Money is made when you fool Mr Market

As I have noted many a times earlier, Mr Market is right most of the time, but not all the times. An investor makes a lot of money when he bets that the market is wrong and later it proves to be wrong. Let me take two examples here:

1. Blue Star in 2001. The company's average share price in 2001 was around INR 35. In the next 7 years, i.e. between 2002-2008, the company gave away dividends worth INR 96.5. Any retail investor who bought 1000 shares of Blue Star @ INR 35, would have got INR 96.5K as dividends in the next 7 years and today those INR 35K would be worth 750K (The company announced 5:1 split in 2006). In 2001 itself, company was giving away INR 5.5 as dividends, i.e. yield at INR 35 would have been 16%. Mr Market avoids companies with such a high dividend yield since it fears the company will cut the dividend or will go bust. Mr Market turned out to be wrong in this case.

2. CRISIL in 2001. The company's average share price in 2001 was around INR 100. In the next 7 years, i.e. between 2002-2008, the company gave away dividends worth INR 124. Any investor who bought 100 Shares of CRISIL got INR 12.4K as dividends in the next 7 years and his INR 10K would be worth 235K today.

Can I see these kind of opportunities today in Indian Stock Market? Have a look at the top dividend yields page on Moneycontrol.

Taking with left hand and giving with the right?

I was wondering about business model of a company, Varun Shipping. The company's dividend yield is around 11% if we consider it paid 50% or INR 5 last year and the price today is just INR 45. Where is all this money coming from? If you look in the balance sheet of the company, it is coming not from the business but from bondholders. The company has paid dividend of 16%, 30%, 45%, 45% and 50% over the last 5 years. The total payout amounts to INR 264.4 Crore including the corporate dividend tax. During the same time, the company's total debt increased from INR 260.33 Crore to INR 2200.82 Crore an increase of around INR 1940 Crore. This is not the case with just Varun Shipping. Most of the shipping companies operate with this model only.

I was approximately right

When I wrote a post in April 2008 about Cipla, I said I had estimated the profits of the company at INR 1032 Crore for FY2009. I wasn't very right but approximately right but for the forex losses. If you exclude the forex losses for Cipla in the last 9 months, which amounts to INR 221 Cr, the profit for last 12 months would have been INR 879 Crore where I am assuming proportional tax paid for the extra income generated. There is still one quarter left and if the rupee doesn't depreciate more, there won't be any forex losses this quarter and assuming 20% growth, the full year profits would turn out to be INR 915 Cr, 11% off by the estimate. However, actual profits would be INR 740 Cr because forex losses are actual off by around 29%, too much for the estimate.

Why to fool investors?

There are many companies announcing buy back these days trying to convince investors that the company's share price is below its intrinsic value. One of these companies is Godrej Consumer Products. Looking at the archived announcements of the company at NSE, I found that the company did a rights issue at INR 123 in March 2008. The company issued 3.2232316 crore new shares to get INR 396.4575 crore. The same company announced a buyback plan in November 2008 at a maximum price of INR 150. Here is the list of shares bought back till 31 Dec:

Date	Quantity	Average Price
4 Dec	7,384	124.98
4 Dec	2,616	124.89
5 Dec	5,687	125.81
5 Dec	4,363	125.72
8 Dec	2,820	122.55
8 Dec	12,560	122.35
10 Dec	11,776	120.63
10 Dec	993	121.02
11 Dec	13,238	120.19
11 Dec	1,104	119.33
12 Dec	1,410	117.35
12 Dec	700	118
15 Dec	967	118.52
15 Dec	5,500	118.48
16 Dec	12,494	115.23
17 Dec	831	116.15
17 Dec	2,288	116.98
18 Dec	610	117.04
18 Dec	19,522	117.6
19 Dec	1,199	120.5
19 Dec	3,101	120.66
22 Dec	1,886	133.13
22 Dec	5,136	133.66
23 Dec	3,253	132.66
23 Dec	6,363	132.5
24 Dec	5,928	137.5
24 Dec	9,107	137.19
26 Dec	6,128	139.99
26 Dec	7,872	139.13
29 Dec	13,000	139.54
29 Dec	4,684	139.34
30 Dec	11,846	143.69
30 Dec	17,729	143.63
31 Dec	21,165	140.58
31 Dec	13,126	140.80
Till 31 Dec	238,386	130.59

Investors would have got 6% returns on their money in 9 months even in PPF. So INR 123 would have become INR 130.59 in 9 months anyway. They didn't get any returns on their money in 9 months with rights issue it seems.

This is "DEFAULT"

We have got some news about second victim with respect to the article Indian Banks are in for a tough time - Part II. Here is the news on economic times Unitech FMP exposure 1500 Crore. Loan restructure is nothing but Default.

BSE 500 to BSE SMALL CAP

The stock market correction of 2008 was so brutal that some companies were moved from BSE500 index to BSE SMALL CAP skipping the BSE MIDCAP. The list is available at
Revision in BSE MIDCAP and BSE SMALLCAP indices. Here is a small list from it:

3i Infotech

ABG Shipyard

Ansal Properties

Asian Hotels

Balaji Telefilms

BL Kashyap

GSFC

Shopper's Stop

SREI Infrastructure

Value Buy or Value Trap?

Lots and lots of IT companies are trading at prices below their cash. Here is the list

Company	Cash per share	Price
Avaya Global	150	90
Aztecsoft	38	37
D-Link India	69	47
Dhanus Tech	114	31
Geometric Software	34	25
GSS America	150	135
Hexaware	48	23
Megasoft	60	20
Micro Technology	115	108
Nucleus Software	58	53
Patni Computers	197	135
Polaris	61	47
Sasken Communication	150	67
Sonata Software	19	18
Vakrangee Software	127	35

Whether they will turn out to be a value buy or value trap, future will tell.