NHAI Tax Free Bonds Issue

NHAI, a Government of India Enterprise is going to hit the market on 28th December ( in next 2 days ) with a 10,000 Crores issue that has maturities of 10 years and 15 years. It is offering 8.2% tax free interest for 10 years paper and 8.4% interest for 15 years paper. Vow. What else could u ask for. A 10 year GOI paper is going at 8.37% in the gilt market on which you are required to pay full tax at your marginal rate of taxation. Now this Gilt is as risk free as they get for Indians ( of course we are all fried if GOI were to default but hey perish the thought on this glorious Monday morning ).

Safety & Returns: So for slightly higher risk ( paper is secured but still there is no explicity GOI guarantee, we only assume that NHAI will not default), we are being offered these rates which are mouth-watering for most of us since most of us are in 30% tax bracket so on a pre tax basis the yield works out to almost  12% per annum


Liquidity:  Bonds will be listed hence there will be enough liquidity ( some may argue with this point though). But you can get out in case of emergency liquidation though do not compare this with liquidity of  a Bank FD


TDS: no TDS hence better than a Bank FD

Tax Angle:  Since these bonds are going to be listed, they will be treated as long term capital asset which means you can transfer them to your sons, daughters and other relatives that you trust and most likely make a capital loss that you can adjust with your other capital gains.

So go for them in drove and lock in this fantastic investment.

Senior citizens and others whose tax liability is low or zero can give this issue a miss.

Happy Investing





Muthoot Finance Public Issue

Muthoot Finance, the largest gold loan company is offering secured, redeemable, non convertible debentures to public and the issue is currently on. Details of the issue are all over the media to I will not put them here. My intention is to see if there is a case for subscribing to these debentures as part of the larger asset allocation program of individuals and also  to look at how market is perceiving the previous issue by this company and other NBFCs

Per tax interest rate of 13.25 % means a post tax rate of 13.25 ,11.925% ,10.6%and 9.275% for tax payers in zero, 10%, 20% and 30% tax brackets. There is No TDS which means if you are lower tax bracket person, you do not have wait for your money to come back to you through the tax refund process ( easily a tedious and time consuming process despite efforts of the last chief of CBDT Mr Satish Chandra)

These debentures are going to be listed at BSE hence they will be treated as long term capital assets. Since there is no STT on these, you get to pay only 10% capital gain tax on unindexed basis if you hold them for more than one year whethere sold through stock exchange or through hand delivery ( this means you can transfer them to anyone including your relatives) through a simple transfer slip of your demat account.

The best debenture is buy are the cumulative options since the IRR on these bonds is little higher and there is no reinvestment risk. Left to ourselves, we will eat up the interest if we subscribed to regular return option. Of course if you need regular income( most senior citizens might fall into this bracket ) then by all means go ahead subscribe to that option. Now because these are long terms assets you can also take advantage of capital loss, short term or long term so for a little experienced player, the advantages over other investments are too good to pass up.

Safety of investment: these debentures are rated AA- primarily because of the leverage that these NBFC have. Though a moving target due to high growth, I think Muthoot leverage is almost 5-6X, the last time I checked. Obviously there is higher than a AA+ company like STFC or a AAA rated company but hey that is why they are offering you higher returns. Now the real risk in case of MUthoot according me are 1. Their ability to manage the scorching pace of growth, possibility of fraud at branch level by employees and of course if the gold prices were to fall big time then the company could be in trouble.

How does the market currently view their existing debt issued in September 2011? Yields to Maturity ( YTM ) on 2 years, 3 year and 5 years papers are 14.92%, 14.34% and 14.21% as of this morning of 26th December, giving an inverted yield curve. Volumes are highest in 5 years paper and extremely thin in other maturity.

This means that you are better off giving a miss to these issues and better off buying from the market.

How do these returns stack up against other opportunities available in the debt markets given the sad state of affairs in equities.  You could move into fixed income mutual funds ( long terms ) and gilt funds offered by practically all MFs as there is expectation of rate cut by RBI. Relatively safe, these funds are expected to provide a return of atleast 10-11% over the next one year if not more. Its better to hold these mutual funds in growth option and take advantage of lower taxation by way of capital gain of 10%, if you hold them for one year or more.

There are of course fixed deposits of banks ( FDs of companies are definitely not advisable at this juncture. You could go for FDs of banks like Tamil Nadu Mercantile Bank, Laxmi Vilas Bank, Karur Vyasya Bank etc and if you are making an FD of Rs. One lac then the safety of deposit is guranteed since these are all scheduled commercial Banks.

I do think we have not yet seen the peak of interest rates offered on FDs by banks and these rates will rise as we go along even if RBI decreases the Repo rate. I clearly remember making FDs at 11.25% at LVB in January 2009 and if you recall, RBI had started cutting rates from August onward and was done with rate cuts largely by January 2009.

Risk is in knowing what you are doing and being able to evaluate the likelihood of the identified risk factors playing out. All things considered, I would think that it is worth buying Muthoot Finance debentures from the secondary market and give the primary issue a miss. You will ofcourse be bombarded by the interested agents asking you to subscribe but be firm, ask them about the YTM on secondary market of the earlier issue and see them either give you a blank stare or slink off.

Perhaps 5-10% of your debt allocation could go into debentures of companies like Muthoot Fin and Shriram Transport Finance in the secondary market.

Happy investing.


Piramal Health-LifeSciences Special Situation-update

Piramal Healthcare and Lifescience, both, made an announcement to the exchanges on 25th November about having received the high court sanction to the scheme. From the time that they made the announcement in May 2011, it has taken approx 6 1/2 months for the procedural work. This is the link to the announcement. http://goo.gl/KojrY

I expect that exchanges will make the announcement regarding the record date soon the record date may be about a fortnight away ( total time about 7 months). 

If you bought PLSL at the time of announcement and are either still holding it or have made a arbitrage trade like me should have seen good profits. If you were smart, you would have sold out PLSL above 90 and made a rather tidy bundle ( sweeter given that broad markets have been screwing us lately).

Curious to see how the FNO trade in PHC will be handled ( i.e would there be an adjustment)- I don’t have an idea about this and second what will be the price of residual  PLSL since it will continue to be a listed entity.

Why is Piramal keeping this company listed is a question that only future will answer but he may well transfer some pharma business to it going forward. 

I am of course long on PHC given that it is quoting at wide discount to cash ( what better safe haven than this in falling markets)


Happy hunting…….


Piramal Health & Piramal Lifesciences-Special Situation-Tax Angle

Query from Kiran on Twitter set me thinking that tax aspect of this transaction is something that I did not analyze originally. I kind of assumed that the gain that I make in the transaction ( hopefully) will be short term capital gain in nature and I will be able to adjust these with short term capital losses during the year.

So about 15 minutes of diving through the Taxmann’s Direct Taxes Primer yielded the following:

Assumption: buying 4 shares of PLSL and getting 1 shares of PHC besides the 4 shares in PLSL after the demerger excercise is over ( we are fairly close to the event in my recokning ).

As per section 49(2)C of I.T. Act cost of acquisition of shares in the resulting compay ( PHC) which bears to the cost of acquistion of shares held by assessee ( you) in the dmerged company ( PLSL) the same proportion as the net book value of the assets trasferred in a demerger bears to the networth of the demerged compay immediately before such demerger.

This in our case means pretty much 100% since I do not see any other business being carried on by PLSL ( there may some marginal other business like herbal business but I think that is pretty much immaterial).

If we take the accumuated losses in the books of PLSL as assets of the company then the ratio of assets transferred and networth is 100%. This means that your cost of acquisiton of PLSL will be treated as zero post the event and all the value will then reside in PHC shares ( of course I am hoping that market does assign some value to PLSL-may be few rupees which should act as the icing on the cake ). However the picture gets complicated if we do not take the accumulated losses into calculation. the percentage then turns negative. This is where I need help of an experienced Tax CA or advocate to clarify. Of course PHC will send out a letter alongwith the letter of allottment that should clarify this position.

Following points are to be noted:
1. For the purpose of determing whether the asset is long term or not the relevant date would be the date of acquisiton of PLSL. Hence if you hold the resultant shares of PHC for one year from the date that you bought PLSL shares, you will be entitled to benefit of long term capital gain tax rate ( zero ).

2. Indexation will start from the date of allottment of PHC shares ( not relevant for our purposes since PHC is a listed company and most likely when you sell, you will sell in the market and pay STT. However if you transfer PHC shares outside the market, this date of start of indexation will be relevant.

There is whole lot of other related stuff like depreciation, transfer definitions etc but not material for the limited purpose of this post.

Blue Dart-is there money to be made

DHL-an arm of Deutsche Post, the parent of Blue Dart (BDL) has made no secret about its desire to de-list BDL from Indian bourses. It made the first formal attempt in Oct/Nov. 2006 wherein it refused to pay the reverse book building discovered prices of  Rs 950 per share . It wanted to pay only Rs 600.

Germans as people are not very market savvy. They are not driven by this valuation driven business philosophy of Americans who do not hesitate to divest a business if the valuations metrics do not work in their favour. Germans are more bottom line and market dominance driven besides valuing product excellence. This is the reason that it made no sense for them to pay Rs 950 when the fair price according to them was no more than 550-660.

They have come to regret that decision since then.

A group of investors identified, Blue Dart  as a value play. These investors led by Ramesh Damani, the much on TV, market guru ( Note: I respect the guy’s investing capabilities ) bought almost 5.5% of the company from couple of FIIs like Citi in the meltdown period of Oct-Dec 2008. I guess they paid no more than Rs 500 per share.

For someone like me who identified Blue Dart, right after its delisting fiasco, in 2006, this was a validation of sorts.

Damani & Co betted on couple of factors.  One: Blue Dart was the most trusted package delivery company in India and Indian and China were the growth markets for players like Fedex, UPS and DHL hence Blue Dart would attract a significant management attention from DHL. Incidentally DHL had right from 2005 onward, started to integrate its backend with BDL so its intentions were no secret.

Two: Since Germans per se have a healthy dislike of stock markets, DHL would prefer to grow the business away from the prying eyes  and it was only a matter of time that it would revisit the chapter of delisting sooner or later.

Third and the most important factor was that Finance Ministry had made it abundantly clear that it wanted a minimum public holding of 25% in all listed companies. This only means that the pressure to delist would become more and more severe over time.

SEBI’s delisting guidelines are totally loaded in favour of the minority shareholders and a company desirous of delisting needs to get minimum 50% of the remaining shareholders to commit and indicate a price or enough shareholders to come on board the proposal so that the combined shareholding of the promoters and consenting shareholders goes over 90%.

Now let’s look at the shareholding pattern as of 30th June , 2011

DHL 81.03%
        SBI MF 4.74%
        IDFC MF 2.00%
FII 1.5%
Body Corporates 5.76% of which
  Derive Trading & PAC 5.49%
Individuals 4.56%

For DHL to be successful in its efforts, it has to either get half of the remaining shares ( 9.48%) on its side or get at least 8.97% to take its shareholding to beyond 90%.

Ramesh Damani & Co. together with SBI and IDFC MF hold 12.23%. Now  anecdotally we all know that Bombay investing community is a fairly closed and chummy club and it is very likely that SBI and IDFC will not act solo and would pool their efforts to get DHL to cough up.

Germans don’t like their b***s being squeezed and they are baulking at the rumoured asking price of 2500. I understand from the market sources that an offer of 2000 has already been made and rejected.

How much will it cost DHL to buy out the minority shareholders ( and it has to pay the same price to everyone that it will pay to some, so no worries ). There are approx 4.5 million shares outstanding besides the promoters. At Rs 2500, this bill would come to Rs 11.25 BN which means the valuations would be over 5 X sales and over 60 times CY 10 Net profits (Rs. 940 Mn).

I think ultimately the decision would be in the hands of the Asian bosses sitting in Singapore who are more in tune with the Emerging market story.

At today’s buy price of 1700, one stands to make a profit of a minimum of 300 which works out to 17.64% and if you are lucky and Damani’s negotiating skills work then one can walk away with a return of 47%.

I have no clue on the time that this process would take. It may take few months or even a year or even more.

On a standalone basis, at the current price, the company is quoting at about 3.8X CY10 Sales and approx 43 X Net profit.( CY10 numbers). Of course in the first two quarters of the current year, company has grown more than 35% YOY. It is this growth which DHL is banking on.

There is nothing called safe bet in the market and it is but a game of possible outcomes and the probabilities and on that score I have a weighted average probability of 2250 happening at about 0.7.

A link to ETNOW interview with the Asia Head of DHL. http://www.youtube.com/watch?v=fVEYFydOVPc

Disclaimer: I have  been holding on to my stake. At the same time, there are trading opportunities in the stock since it fluctuates with every hint of a deal being clinched, hence I will play on both sides.

Dark Clouds on the horizon

There are dark clouds across the horizon. Anywhere you look, news is not good. USA seems to be in for a long haul given the near animosity between the Democrats and Republicans over How much government is good government and no consensus yet on the debt ceiling raise. Sure, I am an optimist and am sure that in the next few days, some kind of deal will be hammered out. But this will not help arrest the decline that the society is in with its emphasis on winner take all. The rising income disparities are not on anyone’s agenda since everyone is looking to drive home their own agendas. Americans are too much into looking good. Ever saw any American wearing shabby clothes. Anyone with a stubble, a dishellved look? Huge amount of money is spent on clothes, cosmetics, shoes, bags, furniture, furnishings, automobiles and other goodies of life. Who buys the maximum number of Iphones- yes, Americans. For US to regain its competitiveness, it has to reduce its costs, learn to have lesser laws to deal with, lesser compliances, cut down on current consumption and save more. Americans used to be hardy lot but the COLA and defined benefits have loaded corporations with too much to handle. So it is a given that US will not lead the world out of the looming recession.