World prices of all basic foods - cereals, edible oils, meat - have skyrocketed in the last year, causing political tremors across developing countries. But they have not caused tremors in the US. Why not? Because most of the cost of a loaf of bread in the US is on account of processing, packaging, advertising and trade margins. So, a 100% rise in wheat price may translate into just a 2% rise for a loaf of bread.
These other components of a loaf's price may be amenable to monetary policy. So, in rich countries, most inflation may indeed be monetary. But even there, central banks recognize that food and fuel are less amenable to monetary manipulation than other items. So the European Central Bank, Bank of England and US Federal Reserve Board target not overall inflation but core inflation - that is, prices other than those of food and fuel. Monetary policy is even more helpless to combat inflation in poor countries, where food and fuel account for a big chunk of the consumer price index. If the RBI raises interest rates and cuts money supply, it will hit industrial production without reducing food prices.
That is why several poor countries have used not monetary policy but changes in import-export policy to curb food inflation. India is not alone in abolishing import taxes on imported food items and banning the export of food staples. China, Thailand, Indonesia, Vietnam, Egypt, Ethiopia, Kazakhstan and Cambodia have done likewise
Friedman was simply wrong in saying that inflation is always and everywhere a monetary phenomenon. It is not the case in poor countries where droughts or a sharp fall in global availability have suddenly caused inflation.
In India, the Raghuram Rajan Committee has just suggested that the Reserve Bank of India should cut down on its current multi-tasking, which covers exchange rates, growth and inflation, and focus principally on inflation control. But in Indian conditions, non-core inflation is often the dominant part of inflation, and in such cases monetary policy is a weak tool to curb prices. India is not Europe, and so the RBI should not try to behave like the European central bank.
Friday, June 20, 2008
Wednesday, June 18, 2008
Deal makers carve their space in VC, PE business : Livemint.com
Investment banks emerge as an important link between companies seeking funds and those vying to invest
Bangalore: When Thrissur, Kerala-based Manappuram General Finance and Leasing Ltd (Magfil), a small non-banking finance company with high ambitions, planned to raise funds, its biggest concern was getting the right valuation and an investor on board for the long term. To do so, I. Unnikrishnan, Magfil’s managing director, took a decision that companies such as his are increasingly making: Engage a specialist investment bank to findhim a suitor.
“We are an emerging company and it is very difficult for us to sell our story on our own to investors, so we needed a credible intermediary,” says Unnikrishnan. The firm raised Rs70 crore from Sequoia Capital and India Equity Partners, with Chennai-based boutique investment bank Spark Capital Advisors Ltd as adviser.
With venture capital (VC) and private equity (PE) investments in India growing, investment banks are emerging as an important link matching companies seeking funds and firms vying for investment opportunities. Experts say up to 40% of investment opportunities are helped by such intermediaries. “Investment banks are crucial as you need a third party during negotiations,” says K.P. Balaraj, managing director, Sequoia Capital India Advisors Pvt. Ltd.
Investment banks with large operations such as local arms of the US financial houses such as Merrill Lynch and Co. Inc. or the likes of home-grown Motilal Oswal Securities Ltd typically look for large deals—say, above $20 million (Rs86 crore) each. Professional services firms such as Ernst and Young and KPMG International, too, have large corporate finance teams. And, Yes Bank Ltd, IDBI Bank Ltd and ICICI Bank Ltd are among a growing breed of lenders with their own investment arms. But, it is the boutique investment banks and specialists such as Spark Capital or Veda Corporate Advisors Pvt. Ltd that are gaining custom from start-ups and firms with small investment needs. Others active in the PE and VC business include Avendus Capital, Edelweiss Capital Ltd, Cipher Capital Advisors Pvt. Ltd, Mape Advisory Group and o3 Capital Advisors Pvt. Ltd.
An investment bank’s job begins with screening companies, which are then introduced to VC and PE players.
With their own reputation at stake, investment bankers say screening and picking companies is a tough task. “We have a deal strike rate of 80-90%, so it is crucial for us to pick the right companies. Our reputation (before VC and PE firms) depends on the companies we propose,” says C. Venkat Subramanyam, founder and director at Veda. The Chennai investment bank has closed more than 30 deals, totalling more than $500 million, and emphasizes on client referrals.
After screening the company, the investment bank prepares an investor presentation, a profile of the product or service offered, and an all-inclusive information memo (that includes valuation), which would be required to interface with prospects. The firm then identifies five-eight potential investors, who could be interested in the deal. The discussions with an interested investor are pursued until a letter of intent is ready, which outlines the broad terms and structure of a potential deal.
Further negotiations include issues such as valuation, terms of transaction and the deal structure leading to due diligence process and other issues leading up to an agreement and the final deal closure, including exit routes. A deal typically closes in three-six months and the investment banks often stay on as advisers, as the promoter may require more funding in future. Sequoia-backed Magfil, for instance, is now looking at raising a second round of funding.
Fees for the investment bank usually varies between 2% and 4% of the capital raised and is paid by the investee company. With early stage firms, the investment banks often opt for a combination of a fee in cash and equity stake. Most promoters have unrealistic expectations on valuations and are disillusioned with the amount of equity dilution in a VC or PE round. Having an outsider on their board of directors is often a big issue with promoters. K. Ramakrishnan, Spark Capital’s investment banking executive director and head, says he has seen promoters who work hard “with the sole idea of getting back their full stake in the company from investors”.
VC and PE firms see value in not having to spend excessive time with company promoters in deals pitched by investment firms. The involvement, however, is not without drawbacks as the firms can create artificial expectations in terms of valuations. “As the investment firm usually proposes one deal to a number of funds, they can create a valuation bidding (among) funds” ending up with a mismatch, says Srini Vudayagiri, managing director Lightspeed Advisory Services India Pvt. Ltd. Experts say the opportunity and outlook for investment banks will continue to be positive, with more entrepreneurs coming into the ecosystem. “The market is untapped for $2-5 million deals,” says Deepak Srinath, founder director, Viedea Capital Advisors Pvt. Ltd, adding the firm has four deals being readied that could be closed in two months.
Thursday, April 3, 2008
Traditional indicators used by derivative analysts to gauge the market direction
MUMBAI: Retail investors are not the only ones who are scratching their heads, trying to figure out where the market is headed. Even the haloed bunch of analysts and experienced traders have been foxed regularly of late by the sharp market swings. The existing volatility in the market has resulted in several conventional indicators in equity derivatives turning ineffective, forcing them to trade on information on a daily basis. Some of the traditional indicators used by derivative analysts to gauge the market direction are
-->implied volatility (IV),
-->put call ratio (PCR),
-->cost-of-carry (C-o-C) and
-->levels of open interest.
are relevant when volumes are high and the bid-ask spread is not too much, but with volumes dipping almost 60% in a month and the spread widening, these indicators are losing potence,” said Karvy Stockbroking’s derivatives head TS Harihar. Ask is the price an investor pays when buying and bid is the price he gets when selling. When liquidity shrinks, the bid-ask spread also widens because of lack of enough investor interest. To gain a sense of the market direction, Mr Harihar checks out select Nifty option strikes with most demand and calculates the IVs of these strikes. “This helps us know where are the shorts or long positions. This method has helped us deduce that the Nifty could move in the 4,500-5,000 range as of now,” he added.
IVs in options, which reflect expectations about the market’s future volatility, is lower or falls when investor sentiment is bullish. It rises when it is bearish, based on the belief that bearish markets are riskier. Most derivative analysts were not ready to come on record to discuss this matter fearing loss of business, which is already on the wane due to sharp dip in volumes. “Nowadays, there is little that can be done with these conventional indicators beyond a day. We try to structure products on the basis of market information we have,” said a senior derivatives analyst with a brokerage. Analysts said investors are content with returns of 3-5% these days, especially when there is uncertainty whether directional bets are going haywire. Tracking the level of open interest, which has been more reliable than the rest on several, has also been of little use for these analysts. Some analysts, after seeing the lighter open interest position after the March series expiry, felt that the market had formed its bottom. Only time will tell if this indicator has let down analysts or not.
-->implied volatility (IV),
-->put call ratio (PCR),
-->cost-of-carry (C-o-C) and
-->levels of open interest.
are relevant when volumes are high and the bid-ask spread is not too much, but with volumes dipping almost 60% in a month and the spread widening, these indicators are losing potence,” said Karvy Stockbroking’s derivatives head TS Harihar. Ask is the price an investor pays when buying and bid is the price he gets when selling. When liquidity shrinks, the bid-ask spread also widens because of lack of enough investor interest. To gain a sense of the market direction, Mr Harihar checks out select Nifty option strikes with most demand and calculates the IVs of these strikes. “This helps us know where are the shorts or long positions. This method has helped us deduce that the Nifty could move in the 4,500-5,000 range as of now,” he added.
IVs in options, which reflect expectations about the market’s future volatility, is lower or falls when investor sentiment is bullish. It rises when it is bearish, based on the belief that bearish markets are riskier. Most derivative analysts were not ready to come on record to discuss this matter fearing loss of business, which is already on the wane due to sharp dip in volumes. “Nowadays, there is little that can be done with these conventional indicators beyond a day. We try to structure products on the basis of market information we have,” said a senior derivatives analyst with a brokerage. Analysts said investors are content with returns of 3-5% these days, especially when there is uncertainty whether directional bets are going haywire. Tracking the level of open interest, which has been more reliable than the rest on several, has also been of little use for these analysts. Some analysts, after seeing the lighter open interest position after the March series expiry, felt that the market had formed its bottom. Only time will tell if this indicator has let down analysts or not.
Monday, March 31, 2008
Hypothesis testing in an i-Bank
Say, a PE fund comes to an I-bank with a hypothesis: "IndianShipping sector is the next big thing to invest in near future"How to go to validate this hypothesis. And if got validated, how the i-Bank analyst go ahead to find a possible M&A, or investment strategy to help that PE fund/MNS to establish itself in India?
This calls for a lot of fundamental analysis ...
1. Start with the govt. website of the shipping ministry or the annual reports stack of the top few shipping companies ... look at the published reports and data ...
2. Judge the demand supply equation to assess the pricing environment ...
3. Interview prominent players to validate your thoughts and to get an idea of what the industry players have planned aheadAfter these exercises, u would be confident about the health of the sector.
For M&A targets,
1. Check the legal environment as to what is allowed and not allowed ...
2. Then based upon clients requirements or perceived environments, select a M&A target
3. Once a target is selected, do a full due diligence exercise; also find out how to woo it listed and private companies would have separate strategies
4. Then comes the valuation part ... where analysts come in
5. After the valuation is agreed upon, again you'll have to convince theregulators/govt bodies.6. Once all approvals are in place, the relationship will have to besolemnized by the shareholders/stakeholders
This calls for a lot of fundamental analysis ...
1. Start with the govt. website of the shipping ministry or the annual reports stack of the top few shipping companies ... look at the published reports and data ...
2. Judge the demand supply equation to assess the pricing environment ...
3. Interview prominent players to validate your thoughts and to get an idea of what the industry players have planned aheadAfter these exercises, u would be confident about the health of the sector.
For M&A targets,
1. Check the legal environment as to what is allowed and not allowed ...
2. Then based upon clients requirements or perceived environments, select a M&A target
3. Once a target is selected, do a full due diligence exercise; also find out how to woo it listed and private companies would have separate strategies
4. Then comes the valuation part ... where analysts come in
5. After the valuation is agreed upon, again you'll have to convince theregulators/govt bodies.6. Once all approvals are in place, the relationship will have to besolemnized by the shareholders/stakeholders
Free Cash Flow
What Is Free Cash Flow?
Most people like to have some money left over after paying the bills--to take a trip, fix up the house, or save for a rainy day. Businesses are no different. But what we call mad money, they call free cash flow. It represents the cash a firm has generated for its shareholders, after paying its expenses and investing in its growth. Free cash flow is equal to total cash flow (earnings with noncash charges added back in) minus capital spending. Free cash flow can be very useful in assessing a company's financial health because it strips away all the accounting assumptions built into earnings. A company's earnings may be high and growing, but until you look at free cash flow, you don't know if the company's really generated money in a given year or not. If you're an owner, that's ultimately what you're interested in. Free cash flows represent real cash. Earnings do not.
Net income + Depreciation/Amortization
- Change in Working Capital
- Capital Expenditure
----------------------------
= Free Cash Flow
Is Free Cash Flow Foolproof?
Although it provides a wealth of valuable information that investors really appreciate, FCF is not infallible. Crafty companies still have leeway when it comes to accounting sleight of hand. Without a regulatory standard for determining FCF, investors often disagree on exactly which items should and should not be treated as capital expenditures. Investors must therefore keep an eye on companies with high levels of FCF to see if these companies are under-reporting capital expenditure and R&D. Companies can also temporarily boost FCF by stretching out their payments, tightening payment collection policies and depleting inventories. These activities diminish current liabilities and changes to working capital. But the impacts are likely to be temporary.
The Trick of Hiding Receivables
Let's look at yet another example of FCF tomfoolery, which involves specious calculations of the current accounts receivable. When a company reports revenue, it records an account receivable, which represents cash that is yet to be received. The revenues then increase net income and cash from operations, but that increase is typically offset by an increase in current accounts receivable, which are then subtracted from cash from operations. When companies record their revenues as such, the net impact on cash from operations and free cash flow should be zero since no cash has been received. What happens when a company decides to record the revenue, even though the cash will not be received within a year? The receivable for a delayed cash settlement is therefore "non-current" and can get buried in another category like "other investments". Revenue then is still recorded and cash from operations increases, but no current account receivable is recorded to offset revenues. Thus, cash from operations and free cash flow enjoy a big but unjustified boost. Tricks like this one can be hard to catch.
Most people like to have some money left over after paying the bills--to take a trip, fix up the house, or save for a rainy day. Businesses are no different. But what we call mad money, they call free cash flow. It represents the cash a firm has generated for its shareholders, after paying its expenses and investing in its growth. Free cash flow is equal to total cash flow (earnings with noncash charges added back in) minus capital spending. Free cash flow can be very useful in assessing a company's financial health because it strips away all the accounting assumptions built into earnings. A company's earnings may be high and growing, but until you look at free cash flow, you don't know if the company's really generated money in a given year or not. If you're an owner, that's ultimately what you're interested in. Free cash flows represent real cash. Earnings do not.
Net income + Depreciation/Amortization
- Change in Working Capital
- Capital Expenditure
----------------------------
= Free Cash Flow
Is Free Cash Flow Foolproof?
Although it provides a wealth of valuable information that investors really appreciate, FCF is not infallible. Crafty companies still have leeway when it comes to accounting sleight of hand. Without a regulatory standard for determining FCF, investors often disagree on exactly which items should and should not be treated as capital expenditures. Investors must therefore keep an eye on companies with high levels of FCF to see if these companies are under-reporting capital expenditure and R&D. Companies can also temporarily boost FCF by stretching out their payments, tightening payment collection policies and depleting inventories. These activities diminish current liabilities and changes to working capital. But the impacts are likely to be temporary.
The Trick of Hiding Receivables
Let's look at yet another example of FCF tomfoolery, which involves specious calculations of the current accounts receivable. When a company reports revenue, it records an account receivable, which represents cash that is yet to be received. The revenues then increase net income and cash from operations, but that increase is typically offset by an increase in current accounts receivable, which are then subtracted from cash from operations. When companies record their revenues as such, the net impact on cash from operations and free cash flow should be zero since no cash has been received. What happens when a company decides to record the revenue, even though the cash will not be received within a year? The receivable for a delayed cash settlement is therefore "non-current" and can get buried in another category like "other investments". Revenue then is still recorded and cash from operations increases, but no current account receivable is recorded to offset revenues. Thus, cash from operations and free cash flow enjoy a big but unjustified boost. Tricks like this one can be hard to catch.
Sunday, March 30, 2008
Does high Net Income certainly adds value to company’s equity shareholders?
May be not. Because earnings available to share holders is the residual income after obligations to creditors have been availed of. Net income generated is the accounting income but shareholders are concerned of the economic value added (EVA) to the firm.
EVA is an estimate of true economic profit after adjusting for the opportunity cost of equity capital.
EVA= NOPAT - $WACC
NOPAT= Net operating profit after tax
= (Revenues- COGS- SG&A-Dep)(1-tax)
= EBIT(1-tax)
= Net Income +Net Interest Expense (1-tax)
$WACC = Weighted average cost of capital in dollar terms
= Capital employed * WACC
EVA is an estimate of true economic profit after adjusting for the opportunity cost of equity capital.
EVA= NOPAT - $WACC
NOPAT= Net operating profit after tax
= (Revenues- COGS- SG&A-Dep)(1-tax)
= EBIT(1-tax)
= Net Income +Net Interest Expense (1-tax)
$WACC = Weighted average cost of capital in dollar terms
= Capital employed * WACC
Valuation Methodologies
A complete business valuation often provides an objective starting point for both buyers and
sellers of businesses. Without a professional valuation, the seller may be ill prepared to meet with
buyers, especially if the buyers have a more accurate idea of the value of the business. In short,
without a comprehensive business valuation you may be leaving money on the table, and not even
know it!
Strictly speaking, a company's fair market value is the price at which the business would change
hands between a willing buyer and a willing seller when neither is under any compulsion to buy or
sell, and both parties have knowledge of relevant facts. This is a somewhat circuitous statement
because it begs the question, "How do buyers and sellers arrive at this value?"
Arriving at the transaction price requires that a value be placed on the company for sale. The
process of arriving at this value should include a detailed, comprehensive analysis which takes into
account a range of factors including the past, present, and most importantly, the future earnings and
prospects of the company.
Valuing a business is not an exact science. The valuation process involves comparing several
different approaches and selecting the best method, or a combination of methods, based on the
analyst's knowledge and experience. Generally, there are several different methodologies that
practitioners use to value businesses. These are:
1. Asset-based valuation;
2. Comparable transactions analysis;
3. Comparable public company method; and
4. Discounted cash flow.
In applying these methodologies to determine the value of a business, one or more of the following
factors are generally reviewed and analyzed:
1. The nature of the business and its operating history;
2. The industry and economic outlook;
3. The book value and financial condition of the company;
4. The company's earnings and dividend paying capacity;
5. The value of the company's intangible assets;
6. Market prices of public companies engaged in similar lines of business; and
7. Transaction prices of other companies engaged in similar lines of business.
Throughout the valuation process, it is important that the purpose of the valuation be kept in mind.
Although a valuation can serve many purposes, if the aim is to sell the business, then the valuation
should objectively determine the fair market value of the business. This objective market valuation
should also take into account the synergies and fit that the business may have with potential buyers.
In addition to valuing a business for an impending sale, a business valuation can also be required
for legal proceedings, estate planning, shareholder disputes and for capital raising.
Although commonly used "rules of thumb" may be a good starting point to obtain a rough idea of
the valuation of a business, a comprehensive business valuation is ultimately what is required.
Rules of thumb often provide a useful "back of the envelope" test of value that is based on
empirically available data. This empirically available data includes industry benchmarks or
historical transaction multiples. Although a rule of thumb can give a quick answer to a difficult
question, they do not take into account business-specific information that may significantly impact
the value of a business above and beyond industry benchmarks. In fact, the IRS weighs in on this
very issue, and states in everyone's favorite IRS Revenue Ruling 59-60 - that, "a determination of
fair market value, being a question of fact, will depend upon the circumstances in each case." The
Rule continues, "No formula can be devised that will be generally applicable to the multitude of
different valuation issues."
Asset Based Valuation
This valuation method is based on the premise that the value of a business can best be determined
by adding the value of all the assets of the company and subtracting the liabilities, leaving a net
asset valuation. An asset-based valuation can be further segmented into four approaches: (1) book
value, (2) replacement cost, (3) appraised value, and (4) excess earnings. Asset-based valuation
methods ignore the importance of a company's earnings and cash flow. For this reason, this
valuation approach is generally not used to determine the market value of a company - especially in
the context of an acquisition.
Book Value - The book value of a company is obtained from the balance sheet by taking the
adjusted historical cost of the company's assets and subtracting the liabilities. Tangible book value
is calculated the same way as finding regular book value, except that intangible assets (like
goodwill) are excluded in the calculation. Using book value does not provide a true indication of a
company's value, nor does it take into account the cash flow that can be generated by the company's
assets.
Replacement Cost - Replacement cost reflects the expenditures required to replicate the operations
of the company. Figuring replacement cost is essentially a make or buy decision.
Appraised Value of Assets - The difference between the appraised value of assets, and the
appraised value of liabilities is the net appraised value of the firm. This approach may be most
commonly used in a liquidation analysis because it reflects the divestiture of the underlying assets
rather than the ongoing operations of the firm.
Excess Earnings - In order to obtain a value of the business using the excess earnings method, a
premium is added to the appraised value of net assets. This premium is calculated by comparing the
earnings of a business before a sale and the earnings after the sale, with the difference referred to as
excess earnings. Assuming that the business is run more efficiently after a sale, the total amount of
excess earnings is capitalized (e.g., the difference in earnings is divided by some expected rate of
return) and this result is then added to the appraised value of net assets to derive the value of the
business.
Comparable Transactions Analysis
Comparable transactions analysis involves obtaining financial and operating data from other,
similar transactions and applying it to the target company to obtain a predicted value. These
historical transactions involve companies that have similar lines of business as the company being
valued. In analyzing comparable transactions, valuation professionals will often divide deal price
by some industry standard metric, such as EBITDA, or number of subscribers. An average or the
median of the resulting multiples is then multiplied by the target company's metrics to obtain a
company valuation.
Depending upon the relative similarity or difference of the target company's characteristics to the
group of comparable transactions, analysts may apply a discount or premium to the multiple before
it is multiplied by the target company's metrics.
Although comparable transactions analysis can be an important valuation methodology, its
usefulness is dependent on the relevance, quality and timeliness of historical transactions data. In
addition, due to the fact that the overwhelming majority of acquisitions involve privately-held
companies, there is often a dearth of financial data available to track the financial characteristics of
these transactions.
Comparable Public Company Method
Public markets are generally considered efficient at valuing companies. Each day, stock prices
reflect the instantaneous and independent pricing decisions of buyers and sellers around the world.
Thus, using existing public companies as a benchmark to value similar private companies is a
viable valuation methodology.
The comparable public company method involves selecting a group of publicly traded companies
that, on average, are representative of the company that is to be valued. What is important is that
investors would view the comparable companies and the target company as similar. Each
comparable company's financial or operating data (like revenues, EBITDA or book value) is
compared to each company's total market capitalization to obtain a valuation multiple. An average
of these multiples is then applied to derive the company's value. If several metric multiples are
used, professionals will often weigh each metric based on the relative importance of the metric in
the valuation of the company.
Because the comparable public companies will have different characteristics than the firm
undergoing the valuation, premiums or discounts may be applied to the target company. These
valuation premiums or discounts are based on generally accepted research and empirical data and
involve such adjustments as discounts for lack of marketability or control premiums. Unlike public
companies, privately held firms do not have an actively traded market for their shares. This
significant factor, referred to as liquidity or marketability, will result in private companies almost
always being valued at a discount to their public company peers.
Discounted Cash Flow
As a methodology, discounted cash flow is often considered the preferred tool to value businesses.
What sets this approach apart from the other approaches is that it is based on projected, future
operating results rather than on historical operating results. As a result, companies can be valued
based on their future cash flows, which may be somewhat different from historical results,
especially if a potential buyer expects to operate some aspects of the business differently
Discounted cash flow analysis consists of projecting future cash flows, deriving a discount rate and
applying this discount rate to the future cash flows and terminal value. This detailed analysis
depends on accurate financial projections and discount rate assumptions. The resulting company
valuation is the sum of discounted future cash flows and the discounted terminal value.
Projecting Future Cash Flows - The first step in conducting a discounted cash flow analysis is to
project future operating cash flows over a projected holding period, generally five years. These
projections are generally done before debt (but after taxes) to obtain an accurate indication of future
free cash flow, without making any assumptions about the company's leverage. The future free cash
flow is the cash left over after operating the business and investing in necessary property, plant and
equipment, but before servicing debt or paying out any cash to owners.
Discount Rate - The second step in the discounted cash flow analysis is to develop a discount rate.
The discount rate is also referred to as the weighted average cost of capital (WACC) and is best
thought of as a percentage which represents the return expected by an owner of the company
commensurate with the risk associated with the investment. For example, a risky Internet start-up
with little in the way of a demonstrated track record, would receive a higher discount rate than a
company with a long history of growth and profitability and more obvious future prospects.
Discount rates are generally calculated by deriving the company's cost of equity capital and the
company's after-tax cost of debt (note that although the cash flows are projected on a debt free
basis, it is important to derive a WACC based in part on the company's expected cost of debt, since
this reflects the company's level of risk). These financing costs are weighted and result in a WACC
percentage, or discount rate. The cost of equity capital is generally determined using the capital
asset pricing model (CAPM), which is based on three inputs: (1) the risk free rate (the expected
return on long term government bonds - currently about 6%), (2) the beta, which is a measure of the
relative riskiness of the company (compared to the market), and (3) the equity risk premium (the
expected rate of return on common stocks in the long run - currently about 8%). The derived
discount rate is applied to the projected future cash flows to determine the present value of the
future cash flows.
Terminal Value - The next major step involves calculating a terminal, or residual value. A terminal
value calculation combines assumptions used to derive future projections and the discount rate to
obtain a current value for a company's long term future cash flows. The assumption underlying this
step is that a company is a going concern and that its value is imbedded in its ability to generate
value not just today, but well into the future. A terminal value is calculated by determining the cash
flow in the period beyond the last projected period. This predicted future cash flow is then
capitalized by a percentage (represented by the company's discount rate less the predicted long term
growth rate) and this capitalized figure is then discounted back to the present using the discount
rate.
Comprehensive Business Valuation
Together with an analysis of the company's operating history, business, industry and competitive
environment, the results from one or more of these valuation methodologies are combined to form
the basis of a comprehensive business valuation. To be accurate, this comprehensive business
valuation should take into account all aspects of the company's business, including factors which
may be difficult to value and that do not show up on financial statements. These factors include,
among other things, such value enhancers as proprietary technology, strong market position, an
extensive sales network and an experienced management, that in the case of a sale, is willing to
remain with the company.
Summary
There are four broad and generally accepted valuation methodologies. They are: (1) asset-based
valuation, (2) comparable transactions analysis, (3) comparable public company method and (4)
discounted cash flow analysis. Valuation experts will value a company with more than one of the
methodologies, comparing results among the different approaches to determine a correct valuation,
all the time keeping in mind the strengths and weaknesses inherent in each approach.
sellers of businesses. Without a professional valuation, the seller may be ill prepared to meet with
buyers, especially if the buyers have a more accurate idea of the value of the business. In short,
without a comprehensive business valuation you may be leaving money on the table, and not even
know it!
Strictly speaking, a company's fair market value is the price at which the business would change
hands between a willing buyer and a willing seller when neither is under any compulsion to buy or
sell, and both parties have knowledge of relevant facts. This is a somewhat circuitous statement
because it begs the question, "How do buyers and sellers arrive at this value?"
Arriving at the transaction price requires that a value be placed on the company for sale. The
process of arriving at this value should include a detailed, comprehensive analysis which takes into
account a range of factors including the past, present, and most importantly, the future earnings and
prospects of the company.
Valuing a business is not an exact science. The valuation process involves comparing several
different approaches and selecting the best method, or a combination of methods, based on the
analyst's knowledge and experience. Generally, there are several different methodologies that
practitioners use to value businesses. These are:
1. Asset-based valuation;
2. Comparable transactions analysis;
3. Comparable public company method; and
4. Discounted cash flow.
In applying these methodologies to determine the value of a business, one or more of the following
factors are generally reviewed and analyzed:
1. The nature of the business and its operating history;
2. The industry and economic outlook;
3. The book value and financial condition of the company;
4. The company's earnings and dividend paying capacity;
5. The value of the company's intangible assets;
6. Market prices of public companies engaged in similar lines of business; and
7. Transaction prices of other companies engaged in similar lines of business.
Throughout the valuation process, it is important that the purpose of the valuation be kept in mind.
Although a valuation can serve many purposes, if the aim is to sell the business, then the valuation
should objectively determine the fair market value of the business. This objective market valuation
should also take into account the synergies and fit that the business may have with potential buyers.
In addition to valuing a business for an impending sale, a business valuation can also be required
for legal proceedings, estate planning, shareholder disputes and for capital raising.
Although commonly used "rules of thumb" may be a good starting point to obtain a rough idea of
the valuation of a business, a comprehensive business valuation is ultimately what is required.
Rules of thumb often provide a useful "back of the envelope" test of value that is based on
empirically available data. This empirically available data includes industry benchmarks or
historical transaction multiples. Although a rule of thumb can give a quick answer to a difficult
question, they do not take into account business-specific information that may significantly impact
the value of a business above and beyond industry benchmarks. In fact, the IRS weighs in on this
very issue, and states in everyone's favorite IRS Revenue Ruling 59-60 - that, "a determination of
fair market value, being a question of fact, will depend upon the circumstances in each case." The
Rule continues, "No formula can be devised that will be generally applicable to the multitude of
different valuation issues."
Asset Based Valuation
This valuation method is based on the premise that the value of a business can best be determined
by adding the value of all the assets of the company and subtracting the liabilities, leaving a net
asset valuation. An asset-based valuation can be further segmented into four approaches: (1) book
value, (2) replacement cost, (3) appraised value, and (4) excess earnings. Asset-based valuation
methods ignore the importance of a company's earnings and cash flow. For this reason, this
valuation approach is generally not used to determine the market value of a company - especially in
the context of an acquisition.
Book Value - The book value of a company is obtained from the balance sheet by taking the
adjusted historical cost of the company's assets and subtracting the liabilities. Tangible book value
is calculated the same way as finding regular book value, except that intangible assets (like
goodwill) are excluded in the calculation. Using book value does not provide a true indication of a
company's value, nor does it take into account the cash flow that can be generated by the company's
assets.
Replacement Cost - Replacement cost reflects the expenditures required to replicate the operations
of the company. Figuring replacement cost is essentially a make or buy decision.
Appraised Value of Assets - The difference between the appraised value of assets, and the
appraised value of liabilities is the net appraised value of the firm. This approach may be most
commonly used in a liquidation analysis because it reflects the divestiture of the underlying assets
rather than the ongoing operations of the firm.
Excess Earnings - In order to obtain a value of the business using the excess earnings method, a
premium is added to the appraised value of net assets. This premium is calculated by comparing the
earnings of a business before a sale and the earnings after the sale, with the difference referred to as
excess earnings. Assuming that the business is run more efficiently after a sale, the total amount of
excess earnings is capitalized (e.g., the difference in earnings is divided by some expected rate of
return) and this result is then added to the appraised value of net assets to derive the value of the
business.
Comparable Transactions Analysis
Comparable transactions analysis involves obtaining financial and operating data from other,
similar transactions and applying it to the target company to obtain a predicted value. These
historical transactions involve companies that have similar lines of business as the company being
valued. In analyzing comparable transactions, valuation professionals will often divide deal price
by some industry standard metric, such as EBITDA, or number of subscribers. An average or the
median of the resulting multiples is then multiplied by the target company's metrics to obtain a
company valuation.
Depending upon the relative similarity or difference of the target company's characteristics to the
group of comparable transactions, analysts may apply a discount or premium to the multiple before
it is multiplied by the target company's metrics.
Although comparable transactions analysis can be an important valuation methodology, its
usefulness is dependent on the relevance, quality and timeliness of historical transactions data. In
addition, due to the fact that the overwhelming majority of acquisitions involve privately-held
companies, there is often a dearth of financial data available to track the financial characteristics of
these transactions.
Comparable Public Company Method
Public markets are generally considered efficient at valuing companies. Each day, stock prices
reflect the instantaneous and independent pricing decisions of buyers and sellers around the world.
Thus, using existing public companies as a benchmark to value similar private companies is a
viable valuation methodology.
The comparable public company method involves selecting a group of publicly traded companies
that, on average, are representative of the company that is to be valued. What is important is that
investors would view the comparable companies and the target company as similar. Each
comparable company's financial or operating data (like revenues, EBITDA or book value) is
compared to each company's total market capitalization to obtain a valuation multiple. An average
of these multiples is then applied to derive the company's value. If several metric multiples are
used, professionals will often weigh each metric based on the relative importance of the metric in
the valuation of the company.
Because the comparable public companies will have different characteristics than the firm
undergoing the valuation, premiums or discounts may be applied to the target company. These
valuation premiums or discounts are based on generally accepted research and empirical data and
involve such adjustments as discounts for lack of marketability or control premiums. Unlike public
companies, privately held firms do not have an actively traded market for their shares. This
significant factor, referred to as liquidity or marketability, will result in private companies almost
always being valued at a discount to their public company peers.
Discounted Cash Flow
As a methodology, discounted cash flow is often considered the preferred tool to value businesses.
What sets this approach apart from the other approaches is that it is based on projected, future
operating results rather than on historical operating results. As a result, companies can be valued
based on their future cash flows, which may be somewhat different from historical results,
especially if a potential buyer expects to operate some aspects of the business differently
Discounted cash flow analysis consists of projecting future cash flows, deriving a discount rate and
applying this discount rate to the future cash flows and terminal value. This detailed analysis
depends on accurate financial projections and discount rate assumptions. The resulting company
valuation is the sum of discounted future cash flows and the discounted terminal value.
Projecting Future Cash Flows - The first step in conducting a discounted cash flow analysis is to
project future operating cash flows over a projected holding period, generally five years. These
projections are generally done before debt (but after taxes) to obtain an accurate indication of future
free cash flow, without making any assumptions about the company's leverage. The future free cash
flow is the cash left over after operating the business and investing in necessary property, plant and
equipment, but before servicing debt or paying out any cash to owners.
Discount Rate - The second step in the discounted cash flow analysis is to develop a discount rate.
The discount rate is also referred to as the weighted average cost of capital (WACC) and is best
thought of as a percentage which represents the return expected by an owner of the company
commensurate with the risk associated with the investment. For example, a risky Internet start-up
with little in the way of a demonstrated track record, would receive a higher discount rate than a
company with a long history of growth and profitability and more obvious future prospects.
Discount rates are generally calculated by deriving the company's cost of equity capital and the
company's after-tax cost of debt (note that although the cash flows are projected on a debt free
basis, it is important to derive a WACC based in part on the company's expected cost of debt, since
this reflects the company's level of risk). These financing costs are weighted and result in a WACC
percentage, or discount rate. The cost of equity capital is generally determined using the capital
asset pricing model (CAPM), which is based on three inputs: (1) the risk free rate (the expected
return on long term government bonds - currently about 6%), (2) the beta, which is a measure of the
relative riskiness of the company (compared to the market), and (3) the equity risk premium (the
expected rate of return on common stocks in the long run - currently about 8%). The derived
discount rate is applied to the projected future cash flows to determine the present value of the
future cash flows.
Terminal Value - The next major step involves calculating a terminal, or residual value. A terminal
value calculation combines assumptions used to derive future projections and the discount rate to
obtain a current value for a company's long term future cash flows. The assumption underlying this
step is that a company is a going concern and that its value is imbedded in its ability to generate
value not just today, but well into the future. A terminal value is calculated by determining the cash
flow in the period beyond the last projected period. This predicted future cash flow is then
capitalized by a percentage (represented by the company's discount rate less the predicted long term
growth rate) and this capitalized figure is then discounted back to the present using the discount
rate.
Comprehensive Business Valuation
Together with an analysis of the company's operating history, business, industry and competitive
environment, the results from one or more of these valuation methodologies are combined to form
the basis of a comprehensive business valuation. To be accurate, this comprehensive business
valuation should take into account all aspects of the company's business, including factors which
may be difficult to value and that do not show up on financial statements. These factors include,
among other things, such value enhancers as proprietary technology, strong market position, an
extensive sales network and an experienced management, that in the case of a sale, is willing to
remain with the company.
Summary
There are four broad and generally accepted valuation methodologies. They are: (1) asset-based
valuation, (2) comparable transactions analysis, (3) comparable public company method and (4)
discounted cash flow analysis. Valuation experts will value a company with more than one of the
methodologies, comparing results among the different approaches to determine a correct valuation,
all the time keeping in mind the strengths and weaknesses inherent in each approach.
HEDGE FUNDS
A hedge fund is a private investment fund that charges a performance fee and is typically open to only a limited range of qualified investors
In the US, in order for an investment fund to be exempt from direct regulation, it must be open to only a limited number and accredited investors
Due to lack of regulation that otherwise apply to mutual funds, brokerage firms or investment advisers can invest in more complex and more risky investments(complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage) than a public fund might
As the name implies, HFs hedge the risk of potential loss using a variety of methods, most notably short selling, but they may not apply to funds that hedge their investments
Being outside the regulatory regime(that applies to retail funds), HFs have acquired a reputation for secrecy.
The assets under management of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage.
Hedge fund activity in the public securities markets has grown substantially as it constitutes approximately 30% of all U.S. fixed-income security transactions, 55% of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, as well as 30% of equity trades. Hedge Funds dominate certain specialty markets such as trading in derivatives with high-yield ratings, and distressed debt
Difference from Mutual Funds
Unlike mutual funds, however, hedge funds typically take long and short positions in assets to lower portfolio risk arising from broad market movements. How?
A hedge fund may take long positions in certain stocks, and short positions in certain other stocks such that their portfolio beta is close to zero. A beta close to zero means that the portfolio will remain relatively unchanged due to the broad market movement. Such a portfolio will primarily change if the stocks move more than the broad market
Consider, for instance, Hero Honda and Bajaj Auto. The hedge fund may buy Bajaj Auto and short Hero Honda, such that the portfolio beta is close to zero. Suppose Bajaj Auto moves up by 10 per cent, and Hero Honda and the broad market move up by 7 per cent. The fund's net gain is 3 per cent. This is because Bajaj Auto outperformed the market, precisely what the hedge fund was betting on when it constructed the portfolio.
In short, hedge funds generate security-specific returns, and attempt to lower market risk. Notice that a mutual fund would have gained 10 per cent if it had invested in Reliance.
To improve their security-specific returns, hedge funds leverage their portfolio. The fund may collect, say, Rs 100 crore from investors, borrow Rs 50 crore, and invest Rs 150 crore.
In the above instance, an unleveraged fund may have gained only 3 per cent of Rs 100 crore. But a hedge fund that has borrowed Rs 50 crore will gain 3 per cent on Rs 150 crore less interest cost on Rs 50 crore.
Hedge fund risk
Investing in HFs can be a riskier proposition than investing in a regulated fund, despite the traditional notion of a "hedge" being a means of reducing the risk of a bet or investment. HFs have following charateristics :
Leverage : a HF will typically borrow money, with certain funds borrowing sums many times greater than the initial investment. Eg HF will borrow $9 for every $1.So loss of 10% will wipe out complete investment.
Short Selling
Appetite for risk : Investments that carry high degrees of risk, such as high yield bonds, distressed securities and CDOs based on sub-prime mortgages.
Lack of Transperency : Difficult for an investor to assess trading strategies, diversification of the portfolio and other factors relevant to an investment decision.
Lack of Regulation : HFs are not subject to as much oversight from financial regulators, and therefore some may carry undisclosed structural risks.
Investors in hedge funds are willing to take these risks because of the corresponding rewards. Leverage amplifies profits as well as losses; short selling opens up new investment opportunities; riskier investments typically provide higher returns; secrecy helps to prevent imitation by competitors; and being unregulated reduces costs and allows the investment manager more freedom to make decisions on a purely commercial basis.
Open-ended nature
Hedge funds are typically open-ended, in that the price of each share being NAV per interest/share. To realise the investment, the investor will redeem the interests or shares at NAV prevailing at that time. Therefore, if the value of the underlying investments has increased (and the NAV per interest/share has therefore also increased) then the investor will receive a larger sum on redemption than it paid on investment. Investors do not typically trade shares among themselves and hedge funds do not typically distribute profits to investors before redemption. This contrasts with a closed-ended fund, which has a limited number of shares which are traded among investors, and which distributes its profits.
Listing : HFs often list their shares on smaller stock exchanges in the hope that the low level of quasi-regulatory oversight will give comfort to investors and to attract certain funds, such as some pension funds, that have bars or caps on investing in unlisted shares. Shares in the listed HF are not traded on the exchange, but the fund’s monthly NAV and certain other events must be publicly announced there.
In the US, in order for an investment fund to be exempt from direct regulation, it must be open to only a limited number and accredited investors
Due to lack of regulation that otherwise apply to mutual funds, brokerage firms or investment advisers can invest in more complex and more risky investments(complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage) than a public fund might
As the name implies, HFs hedge the risk of potential loss using a variety of methods, most notably short selling, but they may not apply to funds that hedge their investments
Being outside the regulatory regime(that applies to retail funds), HFs have acquired a reputation for secrecy.
The assets under management of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage.
Hedge fund activity in the public securities markets has grown substantially as it constitutes approximately 30% of all U.S. fixed-income security transactions, 55% of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, as well as 30% of equity trades. Hedge Funds dominate certain specialty markets such as trading in derivatives with high-yield ratings, and distressed debt
Difference from Mutual Funds
Unlike mutual funds, however, hedge funds typically take long and short positions in assets to lower portfolio risk arising from broad market movements. How?
A hedge fund may take long positions in certain stocks, and short positions in certain other stocks such that their portfolio beta is close to zero. A beta close to zero means that the portfolio will remain relatively unchanged due to the broad market movement. Such a portfolio will primarily change if the stocks move more than the broad market
Consider, for instance, Hero Honda and Bajaj Auto. The hedge fund may buy Bajaj Auto and short Hero Honda, such that the portfolio beta is close to zero. Suppose Bajaj Auto moves up by 10 per cent, and Hero Honda and the broad market move up by 7 per cent. The fund's net gain is 3 per cent. This is because Bajaj Auto outperformed the market, precisely what the hedge fund was betting on when it constructed the portfolio.
In short, hedge funds generate security-specific returns, and attempt to lower market risk. Notice that a mutual fund would have gained 10 per cent if it had invested in Reliance.
To improve their security-specific returns, hedge funds leverage their portfolio. The fund may collect, say, Rs 100 crore from investors, borrow Rs 50 crore, and invest Rs 150 crore.
In the above instance, an unleveraged fund may have gained only 3 per cent of Rs 100 crore. But a hedge fund that has borrowed Rs 50 crore will gain 3 per cent on Rs 150 crore less interest cost on Rs 50 crore.
Hedge fund risk
Investing in HFs can be a riskier proposition than investing in a regulated fund, despite the traditional notion of a "hedge" being a means of reducing the risk of a bet or investment. HFs have following charateristics :
Leverage : a HF will typically borrow money, with certain funds borrowing sums many times greater than the initial investment. Eg HF will borrow $9 for every $1.So loss of 10% will wipe out complete investment.
Short Selling
Appetite for risk : Investments that carry high degrees of risk, such as high yield bonds, distressed securities and CDOs based on sub-prime mortgages.
Lack of Transperency : Difficult for an investor to assess trading strategies, diversification of the portfolio and other factors relevant to an investment decision.
Lack of Regulation : HFs are not subject to as much oversight from financial regulators, and therefore some may carry undisclosed structural risks.
Investors in hedge funds are willing to take these risks because of the corresponding rewards. Leverage amplifies profits as well as losses; short selling opens up new investment opportunities; riskier investments typically provide higher returns; secrecy helps to prevent imitation by competitors; and being unregulated reduces costs and allows the investment manager more freedom to make decisions on a purely commercial basis.
Open-ended nature
Hedge funds are typically open-ended, in that the price of each share being NAV per interest/share. To realise the investment, the investor will redeem the interests or shares at NAV prevailing at that time. Therefore, if the value of the underlying investments has increased (and the NAV per interest/share has therefore also increased) then the investor will receive a larger sum on redemption than it paid on investment. Investors do not typically trade shares among themselves and hedge funds do not typically distribute profits to investors before redemption. This contrasts with a closed-ended fund, which has a limited number of shares which are traded among investors, and which distributes its profits.
Listing : HFs often list their shares on smaller stock exchanges in the hope that the low level of quasi-regulatory oversight will give comfort to investors and to attract certain funds, such as some pension funds, that have bars or caps on investing in unlisted shares. Shares in the listed HF are not traded on the exchange, but the fund’s monthly NAV and certain other events must be publicly announced there.
Wednesday, March 5, 2008
MCX rising when Sensex is falling
Since start of this year Sensex has fallen 20% but MCX index has risen 18%.
Observers blame supply shortages esp crude oil,others see that fund buying is behind the spike price.
US has been lowering the lending rates which expect inflation to accelerate and commodities provide an hedge towards inflation. More over USD getting weak, investors get an easy access in holding the other currencies. After an initial inflow of the money, the emerging markets have not been doing well. Instead money is flowing to commodities.
With yields no the bond so low and unprotected from inflation, money is flowing into commodities.
While MCX Metal index has risen 22%, BSE Metal Index has fallen 21%(BSE Metal Index largely compose of steel companies while MCX Metal index includes precious metals and non-ferrous)
Observers blame supply shortages esp crude oil,others see that fund buying is behind the spike price.
US has been lowering the lending rates which expect inflation to accelerate and commodities provide an hedge towards inflation. More over USD getting weak, investors get an easy access in holding the other currencies. After an initial inflow of the money, the emerging markets have not been doing well. Instead money is flowing to commodities.
With yields no the bond so low and unprotected from inflation, money is flowing into commodities.
While MCX Metal index has risen 22%, BSE Metal Index has fallen 21%(BSE Metal Index largely compose of steel companies while MCX Metal index includes precious metals and non-ferrous)
Saturday, January 26, 2008
January update
- US currency fell Vs 14 out of 16 most actively traded currencies in 2007 as the Fed Reserve reduced borrowing costs three times to temper the worst housing slump since 1991.
- Auto parts supplier Delphi Corp. was spun-off from GM in 1999
- RBI permits short selling and utilizing stock lending and borrowing mechanisms (LBM) for FIIs registered with SEBI. This will lead to better price discovery and boost volumes on the exchanges and save the brokers from the bitter experience of auction of the shares against their short selling commitments.
- Delhi high court said CDMA players will have to wait for the spectrum allocation & will subject to outcome of the appeal filed by the COAI-lobby for GSM.RCOM has already paid Rs 1650cr as licencing fees for GSM services. DoT said that it will allocate spectrum to companies such as Bharti Airtel Ltd., Vodafone Essar Ltd., & Idea based on TRAI’s recommendations, which proposed that existing operators serve up to 4 times the number of subscribers required to be eligible for more spectrum.
- Reliance – ADAG plans to sell 10.1% of Reliance Power later this month ,raising around Rs 11000cr (Price band – Rs 405-450).IPOs to hit market in 2008 :
o
o Ideal Road Builders
o Wockhart Hospitals
o Oil India Ltd
o National Hydro Power Corp Ltd(NHPC)
o Rural Electrification Corp.
o Lodha Builders(FPO)
o Sterlite
o Jaiprakash Power Ventures(FPO)
o Coal
- TATAs clinch Jaguar and Land Rover deals from Ford in
- Allowing sht selling from next month by Institutional Investors is considered a significant move after intro of derivatives in 2001(part of Asia trend).Initially SS will be allowed in only 5% of the publically traded securities, which happen to be stocks in which investors express –ve view by either buying put options or selling futures
- BSNL-Largest telecom comp by revenues plans to start a tower comp.It as most of the towers in tier 2 towns/villages. Idea/Spice and others will rent out those towers to have pan
Total revenues : Rs 39715cr
Bharti Infratel sold 9% stake for $1bn to a consortium led by
BSNL : 31000 GSM towers
7500 CDMA towers
Plans to add 30000 towers this year
CDMA can have 5-6 tenants where GSM can only have 1-2
On 26th Dec Spice sold around 875 towers for RS 600cr to Quipo Tele com Infrastructure Ltd
In Aug, RCOM sold 5% of RTIL to investors for $337m (13000 towers)
In Dec, Bharti(42%), Vodafone Essar(42%) and Idea Cellular(16%) formed JV called
Jan18,2008
- Last week spectrum was distributed to small players but it invited almost no protest presuming without spectrum ,companies posed little threat and they will be invisible w/o spectrum. DoT,s spectrum distribution policy has been not transparent & that includes the RCOM deal. DoT abandoned the competitive process has charged companies to get spectrum at 2001 prices. For Ex Idea got Mumbai licence for only Rs203cr but is valued several thousand crores. The decision to distribute license w/o an auction is slap in the face.
Jan21,2008
- Rights Issue : Company gives shared to only existing share holders. shares are typically offered at 30-50 % discount, hence company’s market price rises just before the rights issue.
- Follow on Public Issue(FPO) : When a listed company makes a public offer -> Secondary issue
- Simple Moving Average (SMA) : A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
In other words, this is the average stock price over a certain period of time. Keep in mind that equal weighting is given to each daily price. As shown in the chart above, many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend. As shown by the blue arrows, short-term averages (e.g. 15-period SMA) act as levels of support when the price experiences a pullback. Support levels become stronger and more significant as the number of time periods used in the calculations increases.
Generally, when you hear the term "moving average", it is in reference to a simple moving average. This can be important, especially when comparing to an exponential moving average (EMA).
- Moving Average(MA) : An indicator frequently used in technical analysis showing the average value of a security's price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.
Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or "noise", that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average (e.g.15-day) crosses above a longer-term average (e.g. 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average
- Exponential Moving Average (EMA) : A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. Also known as "exponentially weighted moving average".This type of moving average reacts faster to recent price changes than a simple moving average.
·One way to judge the fair market value of
if the M-cap/GDP ratio is greater than 100%, it is a sign that the market is overvalued. A value of around 50%, or a value that’s lower than the historical average of the market, is said to indicate undervaluation. According to Warren Buffet, if this ratio rises to unprecedented levels, it is a strong warning signal and if it approaches 200%, one is playing with fire. This rule of thumb has been proved to be true in the past. In 2000, M-cap/GDP ratio touched a historical high level of 153% in the
- Foreign capital comes to
- FIIs who buy shares of Indian companies
- FDI
- NRI deposits which are done to take advantage of higher interest rates in
- By Indian companies buying abroad- External commercial borrowing(ECB) to benefit from lower interest rates in intln market
- the fed reduced the discount rate from 4.25 down to 3.5 per cent, the interest it charges to make direct loans to banks. Commercial banks responded to the Fed's action on the funds rate by announcing similar cuts of three-quarter of a percent on its prime lending rate, the benchmark for millions of business and consumer loans.
Parameters to look out for:
o P/E
o How much away from 52 week high and low
o much away from 200 DMA
Sectors to look out for in 2008
Infrastructure and real estate
The economy is expected to grow at a healthy rate of over eight percent per annum. Domestic consumption and investments in infrastructure are the prime drivers of growth in the economy. Infrastructure and real estate sectors' activities go in high gear in a fast-growing economy. Infrastructure is one of the most talked-about sectors in India. There is a huge demand for infrastructure development in the hotel and hospitality industry, airports, housing, malls, special economic zones (SEZ) and rail/road infrastructure. Many new schemes are coming under the public-private partnership (PPP) scheme. Many real estate companies were listed in the stock markets in the last couple of years.
Power and energy
The economy is growing at around nine percent per annum. Since the demand for power and energy has a direct co-relation with the growth in the economy, India's per capita consumption of energy is growing quite fast. Companies are going in for capacity addition to fulfill the growing demand for energy. As a result, there is a lot of optimism in the power and energy sector stocks.
Banking
Banking services are not much in demand in India (especially in rural markets). Private and foreign banks increased competition in the banking sector by introducing new services. Indian banks are also looking at increasing their profitability by increasing their customer reach, technology usage and with innovative ways to better serve their customers. It is expected that a lot of value will be unlocked with consolidation among smaller banks (especially smaller PSU banks) and there is a good opportunity to make high returns in the next few years.
Retail
The retail sector is one of the hottest sectors in India. The share of organised retail sector is less than five percent of the total retail market in India. The share of the organised retail sector is growing rapidly year after year. Many big players have already jumped into the Indian retail sector and many others are showing active interest in this sector.
Telecom
India is one of the fastest-growing mobile markets in the world. The market of mobile companies is growing month after month. The telecom penetration in India is less than 25 percent which is quite less in comparison to near the 100 percent in developed economies. In the short term, telecom companies are showing sideway movement due to confusion in spectrum and license allotment by TRAI to telecom companies but there is a huge potential for growth for telecom companies in India. Investors should use the current situation to accumulate these stocks with a long-term perspective.
The economy is expected to grow at a healthy rate of over eight percent per annum. Domestic consumption and investments in infrastructure are the prime drivers of growth in the economy. Infrastructure and real estate sectors' activities go in high gear in a fast-growing economy. Infrastructure is one of the most talked-about sectors in India. There is a huge demand for infrastructure development in the hotel and hospitality industry, airports, housing, malls, special economic zones (SEZ) and rail/road infrastructure. Many new schemes are coming under the public-private partnership (PPP) scheme. Many real estate companies were listed in the stock markets in the last couple of years.
Power and energy
The economy is growing at around nine percent per annum. Since the demand for power and energy has a direct co-relation with the growth in the economy, India's per capita consumption of energy is growing quite fast. Companies are going in for capacity addition to fulfill the growing demand for energy. As a result, there is a lot of optimism in the power and energy sector stocks.
Banking
Banking services are not much in demand in India (especially in rural markets). Private and foreign banks increased competition in the banking sector by introducing new services. Indian banks are also looking at increasing their profitability by increasing their customer reach, technology usage and with innovative ways to better serve their customers. It is expected that a lot of value will be unlocked with consolidation among smaller banks (especially smaller PSU banks) and there is a good opportunity to make high returns in the next few years.
Retail
The retail sector is one of the hottest sectors in India. The share of organised retail sector is less than five percent of the total retail market in India. The share of the organised retail sector is growing rapidly year after year. Many big players have already jumped into the Indian retail sector and many others are showing active interest in this sector.
Telecom
India is one of the fastest-growing mobile markets in the world. The market of mobile companies is growing month after month. The telecom penetration in India is less than 25 percent which is quite less in comparison to near the 100 percent in developed economies. In the short term, telecom companies are showing sideway movement due to confusion in spectrum and license allotment by TRAI to telecom companies but there is a huge potential for growth for telecom companies in India. Investors should use the current situation to accumulate these stocks with a long-term perspective.
Sunday, January 6, 2008
Bharti Airtel : NOV 2007
Capex forecasts: Combination of higher subscribers growth, lower subscribers quality, lower incremental ARPU growth and MOU (minutes of use)….higher subscribers targets qualify for additional spectrum and higher capex.
Key upside risks: ability to monetize non core business like DTH, wimax wireless, broadband, or higher than expected valuation of tower business.
Forecasts for FY09: 6% decline in ARPU and MOU. 26% for overall capex.37% for FY10
The spectrum policy : spectrum allocations are fragmented with allocations on circle2circle, than operator 2 operator basis rather than through a uniform national auction system. New policy will raise subscribers targets for incumbents GSM players and new ones like RCOM. Allocations are well below intl benchmarks .Policy discourages large GSM players to further fragment spectrum resources. Lawsuit filed in TDSAT(telecom disputes settlement and appellate tribunal) and TEC(telecom engg centre ) has suggested new subscribers norms for incremental spectrum ,higher than TRAI’s -> divergent views among GSM players weaken future stand. Aircel n spice have already withdrawn from lawsuit.
TEC norms not likely to be adopted since they are mirror image of the TRAI’s and norms from TRAI will be implemented.
Players of Bharti’s league r well placed to accommodate marginal subscribers on the account of the early adopters and contract subscribers. They have managed to capture better quality subscribers on the back of their early move adv. DOT’s decision to move CDMA player RCOM to GSM sphere through a non transparent process raises real ques about politics of spectrum policy
Spectrum constrains are restricted to urban areas & unlikely to hamper rural areas. Bharti offers one of the best plays on the Indian subscribers growth story and entry of new players is unlikely to threat Bharti’s mark share.
ARPU concerns: Bharti’s strong Q results confirms that company is well placed to accommodate marginal subscribers base that will be created by its aggressive drive to tap rural & semi urban areas. Furthermore its initiatives to cut local call rates 4 lifetime may boost usage.
Bharti will have to install 18k capacity towers in case new TRAI norms are accepted-> will lead to increased data revenues. Markets are not aware of the value proposition of the capacity towers. This will lead to addional voice capacity n reduction in network congestion. It will address mobile no portability (MNP).Tower sharing is yet to come.
1. Coverage towers : installed in new region to acquire new customers
2. Capacity towers : used to handle excessive voice traffic in particular service area. They increase overall voice capacity.
Markets are over reacting to the spectrum constrains & appear to be pre-occupied with the notion of increase capex while ignoring the value proposition of the capacity towers. Significant part of new tower investments can be offset by the tower sharing. CTs will be concentrated to commercial locations. Supply side constrains such as high demand for land, high real estate prices & lower available of commercial building makes tower sharing a sense.
Improving data revenues: Bharti has been losing on this and have an opportunity to step up the data capacity by taking adv of lower network utilization (which puts upward pressure on network op costs). During high traffic it can open up its data timeslots to voice.
With RCOM entering the GSM space & MNP in the news: Globally, it suggests that MNP is most valuable to early adopters who view their no as social identity & are not tempted to by 10-15% price cuts. MNP will increase competition, expand customer choices & encourage operators to improve quality. RCOM stand to benefit from MNP.
GSM op will be allocated spectrum in 2100MHz band. Greater the freq higher the no of towers required. With the intro of the 3G services, tower req of Bharti will be twice the current no in service areas where it operated in 900MHz band and 1800MHz.
Financial impact of spectrum constrains: 18k CTs will consume $2bn in next 2 years.
- Call drops & congestion cause op to lose revenues.
- ARPU support will be available assuming it uses incremental capacity to boost data revenues.
- Churn rated expected to be lower with deployment additional capacity, reducing customer retention cost.
- ARPU decline on a/c of marginal subscribers is continue to decline but some stabilization
Bharti Tower Company (BTC) : Markets have still not completely priced in the valuations of the BTC due to lack of the sample deal as with other players. After the de merger we can expect some announcements.
Principal downside risks: possible acceptance of TEC norms, rapid drop in revenue/min, op-margin compression & derating of Indian equities.
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