Indian IPO Market in 2014

Written by HARIKRISHNAN.T
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2014 was a spectacular year for the Indian equities. we have witnessed benchmark indices Sensex and Nifty making life time highs. A new wave of optimism has started to observe in financial markets. It was a broad based rally with almost every stock participating in the euphoria of investors. The market outlook began to change from October 2013 after a series of rumours that Narendra Modi led National Democratic Alliance will come to power at the centre. Indian equities saw its values sky-rocketing after witnessing a clear Majority for BJP at the centre. This optimism coupled with the expectations of cooling of inflation, downward spiral of crude oil prices, hopes that RBI will be able to cut its lending rates after witnessing inflation is settling around their comfort zone, business friendly government at the top added as a catalyst to the euphoria.

Rising markets always means a large number of IPOs. But 2014 did not witness any major momentum shift in the number of initial offerings.

There were mainly 5 companies participated in intial public offering in 2014. They are

Wonderla Holidays
Snowman Logistics
Sharda Crop
Shemaroo Entertainment
Monte Carlo

lets see their listing price and other details



From this figure we can see that all the IPOs except Monte Carlo had a very good run so far. Especially Wonderla and Snowman logistics helped to double investors wealth.

So the question arises is what is the reason for a very less number of IPOs compared with a very strong equity market. The possible reason could be that usually the entire IPO procedure usually takes an average of 12 to 18 months. We witnessed a significant change in the sentiment only by the end of May 2014 especially after the Parliament election. Retail investor participation is a very crucial factor in the success of any IPO. But according to Kotak securities, the retail participation in the market is still very minimal. According to them it is too early to expect retail investors to enter the stock market as a whole, since their wealth and with it their risk appetites, haven't increased. According to Anand Rathi Financial Services, Retail investors right now are taking mutual fund routes to enter market. So it will take time for them to invest in direct equities.

So once retail investors enter into the market by taking direct equity exposure we can expect a turnaround in IPO market also. So 2015 and 2016 should be a better year for primary markets compared to previous years.

Challenges ahead : There are a lot of macro economic indicators suggesting that India can expect a turnaround in growth in the coming years. Estimates from IMF world bank and from other agencies supporting this. But all will depends on the global economy also. China is in a slow growth mode. Euro-zone also facing deflationary pressures. Even though falling crude oil is positive for Indian economy, it can have serious repercussion in US E&P sector and the junk bond market associated with that. A positive synergy among nations is necessary in order to create a better macro economic environment.



FREE FALL OF OIL PRICES AND INDIA

Written by HARIKRISHNAN.T
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On 27th November 2014, a meeting was conducted in Vienna by the OPEC (Organization of Petroleum Exporting Countries) to decide on whether to cut the production of oil in order to support the falling global oil prices. But they were unable to reach into an agreement because of the opposition from Saudi Arabia.

 So the first question that has to come to every one’s mind is what is the reason for the recent free fall of global oil prices?

 To answer this question, first we have to get an idea about shale oil. Shale oil is unconventional oil produced from oil shale (Oil shale, also known as kerogen shale, is an organic-rich fine-grained sedimentary rock) rock fragments. That means if a country has large amount of oil shale reserves, then it can also produce oil. But the problem is the extraction of oil from oil shale. It is a very complex, capital intensive process and the cost of producing oil is much higher compared to the traditional methods.

 US has significant amount of oil shale reserves in their country. Still they didn't produce much oil using this method because of the high costs. But the picture started to change five to six years back. When we consider the oil prices from the period 2010 to 2014 we can see that the price was settled somewhere around $100 per barrel.
This was because of the demand from China and other emerging economies was good and there was some bottlenecks from the supply side because of the political uncertainties from Libya, Iraq etc. This has helped demand to stay always above supply and as a result the price was settled around $100 per barrel for a long period of time.

Price of crude oil WTI. Data obtained from www.nasdaq,com

US energy companies smelled this as an opportunity to extract oil from oil shale. Because they estimated that if the price of the oil is in the $100 range, then even after considering the huge costs associated with the exploration activities, they can still make a decent profit. This insight helped the US energy companies to pump billions of dollars into shale oil production and they have received lot of capital. As a result the share of US in the global oil market has been increased dramatically. US were producing about 4 million barrels of oil per day till 2008. Since then it has been increased to 8.97 million barrels per day at the end of October 2014.

 Situation was good till last September. But it started to change from September onwards. Political chaos in many countries started to abate. Libya’s production has recovered from 200,000 barrels a day in April to 900,000 barrels a day, while war hasn’t stopped production in Iraq and output there has risen to an all-time high level of 3.3 million barrels per day. At the same time global economy started to experience some sort of setbacks. Demand from China, which was the growth engine of the past decade got reduced. Similar trends were seen from all over the world. This lower demand coupled with an excess supply from US and other oil producing nations caused the oil price to fall from $100 levels to $65 levels.

 The next question is why Saudi Arabia is not ready for a cut in oil production. Because they fear that if OPEC cut production, the price will again climb back to the previous levels and as a result they may lose the competitive edge in the global oil market because of the supply from US. The Bloomberg report written by Grant Smith reports that US is on its path to become the biggest oil producer in the world by overtaking Saudi Arabia (Full report can be read from here http://www.bloomberg.com/news/2014-07-04/u-s-seen-as-biggest-oil-producer-after-overtaking-saudi.html)

 So Saudi Arabia needs to make the shale oil production in US unviable and unprofitable by making the crude oil price lower. But there is a very serious negative reaction to this. The major source of revenue for most of the biggest oil producing nations is from the oil trade. So if the price continues to hover around these levels, then it is going to have a very tough time for their economies, because they may have set their economic and public policies on the assumption that they will get around $100 per barrel for oil. So the revenue short fall will be huge. 

 A report from outside the box (Full article can be accessed from here http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/OTB_Nov_26_2014.pdf) by Jawad Mian says that the current oil decline has potentially cost OPEC $250 billion of its recent earnings of $1 trillion. This explains the magnitude of the situation. At the same time in the same report he shared one interesting observation. Even though 50 percent of shale oil is un-economical at current prices, the median cost of producing shale oil came down to $57 compared to $70 last year.  That means even at these price levels US can produce oil economically. So we are going to see a huge price war in the oil sector in the coming years.

 How India will be affected?

 Everyone knows that India is a net importer of petroleum products and we imports around 70 percent of our crude requirements. So this price falls going to be very positive for our nation.

 Our current account situations will be improved because oil is the biggest contributor of our import bill. Every dollar fall in oil leads to 4000 crore saving for India.

 Also this is going to have a positive impact on our inflation front too. According to a RBI report (2005), for every unit dollar increase in crude oil price, WPI inflation rises by 30 basis points. Obviously every unit dollar decrease should also have some positive effects.

 Economists around the world predict that this is not a temporary phenomenon. This price level will be maintained in the years to come. For India “acche din aane wale hai” :)

 References

http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/OTB_Nov_26_2014.pdf
http://www.bloomberg.com/news/2014-07-04/u-s-seen-as-biggest-oil-producer-after-overtaking-saudi.html
http://www.vox.com/2014/11/28/7302827/oil-prices-opec
http://en.wikipedia.org/wiki/List_of_countries_by_oil_production
http://en.wikipedia.org/wiki/Oil_shale_reserves
http://en.wikipedia.org/wiki/List_of_countries_by_recoverable_shale_gas
http://en.wikipedia.org/wiki/Shale_oil
http://en.wikipedia.org/wiki/Oil_shale





When TCS is the cash cow of Tata Sons

Written by HARIKRISHNAN.T
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Tata consultancy services again came into the lime light last week by announcing a strong first quarter results and becoming the first Indian company to achieve the 5 lakh crore mark in terms of market capitalization. The competitors to TCS such as ONGC, Reliance, ITC etc. (in terms of market cap) are far below the level achieved by TCS. 

So I just wanted to check how much TCS is worth to Tata Sons compared to other Tata group companies.

For that I took 12 major Tata group companies and collected their market cap (for July 24, 2014), Net sales and net profit. (On a consolidated basis as on FY14)

The following interesting facts have been observed.



The combined market cap of 12 Tata group companies are 814,681.81 lakh crore (as on July 24). The biggest contributor is obviously TCS with a whopping 62.2 percent share in total market cap. The next biggest gainer is Tata motors. But its contribution is 19.11 percent almost one third of TCS.

The next thing I considered is the net sales and net profit (in a consolidated basis as on FY 14).



The revenues of 12 major Tata group companies for FY2013-14 was at 562,496.87 crore in which TCS contributed to just 14.83 percent. Tata motors were the biggest contributor with a 41.86 percent share followed by Tata Steel with 26.6 percent. But when we come to net profit scenario, TCS contribution was 51.16 percent of the total net profit (total reported net profit by these companies were 37,787.83 crore as on FY14) reported by these companies. Tata motors secured the second position with 37.32 percent share (But most of its profit and revenue came from JLR) and Tata steel came third with a meager 9.7 percent. Interesting isn’t it? The important factor to consider in this scenario is even though TCS contributed a meager 15 percent to the Tata Group companies’ (that I have considered) revenues; TCS contributed a whopping 51.16 percent share in net profit.

From these figures it is pretty much clear that it is this single IT service company that have enabled Tata Sons to keep investing in group companies. Tata group companies especially Tata steel and Tata motors have huge debt in their books mostly because of the acquisition of JLR by Tata motors and Corus by Tata steel in 2007. The situation got worsened because of the global recession in 2008. Even though the JLR contribute significant amount of bottom line to Tata motors, the performance of Corus is quite disappointing. Even though Tata steel posted a net profit of 3663.90 crore in FY14, it reported a net loss of 7,362.39 crore in the FY13 (in a consolidated basis). Apart from this the recent announcement of Japan’s Docomo to quit the partnership with Tata Tele services which they had in the telecom space and the recent decisions to enter into the aviation sector with Air Asia and Singapore Airlines also need a lot of money. Recently announced dividend payout of Rs. 12750 crore by TCS, the highest ever dividend payout by an Indian company should be seen in this regard. Tata sons will get around 9300 crore from this dividend payout since they have around 74 percent stake in TCS which they can utilize for investment in group companies. 

So TCS is and continues to be the lender of the last resort for Tata group.

Views are personal :)

Data collected from moneycontrol.com, firstpost.com and the respective company websites.