Prof. Mohanty's Blog

My Website

2010-07-02T10:19:00.000-07:00

I always wanted to create a website, but could never create one for one reason or the other. I finally created a website. Since I am able to use that as a blog as well, I am not going to post any thing here henceforth.

Please visit the website and send me feedback on how to make it more useful to the students, alumni and in general anyone interested in learning Finance and Excel.

Returning back to India

2010-04-26T14:11:00.000-07:00

After a little more than 8-months' stint in New York, I am finally returning back to India this week-end. I enjoyed my stay here at New York and will definitely miss New York and the US.

Will post about my experience later.

Excel 2007 shortcut keys

2010-02-15T14:40:00.000-08:00

You can find the list of all shortcut keys in Excel 2007 here.

Behavioral Marketing

2010-01-09T19:03:00.001-08:00

Amazon.com is releasing the international version of Kindle DX on January 19, 2010. I am sure there must be other reasons for releasing a larger e-book reader. (I find the smaller one good enough.) But one possible reason (may be this is just my guess) is consumers will find the smaller Kindle more attractive now that Kindle DX is available.

Psychologists say that consumers always compare the prices of products with prices of some related products. When new products are released into the market, consumers get confused as to whether to buy the product or not as consumers just do not know if the price is just right or not. (There are some tech-addicts who buy all new products anyway. I am not talking about them.) Will you pay $259 to buy the smaller Kindle? Is it too high? Just OK? Too less?

It is difficult to say. There is no comparable product available (other products do not have international 3G connectivity). Now that Kindle DX is available, there is a reference. The Kindle DX is priced at an exhorbitant $489.

Now that makes decision making easier. I do not know how much the ebook reader should cost. I do not know whether $259 is enough or not for a smaller ebook reader. But if I find two products, I know that $259 is cheaper than $489. May be people will buy smaller Kindle more now that Kindle DX is available.

I remember another instance where an American company started selling a biscuit making machine for the first time. The sales were low and the company appointed a marketing consultant. The consultant advised to sell a bigger biscuit making machine at the same time at a much higher price. Earlier consumers did not know how much to pay for a biscuit making machine. They did not even know whether they need one or not. But now that a reference price is available, it is easier to compare and take decisions. The company apparently realized an increase in the sales of the smaller biscuit making machine (which is exactly what it wanted).

Compare this situation with a hypothetical situation: You go to a new city for the first time. A taxi says "Pay me Rs.100 to go to a particular place." What do you do? It is very difficult to say yes or no as you have absolutely no idea as to whether the price is right or not. But suppose you find another auto driver says "pay me Rs.90 and I will drop you there." You know what to do. Decision making becomes easier when you have something to compare with.

I have absolutely no idea if this is in fact the reason why Amazon is going to release the international version of Kindle DX. But my guess is, it will increase the sales of the smaller Kindle now that people know it is cheaper to pay $259 to buy a smaller Kindle than to pay $489 and buy a larger one.

What do you think?

Gambling in Atlantic City

2009-12-29T07:36:00.000-08:00

This Sunday, I went to Atlantic city with a friend of mine. People say your visit to US is incomplete without a visit to Las Vegas. :) I do not think I will get time to go to Vegas. So instead decided to visit a poor cousin of it in New jersey. It is apparently organized by the same casino owners and has a similar structure.

It is really worth visiting one of the gambling den. Thousands of small machines and other stuff decorated nicely using a theme. I played (my friend paid for it:)) and we lost about 50% of the money. I think I can teach risk better in a class.

There are two types of people who visit a gambling den. In the first category, you find people who go for fun. Most of the visitors will fall in this category. They have a target amount to lose. If you win anything, it gets added to the total playing amount and hence most poeple end up losing that also.

In the second category, you find the compulsive gamblers. They come to win and I think lose everything. In another road, almost parallel to the sea beach (where all the casinos are located), I found many shops that give cash against gold. Atlantic city is a small city and the number of such shops is large compared to that. These shops are probably catering to the demands of these second category of gamblers.

Anyway, it is a nice experience. As long as somebody else pays for it.

When Man Deviates away from God

2009-12-05T20:07:00.000-08:00

While reading the paper on Overvalued Equity and Agency Costs by Prof. Jensen, I suddenly got a feeling that what Prof. Jensen has written (can be downloaded from SSRN.com) is true in general in human life.

When a man succeeds in the beginning, he attributes a large part of the success to God. Here, success may be doing well in examination, making money in the stock market, making money from real estate in Dubai, doing well in job, etc.

Then he keeps succeeding. (Like a momentum factor). After each succeeding success, he attributes a large part of the success to himself and a much smaller part to God. Each success takes him a bit away from God. His bloated ego stands in the way of his understanding the real cause of his success.

Slowly he starts thinking that he is doing well in examinations because he is a good student, or he makes money in the stock market because he can actually predict the overall market movement, (and that his success in real estate or stock market has nothing to do with luck), etc.

This arrogance (or hubris or whatever you call it) slowly takes him away from God. And that ultimately becomes the main reason of his failure. The less grounded one remains while succeeding, the easier (and faster) becomes his fall.

Research shows that companies that make the biggest blunder in mergers and acquisitions are not the ones who always make mistakes. In fact their prior mergers have generated excess returns for the investors. But as one starts succeeding, one starts believing that all this is happening because of him (as if he is indispensable). And that ultimately leads to his failure.

I remember one story from Mahabharat. When Arjun returned to Hastinapur after Krishna left this world, he could not even fight with very ordinary people on the street (some miscreants who were misbehaving). Then he realized that all the power he had was all because of Krishna.

I have seen many examples where good people behave arrogantly (who were not like that before). It is just a matter of time before God shows them who is the boss.

I give a small example.

X starts a small software company in India. X is hardworking. His company does well. He starts making a decent amount of profit. He believes in God and attributes all this to God. He genuinely believes so.

Then his company starts generating 100% growth in sales and profit. People start praising X. All this goes to X's head. He thinks he (and not HE) is responsible for all this success.

And then he starts making mistakes. He does not realize it because he believes that he will never fail, that he is born to succeed, ...

Learning and Unlearning

2009-11-28T18:32:00.001-08:00

There is no age of learning. You can learn at any age provided you are willing to unlearn and learn again. I am doing that now and the experience so far has been pretty rewarding.

I am attending classes on Equity Valuation (Prof. Damodaran), Financial Modeling (Prof. Dan Gode) and M&A (Prof. Amihud). In the Spring, I am planning to attend a PhD level course by Prof. Ohlson on Equity Valuation. I never studied valuation in a class room setting and it is really good to go through both an MBA and a PhD level course on Equity Valuation.

All the faculties are simply great and sometimes, I just do not realize that the class time is over.

I always thought of offering a 3-credit course on Valuation (without including Mergers and Acquisitions in that) and now I feel confident in doing that.

MBO in Jet Airways

2009-09-12T15:46:00.000-07:00

I am closely tracking the strike by the Pilots of Jet Airways. Any frequent flier in Jet Airways will agree with me that its service quality has gone down after its tie-up with Kingfisher Airlines. Now you look at any two cities and find the best time to travel between the cities and you will find that Kingfisher offers the most convenient timings and Jet does not.
It was a different story before the tie up between the two airlines. I do not know what actually happened behind the scenes. But Kingfisher managed to get a better deal while having a tie-up with Jet.
I personally think Jet will benefit a lot if it breaks its tie-up with Kingfisher. And this is where I see the strike by the pilots as an opportunity. The pilots can do an LBO on Jet and take it private and release value by just breaking the tie-up with Kingfisher. The pilots union will not come in the way of shareholders' value creation as the ownership (at least majority ownership) will be with the pilots.
Any takers?

Back to School

2009-09-09T17:26:00.000-07:00

The assignments for a Fulbright Scholar are not exactly defined. You can do whatever you want. Do research. Study books. Update yourself. Attend classes. Explore United States.

I am doing little bit of every thing. And today I attended the first class here at Stern. I last attended a class in 1994 at IIM Bangalore. Now I am back to school after almost 15 years.
I attended the Valuation class of Prof. Damodaran. He is simply great. A very simple person (I think all great teachers are simple :)), has a great sense of humor, loves the subject, is an expert in valuation. There are some 200-odd students who are attending his class.
It is sometimes good to view class room teaching from a student's perspective.

Nobody taught me valuation at IIMB. In fact, IIMB introduced Valuation as a course in 1995. I learnt it by studying different books. I wish I studied the subject here at Stern.

Problems with Cash-cum-Stock Offer

2009-09-09T17:18:00.000-07:00

There are innumerable evidence about the negative returns to the bidder post-announcement of an acquisition. This makes any cash-cum-stock offer an interesting exercise.

Look at the Kraft Foods' bid for Cadbury. Krafts' price fell by 5.9% yesterday (day 1 in event study parlance) after the announcement of the takeover bid. The bid is a 60% stock and 40% cash bid. Just assume that there is no synergy in the merger. Then the price of Kraft will fall to reflect any takeover premium. But this simultaneously reduces the blended offer value for Cadbury.

The current stock prices of Kraft and Cadbury present an interesting case study in risky merger arbitrage that the arbs used to do during the 1980s and early 1990s. Cadbury's price is above the blended offer price (computed after the price of Kraft declined) and the I Bankers of Kraft are confident that no White Knight is going to come to the rescue of Cadbury.

If this is correct, a risky arbitrage strategy would be to go long on Kraft and short on Cadbury. But as I said, it is risky arbitrage. :)

Credit Rating of Faculties

2007-06-02T23:35:00.000-07:00

While teaching estimation of cost of debt, I often discuss about rating of companies and how the same affects the cost of capital of companies. I have a few amusing experience of how our students (who are now managers of banks) rate the faculties.

a) HDFC Bank told me that I do not deserve a Gold card and that I am only eligible for a silver card:). I told them get lost...

b) Citibank sent me a letter saying that I am not eligible for a Gold card (though I already have a gold card from Citibank) after almost a year of my applying for another card. Surprisingly I received the Card the next day after receiving the the first letter. :) The left hand there probably does not know what the right hand does.

c) ICICI Bank similarly refused me to give a Gold card on the ground that I am not eligible for it.

Given that all those individuals who rejected my application were MBAs, I wonder what our students think of us :)

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BM Course Restructuring

2007-05-31T04:32:00.000-07:00

Dear XLRI Alumni,

I am a member of the BM restructuring committee at XLRI. As part of the exercise, we require your feedback on the existing course curriculum at XLRI and how the same can be improved. Any honest feedback will be welcome. Kindly send the same to my id (pitabasm@xlri.ac.in) asap.

Please do not give any faculty specific feedback. Your feedback should be entirely on the way the core courses and the electives should be delivered (irrespective of who does it).

Thanks in advance

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My Ten Years with Academics

2007-05-31T04:27:00.000-07:00

This May, I completed 10 years in academics. Looking back, I find that the first five years were the most productive ones, when I knew each student by name, where I used to spend hours setting up question papers and then correcting them, where I used to do research and publishing, where I was learning something everyday.

Not that I did not learn anything in the last five years. But they were more on the executive education front, nothing great really! I must have taught thousands of students in the last five years, do not remember more than 20 names, not a single paper (great paper that is!) to my credit. Do not know if I am really adding any value now.

Hopefully the next five years will be more productive, from an academic point of view.

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My Excel Blog Address

2007-05-24T03:20:00.000-07:00

I got a few mails to know the URL of my Excel blog. Actually, it is available in yahoo 360. You must have a yahoo account to view that. Invite me as a friend and needless to say, it is available only to my students.

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Excel Tricks

2007-02-13T03:07:00.000-08:00

Since I learnt a lot of Excel tricks from my students, I have decided to start a blog exclusively on Excel tricks and their applications in Finance and other fields in management. Here, I will share these tricks with screen shots so that one can do it directly.

Needless to say, these are available only to my students. You can find the link at my yahoo blog.

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ER Reports on Singapore Stocks

2006-10-09T22:25:00.000-07:00

While designing the course content for the XLRI Singapore program, I happened to visit the website of Singapore Stock Exchange. I was pretty impressed with one feature of the Exchange, which I think other exchanges in the world can adopt.

They have started a research initiative (known as SGX-MAS initiative), where an investor can go through the equity research reports of stocks listed in the exchange. As of now 187 firms have signed up for the program and about 12 equity research firms track the stocks of these firms. The website says it is available only for two years. Hopefully, it will be extended for more number of years.

One just needs a login account to have access to the equity research reports (available in PDF format). It is free. Visit the website of the exchange to become a member.

Efficient Markets Hypothesis (semi-strong version) is based on the argument that when information is available to all, then prices will always reflect all publicly available information and hence no non-insider can earn excess returns consistently. This is a great initiative on the part of the exchange to make information available to all investors free of cost and will definitely help making SGX one of the best in the world.

The exchange should request (ask) the analysts to particularly track the mid-cap and small-cap stocks so that information will be available on a wide-variety of stocks. Even developed stock exchanges face the problem of lack of adequate information on small-cap stocks and that probably makes the market for small-cap stocks somewhat inefficient. The analysts do not track small-cap stocks because there is a lack of interest in such stocks. Such proactive behavior on the part of the exchanges can definitely help making the entire market efficient.

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Careers in Finance

2006-10-07T09:54:00.000-07:00

I often get mails from past students seeking advice on the right choice in career. I do give some advice nevertheless without telling them that I am not a Career counselor.

I however, found this interesting website of Goldman Sachs that can probably help you in finding the right career. Do not forget to take the quiz.

Apart from this, the following two websites also provide useful information.

a) Careers in Finance which has some general discussion on all the useful areas in finance.
b) Career Journal of WSJ.

Hopefully somebody will find this useful.

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Sequels in Bollywood

2006-08-11T05:20:00.000-07:00

These days most of the comedy hits are coming out with sequels to cash in on the increasing popularity of the first movie. In Hollywood people have used sequels as a way of reducing the cost of the budget in a very innovative way. Let's say a producer produces a movie like "Munna Bhai MBBS" and sell its sequel right to another movie producing company. The second company will have the exclusive right to produce the sequel and he will do so only if the first movie is a success.

This is actually a call option and while selling the right to produce a sequel, one can price the right appropriately by valuing it as an option. I found that a producer can reduce the cost of production by approximately 12 - 20 percent by selling the right to another producer. Given that the probability of creating a movie hit is very low, this definitely reduces the risk associated with producing big-budget movies.

Let's say the cost of producing a sequel is Rs.40 crores and it is expected to generate cash flow (including distribution rights, music, etc.) of Rs.50 crores. I have also assumed that the life of the sequel is four years in the sense, if one does not produce a sequel within 4 years of the release of the first movie, then the option expires (that it makes no more sense to produce a sequel after four years). This may not be a valid assumption for all-time successful movies like Sholay. I have also used a dividend yield of 25 percent. This is effectively the loss to the sequel-right holder of any loss in value of the project if he delays in releasing the sequel.

The value of the option comes to about Rs.5 crores. It is as if the first prodcer recovers 12% of the cost of the movie before releasing the first movie itself. One can also look at it this way: The second producer finances part of the cost of the original movie production.

It is actually not necessary to sell the sequel right to another producer. In this case, the fact that this is a call option can make an otherwise negative NPV project a lucrative project.

And if the dividend yield is assumed to be zero, then even under very mild assumptions the value of the sequel right comes to about 50 percent of the cost of the movie.

It is time Bollywood recruits MBA students for its financial planning!!!!

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Jet Air Valuation

2006-06-27T02:52:00.000-07:00

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

2006-06-19T02:47:00.000-07:00

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

2006-06-19T02:27:00.000-07:00

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?

2006-06-04T02:49:00.000-07:00

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

2006-06-02T08:13:00.000-07:00

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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How Profitable are the Indian Companies

2006-05-20T05:32:00.000-07:00

In one of my recent postings, I mentioned that the stock returns observed for the small-cap stocks has been quite high (175%). The median FII stake and the median FI stake in these firms is zero and their dividend yield is 0. Not many may be convinced that these are hopeless stocks (not all of them, but on an average) just because the dividend yield is 0. May be these companies have a lot of growth opportunities and hence they do not pay dividends. So zero dividend-yield in itself does not tell us anything about the stock or the company.

I did a further analysis of the profitability of these companies. I found that the median ROE of the large-cap stocks decreased from 15.28% to 10.47% over the last one year (I did not include 2006 data because Prowess database does not have the annual figures for most of these companies). The median ROE of the mid-cap companies decreased from 4.7% to 0.86%.

The median ROE of the small-cap companies increased from -34% to -1% over the same time period. (If we ignore the outliers, then the profitability improves from -3% to 8%) That is, the small-cap companies have been able to reduce their loss over this time period.

The dividend yield is zero because they are loss-making companies, not because they are investing money in profitable projects. However, this improement in profitability could be one of the reasons why the stock return was 175% for the small-cap companies.

If we put data for all the companies together, we will find that the profitability of the Indian companies has actaully come down in the last one year. The total profit, of course has increased in the given time period. However, what matters from stock valuation point of view is not the total profit but profitability, and it has gone down for the large-cap and the mid-cap companies.

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Equity Risk Premium in India

2006-05-13T05:01:00.000-07:00

There is a big debate on what is the right equity risk premium for any country and whether the historically realized risk premium is more than enough given the risk associated with investing in equity. Using more than 100 years of data, Dimson, Marsh, and Staunton have found that the risk premium in the US is about 7.6 percent.

Unlike in the US, we do not have a rich array of historical data on the stock returns in India, though Mumbai Stock Exchange in more than 100 years old. Using 26 years of the data (available in the website of RBI), I estimated the risk premium in India. I found that the return on Sensex was on average 13.3 percent more than the yield on 1-year Government Securities (my proxy for a risk-free asset) in India. If we estimate the market risk premium using the post 1991 data, then the equity premium is about 9 percent in India. This comes pretty close to the figure Prof. Rajnish Mehra obtained by using 13 years of data from India. His estimate of the equity risk premium in India is 9.7 percent.

Is this risk premium more than necessary given the risk involved in investing in India? the annualized standard deviation for the 1900-2003 period was 20.1 percent (Dimson, Marsh, and Staunton's study). It was 28.37 percent in India. Ignoring the fact that risk is time-varying, the Sharpe Index in US is 0.378. It is 0.47 for India. For the post-1991 period, the Sharpe Index is much lower at 0.302.

If there is an equity premium puzzle in the US, then there certainly is one in India. The risk premium is just too high given the risk involved.

I am currently working on it. I will post my actual results later.

P.S. There was a mistake in my yesterday's posting. I did not include dividends while estimating returns on Sensex.

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XLRI ranked No 4 in India by SSRN

2006-05-11T23:01:00.000-07:00

SSRN.com has ranked XLRI at no.4 in India and 168 internationally (excluding US Business schools) based solely on the research paper downloads from the site.

Here are the details:

No.1 IIM Calcutta (international rank: 119)
2. ISB hyderabad (Int Rank: 130)
3. IIM Ahmedabad (Int rank136)
4. XLRI Jamshedpur, India (Int rank 168)

As of now, this ranking is not complete because many professors of IIMs do not post their working papers here. For example, if Prof. J R Varma of IIMA posts his papers here, then IIMA would easily become No1.

However, given the objectivity in its ranking system, I am sure after another 5 years, everybody in India will go by this ranking only. And its beauty lies in the fact that it gives 100% emphasis on research, the main job of a management faculty.

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How to become a millionaire

2006-05-10T05:28:00.000-07:00

I found the following to be a good one. So I am sharing it.

A millionaire was being interviewed by a TV hostess.

"What do you think is your secret of becoming a millionaire?"

"My wife"

"Wow! She must be a great lady! By the way what were you doing before your marriage?'

"I was a billionaire."

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Anatomy of the Market Movement

2006-04-30T05:26:00.000-07:00

In the last three-odd years, the stock market has registered phenomenal growth in India. Analysts (that today includes anybody and everybody) generally extend two arguments for this growth:
a) There are fundmanetal factors responsible for this growth. The GNP is expected to grow at 7 to 8 percent and Indian economy is booming, etc. The list goes on.
b) There are liquidity factors responsible for this. FIIs are pumping money into India and hence the prices are rising.

Which one of these factors is responsible for the market growth? Both? Neither?

I think neither. Let's see.

I studied the stock market behavior in the last 30 months (of 2783 stocks) to find out:

a) Whether the fundamentals are really that strong to warrant this growth in price
b) Whether we can link FII stake in the company with the stock returns?
c) Whether we can link institutional investors' stake in general with stock returns?

I am presenting the key results here:

The growth in stock prices is a market-wide phenomenon and is not restricted to any particular size. The large cap stocks have registered an annualized growth rate of 50% in the last 30 months. The mid cap stocks and the small cap stocks have registered 134% and 175% growth in the same time period. To put things in perspective, Nifty registered an annaluzied growth of 62% in the same time period. If anything, the large cap stocks have registered much lower growth as compared to the relatively smaller stocks. (Size effect :))Many analysts would be happy to see these results because they are arguing that what we see is not a scam, and that price increase is not restricted to handful of stocks and that the entire market is bullish. Even I thought so, when I saw the results.
The median FII stake in the large cap stocks is 4% (as against 19.33% in Nifty). It is zero for the mid-cap and small-cap stocks. What does that mean? The FII investment is restricted largely to the large cap stocks. So FII investment cannot explain the huge growth we have seen for the mid-cap and the small-cap stocks.
May be it is the mutual funds, banks, insurance companies and other financial institutions that have invested in the mid-cap and the small-cap stocks. Let's call them OFIs (Other Financial Institutions). The OFI investment in the large-cap stocks is about 5% (against 11.6% in Nifty). The median OFI investment in mid-cap stocks is 0.01% and 0% for the small-cap stocks. The financial institutions have invested mostly in the large-cap stocks. This means the market rise is not liquidity-driven. May be liquidity increases the price to some extent. That is without FII and OFI investment, may be the returns to the large cap stocks would have been little lower. But it would have been very high nonetheless.
What about the fundamental story? I love the DCF story. Let's look at dividend per share. The median yield for the mid-cap and small-cap stocks is 0 percent again!!!! That is, the market has increased the prices of a group of stocks by more than 150% who have not paid any dividends. The dividend yield is a mere 0.9% for the large-cap stocks. Even here, one needs to be really mad to justify this price. To see this, the median market cap of the large-cap companies in my sample is Rs.4381 crores. With a 1% dividend yield, the expected dividend on this is Rs.43.81 crores. This reminds one of the famous Saint Petersburg Paradox.

So who do you think moves this market?

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New Way of Ranking Business Schools

2006-04-27T21:11:00.000-07:00

Ranking of Business schools has always created its own share of controversy because people always disagree on the methodology adopted. Some give more importance to industry interface and others give more importance to faculty research.

Social Science Research Network (SSRN) started a new service whereby it ranks the top business schools by the research papers downloads from the website. Undoubtedly, it has the most comprehensive library of research papers available in the field of social science today. The logic is simple. If a B-school has good faculties with good quality research papers, then more and more people will download those papers. It leaves the final decision to the market.

In SSRN.com, one can first read the abstract of the paper and then decide whether to download the paper or not. So it seems to be a good way to rate the business schools. To see the complete list, visit
http://hq.ssrn.com/rankings/Ranking_Display.cfm?TMY_gID=2&TRN_gID=11

To view the rankings of the international business schools, visit

To view the full list of International Business Schools go to:
http://hq.ssrn.com/rankings/Ranking_Display.cfm?TMY_gID=2&TRN_gID=12

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Poor Monsoon Predicted for India

2006-04-24T23:38:00.000-07:00

After nine years, the weatherman finally predicted a poor monsoon in India for the year 2006.
With services sector dominating the Indian economy, this may not have any significant impact on Indian economy. My research shows that Nifty generated a return of 21.55% when Monsoon was normal in India. It generated a mere 10.89% return when monsoon was below normal. This is based on the performance of Nifty during the sample period 1991-2005.

One can argue that these results are biased because the services sector started dominating Indian economy in the latter part of the 1990s. Hence, a poor monsoon is unlikely to affect our stock market much.

I however, believe that if the market values stocks sensibly (a big If in India), then a poor monsoon will adversely affect the Indian economy and the stock market.

A poor monsoon is definitely going to affect the agricultural sector and some of the manufacturing sector that is going dependent on agriculture. A substantial number of the consumers of the FMCG sector, for example, are farmers. And this is going to affect this sector.

Secondly, the subsidies that the GoI is going to the farmers will also increase in the next year. Since the farmers in India are politically powerful, they may also demand for things like loan waiver, etc. We have seen all that in the past. This will have an adverse impact on the fiscal deficit in India and that will also affect all the sectors in India.

However, its impact will not be as powerful as it used to be in the earlier decades.

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Book on Investments

2006-04-12T03:42:00.000-07:00

The book on Investments written by Bodie, Kane, and Marcus, undoubtedly is the best book on Investment written till date. Last year I got an opportunity to edit the book for the Indian audience. The idea is to include Indian examples, include discussion about Indian market mircrostructure issues, include discussion on Indian regulatory environment, etc.

And the Indian edition is out now. Hopefully, the Indian audience will find the book still more useful and interesting.

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Who Moves the Market?

2006-04-08T07:38:00.001-07:00

Every Tom, Dick, and Harry says that the market is overvalued. Do not buy. A random selection of a few equity research reports available online shows that all the analysts are bearish on the market.

But the market rises almost every day (with minor exceptions like what happened this Friday). The prices of most of the stocks (I can venture to say all...) do not make any sense at all.

Consider this. You assume that dividends will grow at 30% pa for the next ten years. Assume a terminal growth rate of 8%. Assume a discount rate of only 10%. Keep in mind that all these are highly liberal forecasts. You get a value (for nifty) that will come closer to the current market prices. So if you believe the current prices are still going to incresae, then you are more optimistic that what the above numbers indicate.

The discount rate will probably come closer to 17% for an average stock given the high rf and the normal market risk premium. (Incidentally, Prof. Rajnish Mehra (the equity premium fame) has estimated the market risk premium to be about 9.7%. for India. He has used 13 years of data to estimate this figure. The previous studies in India have estimated this figure at about 10 to 11%.)

Though the finance minister is talking about 7-8% growth for India, I am sure even he will agree that a terminal growth rate of 8% for the market is something, highly unachievable.

I did an event-type of study of SBI's price behavior this week to see if this market is rational. On Friday, the employees' strike ended the fifth day. The employees' union rejected the plea of the Finance Minister to call off the strike. A NDTV report shows that finance ministry is thinking of dealing with another nationalised bank in place of SBI. Most of the retail customers are unhappy and are thinking likewise.

And how did the market react? It (SBI stock price) reported an excess return of 0.9% per day (after adjusting for market and industry price movements). This is an adjusted return and should npt be confused with the actual return. On Friday, the stock price of SBI fell. But so did that of Nifty and Sensex and all the banking stocks.

A few months back, there was fire in ONGC. What happened the next day? Ofcourse, the price increased. The list goes on. There is no sense in this market.

Some of the brokers are saying this is not a scam for two reasons:
a) the increase is broadbased (that is you do not find mad prices for a few stocks, you find in all of them :)
b) the fundamentals are strong.

No body denies that the fundamentals are strong. Even a 20% increase for 10 years will be good news for many industries. The point is the market has already discounted the good fundaments long long back. To take a simple example, assume that the market has valued a constant dividend paying stock at Rs.50 (Rs.5 dividend and 10% discount rate). If suddenly, the fortunes of the company change and the market believes that the new dividend is Rs.10, then the price will increase to Rs.100 instantaneously. What is happening is that it increased to Rs.100 the next day and is increasing everyday after that and is now quoting at Rs.1000 and people still srgue that "Look! Its dividend has doubled."

It is not about fundaments. It is about another scam. Right now the issue is not what is the current value of nifty or sensex. The question now is who moves this market?

It is SEBI's job to do the investigate the price movements. Unfortunately, in India the regulators do not worry much when the prices increase. They think the market is happy with the economic policies of the Government. If the market is happy, then in an efficient market, the entire price movement will be felt in a single day. Not every day for a period of 3 years. In fact recently, when Sensex fell, Mr. Chidambaram made a statement that there is nothing to worry. It is just profit booking. He does not apparently bother when prices increase every day.

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Getting Stock Quotation within a Spreadsheet

2006-02-07T08:15:00.000-08:00

I recently discovered that one can get stock quotation of any US based stock from within a spreadsheet and it is very simple. One can do it by following these two steps.

1) First make sure that the smart tags are turned on. One can go to Tools and then select the Auto Correct Option. There click on smart tags and then select label data with smart tags.

2) Then enter the stock symbol in capital letters. Let's say we want data for Yahoo. Then enter the symbol YHOO in an empty cell. Then you can see the smart tag to the right of the cell. Click 0n that select Insert Refreshable Stock Price. You can either get the stock quotations in the sheet itself (after manually typing the address of a cell) or in a new sheet.

Of course you need an internet connection for this.

Hopefully, Microsoft will similarly provide stock quotation for Indian stocks oneday.

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What is happening to Bangalore?

2005-10-29T06:13:00.000-07:00

Bangalore has always remained my favorite city. Whenever I got an opportunity (professionally or otherwise), I always visited the city. My religious trips to Puttaparthi and Thirupathi always used to be via Bangalore.

Of late I am finding the city to face a unique problem. Most of the larger cities will probably face this problem in the future unless they take adequate precautions.

Look at a few actual examples:

a) An IT worker got robbed near Kempegowda circle (heart of the city towards Majestic) in the auto in which he was travelling. He made the mistake of boarding an auto near the ATM form which he withdrew some money.
b) My friend's brother (working in Intel) was returning home after work. He slowed down his vehicle near MG Road to take a left turn when a few people told him that his back door was open. He stopped only to find that four people got into his car and asked him to drive t the nearest ATM. Asked him to withdraw Rs.25000. Fortunately they did not take the laptop.
c) An IIM L alumni went to bangalore Railway station to drop his fiancee and her mother. While leaving the station, he showed the platform ticket to the TTC who immediately asked him "...what if I tell you that you did not produce the platform ticket..." He got robbed that day within Bangalore railway station by the TTEs, railway police protection force, etc.

There must be many more instances like that that do not come to our notice. People suffer in silence.

In all these examples, the victim is a non-Kannada speaking person who is rich and is an easy target for some of the local population who prefer to follow a get-rich-quick scheme. I have nothing against the peace-loving people of Karnataka. In fact I always say that the best of the people in India live in South India (and in particular Karnataka and in particular South Kanranaka). But of late the increasing gap in income between the haves and have-nots is creating a problem that must be addressed immediately before Bangalore becomes another city in Bihar.

The real estate prices are up. And the local non-IT people have to suffer (unless of course they have a land that has been rented or sold). The difference in the average income of the non-IT and the IT workiers in the city is too high and probably forces some of the anti-social elements to resort to steps like this.

It is not that anti-social elements were not there earlier. However, their modus-operandi has changed.

I have a few suggestions for the non-Kannaka speaking people living in Bangalore.

a) Do not flaunt your wealth. Behave like a normal person.
b) Whenever possible travel either in a bike or the BTS bus.
c) And most important, while entering Bangalore railway station, buy two platform tickets.

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Factors to consider before taking a bank loan

2005-07-15T21:45:00.000-07:00

I will not be wrong if I say that not more than 1% of the total population in India is aware of the basic principles of time value of money. And that is why almost always they make mistakes while taking a bank loan. The loan may be for building a house, for financing higher education or whatever. Here, I describe a few rules that every body should keep in mind while taking a loan from a bank. I will first describe two golden rules of bank loan. Then I will describe the factors that one MUST consider while going ahead with a bank loan.

The two Golden Rules are:

a) Public Sector Banks are anyday better than private sector banks. Private sector banks may cheat customers at the drop of a hat. They may not have the intention of cheating a customer. However, most of the time, they do not address your concerns seriously. It is a myth that public sector banks are inefficient; that it takes lot of time to process a loan. I took a housing loan from a private sector bank and it took more than 5 months to process the loan. Any public sector bank will do it faster. There is no incentive for the public sector banks to cheat a client. Private sector banks pay heavily to the employees and keep a very ambitious target. So they are always in the lookout for new clients. Once you take the loan, you are irrelevant to them as far as customer satisfaction is considered. They behave very similar to the Indian politicians. Forget the voters after the election is over. For the private banks the motto is Forget the Customers after the loan is disbursed. Not that they do not take the EMI from you. They sometimes take more than what they promised to take. Of course once you complain, you get back the excess money charged. But whay take the trouble in the first place? If you do not believe me, go to a
private sector bank. Preferably those who spend a lot on advertisements.

b) A fixed rate loan is always better than a floating rate loan. A floating rate loan only helps the bank in their asset-liability management. It does not help the customers. And yes, if you take a fixed rate loan from a private sector bank (that is if you prefer to ignore what I have written in the previous paragraph), make sure that they also write it in their documents that it is a fixed rate loan. I had a bad experience. The bank wrote in my documents that it is a fixed rate loan. But it was a floating rate loan in their documents. I had to send a mail to one of the directors of the bank to sort the issue.

Now let's see briefly how the bank cheats you: You do not need to read this if you happen to take a loan from a public sector bank.

a) You apply for a loan of Rs. 10 lakhs (say). The bank says you are eligible for a loan of Rs.9.5 lakhs. They actually disburse Rs.9.1 lakhs. All your EMIs will be calculated on Rs.10 lakhs. The bank documents will show: EMI of so and so for a loan of Rs.9.1 lakhs. How many people understand this? Good way to make money in India! One of the reasons the stock prices of private sector banks are rising day by day!

b) The loan disbursal takes place on 17th January (say). You have given auto-debit facility to the bank. On 23rd January you find that EMI has been deducted twice from your account. Though they are supposed to calculate pre-EMI interest till 1st Feb, they often deduct the full EMI.

c) You have taken a fixed rate loan at (say) 7.75%. Interest rate drops to 7.25%. Nothing happens to the tenure of the loan. Interest rate increases to 7.75%. The tenure of your loan increases. Bank says it is a floating rate loan. Even if you assume it is a floating rate loan (just for the sake of argument), you can see here that the tenure of the loan should not change because the interest rate today is the same as it was when you took the loan.

d) After 31st March the Bank says that income tax statement cannot be given because you purchased a land. Then you realize all these days the house in which you are staying is a land (and not a building) as per the bank's document.

e) Everytime you complain, the bank makes a phone call. They say the problem has been sorted. They never send a written statement. Good way to protect themselves from the consumer rights court.

f) You give auto-debit facility to the bank. Every month you get a phone call from the bank. "Sir! some money is due. When are you paying?" You go to the ATM and take a statement and realize that the balance is enough to pay the EMI for the next one year.

The list goes on.

P.S. For the benefot of those who do not know how to compute EMI, the PMT function in Excel will give you the EMI directly. If you have a query write to me at pitabasm@yahoo.com)

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When do Indians drink more beer?

2005-04-02T20:53:00.000-08:00

People drink more both when they are happy and when they are unhappy. However, my research shows that Indians drink more when they are happy than when they are unhappy.

In my attempt to find the different indicators for Indian stock market, I found that beer consumption is a coincident indicator. Whenever Sensex goes up the beer production itself goes up. Whenever sensex is down beer production is down. In the book on Investments by Bodie, Kane, and Marcus, the authors mentioned that in the US, automobile industry's production are almost exactly aligned with that of the stock market. In India, apart from the sutomobile industry, it is the beer industry that also seems to be moving with the market.

The correlation between automobile industry production and sensex is 0.25. It is however 0.37 for the beer industry. However, because it is a coincident indicator, it does not lead to any profit making trading strategy.

So the bottomline is people drink more when they are happy than when they are unhappy.

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Jet Airways' IPO: Good for the Stags

2005-02-15T03:51:00.000-08:00

Jet Airways is coming out with an IPO with an issue price in the range Rs.950- and Rs.1125. The issue is opening on Feb 18 and closing on Feb 24. The proceeds from the issue will be utilized to partly prepay some debt. It will also be utilized to finance some capital expenditure. It is definitely worth the effort to see if this price is justified using DCF analysis. The PE ratio is coming out to be about 50 and prima facie it appears to be too high.

Jet Airways is definitely one of the best airways in India. Its market share is about 46% and that is way ahead of its competitor, Indian Airlines (with a market share of 37%). It is the most favored carrier for the business class passengers.

However, there are certain red flags that one has to look at.

a) There is now growing competition from the no-frills carriers like Air-Deccan.

b) The brand name “Jet Airways” is actually owned by Jet Enterprises, a company owned by Mr. Naresh Goyal. As of now Jet is paying license fees to Jet Enterprises on a quarterly basis. Though no information is available about the license fees, one can get some idea about by looking at the profit and loss account of Jet Airways. Other expenses constitute about 30% of the total operating expenses and 27% of the total revenue of the company. One can gauge the significance of this item when one compares it with air turbine fuel (ATF) charges. ATF constitutes about 20% of the total expenses of the company. About 8 to 10% of the expenses will be in-flight foods and beverages. A large part of the remaining other expenses can be the license fees.

c) The cost of ATF has increased by 21% in the last year itself. The air carriers are not allowed to hedge the price risk as of now and hence, will have to bear the expenses themselves. It will be difficult for these companies to pass on the increase in ATF cost to the passengers unless all airlines do it simultaneously. This seems difficult as of now given that a few more players are going to enter the market.

Most analysts are banking on the fact that because the economy is growing, the industry will increase at a fast rate and hence the current price is justified. A quick glance at some of the research reports floating round in the market suggests that it is a good buy because it is the leading player in the civil aviation industry in India, because it is the most preferred airline for the business passengers, that it has one of the youngest fleet in India, etc. All these claims definitely prove that jet Airways is a well managed company. There is no doubt about that. However that in itself does not make it a good investment at the bid price.

DCF Valuation of Jet Airways

World over, civil aviation industry is a cyclical industry. And Jet is no exception. The growth rate in passenger revenue was 0% in 2002, a recession year. It has however increased to 20% for 2003-04. The growth rate in cargo revenue has however remained quite steady at about 18%. One cannot therefore extrapolate the current growth rate into the future to value Jet’s share as this will inevitably overvalue the stock.

Before forecasting the free cash flows, I did a historical sensitivity analysis to find the most important value drivers of Jet Airways. Not surprisingly, other expenses came out as the most important value driver, followed by ATF costs, and passenger revenue growth rate. A 1% decline in DE ratio will increase the share price by about 0.5%. This also a good news because a large part of the issue proceeds will be used to redeem part of the debt of the company. Selling and distribution expense is the fourth largest value driver for Jet. This implies that any valuation of the company is highly sensitive to three things. They are:

a) License fees that Jet is paying to Jet Enterprises. Jet Enterprise is going to transfer the brand name to jet Airways in about six months time. As of now, the value of the brand name is not known and hence the entire DCF valuation becomes highly sensitive to the value of the brand at which the brand name will be transferred to Jet Airways.

b) Air turbine fuel costs: As of now they constitute about 20% of the total expenses and it has increased at the rate of 21% in the last year itself. The airlines in India are not allowed to hedge the price risk. If the airlines simply pass on the high costs to the passengers, then one can use the same cost to revenue ratio while projecting the free cash flows. However, I see increased competition in the industry and hence this may make the final value very sensitive to the projected ATF costs to total revenue. There are rumors (as on 15 Feb, 2005) that the duty on ATF will be slashed. If that happens, it will positively affect the free cash flow of the company.

c) Passenger revenue growth rate: The industry being cyclical, the revenue growth is sensitive to the overall state of the economy. One should not therefore get carried away by the current performance of the economy.

I valued Jet Airways under three scenarios. The first scenario is based on some normal assumptions that take into account the historical performance of the company, projected growth rates, the value drivers, etc and I find the share price comes to about Rs.300 per share. The Investment bankers are obviously more optimistic.

The second scenario is based on somewhat unrealistic assumptions that the current growth rate will continue for ever. This is unrealistic because it ignores the cyclical nature of the industry. This is based on a projected growth rate of 25% in passenger revenue till the end of the explicit forecasting period and a terminal growth rate of 8%. I also kept the ATF cost to total expenditure ratio constant at the current 21% level. This gave a share price of Rs.600 per share.

The third scenario is generated by using a spreadsheet model that uses the principle of reverse engineering. The key idea is to see what assumptions are inherent in the current stock price. I take the lower band of Rs. 950 and try to see what assumptions can justify these numbers. It then becomes easier to see if this growth can be justified. One of the many plausible set of assumptions looks like this:

Passenger revenue growth rate of 30% for the next five years and a terminal growth rate of 10%
Excess baggage revenue growth rate of 15% for the next five years
Cargo revenue growth rate of 20% for the next five years
Other revenue growth rate of 15% for the next five years
Staff cost as a percentage of revenue to fall to 8% (this one seems to be achievable because Jet has succeeded in reducing the staff related costs over the last three years
The ATF cost as a percentage of revenue to come down to 21%.
Other expenses as a percentage of revenue to come down to 26%

If all the above conditions are simultaneously satisfied, then one can justify a price of Rs.950 per share. In all the above assumptions, I assumed that Jet Airways will continue to pay license fees to Jet Enterprises. If Jet Airways buys the brand name by paying the fair DCF value, then it will not have any impact on the value of the share.

Therefore the lower band of Rs.950 seems to be on the higher side by common sense. Nevertheless I will recommend the stock as a short term buy for the following reasons.

a) Most of the stocks are grossly overvalued now. It is the same mad market that will value Jet after its listing. One will not be surprised to see a first day listing price of Rs. 1100 plus for Jet. This is based on the concept of relative valuation where I am assuming that the market will overvalue Jet Airways more or less by the same percentage points as it has done for the other stocks.
b) Prior research shows that most stocks quote at a substantial premium in the week after listing and there is no reason why Jet will be an exception.
c) And finally, this is the first stock from the civil aviation sector that is coming out with a public issue. This definitely gives our shareholders a chance to diversify the risk further.

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Risk Aversion of a Typical Indian Investor

2005-02-13T07:34:00.000-08:00

In Investments, we usually use a number between 2.5 to 3 for a proxy of the degree of risk aversion of an investor. Research in US shows that the typical risk aversion of a US investor can be captured by a degree of risk aversion equal to 3.

Using data for Nifty between 1990-2004, I find that the data is consistent with a degree of risk aversion equal to 1.3 for an Indian investor. This number is too low. It implies that a typical Indian investor is less risk averse as compared to an American. This is a debatable statement. Personally, I do not agree with this. Given the poor equity cult in India, I think there is something wrong with this estimate.

We get a low estimate of A (a measure of the degree of risk aversion) when the expected return is low as compared to the standard deviation. This implies that the Indian stock market has generated lower average excess return given the high volatlity it has. This may indicate that the Indian market has remained overvalued most of the time and hence the average return is less.

Nonetheless, one thing clearly stands out. The Indian market is highly volatile given the return it generates over time. It would be definitely worthwhile to do a further research similar to the equity risk premium puzzle in US. Thus for example, one can always argue that the Indian market has generated the correct return based on the risk. It is the US market which has given higher return given its riskiness. That is what (the second statement only) Chopra and Prescot believe.

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Game Theory and Reliance

2005-01-16T20:34:00.001-08:00

These days most of the business newspapers carry regular features on the Ambani brothers' internal fight to control the company and how Mr. Kamath is going to solve the problem.

In most of the standard textbooks on game theory, a similar problem is however solved in a very nice way. A mother brings a cake and divides it into two pieces and gives a piece each to each of her two sons. The two sons however believe that the other sibling got a higher share. How should the mother solve this problem?

And the answer is the mother should ask one of the two sons to divide the cake into two pieces and ask the other son to decide which piece he wants. I do not see any reason why the same cannot be applied to the Ambani brothers.

Either Mukesh or Anil can be askd to divide the control over Reliance empire into two equal share. Then the other brother can decide which one he wants. In this case both the brothers can do independent valuation of the group companies and the problem can be solved amicably.

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Titan's Valuation

2004-12-26T05:09:00.000-08:00

One thing that has perplexed me is the share price of Titan. Its financial performance is anything but satisfactory. But its share price has more than tripled since March 2003. It was Rs.52 in March 2003. It has increased to Rs. 106 in March 2004, and now it is hovering around Rs.182. Either there is something about Titan that the market knows that I do not know. Or the market is wrong.

I started looking at all that has been written about Titan in the last one year. Yes. Titan has changed, and changed for the better. Its DE ratio has improved. Last year itself, it redeemed debt without issuing additional equity. In the recent past for the first time, it increased sales without issuing equity. It reduced dividend payout and I believe it is a good thing for its DE ratio (2.5 on a book basis) is still very high. Its supply chain initiatives have reduces its working capital investments. It has replaced Rs.100m of short term debt with long term debt.

However, one thing that confused me is its policy with respect to Tanishq. Its operating margin is much lower than that for the watch segment. Though it is contributing about 43% of the total sales, it is contributing only about 27% of the profit. But Titan wants to depend more on the jewellery division. However the share of the studded jewellery (with higher margin) has increased and hence the overall profitabilty of the jewellery division has increased.

I first did a financial statements analysis by using the figures for 2004. It has changed a lot. For every Re1 that Titan gets now, it gets about Re. 0.288 from equity shareholders. Its low working capital investment has increased its turnover substantially, and it ensures that even after payment of interest, there is something left for equity shareholders. The incremental ROE comes out to about 15.2% (against a cost of equity of 14.5%). This figure was negative till last year.

Then I did a value driver analysis on the company. I find that asset turnover does not have a major impact on the EVA of Titan. Does this mean that its entire effort on supply chain is meaningless? The answer is no. Because now sales growth has become a major value driver. More sales can now come without additional investments in working capital. Titan is also increasingly depending on outsourcing. Together they reduce its dependence on debt. This increases the margin (net margin). In fact now, sales growth has a larger impact as compared to margin.

But do all this justify a price of Rs.180? My analysis shows that its intrinsic value can vary between Rs.156 to Rs. 231 depending on what assumptions you make. But one does not need to make mad assumptions now (as before) to justify the price of Titan.

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Compulsory Class Attendance

2004-12-24T02:01:00.000-08:00

What does compulsory class attendance rule achieve?

Nothing, as per a recent research done in US. The study does not find any relationship between the performance of the students in an Economics course (at a graduate level) and class attendance.

I however believe the study is flawed in many counts. Firstly, performance in the examination should not be used as the output in the system. My experience shows that students who attend the classes regularly are sincere students and get jobs during the final placement much ahead of students who are not as sincere.

There is another advantage of attending the classes regularly. Not all lectures will be equally entertaining. In any case faculties are under no obligation to entertain the students during the class. Students who attend all classes regularly get used to this boring stuff and it increases their tolerance level and improves their personality. Once they get a job, where in the meetings they have to listen to all the stupid things their boss has to say, they will be able to cope with the situation much better.

Not so with students who do not attend the clases regularly.

(P.S. I have 14 gmail invitations. If you are interested please send me a mail at pitabasm@gmail.com)

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Stocks for 2005

2004-12-12T20:05:00.000-08:00

I always believe that when real options are absent, DCF method is the only scientific method available to value a stock. DCF method emphasizes on cash flow, growth rate in cash flow and riskiness while valuing a stock. And a rational investpor should care for nothing else.

For a research journal, I was valuing the 30 stocks in Sensex as on 12 December 2004. I found that as many as 23 of the 30 stocks are grossly overvalued. I find that three stocks, namely Hero Honda, HLL, and HPCL are undervalued by the market. So much so that even if these stocks stop growing, one can still find the current values to be lower than the fundamental value.

Amongst the stocks valued at a very high level, Satyam, and Balaji televenture stand out. For Balaji Tele Venture, I found that even a 100% growth for the next ten years cannot justify the current stock price.

Subsequently I tried to value Sensex after deriving the values of all the stocks. Here instead of trying to value Sensex for some realistic growth projections, I tried to find the range within which it can fluctuate given the current madness of the stock market.

I found that if the market remains mad as it is now, the max value of Sensex will be about 6200. However, a more realistic value seems to be about 2300.

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Six Rules of Academics

2004-12-08T23:08:00.000-08:00

Based on my experience in three business schools, I find that certain funny rules work in academics. I am sharing these rules here.

• Even if you extend the deadline of assignment submission by one month, students are going to submit the same assignment that they will submit otherwise.
• Students come to your office to get their doubts cleared, when you are either extremely busy or absent.
• B Com students never do well in accounting courses in an MBA program.
• A finance professor can never tell the difference between OB, HR, IR, PM, etc.
• More the number of students who tell you that they are enjoying your course, the lower the feedback you receive from the students.
• Two professors can never work in a group effectively.

Faculty Feedback: What does it mean?

2004-10-27T21:57:00.000-07:00

In most of the B Schools student feedback is given topmost priority while evaluating the performance of faculties. This is also easy to understand because the job of a faculty is (also) to teach and faculty feedback reflects the performance of a good faculty.

But a recent research done in US covering more than 3000 feedbacks shows some alarming trend. The research results show three things.

a) Students give good feedback in courses where they think they have understood everything. This is easy to understand. However, this also gives scope for manipulation. If a faculty wants good feedback all he has to do is to delete the difficult part of the course and focus on the easier part of the course. In the process the students get the impression that they understood a large part of what is covered in the course. But good feedback comes at what cost?

b) Students give good feedback in courses where they get good grades. Most of the B Schools follow continuous evaluation system. Therefore by the time the students give feedback to a faculty, the students know the grades of most of the components. A faculty can similarly manipulate the feedback by being lenient while evaluating the students. Again this is not good for the students because if the students are sure to receive a good grade it is very unlikely they will take the course seriously.

c) Students give good feedback in courses where the faculty looks sexy. Well, This is one area which a faculty cannot probably manipulate.

So think of the feedback that a faculty receives if he covers highly advanced stuff in the class and he is very strict in grading. Everybody would definitely consider him to be an ideal faculty. Excepting of course that he would not be rated so by the students he teaches.

offset function in excel

2004-09-08T07:36:00.000-07:00

Recently I realized that for portfolio management related excel modelling the most powerful function that excel has is "offset". It is as if Microsoft included it in excel to create dynamic portfolios. It is usually used by the people as an ordinary function. However it can be used to create dynamic arrays- something we use quite a lot in portfolio modelling- and now one can develop a completely dynamic portfolio model without using VBA.

There is a cost however. It slows down the machine speed considerably particularly if one has also used a Table in the model to create the efficient frontier.

The secret in using the Offset function is: keep both the row-ref and column-ref zero, and use the height and breadth using some dynamic reference. You will see real magic in your portfolio models.

Why US B Schools are at the TOP?

2004-09-05T06:56:00.000-07:00

Fifty years back Indians used to look at cambridge and Oxford as the top universities. But that is no more the case. I recently found some interesting research papers, internet postings, etc that proves what is so special about US Universities and why they have dominated the world.

An accounting professor from a well-known university got the best teacher's award. (In US most B School students select one of the professors as the best professor for the year) And at the end of the year he was politely asked to leave the school. The reason is that he did not publish a single paper that year. There is a very well know lady in another top-rated school who got promoted despite having got poor feedback from students. The reason is that she publishes very frequently in well-known journals.

This penchant for research- the slogan that publish else perish- is what keeps the US Universities and B-Schools at the top. In fact an internet site for PhD students advises PhD students not to give a good seminar at the time of recruitmenmt. The reason is obvious. Those who give good seminars will inevitably turn out to be good teachers. That means they will often be visited by students for all sorts of things. And that means less time for research. So an unwritten policy most top schools follow (the internet site claims so) is do not recruit somebody who gives a very good seminar.

You need guts to take such decisions. But it pays handsomely. As my professor at IIM B used to tell me the job of a management school teacher is to create knowledge not to disseminate it. The dissemination part can be left to lesser mortals.

Not everybody may agree. But as somebody said "If you do not like my ideas then there are others".

Finding Cost of Capital when the market value of neither debt nor equity is known

2004-08-19T20:06:00.000-07:00

When doing the valuation of a company we face the well-known circularity problem where one needs to know the cost of capital to find the value of a company and vice versa. In one of my past paper (available in ssrn.com), I discovered a simple method where one can simultaneously find the market value of equity and the cost of capital by using an iteration method. This assumes that one has access to all the other parameters required to value a company (other than the market value of equity).

These parameters include market value of debt, beta, debt yield, cash flows, growth rate, tax rate, etc. This is in a sense a practical approach because the theoretical problem of circularity still remains. That is how else we will know the beta if we do not know the market value of equity?

In one of my ongoing research work I however realized that one can still find the cost of capital, market value of company, debt and equity even when one does not know the market value of either equity or debt. That is in valuation there are two (and not one as I have believed so far) degrees of freedome available.

What this means is that even if we do not two of the parameters, we can always derive them from the other available parameretrs.

Adjusted Present Value

2004-06-08T21:47:00.000-07:00

There is no consensus in finance literature as to how to find the present value of the tax shield. In their original article, Miller and Modigliani proposed to discount the tax shield at the risk free rate of return. Stewart Myers however proposed to discount the tax shield at the cost of debt.
Miles and Ezzels proposed to discount the tax shield at the opportunity cost of capital. Needless to say all these methods will give different values of the present value of tax shield and hence different value of the company.
In one of my ongoing research I find that the model proposed to find the present value of tax shield affects the way the opportunity cost of capital is found out. As of now almost everybody uses one of the following two ways to find the opportunity cost of capital:
a) ignore taxes and find the beta of assets as a weighted average of the beta of debt and equity,
b) use the model proposed by Robert Hamada.

Since the first method assumes the tax rate to be zero, it only yields an approximate value for the opportunity cost of capital. The second method is based on the MM I valuation equation in the presence of tax. However, this model assumes that the rupee value of debt remains fixed.

Therefore when we use the opportunity cost of capital using the Hamada equation it gives satisfactory answer only when we talk about a no-growth company.

In my research work I propose different methods to find the opportunity cost of capital depending on the valuation method used.