There have been some emails and comments about when PowerGrid FPO allotment will be declared, and how many shares a person can expect, so I thought I’d create a small post letting you know that the allotment has been declared and can be checked at Karvy’ s website.
After you find out how many shares got allotted to you please leave a comment and let us know what the ratio was, so that we can use that as future reference for other IPOs.
On a totally different subject – Yesterday I created a page called “Suggest a Topic”, and you can use that to suggest topics for future posts.
A lot of you reply to emails with suggestions for future topics, and that’s great, but sometimes these emails just get buried in my mail box, so I thought I’d create a separate page for this, and better track your suggestions.
You can click on the green call out on the left side bar (just under Seeking Alpha logo) to access this page, or click here.
IRR stands for Internal Rate of Return, and last week reader Sandeep emailed me asking about this, so I thought I’d do a post on the subject.
It’s impossible to understand IRR without understanding the concept of Net Present Value (NPV) first, so let’s begin with NPV.
You know that the cash that you receive today is more valuable than the cash you receive two years down the line or anytime in the future due to inflation. So, anytime you see cash flows going out in the future you will ask yourself how much is all this money worth today? We are all familiar with this concept because we see it every day in our life, and is relevant to a lot of things especially retirement planning, and looking at things such as how much money you will need for retirement.
So let’s say I come to you with a proposal for a project and say that you invest Rs. 1 million in the beginning and after that the project will start generating cash without any further investment, and here is how the cash flows will look like.
Time Period
Project A
0
(1,000,000.00)
1
450,000.00
2
400,000.00
3
350,000.00
4
300,000.00
5
250,000.00
Since it’s me you’d say why did I go through all this trouble of digging up the numbers; take out your check book, and write me a check – thank you!
But imagine for a moment, it was a family member – you would be on your guard then wouldn’t you?
You would obviously want to know if this is a better deal than what your bank gives you, and for that you can calculate the Net Present Value of these cash flows on the rate of interest your bank gives you which is also called the Discount Rate for this purpose. Let’s assume that the discount rate is 8% in this case.
To calculate the NPV of this project you will discount each cash flow with the discount rate keeping in mind the time lapse.
Your calculations will look something like this.
Time Period (T)
Project A
Discount Rate (DR)
DR + 1
(DR + 1) ^ T
NPV of Cash Flow{Cash Flow / (DR +1)^T}
0
(1,000,000.00)
0.08
–
–
(1,000,000.00)
1
450,000.00
0.08
1.08
1.08
416,666.67
2
400,000.00
0.08
1.08
1.17
342,935.53
3
350,000.00
0.08
1.08
1.26
277,841.28
4
300,000.00
0.08
1.08
1.36
220,508.96
5
250,000.00
0.08
1.08
1.47
170,145.80
NPV
428,098.23
An NPV of more than 0 means that you will make more than your alternative investment (the fixed deposit) in your case, so looking at this number makes you really happy.
To sum up – NPV is the sum of all cash flows at a discount rate that represents your alternative investment potential.
What is IRR?
Internal Rate of Return (IRR) is that rate of return at which the NPV from the above investments will become zero. It is that rate of interest that makes the sum of all cash flows zero, and is useful to compare one investment to another.
In the above example if you replace the 8% with a 25% the NPV will become zero, and that’s your IRR. Hence, the statement that IRR is the discount rate at which the NPV of a project becomes zero. How did I know that the I need to use 25%? I used the Excel formula called IRR to find that out. Manually, you will have to do a bit of a hit and trial to arrive at that, and if you have Excel handy then that’s the easiest way to calculate IRR.
The IRR is useful if you have to compare with one project with another that has different cash flows at different times.
So, to add to our example – let’s say you are presented with the following two options to invest your money in – which project will you choose?
Time Period
Project A
Project B
0
(1,000,000.00)
(1,000,000.00)
1
450,000.00
250,000.00
2
400,000.00
300,000.00
3
350,000.00
450,000.00
4
300,000.00
450,000.00
5
250,000.00
450,000.00
Quick mental calculation will show you that the cash flows from the second project exceed the first one, but you also notice that they do’t exceed by much and are also at later years, so it might be worth your time to calculate the IRR. In this case the IRR is 22.99% as shown by the table below because that is the discount rate at which the NPV becomes zero, or close to zero in this case due to rounding errors.
Time Period
Project A
IRR
IRR + 1
(IRR + 1) ^ T
NPV of Cash Flow
0
-1000000
0.23
–
–
(1,000,000.00)
1
250000
0.23
1.2299
1.23
203,268.56
2
300000
0.23
1.2299
1.51
198,326.91
3
450000
0.23
1.2299
1.86
241,881.75
4
450000
0.23
1.2299
2.29
196,667.82
5
450000
0.23
1.2299
2.81
159,905.54
Total of Cash Flows
51
Your new information tells you that one project has an IRR of 25% while the other has an IRR of 23% so that gives you more information to make your decision from.
So, this is the way IRR helps you in making a decision when comparing different projects, and is one of the several tools that can be used in evaluating any project that has cash flows distributed over the years.
To learn more about this concept head over to this link which does a great job of explaining IRR and getting into the details also. and leave a comment if you have any questions or clarifications, or juts see an error somewhere.
I just got my hands on the red herring prospectus of MOIL Limited (formerly Manganese Ore (India) Limited), so I’m not quite ready to do a full post yet, but a quick glance shows that the company is on pretty sound footing.
It is the biggest producer of Manganese Ore in India, which is used for steel production, and is a profitable company with zero debt. The MOIL IPO will open on the 26th November 2010, and close on 1st December 2010 for retail investors. The pricing has not been decided yet, and will be declared on the 23rd November.
Here are some vital stats of the MOIL Limited IPO.
MOIL IPO Vital Stats
I will try and do a full review later, but it will probably make more sense to wait till the pricing is out because other than that the company looks to be in pretty good shape.
Update: Since the pricing is out, I did a more detailed post on MOIL IPO here.
In the last poll I had asked you the objective of your IPO investment, and you had three options:
To get a good stock for the long term.
To sell on listing and make a quick buck.
I don’t invest in IPOs
Here is the results of that poll, and I will make a couple of points about long term investing in IPOs and short term listing gains as well.
Do you invest in an IPO - Poll Results
IPOs as a Long Term Investment Vehicle
If you look at the picture above (you might need to click it) – the graph at the lower half shows you the number of IPOs in a particular month in 2010 on one axis (the bars), and the Nifty close at the end of the month on another axis (the red line).
You can see that in the last couple of months or so the number of IPOs have increased quite a bit, and Nifty has rose to highs as well.
Since the promoters are trying to maximize the money they can raise from the market it is only natural that there are more issues in the market when the sentiment is positive, and there is general euphoria in the markets.
If you had a company would you take it public when there is blood on the streets, or when everyone is gung – ho about stocks?
This is an important thing to keep in mind for long term investors. If you are looking at a time horizon of several years, and you feel that the promoters of the company have not left much on the table for investors then it is probably better to wait for the markets to settle down, and initiate a position when the markets are not close to their all time peaks.
At the same time if you like a company because of its fundamentals and feel that the issue has been priced attractively – by all means – go for it.
This is just meant as a piece of caution because you will hear and read a lot about IPOs at about the time the markets are high, so that’s one thing to keep in mind while investing in them for the long term.
IPOs for Listing Gains
In August I took all the IPOs that had came out in 2010 (till that point), and plotted their returns to see how they fared. The results were quite mixed. Here is how that looked.
Even though the data has not been updated, the point still remains that you have to do a bit of a guess-work in determining which one of your IPOs will get you a good listing, and which ones will be just dud issues. If it’s too apparent that pricing is attractive then the over-subscription will be high and you won’t be left with much money.
Personally, making a quick buck at listing gains doesn’t attract me in the slightest, but that’s just my view, and no reason why it should turn you away. I’d just say that take stock of the IPOs you have invested over the years, the money you have made, and the money you have blocked in them. How would that compare to simply investing in a mutual fund or even a fixed deposit? A little bit of introspection might change your mind.
Lastly, thanks to all of you for voting, and I’d love to hear what your experience with IPO investing has been, and also like to hear any poll topics that you might want to see here.
A lot of you are interested in the next infrastructure bond issue, which helps save tax under section 80CCF, and since I didn’t find any consolidated information anywhere I thought I’d create this post with a list of the infrastructure bond issues that are expected to come out in the market in the next few months.
This was also triggered by the fact that ICICI Direct has started offering the IFCI Infrastructure Bonds series – II already, and it looks like these bonds will be available till December 31st 2010.
I couldn’t find their prospectus, and the page on their website that should hold details about the issue is actually blank! So I don’t have a lot more details right now, but will write a post once I get more details.
Here are the bond issues that I’m aware of.
S.No.
Name of the issuer
Expected Time Frame
1
REC
January 12th 2011 – March 31st 2011
2
IDFC
Issue re-opens on January 17th 2011
3
IIFCL
Feb 4 2011 – Mar 4 2011
4
L&T Infrastructure Bonds
Second tranche in February-
5
Power Finance Corporation (PFC)
6
IFCI
November 16 2010 – January 12th 2011
7
LIC
There are reports that this issue may not happen this year.
If you know of any other please leave a comment and I’ll update the post.
This week I also saw Mark Zuckerberg’s interview in the Web 2.0 Summit 2010, which I really liked. I’m amazed how so many people dismiss him, or say he’s too young, just lucky, or that Facebook is useless or other things like that. He has created something that has over 500 million users for heaven’s sakes! Before you say he was lucky or any other negative thing about him, try building something which has even 500 users, and then maybe you’d appreciate him a little more.
There is something to learn from everyone, and especially from people who achieve so much; I can’t understand how people are sometimes dismissive of others who are a gazillion times more successful.
Last week I wrote about India’s unemployment numbers and I was quite surprised to see that Goa was the state with the highest unemployment.
I’ve lived in Goa for about a couple of years so I know it to be a prosperous state, and I wasn’t really convinced that Goa does have the highest unemployment, and then I do have a special relationship with Goa, so I decided to dive into these numbers a little more.
Households
First let’s take a look at how households are divided into rural and urban areas. Here is how the population is split between rural and urban areas in Goa.
Rural Urban Population Split for Goa
The population is split out relatively evenly when you compare it to the rest of the country, as most states are really heavy on the rural side. The only exception to this are Delhi and Chandigarh, but then these two are not really states in the sense the other ones are.
Let’s take a look at how the households are categorized and split out in the rural and urban areas in Goa.
Rural Household categories
While dividing the households into categories, the survey has placed each household in one of the following categories:
Self employed Agriculture
Self employed non Agriculture
Agriculture Labour
Other Labour
Others
In Goa’s case here is how the numbers break out per 1,000 households in the Rural areas.
Rural Household Categories in Goa
You can see that only 1% are self – employed in agriculture, and 7% are self – employed at all. The 1% self – employed in agriculture is the lowest among all states, with Pondicherry having the second lowest of 3% self – employed in agriculture.
In fact there are only three states – Delhi, Goa and West Bengal – in which the number of self employed agriculture households is less than the number of self employed non agriculture households. To give you a sense of how low this number is take a look at the states with the 5 lowest self employed persons in agriculture.
Self Employed Rural Agriculture
Looks like this is one of the key numbers when looking at Goa’s unemployment situation and we will come back to it later. For now, let’s move to the urban household categories.
Urban Household categories
Let’s look at the numbers in the urban areas now.
In this case the categories are:
Self employed
Regular wage
Casual labour
Others
Here is how the numbers look like.
Urban Household Categories in Goa
The noticeable thing here is that Casual labour is one of the lowest in the country with Sikkim having the lowest number of 17 per thousand.
Education Levels
Now let’s look at the education levels for all of Goa. The survey splits it up further into urban / rural, and male / female, but for this I’m going to take the number at the consolidated levels only.
Education Levels in Goa
From these numbers you can see that Goa boasts of one of the lowest “not literate” numbers in the country. Kerala is the best with only 37 per 1,000 and Goa is second best with 56 per 1,000.
Worker Population Ratio
Next up is the worker – population ratio which is 305 per 1,000 in Goa. The highest number is for Meghalaya at 679 per 1,000 followed by Sikkim at 533 per 1,000 and among the bigger states Tamil Nadu has got a good ratio of 420 per 1,000, and Karnataka at 411 per 1,000.
Labour Force Participation Rate
The consolidated LFPR for Goa is 424 per 1,000 which is at the higher end because Sikkim has got the highest LFPR at 456, and among the bigger states – Tamil Nadu has got a high LFPR of 446.
Bihar has got the lowest LFPR among the bigger states with a number of 284, and the lowest is Pondicherry with a LFPR of 264.
Not in Labour Force
Goa has got 555 per 1,000 persons not in the labor force; J&K is the state with 702 persons per thousand which has the highest ratio of persons not in the labor force among the bigger states, and Pondicherry is the highest one with 724 persons per 1,000. On the other end of the spectrum in Chattisgarh with 516 persons per thousand not in the labor force.
Unemployment Rate
The unemployment rate for Goa is 281 per 1,000 overall; 391 per 1,000 in the rural area, and 183 per 1,000 in the urban area. The rural numbers are quite high relative to others because the next highest numbers are 299 for Jharkhand, 221 for Pondicherry, and 206 for Rajasthan.
Unemployment in Goa
If you look at the unemployment rate for women in rural areas then Goa has 531 per 1,000 which is only higher than 596 of Chandigarh, but then I guess that doesn’t count much. The next highest number is 449 for Jharkhand, and then 362 for Rajasthan and Pondicherry.
Conclusion
The thing that jumped out at me looking at these numbers was the extremely low level of self – employment in rural agriculture, coupled with a high unemployment rate for women in rural areas in Goa. I think that one is related to others, and women in rural areas are more likely to get self employed in rural areas, than work in other’s farms. This is purely a guess though, and I might be way off the mark, but to me these two factors are worth taking notice.
Women in rural Goa are not getting as many employment opportunities as women in other states in the rural areas.
The level of self employment in rural agriculture is very low in Goa.
It could be that people in rural Goa don’t have enough land as compared with other parts of the country to make self employment profitable, or some other reason, but the key to increasing employment (at least going by these numbers) seem to be promoting employment opportunities for women in rural Goa, and investigating the cause of low level of self employment in rural agriculture might just have the key to solving the issue.
I hope people smarter and more powerful than me look at the great information generated by these new employment surveys, and it becomes a part of our policy formulation, and leads to some great positive action.
The Shipping Corporation of India (SCI) has filed its draft red herring prospectus with SEBI, and this Navratna will probably come out with an FPO this November.
The company will come out with an issue of 84,690,730 equity shares – half of which are existing government shares, and half of which are fresh issue. Since this IPO contains a component of a fresh issue of shares – SCI will receive money from this issue even though this is disinvestment, and some of these funds are going to be utilized for its fleet expansion plan.
SCI is one of India’s largest shipping companies with approximately 35% of Indian flagged tonnage as on June 30th 2010. The company owned a fleet of 74 vessels of 5.11 million dead weight tonnage (DWT), and had ordered the construction of an additional 29 vessels to be delivered between 2011 and 2013.
Here is a breakup of the 74 vessels.
SCI Fleet Breakup
The bulk carrier, and tanker division generates the majority of the revenue with 68.5% percent of total income coming from this segment in 2009.
SCI Financials
The fortunes of the shipping sector are closely tied with the global economic conditions, and this is clearly illustrated with the revenue movement of SCI over the years.
The company generated revenues of Rs. 39.06 billion for the year ended March 2010, which was lower than the revenues generated in 2009 of Rs. 45.57 billion. The profit after taxes also follow a similar trend, and the chart below shows how the numbers moved from 2007 – 2010 (in Rs. million).
SCI Total Income and PAT
SCI had Rs. 22.11 billion in cash and equivalents on June 30, 2010, and had a debt – equity ratio of 0.45. The EPS for 2010 is Rs. 9.29 which is down from Rs. 22.66 EPS in 2009, and Rs. 17.82 EPS in 2008.
The company derives the majority of its revenues from the bulk carrier and tanker division, which in turn is dependent in movement of energy related products like crude oil, gas and coal, and this segment is the cause of the drop in revenues and profit from 2009 to 2010.
These three passages from the Management Discussion are quite useful to understand how the revenues and profit of SCI are impacted by external conditions and its own cost structure.
Demand for energy products
Our bulk carrier and tanker division is the primary revenue source of our Company, accounting for 70.5%, 71.7%, 68.5% and 63% of our total income for Fiscal Years 2008, 2009 2010 and the three-month period ending June 30, 2010, respectively. The demand for our bulk carriers and tankers, to a large extent, depends on the demand for energy related products, including crude oil, gas and coal. Due to imbalance in supply and demand of tonnage and its consequential effect on the freight market, our total income and adjusted profits for Fiscal Year 2010 dropped by 14.3% and 59%, respectively, compared to Fiscal Year 2009. We expect that our results of operations will continue to be dependent upon demand for shipping of energy related products in the future.
Fluctuations in charter rates
Our total income and operating margins are affected by the charter rates that we charge for our shipping services, which are largely dependent on supply and demand. Charter rates have declined during the global economic slowdown in Fiscal Years 2009 and 2010 due to the reduced demand for shipping services. During that same period, our total income and profits for Fiscal Year 2010 dropped by 14.3% and 59%, respectively.
Our operational and fixed expenses
Our profitability is significantly impacted by our operational expenses. For Fiscal Years 2008, 2009, 2010 and the three-month period ended June 30, 2010, our operational expenses were Rs. 25,939 million, Rs. 28,103 million, Rs. 27,646 million and Rs. 6,275 million, respectively, or 64.3%, 61.7%, 70.8%, and 63.1%, respectively, of our total income. Some of our expenses, such as those for rent on our properties and interest on our indebtedness, are fixed or subject to limited adjustment by us, and will not fluctuate in proportion to changes in operating revenues. The fixed expenses allow us to control our expenditure. However, if our income from operations decreases due to our inability to employ our vessels at profitable rates or low productivity, we are still required to pay such fixed expenses which will reduce our profitability and operating margin. In addition, any increase in expenses related to bunker (of fuel), maintenance, repairs, spare parts, salaries, consumables and compliance with new rules and regulations will also have a material adverse impact on the results of our operations, if we cannot pass such increased costs to our customers.
To summarize – recessionary conditions lower the demand for oil and fuel products, which drives the majority of the revenues of SCI, and charter rates for the ships are lowered due to the decreased demand. Combine this with a high fixed and operating cost, and the company really feels the squeeze of the slower economic condition, and has its fortune tied to the economy quite closely.
The pricing, or exact dates for the SCI FPO have not been declared yet, and I’ll update this post when the dates and pricing are available.
I’ve received a few emails about when applicants will receive the IDFC infrastructure bonds, and since the company didn’t announce when this will happen before hand – people have been wondering when they will get the bonds.
Readers Ajay, Loney, Satish, Nageswara, Sandeep, Sangram, and Subhro (among others – it’s a really big thread so I couldn’t include all names) have left comments sharing their bond status, and that helped a great deal in getting an idea on what’s going on with this.
A big thank you to all of you for keeping everyone informed!
I don’t think everyone who applied for the IDFC Infrastructure bonds is subscribed to the comments on that post, so I thought I’d create a post from the information shared by these folks.
Let’s take a look at some of the more important points from that thread:
1. Allotment took about 3 weeks: The bond issue closed on 22nd October, and people have only started seeing the bonds credited to their demat accounts, so the time from issue closure to the actually seeing the bonds has been around 3 weeks. This will form a good reference for other infrastructure bond issues in the future.
2. Not everyone has received the bonds yet: There seems to be some mechanism by which bonds are being gradually credited across applicants, and not everyone has received these bonds yet. If your account has not been credited yet, then there is no need for alarm, as people have only recently started seeing bonds credited, and it might still take a few days for it to appear for you.
3. NSDL sent an SMS about credit of IDFC Bonds: The depository – NDSL – had sent a SMS letting people know that the bonds have been credited. However, the bonds were not visible in the account immediately. So even if you received the SMS that doesn’t necessarily mean you will see the bonds in your demat account as well.
4.No one has received the physical certificate yet: The people who have reported getting the bonds have all applied through a broker, and have demat accounts, and none of them have received the physical certificate yet. So if you have applied without a demat account, then it might take longer still for you to get the physical certificate.
Don’t press the panic button if you haven’t received the bonds yet because you are not alone, and there are several others whose money has been debited, but the bonds haven’t been credited yet.  My guess is that you should start seeing them in your demat account in the next few days.
Future Infrastructure Bond Issues
Some of you have also expressed dismay at the fact that you missed this and the L&T issue, but were interested to buy the bond for tax saving and other purposes.
The good news for you is that IDFC as well as other issuers have said that they are going to come out with more such issues towards the end of the fiscal year because that is when most people are actively looking out for tax saving vehicles, and they are likely to do a lot better at that time than now.
Finally, some people have written in asking if it’s better to wait out for a higher rate of interest than investing in this offer.
I honestly don’t know what issuers are planning for the future, based on the lukewarm response, they might sweeten the deal, but I have no way of knowing for sure.
I’d say don’t lose perspective of the fact that the primary benefit of this is of tax saving. If you’re able to wait and get a bond which offers a percentage higher, and you invest the maximum Rs. 20,000 in it – that means an additional 200 bucks extra in a year; what is that worth to you? How many hours of Googling and speculating is it really worth?
This is a personal decision really, but something worth keeping in mind the next time you speculate on whether you should wait or go ahead with it. And once again – a big thank you to all of you fine guys who left comments and kept everyone informed!
There are several gold ETFs in India, but no silver ETFs at all, and this makes it difficult for investors to take positions in silver (if they are so inclined), however there are a few other ways of getting exposure to silver, and I’ll talk about four of them here.
1. Milestone Bullion Series 1: I’ve already written about this option about a month ago, when reader Prasanna sent me details about it. This is a structured product, and the minimum investment needed to get into this product is Rs. 5 lakhs, so this is clearly not for everyone.
The way it works is that they take the money and invest in a portfolio with the following assets:
Silver: Up to 40%
Gold forwards / Gold deposit schemes: up to 40%
Gold linked structure: up to 30%
The fee charged is as follows:
One time set up fee of 2% or 2.5% in case of investment less than 10 lacs.
Annual Management fee of 1.5% of the committed amount.
2. Commodity Futures: You can trade in commodity futures in India, and silver is one of the commodities that get traded, so you could potentially take a position in silver by trading on its futures. You can enable commodity trading by a special request to your broker, and thereafter trade in all the commodities available in exchanges like MCX and NCDEX, which include silver futures as well.
3. National Spot Exchange Limited (NSEL): NSEL is a relatively new player in the market, and allows you to trade in e-Gold and e-Silver, and this is another way of getting exposure to silver. You can open your account with one of their Depository Participants, and there’s also an option to take physical delivery if you’re so inclined. The futures unit of silver is 100 grams of silver, and you can take delivery in 100 grams, 1 Kg, 5 kg or a combination. ET reports that NSEL is Shariah Compliant as well.
4. Buy US silver ETFs from your trading account: ReaderVenkat left a comment a few days ago about buying US silver ETFs by enabling overseas trading through your brokerage. You can ask your broker to enable overseas trading to you, and once enabled – you can buy and sell selected securities that trade in the US from your trading account. Venkat sent a brief list of silver securities also, and I see that there are quite a few silver options in there including silver futures, silver mining companies, and silver ETFs as well, so this option is something that you can also consider if you are interested in investing in silver.
As I said earlier, I have not been interested in buying gold or silver, so I don’t have first hand experience with any of these options listed above, but they are options for people interested in buying silver or getting exposure to silver in India, and if you’re interested you can pursue them further.
If you have any first hand experience or any other insights to share on this, please leave a comment.
