the two sides of india gdp

The long-term growth has been quite good for India. And there is a reason to argue that it will continue to be good, given India's potential.

It's been quite a journey to reach $1.9 trillion. 

The nominal GDP growth: 

The real GDP growth adjusted for inflation:

Just that comparison with US is not warranted.

But the recent quarters tell a different thing. The reason is simple, but asks a few questions:

Are we an investor friendly nation? Are we encouraging domestic firms to invest? Are we encouraging foreign firms to come and invest?

If we did, the rupee would not fall the way it did; we would have had far better infrastructure; power and oil & gas production would have been much higher.

Do we have a healthy environment for creating jobs? Are we giving the poor and unemployed jobs, rather than food, to feed themselves for life? 

Are we cutting the corruption from system? Are we making the system market-driven, rather than vote-driven? 

There are many more, but I guess we get the point. Heck!

ntpc, the laggard

I noted here that the state of affairs for NTPC was poor based on what I saw then. What has changed since then? Well, not much.

This company continues to surprise by not budging. You can see it to believe it:

It has poured in capex of about Rs.1,131 billion in the last 10 years. This capital does not convert into much of revenue; it is partly due to the nature of its business. On top of that return of capital and equity are not that good. Its after-tax return on capital is noted below:

You can calculate this ratio in various ways; but the point I am driving is, it is quite low. 

NTPC has to improve its operating margins significantly or generate much higher revenue per rupee of capital invested. 

Now it is available at a healthy dividend yield of over 4%. If you consider NTPC as a stable firm and rely on its dividend paying ability until perpetuity, the market is pricing dividend growth of 5.31%; historically it has grown more than twice that rate.

You can see the potential for value based on the dividend growth:

Of course, this comes with its set of assumptions on growth and cost of equity. But that's not much of a deal. The question is - is NTPC a stable firm? In my view, it is not; yet.

So, we come back to its cash flow generating ability, and I am yet to see efficiency here.

keeping track of predictions

Further to this post, I thought I should keep track of some predictions:

• Nifty may slip to 4800; bet on fixed income
• Govt measures are hopeless, I am not optimistic on India
• Continued rise in US dollar to bring Asia to a 1990s like situation
• CAD may come down to $70 billion in 2013-14
• Rupee to hit 69, RBI to focus on currency: poll

And 

• Govt to clear all stalled infra projects in next 60 days

How many of these will come true? 

What's the big deal? It's alright. It's fun.

Let's check them out, though.

predictive powers on where rupee is heading

Here's what was predicted in July 2011: Rupee will reach 40 against dollar next year. This is just one for instance; there were several such predictions. Dec 2011: Rupee sheds 7% in November; worst fall in 16 years. Now, 2013: Why some brokerages see rupee hitting 70. 

You see, when opinions are sought; they are given. Sure, they are given away free too, even when not asked for. Such is life for the attention seekers, I reckon. 

Now, what will happen to the rupee in future? Can we genuinely predict? I doubt, for we do not have any better predictive powers than an average person on the street on such matters. Having said that a person who has studied what impacts currency rates might have something to say about why it happened the way it did; of course, all this is with the power of hindsight. 

Currency rates move, as other prices do, based on demand and supply. Causes of demand and supply could be different at different times, but ultimately it is dd and ss that decide the prices. A housemaid who buys groceries regularly would be able to tell this. 

These days, less people (including the institutions) are buying rupee than before; and more are selling it than before. Consider this: 

Foreign direct investments and dollar inflows in the stock market have drastically come down; the dollar has moved away from India; they have sold the rupee and collected their dollars back; more and more of this, and the rupee will fall.

The people of India love gold which is paid for in dollars; the more they buy it, the more rupee is sold. Furthermore, India needs oil both for its survival and growth; and it buys a lot of it; when it does that a lot of rupee is sold. 

Moreover, India does not have world-class products and services in a meaningful sense where the dollars are ready to flow in exchange for those products and services on a regular basis; It is no US or China.

Then there are other inflows of dollars in the country for capital and other requirements; these impact the rates too; when the inflows go down (and/or earlier remittances go back home), the rupee is sold to make way for it. 

And when the combined effects of these nuances take place on a continuous basis, lots and lots of rupee is sold; demand for the dollar gets higher and for the rupee lower; and presto, the rupee will fall; and it did.

The long-term dollar-rupee past - 1973-2013:

As we can see the rupee has depreciated a great deal against the dollar over the years.

Now, if you ask me what will happen to the rupee in future, I have no answer. However, if the government takes the right measures in terms of dealing with its fiscal deficit and current account deficit, something better should happen. 

Just a few: Curb the demand for gold; expedite policy and approval matters, especially to produce more oil and gas at home; create conducive environment for investments; create jobs.

Will this happen? Why don't we wait to see it? 

tough road for balaji telefilms

The transition is interesting:

Although the performance in 2013 has been somewhat better than the immediate prior years, it seems like a long way to go for this firm.

Operating losses, low earnings translate into not-so-meaningful return on capital and equity. This is something management should be aware of and consider measures to improve. More so for their own benefit since the promoter-management stake is about 42%.

The company's business is both television and movie-making. It is a challenging business; highly competitive, and depends more on individual talents and audience perceptions. 

But then there is immense scope:

The good news is, there is no debt. The bad one is, there is a lot of capital which needs to earn its fair share.

Can Ekta Kapoor pull it off? She is very much capable. 

nifty and the players

When was the last time Nifty touched around this range?

Fairly a long time. Then on 9 April 2013 it was 5495.10 and today 5414.75.

The below chart shows how much the market has fallen today since:

For instance, from 23 July 2013, it has fallen by over 10%; and 1.69% from 16 Aug 2013.

Thud!

nifty - future to the back

The market is making merry.....at the cost of punters, of course. 

We are down from where we stared the year; and it's already 7 months. That means we have only 5 months to recoup. Can we? Of course. Would we? I don't know.

For those who invested for the short-term without understanding how firms operate, businesses function and markets react, it has become tough, I guess. Market inefficiencies galore.

We have seen before: 1) the drunken steps; 2) the 1000-6000 market; 3) what moves the market; 4) falling prey to the numbers.  Humans are not rational animals, but rationalizing ones. 

The only way we can make money in the stock market is by understanding businesses and their value, and buying them at the right price. Good behavior (control of emotions, in particular) is critical in this process, not extraordinary brilliance.

Financial history is full of highly intelligent people who stumbled along the road.

fighting for the penney

It is not very clear (or may be it is) what has gone wrong with JC Penney; for its market value has dropped southwards with some speed.

From $9 b in Sept-2008 and again in Feb-2012, now it is worth $2.8 b. You can keep waiting, but it might look longer.

Of course, a few things went wrong: Lower revenues and operating losses, poor management of cash, and the fighting management. Instead of looking at ways to improve the business performance, the fight is on with pointed fingers. 

JCP's capital has reduced from $10 b in 2003 to $6.5 b in May-2013; its cash has reduced from $3 b to $0.8 b. The business earned about $3.6 b during the period, paid dividends of about $1.4 b and bought back its stock for about $5.5 b. Now, its debt stands at $3.7 b.

One of the rudest ironies - call it error of judgement - its stock buybacks were made at the wrong time. Of course, it is visible for us with the advantage of hindsight.

The firm bought its shares back worth about $1.6 b in 2004 and $2 b in 2005; it couldn't be below $35 per share (see above), probably more. It bought back again in 2006 and 2007. It also bought back about $0.9 b in 2011, again probably for about $35 per share. In all, approximately $5.5 b was spent on buybacks, which unfortunately, did not work. 

Stock buybacks are good when the stock is purchased at less than the intrinsic value of the equity; these should be done only with excess cash. Otherwise, the cash spent would cost the shareholders heavy, which it did apparently. See the stock price now at $13 per share.

The times aren't good it seems. Is the turnaround possible with a different CEO now? Time will tell.

airline business - trying hard to make money

If this chronicle has to be believed, Kingfisher Airlines is now worth anywhere between Rs.7,000 crores to more than Rs.8,000 crores. The irony is that almost all of it is due to the debt-holders, rather than the equity-holders. 

The airline's equity is now selling at Rs.320 crores, but likely has debt over Rs.7,500 crores. The actual amount of debt is not published, yet. 

Make the mistake of buying the entire firm, quickly you assume that mountainous debt.

The market value of equity has had a nasty ride: Those 7 years:

Look who appears to be a winner - it's the Nifty, which otherwise is not.

And those 8 years for Jet Airways: Market value - Rs.2,800 crores. Debt - over Rs.9,000 crores

And those 13 years for Spice Jet: Market value - Rs.1,350 crores. Debt - likely over Rs.900 crores

Where is all the money? Neither here; nor here.

What a business an airline venture has been! Large capital, losses; more capital, more losses - a global airline phenomenon.

Kingfisher has to come up with a revival plan now; but how?

the drunken steps

Just when we were talking about the 6000-market a few days back, we probably did not know that it was on steroids. 

It was due for some contraction, I guess; and it did:

These were the steps:

I am not sure what changed over these months in terms of the fundamentals. I don't know why it had to go to 6000 from 5500 and come back there. Some activity for the idle I reckon.

The game is played by the institutional investors, especially the foreign. They set the prices. They drink and inhale...it is they who are on steroids. Their pendulum swings between the points of manic optimism and manic pessimism. Have they ever been rational? Their performance speaks for itself probably, for a majority of them fail desperately trying to beat the market.  

You can pick a starting point and see how much the market has fallen or risen. Now, it is on an earnings yield of about 6%, probably the highest for sometime; 2.75 times the book and has a dividend yield of 1.5%.

It was not me who said long back, a strange enigma is man...... Whoop!

valuing facebook

Facebook is back in action....the price has moved from near-40 to below-18 to 38 within months:

At the current price of $38.40, Facebook is worth around $92 billion. But is it really worth that much? To attempt that question, let's have a look at its historical performance:

Facebook earned $32 m on revenue of $5 b in 2012. If we consider 2012 as a one-off year, extrapolating its Q1 2013 we get earnings of about $1.3 b on revenues of about $7 b. It had operating capital of about $4.6 b in 2012 and about $1.8 b in 2011.  

There you have a firm earning a pretty decent rate on capital and trading at about 70 times its (extrapolated, future) earnings. Assuming Facebook as a high-growth business, is such a high value for growth justified? We can't tell anything about it since it is extremely difficult to value growth, especially for a technology business.

But we can look for some clues.....to begin, we can find out the number of companies that are worth close to $100 b and having earnings of around $1 b. This list has the world's biggest public companies compiled in May 2013. I have selected some numbers that look interesting:

We know that historical profits don't really matter for the market for valuing businesses. Suddenly, it gets some insight on the firms' future profits for its model. 

Facebook has about 2.4 b shares outstanding and some stock options too. While stock options are likely to grow in future, for simplicity we can do some math (no dilution in stock) to see how Facebook stands for its current valuation. 

We can test this in another way: It is unlikely to pay any dividends in the next 10 years. If we believe that its latest earnings are sustainable and will grow in future, we can find out at what rate these earnings will have to grow in the 10-year period assuming Facebook would trade at about 25 times its earnings at that time, in order to earn a decent rate of return for the investor. Here's how it looks:

If an investor buys Facebook at the current valuation, (say, $92 b), its earnings will have to grow at about 27% compounded over 10-year period for the investor to earn about 15%. Is this possible for Facebook to pull of? I am not able to answer this. But you have to decide whether you want to take a chance just for earning 15%. Because the odds are: if earnings grow at 15%, the return for the investor would come down to 4%.

Next I want to look at the price at which one could be comfortable in buying.

If our assumptions (earnings and their growth, PE, no dilution and no dividends) stay, the investor has to buy Facebook at $69 b (about 25% lower than the current price) in order to earn 18% return on the investment. If he buys at 75% lower, the return would be about 32%!

Is this possible? The biggest challenge is the earnings growth. This is a call I cannot take. But some seem to be experts on these things. For them it is a piece of cake to get hold of the latest earnings, apply a growth rate to it and rationalize the price.

Watch the fun:

If earnings growth drops to 20%, our return would drop to 11.6% from 18% when bought at 25% discount to the current price. 

Some more fun when earnings growth is at 15%:

Of course, you could say that Facebook's earnings would grow at 27% over the 10-year period and it would trade at 40 times its earnings at that time. Before you do that just look for the companies trading at that rate. But then, anything is possible; life can be great.

Amazon did it although its recent performance has been a little erratic. Google has done well too.

Facebook's past performance may not be a very good indicator, but this is how it did compared to the broader market:

Facebook's earnings are difficult to predict and its managers are insiders.

In the final analysis, my conclusion is that I cannot buy Facebook at its current price and I cannot find a way to reasonably value it in order to decide on a price to buy either. I don't care.

You decide for yourself.