Monday, September 6, 2010

Hungry for more?

It seems that the bull run in India that started in 2004 has made more and more businessmen hungry for getting rich. As if they are not satisfied with the current overvaluation of stocks, they want to push for higher and higher valuations, by doing anything they can. How can you judge? Read the following on NSE:
Gateway Distriparks Limited has informed the Exchange that the Board of Directors of the Company at its meeting held on September 04, 2010: (a) Approved the payment of Special dividend (Interim) @ 10% (ie. Re.1.00/- per equity share of Rs.10/- each) for the financial year 2010-11, to mark the successful conclusion of the discussions with the Blackstone group which has resulted in Blackstone investing Rs 300 Crore in our subsidiary, Gateway Rail Freight Limited (GRFL). This is the largest private equity investment in the GDL group to date.

The basic idea behind raising money from outside is that the company does not have enough money to put in new venture itself and the opportunity is there to earn better than the cost of capital. When the company shell out INR 12.5 Crore (including DDT) as dividend to shareholders, that gives the impression that the company does not have a better use of this money to earn over the cost of capital. At the same time if the company collects INR 300 Crore from private investors, it is not just contradictory but it is a real gimmick to keep investor interest in the company. This blog over the last few months is pointing out again and again that the Indian stock market has entered a bubble and as for every bubble, this will end in tears too. Happy Investing!!!!

Security prices and yields are not determined by any exact mathematical calculation of the expected risk but they depend rather upon the popularity of the issue. - Benjamin Graham
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