Deepak Shenoy's blog

IPOs Largely Suck in 2010-11

The performance of IPOs in 2010-11 has been fairly pathetic, with the average return being -13% on the NSE. Removing BSE only stocks, I've charted a list of IPOs that happened this year, with their returns till last friday.

The best returns are of stocks like Gravita India (+160%), C Mahendra Exports (127%), Mandhana Industries (80%) and Talwalkars (72%) . image (Click to see a huge picture) Notably, a government IPO - Coal India - has seen a 46% return on the back of rising coal prices. Gujarat Pipavav Port is still positive, while the smaller and popular IPOs of Lovable Lingerie, Persistent Infosystems and Career Point should help entrepreneurs that are actually making decent profits think of an IPO.

The worst performing IPO, Aster Silicates, went all the way to 250+ before crashing, in just a few days to end up 78% in the red. To the people who wanted to ride it up after listing, the return is even worse.

Of the losers, too many of them are shady small cap stocks that shouldn't deserve a mention. Of the notable non-shady stocks (or at least, people that have fancy degrees and wear ties) SKS Microfinance is in bad shape with a 44% negative return, most of which happened because of the AP government rules that took the carpet from under them.

Infra and power players like Nitesh Estates, Prestige Estates, Indosolar and SJVN fell more than 20% from the IPO prices.

As a follower but not a buyer of IPOs, I've seen that some stocks - notably those like Bedmutha Industries - are heavily manipulated. With huge volumes (over 50 cr. sometimes) and low delivery volumes, there seems to be a lot of circular trading or activity that smacks of promoter blessings. While there have been some investigations in the IPO process, we haven't seen any really strong effort to figure out how stocks are manipulated immediately after the IPO. With little history, it's difficult to trade them technically, and with little trader interest and low institutional support, such stocks can be easily moved around and rumours like "buy now before the juicy news comes" floated. But markets are markets, and money brings with it great incentives. All I can say is - if you trade them stick with a strong stop loss and expect that you'll get on the bad side of some manipulation.

Mutual Funds and Demat Fallacies

Some advertisements recently give the impression that you can "Demat" your mutual funds! Yippee! So you should buy through a stock broker on an exchange!

But this is a stupid reason.

Mutual funds are "dematerialized" anyway.

Materialized means that the unit certificate that you have is the be-all and end-all of your ownership; in the past, shares were sold as certificates. When you sold, you gave your certificate to the broker, who would find a way to get it over to the new buyer. If you lost your certificate, you were in deep doo-doo. You had to file an FIR and hope you had a photocoyp and beg and plead and offer your children as guarantee to get your shares back. Many instruments - NSCs for one - are like this.

Dematerialized means what you get in paper is an account statement, that your holdings are really maintained electronically. If you lose your statement, no big deal, you just call them and they send you a new one. You might need some details, but usually they can find your holdings with a PAN number nowadays. Shares are now usually held in demat mode, with demat "depositories" like NSDL and CDSL accounting for a major part of all share holdings in India.

SBI Bond Yield Calculator

SBI's four bonds listed today. First question: Why are there four bonds? Well, each of the two types - 10 and 15 years - had two options: for retail (individuals, 5 lakhs or less) and the rest.

Also see: "SBI Will Sell Bonds at 9.95%"


Rupay: India's Own Payment Processor

Econonic times says that soon India will have it's own payment processing firm (to rival Visa and Mastercard) called Rupay.

After almost two years of planning, the National Payments Corporation has at last finalised the proposed unique India Card which once commercially launched would be an domestic alternative to the global real-time payment processing firms like Visa and MasterCard .

At Yahoo: Accelerated Correlation

On Yahoo, you'll find me writing about Accelerated Correlation.

(Reproduced in Entirety)

Accelerated correlation

I heard recently that a $1 change in crude oil would impact our fiscal deficit by 0.80%. The calculation is simple. India imports about 750m barrels of crude per year. A $1 hike in crude is equivalent to $750 million more to be spent buying crude, which at the rupee rate of Rs. 45 is Rs. 3,375 crores. That will push up fiscal deficit of about 400,000 crores by another 1%. Ceteris paribus, or "all else being equal".

But ceteris is not paribus, if you'll excuse the bad Latin. All else is, as usual, not equal. The fiscal deficit is impacted by multiple things — oil subsidy, fertilizer subsidy, interest paid by the government on borrowings and so on. In good times, these are reasonably independent of each other. But a rapid crude price increase changes the picture dramatically.

A 1% increase is likely to be subsidized as well. But when crude goes up 10% or 20% there is no room for the subsidy and the price increase has to spill over to actual fuel prices, which that hurts everyone through inflation. High inflation will be countered with high interest rates, which even the government will have to pay on its borrowings. Fertilizer creation involves natural gas, which moves with crude; and so up goes our fertilizer subsidy as well. The impact to the deficit, on an extreme move, is probably much higher than the 0.8% assumed.

At Yahoo: The Japanese Fallout:Is Nuclear Power Dead?

I write at Yahoo on The Japanese Fallout:Is Nuclear Power Dead?

(Reproduced in entirety)

The Japanese Fallout:Is Nuclear Power Dead?

At least for the near future, it seems doomed.

The recent earthquake and tsunami in Japan has brought Nuclear Safety to the forefront again. In the Fukushima Daiichi plant, three explosions occurred, which have caused alarm that the reactors may release radioactive emissions into the atmosphere. Reactors have a core consisting of fuel rods which, on the nuclear reaction, emit heat. The heat is used to generate steam, which runs a turbine and generates electricity.

Must See: Excellent visualizations of reactor shut downs, failures and meltdowns in the NYT.

In a crisis, reactors automatically shut down. Control rods are inserted between fuel rods to prevent further reactions. But they're all still very hot and emanating heat. During this time, the reactor needs to be continuously cooled — and that is done by using water, draining out the steam, putting fresh water, etc. This process needs some power, which wasn't there with Japan's electricity gone due to the Tsunami reaction, and the limited capacity of backup generators. The process is now being carried out by supplying water from the ocean, even that is steaming up so fast that water levels are dangerously low.

Jyoti Structures: NCD + Warrants Tradeable, Worthwhile?

Jyoti Structures recently offered a rights issue of Non Convertible Debentures (NCDs) and Warrants to its shareholders. See: Letter of Offer


Redemption price: Rs. 120 on April 15, 2012
Interest: 7% payable quarterly
Current Market Price: Rs. 114.
Started on: Jan 15, 2011


RBI Ups Repo to 6.75%

RBI today increased the Repo rate by 0.25% to 6.75%. Repo is what banks pay the RBI for overnight (1 to 3 days) borrowing. Reverse repo, or what the RBI pays for excess cash parked with them, is up to 5.75%.

Please don't consider this a big deal just yet. here's the long term history of rates:

India Repo Rate Chart

Weak Oily Chains and Weak Probability Implications

Fundoo Professor writes: How Weak is this Oily Chain?

Today’s Finanical Express carries an interesting column by Vikram Mehta, Chairman of the Shell Group in India.

The following passage caught my eye:

“Success in the exploration and production of oil & gas requires a company to overcome three interlocking sets of probabilities. The probability that a given geologic structure contains hydrocarbons [let's call this Event A]; the probability that hydrocarbons will be located [lets call this Event B], and the probability that once located, the find can be commercially exploited [let's call this Event C].”

Vikram’s statement has vast practical implications for security analysts.

The market value of an asset is the present value of its expected future cash flows. Cash flows from an oil exploration company can be derived only out of hydrocarbons which can be commercially exploited. And for that to happen ALL of the above three events must happen.

Suppose that the probability of Event A happening is 40%, that of Event B happening is 20%, and that of Event C happening is 25%.

Then the probability of seeing cash flow which is valuable is 0.40 x 0.20 x 0.25 or 0.02. That comes to just 2%!

I wonder if the market participants think in those terms before valuing oil exploration stocks.

My comment to it was:

Sir, what matter is returns. If they can make 100x their investment on an oil find that meets all three parameters, and they have enough blocks to explore, then the 2% probability is ultimately a reasonably large return. For every $100 they invest they will eventually make $200.

The Game Of Dice

“I challenge you to a game of dice”, said Shakuni, his various large rings glimmering as he tried to keep his glee under control.

Yudishtir frowned. “Can’t we do poker or teen patti or something?”

“Look, this is the Mahabharata, even before Krish did the Gita, so can you hunker down and get with dice?”

“Oh, okay”, said Yudishtir, trapped in a time warp, “but you gotta play fair, okay?”