices (Bonds they are holding in their portfolio) pursuant to fall in interest rates (Bond prices are inverse to Interest rates).

I have mentioned many times that Banks, in their quest for growth, aren’t constrained by deposits or reserves (as is commonly thought) but by Capital. Banks are always short of capital. They need to maintain minimum Capital adequacy ratio; a capital base adequate to absorb any unpredictable losses in the future. The current NPA issues of our PSU Banks have the potential to destroy any chance of future growth as in the absence of adequate capital they can’t offer more credit.

SOLVENCY RATIO: Fat is good

In the same way, Insurance companies are also constrained by capital. The adequacy in case of General Insurance companies is a function of Solvency ratio. Insurance is a very risky business (riskier than banks) where one calamity like Chennai floods or an earthquake can create havoc on their business. So these companies need to have enough capital to absorb any such shocks on our behalf….which is their business. We are paying them only for this. It is not like equity money invested into current retail startups like Flipkart (Startup!!) which can burn this cheaply for acquiring more customers. Insurance is big responsibility…requiring careful business mind. They are supposed to get fatty in order to bear the pain during starvation. But our General insurance companies at present are devoid of any such fat…they are way too lean.

PSU General Insurance giant National Insurance’s solvency ratio (1.2) is well below the mandatory ratio as prescribed by IRDA (1.5). Oriental Insurance has solvency ratio of 1.14….and they are planning for IPO?? What special valuation will Govt get from these general balance sheets?

Solvency Ratio is a measure of total assets of an Insurance company relative to its total liabilities. As per current IRDA rules, assets must be 150% of total liabilities. The process involves valuation of the assets and determination of the liabilities. The value is assigned to assets as per the provisions laid down in IRDA Rules. For instance, advances of unrealizable character, deferred expenses, preliminary expenses in the formation of the company, etc are to be assigned zero value. Assets also include the insurance company’s investment in approved securities, non-man-dated investments; etc. The determination of liabilities is more complicated. IRDA Rules have prescribed a detailed method for the determination of liability by both life insurance as well as general insurance companies. I’ll try to post another study on this when time permits.

We live in a dangerous world now. Our capacity to create destruction has only grown multifold. Events such as the terrorist attack on the World Trade Centre in New York can create unexpected liabilities of a magnitude difficult to anticipate and cover. A giant earthquake and terrorist attack can impose unbearable burden on the Insurer and it can go insolvent. That’s why Solvency ratio is very important.

In my post related to GDP (Click here), I have mentioned that being resilient is one of the factors of growth. Solvency ratio is just that…it demonstrates the resilience of an Insurance company. It needs to have extra cushion. Imagine a situation when a Life Insurance company with inadequate solvency ratio is required to pay for claims due to some big natural calamity and in the process it goes insolvent…we’ll lose all our money…our investment.

Insurance is not about Cheap and Low Cost Products

That’s why I feel that Insurance is a specialized service requiring high business acumen. I always tell that cheap policy or High promised returns are not the prime metrics in choosing an Insurance company. We are misled here as Solvency ratio is the biggest relevant figure to look out while choosing an insurer. Higher the ratio higher the chance that you insurer can meet any calamity. And calamities are inevitable…once in a while they are coming always. So Insurance companies can’t relax in wasting money in acquiring cheap customers by offering low priced insurance policies. Just for putting things into perspective, among Life Insurers Bajaj Allianz was having Solvency ratio of around 7 and also it was the only company in General Insurance earning underwriting profits (Bajaj Finserv is the holding company, I always like Bajaj for their great Business insights).

So these General Insurers can’t think of getting high valuations with low valued balance sheets and business models. PSU General Insurers can’t always look towards Govt for their capital needs; they need to have self-sufficient model. Sometimes I think that this reckless behavior from PSU business houses like Banks and Airliners should have been penalized by competition watch dog. These PSU’s do bad business…bad management…terrible choice of customers (Mallaya/Jaypee)….they compete on cheaper prices. But when they are into losses due to their terrible business models, they beg to Govt for capital which our Govt does with public money. This is pure looting and should be stopped.

So I think good time for General Insurance industry will come shortly. We may witness some consolidation. We’ll see players with more specialized set of services. Like Max Bupa is catering to Health Insurance and due to synergy of Max hospital can become a force in health insurance.

Some time back I have shared about the potential of Internet of things (IOT) in business. IOT can provide big benefits to General Insurance sector. Sensors in Cars can detect the driving pattern of a person and on the basis of the same premiums will be charged (High premiums for bad driving, Salman khan!!). Health Insurance companies can use wearable devices to monitor the health of its customers and can take advance decisions/steps in case of emergency and thus reducing its costs. But these things will become a reality when they have profits to back up these specialized set of services. That’s why I feel quality of services and innovative products are the key.

General insurance penetration is extremely low in India...around 30% for 2 wheeler, 40% for commercial 4 wheeler (private is good at 70%), health insurance is just at 20%. Crop insurance is the new high growth segment.

So as explained in earlier post also, General Insurance stocks like Tube Investments of India (CMP 570), Sundaram Finance (CMP 1230) , Bajaj Finserv (CMP 3011), Max India (CMP 140) are a great fit for investing. Even Future enterprises, CMP 18.30 (Holding 30% share in Future Generali Life Insurance and 50% in Future Genereli General Insurance) can be worthy...and this can surprise as it is focusing big on health insurance. Its Gross written premium was 1600 cr in 2016. I am never a follower of Reliance (Reliance Capital) and Religare…so I am leaving these from my study....because we are looking for Special companies in General.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

Happy New Year 2017: Let's Make More Time This Time

….and another year is passed. I constantly hear people pointing out the incredible speed at which time is running away from them. Years look like months. One hour phone call to my love life (of course before marriage) now appears bigger than 5 years of married life. Time appears to be moving slow in young age and quite fast as we age. Well, there are some strange theories which say that this perception of time (moving fast or slow) has its roots linked with the ratio of time interval to the total life span we have been alive. Like for a 10 year old young boy, one year is a long period of time since one year is 10% of his total life so far. But for a 50 year old this one year is just 2% of his total life. So no doubt we can see here that 10% is more than 2%.

But I have always felt that somehow this time perception is related to level of my consciousness. How conscious or we can better say “aware” I am?  And we are aware only when we are doing something novel, when we are in some adventure, when the moment is a quest for life and death….and time is slow. We can see that as we age our routine becomes repetitive, there is nothing new in it….we just get up (or gather ourselves) from the bed, breakfast, routine job, some flirt/gossip, back home and sleep. There is nothing novel in it….nothing new to challenge our mind. In fact our mind can do these things for us in sleep also. Our Mind can only Re-act….it can’t act…it filters through the stored memories and then suggests the route of action. Act is the responsibility of Consciousness or Soul….when we challenge the order of our life to experience something new. Remember our first love proposal…of which we had no experience, job interview, a warrior fighting for life and death….and these moments are eternal.

So the more we learn new things, new adventures, challenge our notions and principles…more alive we are for we are not an entity but a flow. We are not here to pass time, to please some God…but we are here to experience ourselves…and through this experience we absorb this mysterious phenomenon called life…we move forward towards our quest to know what we are.

So let’s plan something new for ourselves this year…learn something new…anything that we are yearning for long…anything that makes us more alive….music…martial arts…language….stock market. This is the path of a warrior…to explore life…to live more and follow less.

MY BEST WISHES FOR A GREAT LIFE FROM THIS YEAR…HAPPY NEW YEAR.

Laurus Labs IPO: Quality is Indeed Pricey

I couldn’t do a detailed study of this as it requires a great deal of time to study a pharma player. But it is looking good although somewhat pricey which i feel is justified for a high quality player like Laurus.

But it has a great promoter Mr Satyanarayana who is a veteran of almost 25-30 years. He has taken Laurus from nil in 2007 to 1800 cr in 2016 which is a great feat indeed. But it has low margins of below 10% as compared to high 20's of other players...but i think this is well explained by unused capacity, capacity under construction and high investment in R&D. It invests around 5% in R&D which is a unique feat for any Indian pharma company. But it has some credits due to high R&D focus. Efavirenz is an active pharmaceutical ingredient (API) in many anti-retroviral or AIDS-treatment drugs. And half the Efavirenz in the world is made at the Hyderabad-based Laurus Labs. In early 2008, they achieved another feat by replacing, In one anti-retroviral, a reagent called di-ethyl zinc, which was used to be imported from Europe costing $60-70 per kg, with a mixture of sodium hydride and zinc chloride, which cost just $6 a kg. 

Of top five Active pharmaceutical ingredient (API) worldwide including Efavirenz , Laurus has around 30 to 35% share. Due to this superior built up, it counts the global giants of the likes of Mylan, Aurobindo Pharma, and Strides Arcolab in India, Hospira as their biggest clients. So I feel any R&D focus company whether it is Biocon or Advanced Enzymes deserves premium valuations as they are doing something which not many Indians can dare along with the fact that they have the results to support their adventures in R&D. So at a valuation of 32 although it looks pricey as compared to some of the listed peers but strong brand strength and R&D supports this. It owns 32 patents and has 150 pending patent applications, in several countries, and has commercialized 59 products since its inception. Its Research-first approach puts it in unique orbit.

Although it is now an API player but it is dealing in high entry barrier and high growth oncology and anti-retrovirals (ARV) segment which is very different from other players. It is now focussing on formulations business to leverage its technology and capacity.  Also out of IPO proceeds of 1300 cr, around 1000 cr is going to PE investors and 300 cr for debt payments. It is good that company promoters are not selling anything which shows that they are seeing something much better. So far it has received only one warning from US FDA for its Vizag facility and successfully responded and closed the same.

So i think it is worthy for investment but in case of any fall...just buy more. Good things are always beyond and above short time variables....and it is never too late and too much of a good thing. It is a good buy even at 500 (In case it lists at some premium) and i am going to buy it from the very listing day itself. I think Laurus will be one of the few winners from Indian Pharma stocks. There is going to be high competition in simple generic medicines in USA but entry barriers in complex medicines like for Cancer are very high and margins are also strong. So i think complex generic medicine will see high growth and we'll see Laurus seeing high growth. Another area is Bio-similar where entry barriers are extremely high as developing a Biosimilar is just like developing a new drug from the scratch and we'll see our Biocon witnessing even strong growth. Biocon is already trading near 960-970 more than 3 times from our entry price of 300 but it can still achieve even higher growth.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and applied for the IPO of Stock discussed in this Post)

Tata vs Mistry: Glass vs Mirror

A Glass doesn’t hinder our view of the world and we can look through it; it never gives back anything to us. But you paint the glass from one side and it becomes a mirror. But a Mirror can be irritating as it shows us our ugly face. It just reflects the reality. And in the moments of despair and madness we can break the Mirror. So Cyrus Mistry is broken. But I am really at shock over what has happened with TATAS...i can't expect this type of nasty fight from Tatas. I am feeling bad for this guy Cyrus...i don't think that he was doing a bad job with all the heavy load of expensive investments at wrong times. I don't think that decisions regarding sale of Corus and fight with Docomo for denial of buying of right issue was entirely of Cyrus....what was Board of directors doing?

So Cyrus has left a bomb over Tatas...but i hope it is not a time bomb and will explode now only to have the momentary impact. But there is no need to panic and pressing the sell button. Just hold on to your fronts and no need to make any surgical strike either (Buying). Let time clears the clouds.

But it is always not hard to fathom your wrong turns; the hardest thing is to accept these-especially publicly. In the dream world of becoming hard core Indian MNC, Tata made some nasty investments that too at the peak of commodity cycle. Tata's bought Corus at mighty price of $12 billion. I can't understand how they couldn't see the coming over-supply in the steel world....China couldn't alone drive the world steel demand and if it was doing it could never be forever and not sustainable at all. Now China is fearing the heat of huge amount of melted steel used by it for creating unnecessary redundant infrastructure. How our so called highly paid economists/CFO's can't take precautions while going for expensive decisions if they can't predict the over-supply or lower demand.

Jaguar buy saved Tata although Jaguar has sparkled because of high china growth and only Tatas can tell whether their decision to buy Jaguar was due to this china story or they were trying to buy a premium prized asset for western markets. Indian Hotels bought some costly international properties when growth in Indian market was the visible choice. Global MNC giants were investing in India but Tata bought international properties. I think Cyrus was right in shedding the Fat when he sold some of these high prized hotels.

But we all do mistakes...it is our right to make mistakes in our path to success and glory. But when we make some mistake and later when we realize it, our focus should always be on solving it and finding the solutions. But what is Tata doing off late....it is investing into Airlines business which is also a high capital intensive business and prone to high losses for 5-10 years. That can't be the right approach...Tata should have been concentrating only on solving the mess of Mundra plant, Corus deal etc. Tata global still needs to find a way to grow its Himalayan Mineral water business for long....Starbucks JV is operating in dangerous price conscious Indian Market. So Tata is at inflection point and some tough decisions are required-no point in clinging to your faults.

I remember how Kishore Biyani is trying to save his retail business. In this quest he has sold so many of his prized dream assets like Pantaloons, Capital first etc. Jain irrigation has taken some tough decisions and they have really saved the day for themselves.

So i think this fight my turn ugly and we'll see more pain for Tata stocks although i think recent 10-12% fall is already severe and more than enough. But i don't find anything fishy and material in this 1.18 lac crore loss in the value of Investments in Power, steel business. Businesses do witness prolong periods of downturn due to economic and industrial slowdowns or over-supply. The only option and strategy is to pass/live through these difficult times gracefully. I think Tata can solve the mess of its power, steel and tea businesses.

I am still having the faith in Tata group...but the only thing i am worrying is whether they can do this Gracefully?

Crop Insurance and Commodity Trading- Farmer will See the Sky-Finally..................................................................... Stocks Covered: MCX India, Tube Investments, Sundaram Finance, Max India.

Farmers don’t see the sky…they just WATCH it…with hope and most of times with despair. The sky as we know (and enjoy) isn’t known to the farmers. They see a different sky…for them it is from where their lives flow…water. We may be enjoying the falling sky…but for our poor farmers every fall is not a water fall. We may have placed satellites beyond the sky but our farmer is watching the sky for thousands of years…for them nothing has changed…satellites broadcasts entertainment shows for us…but sky is always a broadcaster of horror for farmers.

India is a farmland…we have vast length and breadth of farmland with 60% of our people are sky based. The average size of farm land holding is around 3 acre. 85% of the Indian framers are cultivating the 70% of farm lands which are below two hectares each, more than 60% of the farm produces come from the small farms only. So we can’t think about economy of scale…and with low productivity from smaller farmlands; no doubt our farmers are vulnerable and terrified by the sky. But if India wants to touch the growth sky then we need to free our farmers from sky. I have no doubt that next leg of Indian growth will come from rural India. Rural India is neglected for so long…we think that high growth in agriculture in past decades should have brought prosperity all over the villages; but it is not as farmers aren’t able to earn the biggest pie which they should but the same has gone to the middlemen.

Poor small farmers are still poor…they still know moneylenders not banks. Farmers can’t store their produce due to lack of warehousing…they urgently need cheap electricity (Not free and subsidized; we need to produce cheap but profitable electricity), they need roads to carry their produce (although their small produce makes it costly to transport it to point of demand), they need timely advise for cropping. The list of things which can remove the variability from the farmers’ income is still long; but the factors bringing this variability are even bigger and most of the times beyond the reach of farmers and policy makers like floods, hailstorm, and fire etc. So apart from policy paralysis induced infrastructure deficiency they face the agony of the nature helplessly. 

That’s why when somebody says that power sector is all but gone in India; i find the statement and logic powerless. There is huge unmet demand for power in villages...one bulb lighting at home is not electricity. We are yet to see the real growth of the Indian power sector. The current lull will force out the inefficient ones and only mighty will remain (I see Tata power as the next biggest after NTPC, a great long term play).

Certainty of stable long term income/cash flow is the biggest decisive factor  whether you are planning for domestic consumption or taking any investment decision…the moment you have any surety of long term stable inflows…you can take the decisions as you can plan with assured cash flows. Hence I feel, insurance of farm income will make the Indian growth story comprehensive. Right now there is high distortion in the spread of income. In one season, they earn bumper but in the very next season they are ruined to the bottom either by Nature or by market forces like slump in the prices.

So now we need to see which factors can bring the stability in the farm income. Apart from policy based decisions I am seeing some niche solutions which can play very important role in the development of rural India. Let’s see these:

Crop Insurance: India, due to its huge reliance on agriculture, should have a strong crop insurance structure but only for complex structure of Indian agriculture. Crop insurance is one thing which is not in the radar of many but it is some serious business opportunity. Crop Insurance is a part of general insurance which I feel is even better opportunity. Indian equity markets will take some time to understand the valuation of Life and General insurance companies when more IPO’s of insurance companies will come. But I still feel insurance is the business which is not easily understood by many because it is indeed very complex.

Understanding Insurance Business

Profit and loss account and balance sheet of an Insurance company is very different from any other company we understand. Let’s have a short glimpse; Insurance companies have two main sources of revenue first is Underwriting profit which is the net excess of premiums received over claims paid. Like in a term plan, Life insurance companies collect the insurance premiums from policyholders (in case of endowment plans, a part of premium is towards Life insurance which is treated as income and the balance is kept for investment purposes on behalf of the policyholder) and in the event of death it pays the sum insured as claims…so any net premium excess is underwriting profit. Indian Life insurance companies are now making underwriting profits but General insurance companies which deal in Motor, marine, health and Fire insurance etc. are not making any underwriting profits at all. General insurance companies in India are selling policies at low premiums to get more business due to fierce competition and future growth strategy. First private General insurers started the battle with four public sector giants having 100% market share. During this fight which started in 2000, the four state-owned companies - New India Assurance, National Insurance, United India Insurance and Oriental Insurance - have seen their combined market share fall to 55 per cent from 100 per cent. This fight is keeping the general insurance premium at low levels. So right now every general insurer (Private/Public) except Bajaj Allianz is incurring underwriting losses in India.

So how these General insurance companies are making profits? With the answer, we move to the second source of revenue for the Insurance companies and this is-Investment Income. Insurance companies receive premiums and pay the claims against premiums received. But there is time Gap between these two events…they are not paying claims immediately…there is always a time gap between premium period and claim period during which Insurance companies can use this float to earn investment income from the premium amount. Float is the money that doesn’t belong to Insurance companies but which they temporarily hold. So Insurance companies invest this float money into so many investment options like Bonds etc. and earn investment income. Indian general Insurance companies are profitable only due to this investment income.

But things will change when these insurers will target underwriting profits after the consolidation in the Indian insurance sector. IRDA has also directed for compulsory listing of general insurance companies operating for more than 8 years and 10 years for Life insurance companies. The insurance regulator has said that all companies meeting the stipulation on minimum years of existence for listing should initiate steps to get listed within a period of three years from the date of issue of directions under these guidelines.

After listing there will be pressure for underwriting profits. Also amid falling interest rates, I think insurance companies would need to look beyond investment income. But general insurance is a great business opportunity in India as penetration levels are still very low in India. General Insurance business, once it achieves a scale, is a highly profitable business with very strong brand loyalty. Return ratios are very high in general insurance which is more like a necessity than a choice like Life insurance where people are literally chased for taking up the life insurance. Motor, Health insurance are among the necessities of the life these days. We can’t take a chance to avoid these.

So I think we’ll be seeing some of the most profitable business opportunities when the IPO’s of these general insurance companies will come. But as we have always done; it is way better to pick these before many are aware of this. So I am continuously buying the stocks like Tube Investments of India (Cholamandalam MS general insurance is the Subsidiary), Sundaram Finance (Royal Sundaram General Insurance), Max India Ltd (Max Bupa Health Insurance).

Crop Insurance is another big opportunity

History of unsuccessful attempts for Crop Insurance is very long in India. Unsuccessful is due to the complexities involved in the crop insurance and strained financial position of states/center Govt to fund the crop insurance. Unlike other forms of Insurance, crop insurance claims happen in heaps as it is not that floods will destroy only one or two crops in a Village. Entire village will be affected but again the impact of floods will be different on every single standing crop which necessitates measuring the loss of every individual farmer. However small land holdings of farmers in India make the administration of this task very costly which only raises the cost of insurance.

Also, as I have mentioned earlier, poor infrastructure in Indian Villages for Farming like poor irrigation, low use of Pesticides, Inadequate storage facilities, low quality seeds etc. further aggravate the situation as these factors increase the vulnerability of the crop loss to the farmer even in case of a low level calamity. All these factors impact the calculation of Actuarial Insurance premium which becomes very high due to these constraints and risks. So we can see how things are intertwined…bad infrastructure is also impacting the decision making at other fronts. Farmers can’t bear this high premium which sometimes is 20-25% of the sum Insured….even 10-15% is a high sum. If a farmer wants to insure his Kharif crop for Rs. 40000 per acre then at a normal premium rate of 10-15%, he has to shell out Rs. 4000-5000 which is very high for a poor farmer. Even Government can’t subsidize it fully. So all this resulted in payment of Low Insurance premium both by farmer and Government Subsidy which only resulted in low Sum Insured. In most cases, sum insured barely covers the cost of cultivation.

New Crop Insurance scheme can be a game changer

But current Government in Jan-2016 introduced a New Crop Insurance scheme; Pradhan Mantri fasal Beema Yojna (PMFBY). Here, premiums are fixed for farmers at 2% of the sum Insured in case of Kharif crop, 1.5% in case of Rabi and 5% in case of Horticulture crops. Sum Insured is kept at high levels on the basis of average per acre yields in last seven years (excluding calamity years) of a village. These average yields are then multiplied with Minimum Support prices to get the figure of sum insured. Actuarial insurance premiums are calculated for each village. After the contribution from farmers as mentioned above, the balance premium is shared equally by state and central governments. Hence there is no cap on the sum insured because there is no cap on the premium payment. All depends now upon the will of state and center government.

Due to high cost of Insurance earlier, only 20% of farmland is covered under insurance (Out of 200 Million hectare only 40 Million is covered). Although under coverage is not the only problem; inadequacy of the coverage is even bigger problem. But PMFBY is trying to sort out the both issues. Here as sum insured is kept high at actual loss of crop value hence there is no upper limit on the premium subsidy to be provided by state and central governments. But it is still far better than shelling out compensations after the calamity…waiver of loans etc.

One insurance company will be selected for one state on the basis of lowest premium quoted. That company will execute the crop insurance in the state. It can reinsure the crop insurance provided if it feels that risk is getting higher for its capability.

Technology is the key for crop Insurance success

The real test in Crop Insurance is how fast and accurate insurance claims will be processed as during earlier avatars claims took 3-4 years for settlement which becomes a joke on poor farmers. So here, supporting infrastructure and technology will be the key for successful implementation of the crop insurance. So farmers may see drones flying near their farms to capture the data for processing their claims when earlier assessment of loss was done by local Patwari by using Eye which was never credible and lead to corrupt practices.  Hence government needs to establish supporting infrastructure like weather stations in every block, use drones to assess damage and low earth orbit satellites to geo-tag plots to identify farmers.

With all this in place, if, say, a hailstorm flattens crop in a district in Madhya Pradesh, the satellites could pinpoint the plots and the geo-tags could identify the owner of the land. The weather stations would have already reported the hailstorm and drones would assess the damage more closely. The data is enough to make a quick assessment and the insurer can identify the farmer with the geo-tag and pay the claim directly into her Aadhar linked bank account. I think, drones and satellites (Remote sensing) can be easily implemented but weather station will require huge time and investments.

Actually, we’ll see more and more use of satellite technology in our day to day life in the near future as costs are coming down. Satellite internet is the biggest opportunity. Low earth orbit satellites will improve the internet speeds to compete with broadband. Reusable rockets will lower the costs of satellites even further. Broadband is a very costly affair especially in remote hilly areas where small users are scattered far away. It is very costly to dig lands and laying cables, mobile towers are a big nuisance and costly as they need continues power and high initial investments. So things are happening fast in the sky. That’s why the likes of Elon Musk of Tesla and Brenson of Virgin airlines have grand plans for Low earth orbit satellites. They are planning for around 4000 small satellites in the coming decade with around 600 by 2019 to provide speedy internet to remote parts of the earth where demand is strong and people can pay. Cable tv and broadband can’t stand on its feet in these remote areas. My main reason for buying Nelco was due to this coming of satellite internet. Tata communications is also going to be a big player in this arena.

General Insurance and Crop Insurance will see high growth in the near future

Indian General Insurance sector is Rs. 80000 crore story so far…out of which around 45% is Motor insurance and 25% is Health Insurance. So we can see with rural growth and demand for cars and bikes will result in high growth of Motor insurance although I feel in Motor insurance biggest growth will come from increase in the premium amounts. Health Insurance will see the high growth and will be the sector to watch. Indians are paying high health care costs out of their pockets which is a big negative and with more awareness people will realize the benefits of health insurance.

MAX India Ltd: My pick for Health Insurance is Max India ltd at 140…its main business right now is max healthcare which is growing fast but premium income of Max Bupa is good at 500 cr. Max Bupa now has strong brand positioning. Max Bupa and Max Healthcare will provide the high synergy to each other.

Crop insurance will be a big business within a year or so. General insurance which was on slow footing in last few years will see high growth in tandem with good economic growth. Actually the signs of growth are visible. In sep-16 alone, General insurance companies posted a growth of 88% yoy in gross direct premium.  In September, the general insurance industry saw gross premium income at Rs 15,087 crore against R 8,029 crore in September last year. Health insurance companies saw a 48.2% surge in their premium income in September. One of the factor of high growth in Sep-16 is crop insurance growth after good monsoon this season.

This year General insurance sector will touch Rs. 100000 crore premium collection figure as so far up to Sep-16 figure has already crossed 60000 cr. So we’ll see General insurance companies witnessing comprehensive high growth from this year. Market forces are sitting unaware of this big opportunity. Only when IPO’s will come then market will get a feeling of the business strength of General insurance industry. Hence I am regularly picking:

Tube Investments of India: Earlier advised at Rs. 400 last year but still way undervalued at CMP of Rs. 592. I have already posted a detailed blog post on Tube Click here. But i still feel it is a stunning stock to have; I am still buying it. So i am just revisiting it again:

 It is the owner of BSA cycle with 1500 Cr turnover and profits of around 70 Cr....its other businesses which are of substantial scale are tubes for various industries and metal formed products like door frames, chains etc....its clients includes the likes of Toyota, Tata etc. It is having around 70% share in Shanthi Gears. BSA cycle  has  a huge premium brand positioning in India....i see this business growing big in India. Its standalone business is around 4000 Cr with np around 250 Cr but will see it around 400 Cr  in near future due to recent capacity additions. So this was standalone.

But real gems are its holding of Cholamandalam finance which is a listed NBFC with market cap of 12000 Cr....Tube is having 46% of it. Another feather in the cap is its unlisted general insurance company Cholamandalam MS general insurance co.  Tube is having 60% share with balance with Japanese MS. Last Dec it sold of 14% for 900 Cr to MS which is lying with standalone arm. Cholamandlam MS General is having NP of around 170-200 Cr....but it is just the beginning. As explained earlier, all General Ins companies in India are incurring losses in underwriting business as they are in expansion mode and charging aggressively…they are earning NP from investment business only. But this will change soon and general insurance will grow big in India.

At CMP of Rs. 592 market value of just 11000 Cr.

Sundaram Finance: Pertains to top class TVS group. I have great regard for TVS group for their high class management skills. Just great people they are...TVS has never faced labour problems in their 100 year history. They keep their employee happy at any cost...Medical costs, including that of employees' family members, however high, are borne by the company. It also offers scholarships to their children. If an employee dies while in service, his dependents get not only his dues, but also the proceeds of a 'death fund' created for him.

Unions have best relations with TVS management which is seen seldom in India. TVS Management avoids top/senior level recruitment from outside...they try to give more chances to their employees.

Sundaram Finance has strong NBFC and Housing finance business apart from Royal Sundaram General insurance business. They are also having some other small but growing businesses like BPO and IT management business. Their general insurance has gross written premium of 1700 cr in 2016. Underwriting losses were Rs. 167 cr while investment income was Rs. 162 cr…so it is making losses but last year Net income was at 27 cr due to lower claims. In 2016, they paid higher claims due to Chennai floods. But there will be high growth in the business this year.

Sundaram is always proactive in making its books as clean as possible. It has done something remarkable in ensuring the quality of its loan assets. RBI in 2014 with a view to bring NBFCs at par with banks, had mandated that bad loan recognition happens at 150 days by end of March 2016, 120 days by end of March 2017 and 90 days by end of March 2018. This has impacted most NBFCs that have had to make additional provisioning for bad loans, in accordance with the new norms. But Sundaram Finance had already adopted a 120 day norm since 2012-13.

In 2015-16,the company has, in fact, moved to the 90 day norm, two years ahead of the regulatory norm. Despite this, Sundaram Finance’s gross NPAs are at 2 per cent of loans, when others such as Shriram Transport Finance (at 150 days from the March 2016 quarter) and Mahindra and Mahindra Financial Services (at 120 days) have higher gross NPAs of 6 per cent and 8 per cent respectively.

So these are the types of companies which we can hold for decades. At CMP of 1350 it is a good buy.

Commodity derivatives: Another big step in insuring Farm Income

MCX India Ltd: This is another innovative solution which can ensure the stability of the income of the farmers. Our farmers are ill equipped with the data to take the decision regarding which crop to sow. They mostly take their decision with rear mirror…they look at the prices of past season and crop accordingly which most of the times turns out to be a bad decision due to supply glut as every farmer is cropping the same crop which results in big price fall. We are seeing this all the time with prime victims are Tomato, Potato and Onions.

But if farmers can use agri commodity futures to hedge their produce that can solve their biggest worry. In fact, banks these days are asking and educating farmers while disbursing loans to use the hedging to safeguard their crops. Using commodity trading, a farmer can presell his produce at the commodity exchange thereby locking his sale price and saving his crop from any adverse price fall in the future. Futures and options can be used for hedging purpose. The only thing here is the awareness and education of the farmers and supporting policies of the government to promote commodity trading. Users of agri commodities like Pepsi (Potatoes for lays chips) also need these for locking their purchase price although they also resort to contract farming to mitigate the risk of high price variation. So this can be a win win situation for both.

There are quite a few real life cases in the past when farmer groups used commodity exchange to sell their produce and later price fall saved them big time. Commodity exchanges have also taken the task to educate farmers in commodity trading. In delivery based commodity trading, a high class certified warehousing is a must and we can recall many of our other picks like Snowman logistics, Balmer Lawrie, Concor, Redington, Gateway Distripark and Future enterprises (For Future supply chain) which are into high technology based warehousing and logistic business.

So I was looking for a commodity exchange for agri commodity trading. NCDEX is the leader in India with around 90% share but it isn't listed (but NSE, IDFC are the shareholders of NCDEX). However agri commodity trading is very low in India as compared to non-agri commodities like Gold, Oil and other metals where MCX is the leader at 90% share and it'll remain the leader due to NETWORKING effects. I think it is a great fit for the future; top management, monopoly, high growth in the future scale, big margins etc. are the key factors. No need to look at the high PE...it will change with the high growth in the future. MCX was blazing earlier but its turnover/profits were stalled due to imposition of CTT (Commodity transaction tax) by govt on Non Agri commodities in order to curb the speculation...although i think there can be some better solutions than just imposing tax every-time for every economic issue.

The things like CTT has resulted in high transaction costs for commodity trading in India forcing the likes of Hindalco/HZL to hedge their products in foreign commodity exchanges. If Government scraps the CTT in the near future then MCX will just blast.

Although at present, Agri commodity trading is a small part of turnover of MCX where NCDEX is the major force but MCX is taking steps for increasing its market share in Agri-commodity sphere so as NCDEX for Non-Agri commodities. Any positive outcome in this regard will be the biggest game changer for MCX. Also I hope NCDEX comes with the IPO.

I picked MCX recently (21^st Sep-16) around Rs. 1000 and it just started blasting after that. I made further buying at 1055 and 1160. It is now at Rs. 1300 after touching 1400 in just 10 days. The same was shared via email...but this time as more readers of this blog has subscribed to the email of this blog so i hope most of us are having it. But It is still a good buy and should be added at every fall.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)