Thursday, May 29, 2008

Reckless Investment by Mutual Funds

I want to show some deals by mutual funds that clearly targets reducing investor returns:

Fund SchemeStockPriceEPSP/E
Tata Indo Global Infrastructure FundMadhucon Projects7501263.53
Tata Infrastructure FundGMR Infrastructure2201.1200

Consider the deal by Tata Indo Global fund for Madhucon Projects. A company was bought with a P/E of 63.5. The company pays just INR 0.60 as dividend, a yield of less than 0.1%. The company's growth over the last 3 years has been impressive at 47% a year but even with that it will take 4 years for P/E to come down below 20. GMR also grew by 45% a year for the last 3 years. It will take 6 years for company's P/E to come down to 20. Madhucon has a profit of 50 crore with a market cap over 3000 crore. Even if after 4 years it earns more than 200 crore, it will be at par with IVRCL and Nagarjuna today. GMR after 6 years will have a profit of 1900 crore equivalent to what L&T has today. Do you think this will surely happen? There are so many ifs and buts.

Do you always have to buy stocks which are at such a high P/E when companies bigger than those are available at a lower P/E than their smaller rivals? IVRCL has a profit of around 300 crore (consolidated) and trading at market cap of 5000 crore. L&T has a profit of 2200 crore and trading at a market cap of 84K crore. Both are at much lower P/E than their smaller rivals. And putting Infrastructure in your scheme's name doesn't tell you that the stocks you buy should also have Infrastructure in their name.

Container Corporation, Asian Paints, Pidilite, Balmer Lawrie, Blue Star are also part of infrastructure trading at a much lower P/E than even the L&Ts and IVRCLs. Every bridge, building and house needs paint, adhesives and water proofing chemicals. Every mall will need an air conditioner. Every power plant needs coal transferred through container cargo. You can buy good infrastructure finance companies like SREI infra which was trading at a P/E of 4 till 2007. What we need is intelligence from Mutual Fund managers not stupidity.
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