HUL OFFER IS A WATERSHED MOMENT, DON'T TALK VALUATIONS HERE

The voluntary open offer from Unilever for shareholders of Hindustan Unilever is easily the most significant development for Indian market. Make no mistake, its way bigger than a petrol price decontrol, or allowing FDI in retail or anything where you may have heard lot more noise. What we should not do at this moment is to belittle this deal by talking about valuations, acceptance ratios and punting on what it means for other cash rich MNCs and their Indian arms.

Just think about it, Unilever is willing to put $5.4 bn cash to work, just to increase their stake in Indian arm to 75% and be rest assured, they won’t get all they want at Rs 600/share and they may at some point make a higher offer which we cannot speculate at this point. (By the way, the promoters of Saint Gobain and Fresenius Kabi should note this development and not dither over what is loose change)

What should an investor of HUL do? While the HUL stock is at life time high, this does not take away the fact that the stock would still rank as an underperformer if you invested in the stock 10 years back.

You will be amazed to know that despite all its massive outperformance in the last 3 years, only 3 index stocks have underperformed HUL over the last 10 years. While HUL is up 190% in last 10 years, only Hindalco, Reliance Infra and Ranbaxy have given lower returns if you take data from February 2003, which is when the great Indian bull market actually started.

During these 10 years, Sesa Goa has become 82 fold, Lupin 47 fold, Kotak Mahindra Bank a 40 bagger, and Axis Bank a 30 bagger. Ok, let’s agree that some of them have not been the part of index for 10 years and have only been added after significant outperformance. So look at peers, who have been in index for long. M&M is a 30 bagger, L&T a 15 bagger, Tata Motors 8 bagger and even the closest competitor ITC has been a 14 bagger. Of course all these stocks have had their triggers over last 10 years in terms of economy and individual company issues.

Unilever clearly is not doing this for charity, nor is it doing this because it thinks it owes it to shareholders. No way, it is doing that because it is betting on the much larger theme, which is the Indian consumption story. And while we may keep debating how expensive stocks look in the consumption basket, as the past bull market has shown, the market can make absolute mockery of near term valuations when it gets in the mood to reward a particular sector or a stock.

ANOTHER MNC DELISTING GONE SOUR

Are these MNC promoters coming out with a clear message? Give us your shares at our price, else we will short change you, and not even give you the current market price and the Indian merchant bankers will help us short change the Indian shareholders?

Since I got a lot of feedback on Fresenius Kabi, here comes the next important issue on the radar. Just look at how the minority shareholders of Saint Gobain Sekurit are being treated. Again, all of this is done within the letter of the law, but the spirit is nowhere to be followed.

Just a backgrounder – In 2012, the promoters of Saint Gobain Sekurit came out with a delisting offer and indicated a price of Rs 31/share as acceptable to them. The discovered price, to their horror was Rs 90/share and even at that price, not enough investors tendered and hence the company rejected the delisting. Of course, even the shareholders got greedy and may be Rs 90/share was not the right price for Saint Gobain but what they are getting now is clearly not the right value. 

Now look at what's happening. The same promoters have another company called Grindwell Norton (which is much bigger in size) and now they are merging the 2 companies. But the merger ratio leaves so much to be desired.

A simple stock price related swap would have meant 1 share of Grindwell for every 11 shares of Saint Gobain. Even in terms of sales, Grindwell is 9 times bigger than Saint Gobain. And in terms of market cap, Grindwell is 7 times Sanit Gobain. But look at the merger ratio – 17 shares of Saint Gobain are needed for a small mercy of 1 share of Grindwell Norton.

Simply put, if you have shares worth Rs 380 of Saint Gobain, you will get a share of Grindwell worth Rs 255. That’s a loss of 33%, technically the share of Saint Gobain is now worth Rs 15/share. It’s the same company, where the promoters were happy to delist at Rs 31/share.

And more importantly it does not end here. The merger process also involves merging 2 unlisted companies with Grindwell Norton and you don’t need knowledge of rocket science to know that these 2 companies should be promoter entities and look at the merger ratios here

For every 1 share of unlisted Saint Gobain Crystals, you get 2 shares of Grindwell Norton and for every 1 share of unlisted SEPR, you get 2.6 shares of Grindwell Norton. So technically, the assets of Grindwell Norton are being distributed among the shareholders of unlisted companies while the minority shareholders of the listed entity are being given the loose change.

In the listed Sanit Gobain Sekurit, the MNC promoters own 86% stake with no institution holding and the balance 14% stake is with small shareholders. In Grindwell Norton, promoters own 58%, has large institutional holding with both domestic mutual funds and FIIs listed as shareholders.

Do the promoters of Saint Gobain Sekurit have absolutely zero regard for the minority 14% shareholders of the company? It’s a 200 crore market cap company so 14% represents a princely sum of Rs 28 crore. Why can’t they be fair to these small investors? Or is this the new way of MNC promoters bullying small shareholders and telling them – it’s either our way or highway.

IS SEBI WATCHING THIS DAYLIGHT ROBBERY?

Fresenius Kabi! Rings a bell? It should, it was the first company that burst the bubble of MNC delisting hope story by opting for an offer for sale to reduce promoter stake. Basically, according to SEBI guidelines, promoters need to either cut stake to below 75% or delist the company. Fresenius Kabi had 90% promoter stake and was on top of the list of punters taking bets on top dollar delisting price.

Now take a look at the set of events. The stock first doubled from 85 in December 2011 to Rs 170 by April 2012 on hopes of deslisting. Then, the promoters opted for an OFS instead of delisting and the stock fell to Rs 80. The OFS took place at Rs 80 but what was interesting was that a large chunk of OFS was subscribed by 4 merchant bankers. RBS Merchant Bank subscribed 30.5 lakh shares, Macquarie bank 29.65 lakh shares, Morgan Stanley 25 lakh and Nomura another 23 lakh for a total of 1.08 crore shares.

Now this is not illegal, and at no point am I accusing any of the entities here but look at what the company is doing now. Its come out with a voluntary delisting offer with a floor price of Rs 130/share. I am not in the business of predicting these developments but if all these merchant bankers do tender at 130/share, that will go a long way in the company being delisted. Remember, with the current float of 19%, the company now only needs 9.5% stake to delist and keep in mind, it did an OFS of 9% to cut stake from 90% to 81%. Do the math here. Its far easier for company to accumulate 9.5% after having given 9% stake in an OFS to select entities than it was to garner 5% when the public float was 10%. And I won't be surprised if all those who were allotted shares in OFS actually do tender in delisting offer.

This stock was seen as undervalued at 180/share when delisting buzz was alive. Just imagine, what a daylight robbery it would be if indeed the promoters manage to delist the company at Rs 130/share. Is there anyone looking at the plight of minority shareholders? This is all being done within the law, but sometimes spirit of the law is ignored in just following the letter of the law.

My other fear is that once this delisting is through, this will provide perfect precedence to some other promoters on how to delist the company at throwaway prices.

IS THIS INFOSYS OR SOME MIDCAP COMPANY?

Let’s be blunt here. Infosys is not the respected company it has been. It does not deserve to be called an IT bellwether anymore and clearly the current management is absolutely no patch on the kind of leadership it had some years back.

Just imagine this kind of performance under Nandan Nilekani and Mohandas Pai. Even if they would have come with an occasional shocker, they would stand up to tough questions and not stand behind the comfort of their own corporate communication manager asking them silly and easy questions.

Look at the guidance. 6-10%. Why not 2-14%? That also has same median or even 0-16% for that matter? Let’s be clear here – Infosys guidance has ZERO meaning for the market now. It does not respect the current management and it should not do it in near future too.  And they haven’t declared EPS guidance because they have no clue on what will be their pricing, margins or anything for that matter. And what will be amazing? Expect TCS and HCL Tech to rub salt into their wounds over next 2 weeks by maintaining their standards (just like Infy maintained its standards).

And one word for the analysts too who keep saying this is a great, under-owned stock. Under-ownership? What under-ownership. The FII holding is at multi-year high, mutual funds have not sold much. The only selling has come from LIC and insurance companies which had their own reasons as I wrote in my previous blog.

But, my apologies to LIC – they turned out to be the smartest investors, even if it’s by default. They sold 80 lakh shares at around 2900 Rupees (something which the stock will not hit for at least 2 years)

Nine months back, I turned positive on Infosys. I had a strong feeling that it was coming out of a rut and a patch of outperformance was coming. I was right for last 9 months but today’s event has changed it all. The company has revised the clock backwards by a good 2 years and whatever confidence it built over the last 6 months has been destroyed.

Be under no illusion of stock finding bottom at 2300 or so. For me even if you assume an EPS of Rs 170 for Infosys, you should apply a multiple of 10-11x because this is now just another midcap kind of volatile companies which we have plenty of in this market. The stock doesn’t deserve to trade above 1700-1870 given the circumstances.

IS LIC BEING FORCED TO SELL BLUECHIPS?

Its Earnings season again, and as usual, companies are reporting the shareholding pattern changes to the exchanges and this gives data hungry people like me some fodder to feed on. So let’s get started. Of course, this is still early stages and we will get more data as and when more companies come out with this mandatory requirement.

Around 10 of Nifty 50 companies have reported this data so far and to me, what really stands out is the kind of selling LIC has indulged in.

LIC has sold nearly Rs 3,000 crore of their investment in 6 Nifty stocks – Infosys, HDFC Bank, HUL, Cairn, BHEL and Bank of Baroda. To be fair, out of these, it has actually added investments worth Rs 540 crore in India

The largest selling from LIC is in case of Infosys. The corporation has sold 80 lakh shares in April-June quarter worth Rs 2,200 crore. Of course, they made a bit of killing on it since the stock came out of a bit of a bear market post its earnings and had a one way rally from Rs 2,200 to around 2,900 and LIC had been accumulating some of these shares at very low prices.

LIC has also sold nearly 1.4 crore shares of HDFC Bank worth Rs 260 crore; 1.3 crore shares of HUL worth Rs 650 crore and as I mentioned earlier, has bought 1.8 crore shares in Cairn India worth Rs 540 crores.

What really stands out is LIC action on BHEL and Bank of Baroda. The corporation has sold shares worth Rs 400 crores in these 2 underperforming PSU stocks.

Now, like everyone else, LIC is in stock markets to make money, preserve profits and cut losses – so nothing sinister in it. But then, you associate LIC with really long term investing, especially in blue chips and any kind of selling will attract suspicion – more so with the market being so dependent on institutional flows.

The big question is – would LIC have still sold so much in secondary market if it didn’t have to face an aggressive Govt calendar of PSU divestment? And this question becomes important at a time when LIC is actually pleading with regulators to remove the 10% cap on company specific investments

DECODING THE FII DERIVATIVE DATA

If you thought Monday’s FII action in derivatives was eye popping, Tuesday would make you fall off the chair. While on Monday, FIIs net bought Rs 2,200 cr worth Index options (mainly Nifty) with Open Interest  going up by 73 lakh shares; On Tuesday both these numbers almost doubled with net buying of Rs 4,000 cr along with an addition of a massive 1.5 crore shares in Open Interest

What really stands out on both days is the massive Open Interest build-up at deep out of the money strikes. For example, in Tuesday’s trade, 5600 Put added 26 lakh shares while 5500 Put added nearly 15 lakh shares. For an index, which is trading above 5900, we are talking about strikes which are a good 5-7% off current levels with a relatively short series (only 11 days left in current series)

Tuesday also stood out in terms of futures data from FIIs, with a net selling of nearly Rs 500 cr and an Open Interest build-up of nearly 6 lakh shares. For the first time since budget, we have seen short positions in Nifty.

Now, what does this data mean? Well it could mean 2 things – first, some FIIs are buying in cash markets but given last month’s experience, they want to be completely hedged. And second, some FIIs have taken directional call on the Nifty with a view that the short covering bounce is mostly done with and an inherently weak market would now complete its logical move towards the 200 day moving average. If it’s the first case, that’s as healthy as it can get for the market since over-hedged markets would normally inch higher. But if the second scenario plays out, it may actually make February look relatively better.

What was also interesting on Tuesday was the sharp intra-day recovery between 1:30 to 2:30 and an equally sharp drop again between 2:30-3:30. There is an old saying “Amateurs open the market and professional close it”. Normally if a market closes near day’s low, it tells you that professional traders are happy keeping their shorts overnight. What was also interesting was that the last hour selling was not accompanied by added weakness in global markets. In fact, European markets had turned in the green.

Keep in mind the market had a crunching 7% fall from its February high of 6110 to the budget day low of 5670. That’s a total of 440 points. At Monday’s high of 5970, it had reclaimed 300 points out of that. We all know that bear market rallies are sharp and at times give an impression that a new bull market has started. But until the Nifty crosses 6,000 and makes a move towards previous peak, this just remains a sharp pullback in a structurally weak market. One thing is certain; the screen is not looking comfortable, especially for the high beta midcaps and to me last week remains a sucker’s rally. I would be happy to change my view if the Nifty rallies this week.

Disclaimer: I reserve the right to be wrong. If I was always right about stock markets, I would own some island in Caribbean.

SUCKER’S RALLY ON – BULLS BEWARE

The word on the street is that the worst is over for Indian markets. Budget coinciding with expiry was seen as a climatic event with selling reaching its exhaustion. There are a few data points which actually support that view.

First, the market has found support at budget day lows and for last 3 days has been closing at day’s high. Secondly Nifty has rebounded from the mid-point of its 100 and 200 DMAs (daily moving averages). Then of course, the midcap screen is looking much better than it had looked all of February.  And the most important one, the pullback from budget day low has been led by Bank Nifty and strong banking stocks which leads one to believe that the market may be a bit more constructive. Even on the F&O side of the market, the Nifty futures have kept pace with the spot and are trading at decent premium. And while stock futures have shed nearly 10 cr shares in Open Interest over last 2 days, that’s only because of NHPC. Excluding NHPC, stock futures have actually added Open Interest.

However, one look at Tuesday’s FII number would suggest that something is amiss. The way Reliance, TCS and ICICI Bank rallied on Tuesday, I was expecting to see an FII buy number of over Rs 1,000 cr. But the number is actually Rs 220 cr. On top of that, DIIs actually sold Rs 245 cr. On a net basis, institutions sold in cash markets. There was no great buying in the futures markets either and that’s where I get most of my cues.

There was big buying by FIIs in Nifty options and if you see the build-up, it was mostly in Puts. Now conventional wisdom would suggest this is Put writing and hence positive for markets – the texture of the market over last few months has changed with a bias of buying options rather than selling them. Even individual stocks are not giving the comfort that they could be bought again.

Also, let’s keep the global setup in mind, the market has been underperforming the globe this year. While most markets are near all time high with US markets actually right there, the Indian market is still a fair distance away from that. The rupee market has not stabilized at all and is giving an indication that a move towards 56 is on.

So the big question – how to trade this market? The best strategy would be to identify weak stocks and keep building your shorts at every minor pullback. Some examples could be the likes of IFCI, Unitech, HDIL, IVRCL, Welspun Corp, Adani Power. Now keep in mind, some of these stocks could have big intra-day bounces and hence the best way to play these stocks would be via Put options, which are very liquid in most of these stocks. As for Nifty, you should ignore the first 3-4 days of a new series in determining a trend, which would emerge next week. My sense, looking at the internals is that another wave of selling is coming our way and the Nifty may head towards 5550, where the mother of all support of 200 DMA comes in.