Investment value chain by looking downstream

In the last post, I had mentioned about the importance of cash flows. One shouldnt however follow it blindly as I was almost about to sell BEML stock based on
negative operating cash flow of Rs 411 crores(Rs 4.11 Billion). However it was the inventory which increased from Rs 2 Bn to nearly Rs 6.9 Bn. With an inventory turnover ratio slightly greater than one. The gearing has also increased due to increase in working capital and other capex.

Looking at the downstream value chain becomes important as one analyzes as to where are BEML's products being used: for building roads and metro coaches primarily. The Medium term drivers are following:
1. The National highway development plan is going to receive a boost, however I saw mostly kobelco earth moving equipment in Hyderabad while travelling to the airport. So is this a valid correlation cov xy/ sigma x. sigma y
2. Metro is going to come up in Bangalore, DMRC is in for a massive expansion, so rolling stocks requirement is going to increase. That could be a reason for the significant increase in inventory other than a desire to build up inventory when the raw materials are in a negative cycle

In terms of long term drivers:
- Public transport could receive a boost with increasing urbanization and spending power in developing countries while the lobbying power of automakers decreases witht the Detroit bankruptcies.
- Mechanization in building roads is going to increase in India.
- Real estate prices in Bangalore are going to increase and BEML's real estate assets are significantly undervalued.
To end the post let me be a bit humorous, history does repeat itself like I read in russian science fiction in a story where a physicist is about to cross an unmanned railway crossing. BEML price has yo-yoed between 500 and 1700 in the past, so buying opportunities might be there sub Rs 750. Credit Suisse has a target of nearly Rs 1200.

Non recurring items and other income

HDFC Bank: Out of a total income of $1040 Million, other income was nearly 20%, up from 14% in Q1 of 2008. What does this other income constitute of ; unconsolidated subsidiary earnings?
BHEL also had a higher income due to non-recurring item. These are important as analysts are primarily using recurring income from continuing operations to gauge the valuation of company. Will this impact DCF valuations, yes ! as one needs to make sure that the future cash flows are not incremented based on a current bloated cash flow due to one time infrequent /unusual/extra-ordinary item.

Praj Industries foreign investments and numbers

Let me be honest, I invested in Praj after seeing a news item that one of the Menlo Park investors had invested in it. Venture capitalists are more focussed on the business model than on just the numbers which means that they look at cost structure, core capabilities, value configuration, opportunity cost, value proposition, customer relationship, distribution channel, target customer and revenue streams. Let me take a peek at revenue and cost.

To get an appreciation of the magnitude of Praj industries overseas investments and their performance, lets look at their annual report. Revenue was 7719 Mn in FY 2009 up 10% YOY. The Profit after tax was Rs 1297 Mn, down 15.5%. Site expenses and labour charges have increased to Rs 1907 Mn from a base of Rs 496 Mn.
The breakdown of revenue has been almost half and half in rest of world and India.

The subsidiary financials have been consolidated with Praj industries financials based on AS-21.With these figures in perspective, Praj industries has invested Rs 218 Mn in Praj Schneider. Praj owns 60% equity in Bioenergy Europa which has revenues of Rs 705 Mn in FY 09. Unrealized forex gain is Rs 240 Mn.

Beers sales are only expected to rise with the increasing pricing power of fermenting industry in India. Praj is working on both ethanol and bio-diesel technologies. If we take a 10 year horizon, Oil is definitely going to spike again resulting in super normal profits for the alternatives. Governments may further the alternative investments to protect the domestic economies. Clean technologies has been a theme with lot of emotional attractiveness and makes financial sense.

Americans think in months and British plan in days

Look at the date format mm/dd/yy. Annual planning is much easier :). While typing 4/23, the first letter occupied my sphere of concentration and I was able to immediately discriminate with another meeting on 5/7. Hence I conclude that the American date format helps to plan for longer time horizons w.r.t the dd/mm/yy format.

Look at the distance in miles, it is numerically less but actually equal to kilometers.Let me think abou it ..abhi bahut door jaana hai servo extra mile bharo

EMI Demystified and relationship with PVIFA

Excel simply will not scale like code ! So here is the derivation from the fundamentals; Enjoy:
Geometric series 1+x+x^2+x^3+...= 1/1-X if X<1
PVn = A/R - A/[(1+R)^n.R]
e.g. PV3 = PV(infinity) - A/[(1+R)^3.R] where PV(Infinity) = A/R; remember D1/Ke-g
FV=PV(1+R)^N + PMT[(1+R)^N -1]/(1+R)^N*R)
pvn =" A/i" N=" Periods," R="Rate," A =" PMT"

FV="O"
- PMT = PV*R(1+R)^N/((1+R)^N -1)

disc = (1 + coupon) ^ N

payment= Bal * coupon * disc / (disc - 1)

InterestCashFlow(period) = Balance(period - 1) * Coupon / Frequency
PrincipalCashFlow(period) = payment - InterestCashFlow(period)
Balance(period) = Balance(period - 1) - PrincipalCashFlow(period)

The diagrams are simplified and do not denote the complexity of Net Interest Margins of different assets e.g. Senior Notes

Assets are valued by Sellers/Securitizers based on:
1. Interest
2. Default
3. Recovery rates
4. Credit spreads
5. Prepayment rate

Entrepreneurship motivation

The thoughts on top of most peoples minds is the global recession. Similary the driver for most people contemplating self owned business is money! I was thinking if giving employment to tens of people is a valid motivation. The right wing economists will start puking as they believe that profit should be the only motive and corporate social responsibility is not good for corporate health. The owner of business is an extension of the company, so this logic should hold for owner's motivation or driver as well.
The good thing was this thought chain helped clarify the dichotomy between trends and drivers. Trend would be the recession and driver would be something which affects the company postively or negatively like changes in interest rate , currency rate volatility, commodity price change. The visualization I had in mind was a person driving a vehicle, so what would be the primary driver for a company ? People and their intent!! So are drivers more likely to be internal than external like trends? This is like looking behind using the rear view mirror or the side view mirror. Most strategy maps have people as the point of primary focus to drive internal and external scorecards culminating with the financial scorecard.

I had these thoughts speeding through my mind after having a fast drive. There is delicious fatigue in the bones which prevented me from posting as soon as some insights crossed my mind. Now I am struggling hard to recall those nuggets, and hence this build-up.

Economics focus| looking good by doing good

The incentives covered as an introduction to Freakonomics were financial, social and moral. The article examines if the so called moral incentive from contributing to charity is actually a social incentive. The article also examines if it’s possible to give creative financial incentives to boost charity.
Some of the questions which arose as I pored through the article were:
a) Does Individual responsibility have to be publicized? How much of charity is publicized. Statistics from a particular case in point can be misleading e.g. just taking Boston’s Institute of contemporary art(ICA) as a single data point prove that less than 1% of private gifts to charity are anonymous might be erroneous.
b) Is charity increasing in terms of volume figures and actual revenue? A 2001 survey that 89% of Americans gave to charity does point towards charity becoming more broad-based. Actual charity revenue might be totally opposite. Taking inflation into account, the tripling of charity to $306 Billion from a base of $100 Billion in 1965 is no wonder. In real Dollar terms, charity today should be approximately $719.47 Billion to have the same effect it had in 1965. Take a look at the table below. The table below also illustrates the effects of compounding. If there is 7% inflation, then money doubles in 10 years. Coming back to the crux of the article, if the author of the article intended to point out that charity has increased due to associated social incentives; it is not the case at least in real dollar terms. The data points to charity in real dollar terms being half of what it was in the year 1965.

c) Are financial incentives in charity inversely correlated to looking good in the eyes of those whose opinion charity givers really care about (Image motivation)? According to the article behavioral economics might provide the answer, but going by the recent boom bust and catastrophe in the global economy, it seems highly unlikely. In case of blood donation, the hypothesis might be true, but it cannot be expanded to cover all charity and all financial incentives to charity. Tax breaks are a very strong incentive to charity.
In some parts of the world, Charity is a method to launder money from black to white. Educational institutions and religious institutions play a role in this business.

Right wing Economists who have a belief that self interest governs most actions of man are intrigued by charity. They will take solace in the fact that charity has in fact fallen to half of what it was five decades back in real dollar terms. They might miss out the fact that today charity is international wherein aid workers and religious workers reach out to remote places to be noble. The cynic would say that the well-off are reaching out to exorcise the demons within them. If we are less cynical then we would simply look at the good which is resulting from charity.