IL&FS and the Rating agencies

Indian rating agencies have blamed the lack of timely default data for their delay in downgrading IL&FS.

How true are their claims?

As early as 2015, IL&FS had disclosed FD under lien of Rs. 161.7 crores in its Cash Flow statement.
This certainly should have been an eye-opener considering the company had disclosed cash of Rs. 6,419 crores in its Balance Sheet.

However, that's not all: it seems the cash disclosed under the Balance Sheet was not freely available to the company. The Cash Flow statement depicts a further bifurcation of this cash balance as balance under margin/ security/ lien and as per the cash flow statement.

 As seen the percent of free cash available to the total cash declined from 87% to 41%.

Meanwhile the current maturities of long-term borrowings and short-term borrowings increased from Rs. 10,610 crores to Rs. 25,797 crores.

The percent of free cash to short-term borrowings plunged from 26% in 2014 to 17% in 2018. In other words, to meet a rupee of the short term borrowings only 0.17 rupee was available in 2018 from 0.26 rupee in 2014.

 Coupled with the almost 100% increase in the Debt-equity ratio, the situation at IL&FS was screaming disaster and the only ones who couldn't listen were the ones who didn't want to listen.

Market experts??

Shouldn't investors ask the so-called "Market experts" for compensation in case they rely on their so-called expert opinion to invest in stocks and suffer losses.

As seen, on April 25 and July 4, Mr. A.. advised investors to purchase DHFL, etc.

Within barely two months there is a complete turnaround with the same Mr. A.. advising investors to sell DHFL and the stock dropping 45%.

Isn't it time SEBI and the other regulatory authorities look into such "Market experts" advices?

Yesterday's laggards turn leaders

Source: WSJ

After being the best performing asset class in 2016, Natural gas futures have fallen 15.52% YTD. As pointed out in an earlier blog, best performing asset classes of one year can deliver the worst returns the next year and vice versa. The example given of was Natural Gas and it was stated that it was quite possible that Natural gas would significantly underperform.

On the other hand, Cocoa, which was the worst performing asset class in 2016 (-33.8%) has so far outperformed Natural Gas, Crude Oil and Sugar (some of the best performers of 2016).

As has been pointed out by Benjamin Graham and subsequently by Seth Klarman, overperformance generally leads to overcrowding the market and consequently diminished returns. By comparison, underperformance will generally lead to diminished competition and subsequently higher returns.

This trend seems to repeat itself in the stock markets too. As the below chart shows, in 2011 Financials were the worst performers only to emerge on top in 2012. Utilities, after being the worst performers in 2012 and 2013 emerged out on top in 2014. The only sector which remained in the middle was S&P 500. So, investors looking out for stable returns would have been better off invested in an index fund. 

Yahoo Finance

It would help Investors not to get too caught up by high growth figures and future expectations but also rely on Margin of Safety as professed by Benjamin Graham.

Sikka’s $200 million boon to Hasso Plattner turns out to be a big headache for Infosys shareholders.

In the ongoing Infosys tussle with the founder, Narayana Murthy, the present CEO and MD Vishal Sikka has termed himself as “a warrior”. The reasons are not far to seek. Ever since his appointment, Sikka has been pursuing a strategy of employing the huge cash reserves (Rs. 30,367 crores in consolidated BS) to go on an exorbitant shopping spree to boost the value of his 178,195 stock options issued within two years. Coupled with liberal bonus issuances, Sikka has been trying to drive up Infosys’ share price. With so much at stake, it’s no wonder he calls himself “a warrior” out to rake in the animal spirits.

Talking to Time Magazine a few years back, Peter Drucker got to the heart of things: "I will tell you a secret: Deal making beats working. Deal making is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work . . . deal making is romantic, sexy. That's why you have deals that make no sense." (From Warren Buffett's shareholder letter)

One of Sikka’s acquisitions, Panaya, has been a complete failure. Acquired on the brink of failure in March 2015 for a whopping Rs. 1,398 crores, the net assets of the company were only Rs. 47 crores implying a goodwill of Rs. 1,351 crores. This transaction would have been somewhat justified if Panaya was in a top-notch growth phase with substantial revenues. However, a look at Infosys’ annual reports for 2015 and 2016 belies any such conclusions. The revenues accruing are negligible and the profits are negative. For the year ended 31.03.2015, Panaya contributed 12 crores towards revenues and had a net loss of 6 crores. This gets worse in 2016 with a net loss of 67 crores. There is no mention of revenues for 2016. 

The link between Panaya and Sikka’s former employer, SAP, does bring into account a lot of questions. Panaya’s investors include Hasso Plattner Ventures. Hasso Plattner was the co-founders of SAP. Were the shareholders made aware of this obvious conflict of interest. It does seem that Sikka granted a huge lifeline to Hasso Plattner at the cost of Infosys shareholders. Even though the Infosys Annual Report mentioned that Panaya was incorporated in Delware, no SEC filing was found for it.

Infosys has substantially underperformed both Nifty (35%) and TCS (16%). Throwing away almost 5% of the consolidated cash balance for a company on the brink of collapse proved to be a game changer for Hasso Plattner. That same 5% could have been used for stock buybacks greatly boosting shareholder value.          

Asia's oldest stock exchange finds tough love from investors

The Bombay Stock Exchange, Asia's oldest stock exchange founded in 1875, saw dismal participation from investors on the first day of its IPO. Barring retail participation, the issue saw negligible bids coming in from Corporates and no participation from FIIs, DFIs or Mutual Funds. This speaks volumes about the issue quality. Coming shortly within the demonetization exercise, the issue should have seen better participation atleast from the domestic players. However, apart from a measly 1,000 odd shares none of the domestic or foreign players found the issue alluring. 

There are still good chances that the issue may witness last-minute participation from “motivated players” and get filled up as happened with other downbeat issues. However, investors looking to hold the stock over the long term need to be tread very carefully. “Motivated players” interested in the issue due to extraneous reasons can get demotivated very easily and jump to other issues.