Sailing the Way

This ongoing stock market rally has completely baffleed me. There isn't any fundamental reason for market to move the way currently it is and so I was bearish since 4700 Nifty and have being proven completely wrong.

All the asset classes are rallying in a way it has never happened before. Gold prices are rising because US dollar is loosing its strength against Euro and this is happening because people believe that the excess liquidity infused will definitely lead to inflation in coming months and so a weakening dollar and the demand for gold is increasing as a hedge against inflation.

But text book fundamental says that if people anticipate inflation then the treasury yields should increase and gold should rise and equity should fall. The former two is happening but only GOD knows why the equity is not correcting. If the theory is correct and the same things have happened in the past, it should happen in the present also. Inflation expectations and equities can not rally together.

As the market direction is not clear I would not comment more on that. However I believe that stocks or sectors which have not joined the current rally should definitely perform. One such stock is Great Eastern Shipping.

The company is India’s largest private sector shipping company with excellent fundamentals. The stock despite having high ROE, ROCE and margins compared to its peers is only trading at a P/E of around 3.5 and only 0.8 times its book value. It has a good dividend paying track record and currently the dividend yield is around 3%. The sector has immense potential since with the the recent surge in the global economic activity, followed by the rise in the India’s industrial production index could lead to a higher demand for the shipping activity.

I strongly believe that this is a value pick and should be added on the dips for an investment horizon of around 1.5-2 years.

Please use the link below to access our group's recent report on GE Shipping.


http://www.scribd.com/doc/19964042/KBSL-GE-Shipping

Too many Expectations = DISSAPPOINTMENT

"Disappointment is a sort of bankruptcy -- the bankruptcy of a soul that expends too much in hope and expectation. " The quote by Eric Hoffer clearly sumps up the recent disappointment of Indian investors after the larger than life IPOs.

The Valuations at which the companies like NHPC and Adani were offered to the investors were completely sky rocketing, still the way these issues were over subscribed was completely amusing. The power sector story was sold as if the GOD himself is a merchant banker and when he is underwriting an issue, d investors are bound to gain since god would always want to do charity.

But the reality is that the promoters have squeezed all the juice out of the IPO and what was left for the investors on the table was just an empty pot. Selling an hydel power generating company at 36 times its trailing earnings is absolutely crazy. The kind of risks associated with an hydel power generating company were never discussed even in media before the issue. Because of the current drought like scenario most of the hydel power plants in the country are operating at around 50% of their capacity and the chances are that some or most of them could also be shut if the situation continues. There are risks of landslides or similar natural disasters in the area where these companies have build plants.

Adani Power's valuation was justified that it would generate around 9000+ MW of power by 2012 and so its really a cheap one. The same story was weaved around Reliance Power some 2 years ago with numbers like 33000+ MW and today the company after 2 years is not generating even a single MW and the stock has almost more than halved from its issue price. Even if one plant of Adani does not reaches closure as per the stated time or does not get the fuel supply, the kind of interest cost the company has to bear is way too much.

Thus, I believe that people specially retailers who have applied for these IPOs can seriously exit before any sort of damage happens. These stocks, based on valuations I believe will be available at lower levels in near terms and then one should enter them for a long term investment horizon. Probably 70-75 for Adani and around 25 for NHPC makes much more sense rather than holding them currently.

But one more thing that amuses me is that one buys in an IPO with good long term investment rather than with an intent of selling on listing and so the disappointment is inevitable since those crazy days of 2007 are no more there.

I believe the forthcoming Oil India IPO will also see the same fate and one should avoid that because even at the lower end of the price band company is expensive than ONGC.

Moreover the markets are likely to remain on a positive note before the Oil India Issue closes since, this will help company issue the stock at the upper end of the stock band.

Happy Investing