Six Reasons why Investing in India’s Defense Industry is a Great Idea

20 Jun, 2010
PSU,Telecommunications

The Indian Defense Industry is great way to invest in an area which is Recession Proof and benefits from the one of the World’s Fastest Growing Economies.Here are Six Reasons that support that this thesis

  1. Pakistan – India and Pakistan have a long history of bloodshed and acrimony right from their birth when the British partitioned South Asia in 1947 . India has fought 3 wars in 1948,1965 and 1971 with Pakistan.The tensions between these two countries makes it  one of the world’s  riskiest area in terms of a potential Nuclear War.Recently radical Islamic terrorism emanating from Pakistani’s wild west has become the main source of tension.The recent Mumbai terrorist strikes again ratcheted up the temperature between the countries leading to a suspension in talks.The chances of a detente remain a distant possibility.
  2. China - India and China have also a long history of mutual suspicion and border problems.They fought a small scale war in 1962 in the Himalayan region and since then both countries have viewed each other with doubt and suspicion.They have not formalized the long border boundary between them leading to sporadic incidents.However the relations between these two Asian giants have been improving alongwith bilateral trade.Recent visits by the leaders of the two countries have signaled the desire to improve relations.However the Huawei and ZTE ban underscores the suspicions with which these countries view each other.
  3. Rapid GDP Growth- India’s GDP has grown at a spectacular pace in the last 5 years as reforms undertaken in the early 1990s fuel growth in India’s economy.Though recent reforms have been stalled,India’s economy continues to grow at a rate which is second fastest among major economies.Its Consumption oriented Growth Model makes it relatively insulated to the Global Financial Crisis,so that the same rapid growth  rate is expected going into the future as well.
  4. Rising Internal Strife - India suffers from countless insurgencies and local terrorist groups.Some of these are externally supported while others are home grown.India is the most diverse country in the world with respect to ethnicity,religion,race and language.This naturally gives rise to internal divisions and fractures.The most acute is the Maoist based Terrorism which led the Indian Prime Minister to term its as the biggest threat to the Indian nation.
  5. Recession Proof – While this reason holds true somewhat for defense industries in all countries,it strongly applies to India.While countries in Europe are thinking of cutting defense spending,India due to the above reasons can’t even think of doing so.High defense spending is an imperative rather than an option.
  6. India’s Great Power Aspirations – India is home to 1/5th of the world’s humanity and is one of the oldest civilizations.Before British colonization,it was one of the most prosperous countries in the world with a great history and culture.With growing economic strength,India is strongly lobbying for a seat in UN’s Security Council.A country with a Great Power aspiration necessarily require a strong military.

How to Invest in Indian Defense Industry

India does not have a lot of options in pure play defense companies like US and Europe.Most of the equipment is imported while the rest is manufactured by government run organizations.However India has been opening up its defense industry to allow private sector participation.One way to invest is to put money into publicly listed Indian government companies like BEL and BHEL which are involved in supplying equipment to the Indian military The second way to invest is to buy private companies like L&T,Tata Motors,Mahindra,ABG Shipyard and Bharti Shipyard.Though their defence related revenue is quite small,it should rapidly grow in the future.

Indian Government fails to Rein in Fossil Fuel Subsidies despite Favorable Political Position

8 Jun, 2010
Energy,Gas,Oil,PSU

The Indian Government failed to pass a law reforming the structure of state subsidies to the Oil sector .The Meeting between a empowered committee of Indian ministers was expected to loosen the control over prices of petrol,diesel and cooking gas.However the Government failed to make any headway citing high inflation as a reason to delay critical reforms in this sector.India’s State Oil Companies face the brunt of these price controls facing huge losses by subsidizing the cost of petroleum products.The Indian government  periodically issues Oil Bonds when the Losses by the Oil PSU’s becomes too great for the companies to bear.Note the subsidies are mostly a complete waste not reaching their target segment as most of these products are consumed by India’s well off classes.The Cooking Gas subsidy is the most obvious example of this waste.No one amongst India’s poor can afford Cooking Gas using mostly Kerosene or Wood .

India which has been mostly ruled by Coalition governments in the last 20 years has never possesed the political will to implement  unpopular reforms in the Energy sector.But the UPA coalition this time which has the Congress Party as a Dominating Member had raised hopes that they could  pass some unpopular reforms.The government has managed to pass some Reforms in the Social Sector like Education and Female Empowerment,however the Government has failed to muster the Political Will in the case of Oil Subsidies.India’s State owned Oil PSU’s whose stocks had risen with the expectations of Oil Reforms have fallen back once again.

India Delays Fuel Price Decision Amid High Inflation – Bloomberg

India delayed a decision to raise prices of fuels including gasoline and diesel on concern higher costs will stoke inflation, already running at the fastest clip among the Group of 20 nations. Shares of state refiners fell.

Ministers led by Finance Minister Pranab Mukherjee met yesterday to discuss a recommendation made by a panel in February that India free gasoline and diesel prices from state control and increase kerosene and cooking gas rates. The group is likely to reconvene in 10 days and a decision may be reached then, Oil Secretary Sthanunathan Sundareshan said in New Delhi.

Raising prices will help the government cut expenditure on fuel subsidies, which were 260 billion rupees ($5.5 billion) last year. India, which more than doubled prices of natural gas sold by state-run Oil & Natural Gas Corp. and Oil India Ltd. last month, is seeking to limit losses of state refiners that help cap inflation by selling fuels below cost.

SJVN leaves Nothing for IPO Investors;Tarapur Transformers falls more than 30% since IPO

20 May, 2010
Energy,IPO,PSU

SJVN was one decent quality company to offer shares amongst the sea of junk initial public offerings.The government which had faced tepid response to the IPO of its state owned companies earlier in the year tried to leave something on the table for the investors with SJVN.But considering the price action today it seems the government has failed to leave even bare crumbs for the SJVN investors (at least till 2 pm).Considering that the Government is planning to list more companies in the current year it will have to reconsider its Strategy once again .

India has seen a raft of IPOs in the past 2-3 months which are  of dubious quality and barely manage to get subscribed . Tarapur Transformers heads the list of these junk IPOs. I did not understand why the Tarapur got subscribed at all considering the non existent fundamental reasons .However Indian markets routinely see such junk get listed with help from “friendly circles” .Tarapur has already costs its investors more than 30% in the week since its listed and considering its fundamentals , the investors will have to wait a long time to regain even their capital much less any positive returns.Here is what I wrote while analyzing  with Tarapur Transformers from its prospectus

It is raising around 125 crores at 50 times P/E and more than 6 times P/S. This from a company which has negative operating cash flows in the last  4 out of the 5 years . Note the other companies in this space have got multiple which are much lower than this stock which has pathetic financial and operational parameters. This sort of valuation is generally reserved for very high growth , high quality companies . The i-bankers of this company “Comfort Securities” look equally shady if they are willing to IPO such a company . Guess this is one stock where you can be sure that only vested parties would be buying the stock.No right minded rational investor would even think of putting a paisa into this company. The Rating Company Crisil  has at least done a decent job by grading it 1/5 though I think a negative rating would be more appropriate.

Here is a list of some of my postings on the Indian Junk IPO market

  1. Texmo Pipes seems a classic case of “Pump and Dump”

  2. Tara Health Foods Fails to Get Subscribed

  3. Real Estate IPO Nitesh Plunges 6% on Listing

  4. Texmo Pipes seems a classic case of “Pump and Dump”

  5. Cattle Feed Company “Tara Health Foods” gets No One to Chew

  6. Jaypee Infratech IPO just manages to scrape through at lower end of price band despite Nine I-banks selling it

India’s Publicly Listed Oil Companies remain Captive to the whims of the Government

20 May, 2010
Energy,Oil,PSU

India has a number of large state owned Oil/Gas companies most of which are listed on the stock exchange.However these companies are difficult  to value fairly as the government not only owns controlling stakes in these companies but also has a complex system of subsidies which lead to large losses for these companies.If the government  decontrols the oil sector , then the market valuations of these large oil large caps would multiply rapidly due to the removal of these artificial losses.Some of the large companies listed in this space which are subject to government vagaries are

  1. ONGC
  2. IOC
  3. BPCL
  4. HPCL
  5. OIL India
  6. GAIL

Besides these large companies most of which are listed in India’s Nifty Fifty , there are also some smaller players like Chennai Petroleum, Kochi Refineries, Bongaigaon Refinery and Petrochemicals and Mangalore Refinery and Petrochemicals which also see their stock values fluctuate with every new regulation and ruling from India’s government.The inefficiency in the sector brought upon by the misguided policies of the government, last year led to the closing of the entire retail oil/gas network of private players like Reliance and Essar which could not compete with the subsidies given by the state owned PSUs.There has been talk of reforming the oil sector since a long time but no government has taken the pain of bringing reforms leading to continued distortions and inefficiences.

ONGC climbs 11 pc on BSE on natural gas price hike – Economic Times

Shares of oil companies led by ONGC surged by nearly 11 per cent on the BSE, a day after the government more than doubled the prices of natural gas to cut the losses suffered by oil companies. Shares of ONGC jumped nearly 11 per cent to a high of Rs 1,141, and OIL India climbed to Rs 1,255, up nearly 9 per cent on the Bombay Stock Exchange, in the morning trade.

Yesterday, the Cabinet hiked the prices of natural gas sold to power, fertiliser and city-gas projects from Rs 3,200 per thousand cubic meters ($1.79 per million British thermal unit) to Rs 6,818 per thousand cubic meters ($3.818 per mmBtu). After adding royalty, the price for user industries would be Rs 7,500 or $4.2 per mmBtu, at a par with the rate at which Reliance sells its gas.

SJVN will leave something on the table for Indian equity investors

28 Apr, 2010
Energy,IPO,PSU

After a bunch of junk IPOs that have flooded the market like Nitesh Estates ( subscribed 1.15 times ) , Tarapur Transformers that seems to have only retail and HNI investors till now,Tara Health Food ( hugely overpriced)  , Tawalkars Gym ( same overpricing) and Mandwana, we seem to have a quality IPO coming at a decent price.The government has apparently discounted this offering after dismal perfromance by earlier IPO and FPOs like NTPC,NMDC etc.
SJVN selloff price lowered – Economic Times

In a surprise move, the government has settled for a divestment price for SJVN (formerly Satluj Jal Vidyut Nigam) that is substantially lower than the price that institutional investors were willing to pay during the company’s pre-IPO marketing rounds.

On Tuesday, SJVN said the government will sell 41.50 crore shares through the IPO at a price band of Rs 23-26 per share. Earlier institutional investors were willing to pay a price in the range of Rs 27-30 per share, market players said.

Through this offering, the government is offloading 10% of the hydro-power generating company and is expected to mobilise around Rs 1,000 crore. The IPO will open on April 29 and close on May 3. Retail investors will get a 5% discount to the final price, set post the book building process.

Brokers and dealers said that the move by the government to agree to a price band that is about 13-15 % lower than what was being planned initially, indicates that the government has realised it needs to leave something on the table for investors to come back to all the divestment offers. ‘‘ Going by the price band and the fundamentals of the company, SJVN could bring back retail investors to divestment offers,” head of a local investment advisory firm said.

Over the last one year, the government has divested its stakes in five companies — NTPC, REC, NMDC, Oil India and NHPC, raising about Rs 23,500 crore. However, retail response to these offers were hardly encouraging since most analysts and brokers felt that the pricing to most of the issues were on the higher side. For example in NMDC divestment, the retail response was just about 20% of the portion reserved for these investors.

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