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.