Jet Air Valuation

Let's attempt a relative valuation on Jet.

In Mid January, 2006 when Jet made a Rs.2300 crores bid for Air Sahara, its (Jet's) stock price was Rs.1129 per share. Nifty was 2809.

In June 2006, Jet's stock price is about Rs.645. Nifty is hovering around 2943. There are broadly two stories floating around to explain the fall.

a) The Air Sahara acquisition is an expensive deal and for an ailing company like Air Sahara, a consideration of Rs.2300 crores is much on the higher side.

b) Jet is facing competition from most of the new entrants into the civil aviation industry.

I think it is the first reason that can partly explain the fall. No new entrant suddenly entered the market after January 2006. And when Jet went for the IPO, many analysts predicted revenue pressure because of the new entrants. So the market must have factored that in the pre-Januart price of Jet.

The first reason, however, partially explains the fall because the fall in the market capitalization in Jet is Rs.4152 crores that is about 180 percent of the total consideration that Jet pays for Air Sahara.

This seems little difficult to justify. Even if one puts zero value on Air Sahara, the fall in the market cap of Jet cannot be so high.

Unless of course the market puts a negative value on Sahara ...




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Taking an educational loan

This is the beginning of the new academic year and it is time for the freshers to decide how to finance their MBA. I think one should keep the following in mind.

a) If you have enough surplus cash lying idle in a saving bank account that you do not intend to deploy elsewhere, then it is better to finance your MBA with your own money. Borrowing makes you poorer here.

b) If you have parked your money in other assets and plan to liquidate them to finance your MBA, it probably is a better idea to take a loan if the after-tax return is greater than the effective cost of the loan. Keep in mind that you will get tax benefits on the interest payments without any limit.

c) If you are taking a loan, then preferably take a fixed-rate loan. The cost may appear to be higher than a floating rate loan. But the effective cost for a fixed rate loan will be lower than that of a floating rate loan. As per a circular sent by the Finance Ministry to the chairmen of all the scheduled commercial banks, the banks cannot charge more than their PLR for loans below Rs.4 lakhs. That is why most banks offer floating rate loans. However, some banks do offer fixed rate loans. United Bank of India, for example, gives loans at 11% fixed interest rate. During the study period, they charge interest on a simple interest basis. Afterwards they use the standard compound interest formula. For details, you can visit the bank website. HSBC also offers fixed rate loans. You can visit the website to get a quote.

Visit the website of UGC to know the details of banks that provide education loans.



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Some Typical Excuses

You rarely find an MBA crowd that voluntarily submits assignments ontime. I have seen that they (students from different B-schools and different batches) give more or less similar excuses for postonement of assignment submission deadline. I am listing a few here.

a) Sir, we are finding your course extremely interesting and useful and we do not want to submit a half-baked assignmenmt. We want to do justice to the submission and we need some more time.
b) Our group members are busy for a paper-writing competition and we did not get enough time.
c) Sir, we are having a crash course as a visiting faculty has to finish the course.

But I liked the honesty and ingenuity of the following:

d) Sir, I had some doubt and I thought I should get them cleared before submitting the assignment. I wanted to come to your house yesterday afternoon. But I thought you must be sleeping. So I did not come.

I hope future batches will give more creative excuses.



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What is there in a name?

Ever wondered why it is called "Insurance Regulatory and Development Authority"?, and not "Insurance Development and Regulatory Authority"?

The answer lies in the mentality of the regulators. Even after the so-called liberalization that started more than 15 years back, we still believe in regulating the financial sector (some amount of regulation is nevertheless needed) and by naming the apex insurance regulatory authority as IRDA and not IDRA, our bureacrats make their priorities known to every one.



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Share Issue Expenses in India

A survey of all the companies which went for public issue of equity between 1995-2005 shows that Indian companies on an average spend about 4.4 percent on issue-related expenses. The issue expenses were 5.3 percent between 1995-2000 and came down to 3.3 percent between the 2001-05 period.

There are two quick implications of this.

a) Issue related expenses have come down and this is a good news. This means the effective cost of capital of the Indian companies has also come down recently.

b) In the U.S. the underwriting spread is closer to 7 percent. And it is definitely heartening to know that Indian companies are able to raise funds at much cheaper rate.

(Source: My data source, as always, is Prowess of CMIE)


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