Reliance Industries has said it will consider a share buyback in its Friday board meeting, and the stock went up 5% to 780. The theory is that Reliance will use its huge cash reserves – over 85,000 crore – to buy back about 10,000 to 12,000 cr. worth of stock. They will do this using a “market buyback”, where an investment banker will buy Reliance shares using Reliance’s money.

(For more information on what market buybacks are, read my article: Buying Back Our Deficit)

Moneylife finds that they have done a buyback announcement earlier, that didn’t quite meet their stated goals:

RIL has announced a buyback. It had announced a buyback on 28 December 2004. On that occasion the maximum buyback price announced was at Rs285 per share (that is, pre-bonus price of Rs570 per share). The maximum buyback price RIL announced was about 10.87% premium over the share price just before the buyback announcement.

The buyback program, seven years ago, was kept at Rs2,999 crore, which was about 10% of the share capital and free reserves of Reliance as on 31 March 2004.

However, throughout the period, Reliance bought back its shares only on nine days. And, the total buyback done by the company was a measly Rs149.62 crore. So, the actual buyback program was just 5% of the total buyback size of Rs2,999 crore.

(Emphasis mine)

This is not just Reliance, but in most market buyback announcements I have tracked in the last five years, companies have bought substantially lower quantities than they supposedly intended to. The idea of a share buyback was usually to keep the stock price up, but a few days after the announcement the shares would go back down. (Also see: Rajat Rajgarhia of Motilal Oswal thinks the aim is to “shore up sentiment in the stock”)

Another reason I’ve seen quoted for this announcement is that Reliance lost its position as the top weighted stock on the Index, and that Mukesh bhai is big on ranks. Not that this is substantiated, but it’s such an awesome gossip conspiracy story that I had to mention it!

It’s not usual, though, that a company of Reliance’s size – one of the largest in India – makes such “preliminary” announcements, but the company has been very careful to ensure that the stock doesn’t crater around bad results seasons. They have announced gas finds, deals, and agreements, nicely timed around results announcements, which is all above board (and it’s not just them, the big IT company we all know about has done it as well).

The stock, in the last couple years, has not done very well:

And in relative terms, the high for this stock is 1,650 in 2008; and it recently saw levels of 685.

Will this announcement take Reliance to the next level? Chances are: no. They have to show great results. Their Q2 numbers were not great, and their gas and crude finds are in decline; for serious growth they have to rapidly increase investment. While a buyback at this level for the company is good (lesser capital to service), there will be large capital requirements coming in as they explore and find gas, invest in shale assets, expand the broadband/BWA offering, enhance their retail setup or indeed, make their massive refining operation more efficient. These are real game changers, not the buyback.

If the quick rise from the bottom – nearly 20% now – is exciting, then the game is in short term trading, not in a “buy and hope for the Ambani magic”.

It looks like we have a victim of leverage, in Kingfisher Airlines (KFA)

Kingfisher, which is partly owned by brewery tycoon Vijay Mallya, has canceled more than 120 flights this week as pilots and crew called in sick after their October salaries were delayed.

The airline says flights were canceled because it was reconfiguring planes, the Press Trust of India reported. The Economic Times reported that leasing companies want Kingfisher to return their planes after the company fell behind on payments.

Kingfisher shares slid more than 12 percent on the Mumbai stock market Friday.

India's airline industry has been hit by rising fuel costs and a crushing price war. Kingfisher is currently struggling under debt of $1.4 billion and shut down its budget carrier in September after it ran up losses.

…

Kingfisher's problems have worsened after three oil companies stopped giving it jet fuel on credit and asked the airline to make daily payments.

The airline has grounded eight of its leased turboprop ATR aircraft, and returned 14 leased A320 jets, leaving it with fewer aircraft in its fleet.

The stock’s at 19 and looking very bad, as it went below earlier lows of 18.85 earlier before it rebounded up. I’d be very careful buying this stock. But of course, it’s the age of bailouts….

The latest SAIL results had this to say:

vi) Due to unusual and steep depreciation in the value of the Rupee against US Dollar
and Euro during the current quarter / half year, the foreign exchange fluctuation loss of
a) Rs. 508.72 crore for the current quarter and Rs. 520.37 crore for the current half year
on short term foreign currency loans have been considered as an 'Exceptional Item'
by the Company; and
b) Rs.163.83 crore for the current quarter & Rs.163.26 crore for the current half year
on long-term foreign currency loans have been adjusted in the carrying cost of the
Fixed Assets/Capital Work-in-progress, in accordance with Companies( Accounting
Standards) Amendment Rules 2009, relating to Accounting Standard 11, notified
by the government of lndia on 31" March 2009.

The concept is like this.

1. SAIL has loans in foreign currencies. Not all that exposure is hedged.

2. The rupee depreciated nearly 8% last quarter – meaning, SAIL has to pay 8% more rupees today to pay back the loan.

3. This is a loss, because it’s effectively excess interest that needs to be paid. If there is a forex gain (if the rupee appreciates) we must have a profit.

4. Some of this loss – the 508.72 crore they mention in a) above – has been taken on to the profit and loss statement, taking their profit down nearly 55%.

While the 508 cr. “exceptional” items is only this quarter, which seems to be on short term loans taken in this very quarter. That means earlier when the rupee appreciated there were no such loans and no cause to book such profits.

Also note that profit before exceptional items was any way lower (1224 cr versus 1592 cr last year), so Sail has operational issues as well.

The WTF

Worse, in point b) above they mention that they have EVEN more losses (Rs. 163 cr. worth) on the rupee, that they’ve adjusted against reserves.

Assume you are SAIL. You took a loan at Rs. 40 to the dollar, of $100, to buy some “fixed asset” – let’s say a darn cheap furnace. That’s Rs. 4,000 that goes into your balance sheet, and every year, you depreciate it down – say 10% a year, so about Rs. 400 per year. You have debt of $100, which is payable at the end of two years.

Now the rupee goes from Rs. 40 to Rs. 44 per dollar, which means your loan of $100 needs  a repayment of Rs. 4,400. The excess Rs. 400 is the increase in the exchange rate, which should hit your profit and loss account (P&L). But no, even when ICAI has said explicitly that companies should take the P&L route, they find a loophole that the government opened for them.

They now tell you that because they took the loan to buy a fixed asset, even the increase in cost should be “depreciated” rather than taken at once. So they just mark-up the value of hte purchased item to Rs. 4400 instead. That extra Rs. 400 only gets “depreciated” along with the physical asset, over years!

This seems like cheating, but one might give them some leeway. The real problem is that when the rupee reverses direction (and goes up) they forget all about this “reserves” bit and directly take the gains on P&L (which will show higher EPS and therefore is attractive). Jugaad on the way down, but proper on the way up. That bit I do not like at all. (See post on RCOM which has been accused similarly)

I sometimes wonder why I bother with fundamentals. It’s all magic tricks, and spinning webs.

Bloomberg posts an article about how in the last 30 years, bonds have beaten stocks. But turn the clock back 30 years ago, and what do you find?

In 1981, the Volcker move had taken interest rates – and thus yields – to big highs. The 30 year was available at 15% yields, which means a return of 15% per year (sure, not compounded).

(Higher yields = Lower prices)

Given that, wouldn’t the 30-year bond have outperformed in any case? Equities in the US have returned around 12% compounded since then, I think. Perhaps a case of appropriately fitting data, one thinks?

In India, I don’t have enough data, but stocks have done better over the last 10-15 years.

I make the case at Yahoo for a common stock ticker set.

Have you heard of RELIANCE? Yes, that Ambani company. The fellows that keep arguing about how much gas they're producing. But it's also called RIL. And RELIND. Or RELI.

Whoa, you think. These are the same company? Why so many names? Or, in twitter parlance, "Why U No Call It Reliance?"

Because we don't have a common ticker system for stocks. The NSE has its own set of stock codes. The BSE gives stocks both a code and a 6 digit number, which old-timers are proud to know by heart. Because the exchanges wouldn't settle on a common naming convention, brokerages that needed to sell stocks decided that they will have their own names; ICICI Direct calls it RELIND, while NSE calls the company RELIANCE and BSE uses RIL.

Given that there are at least 10 large brokerage outfits, with each one using the symbols they want, the "ticker" confusion remains. Does RELINFRA mean Reliance Infrastructure? Or Reliance Industrial Infrastructure? Both are run by an Ambani, but a different one. My broker had  the RELINFRA for the latter company, and I tried to buy shares online thinking it was the former - I was lucky that their prices were so different (the first one was in three digits, the second in two) that the order was rejected for being way out of range. The brokerage in question has since shifted to the NSE symbols (which use RELINFRA and RIIL respectively) possibly to avoid frantic support calls from people less fortunate than me.

Ticker symbols on TV and web sites take their own hues; if you watch the price disappear across the screen by the time your mind has decoded the symbol, you are not alone.

And then, you get the symbol changes. Companies change names often, and then their ticker symbols change. HEROHONDA dropped the Honda name after the Japanese giant dropped out of the partnership - the company is now HEROMOTOCO. The famous Infosys was "INFOSYSTCH", and we had a "TCSCONS" - they were recently changed to "INFY" and "TCS" respectively. Demergers and mergers impact name changes - Larsen and Toubro (L&T) was demerged into, well, Larsen and Toubro (Now LT) and Ultratech Cement (ULTRACEM).

While one can't really ban name changes, a standardized ticker will make a change undesirable, since the ticker adds to the brand value. We can't underestimate the power of a ticker symbol - even when Bombay was rechristened Mumbai, they didn't want to change the "BEST" name for the electricity and transportation provider, so it became "Brihanmumbai Electric Supply and Transport" - still "BEST" in short.

In the US, each stock has a ticker symbol that remains the same everywhere. I look for a symbol - say GE - and it is GE no matter where you look: on TV, on a web site, on the SEC site or in a newspaper. The ticker symbol also has few characters - AMZN (Amazon) and YHOO (Yahoo) have four but you'll even find single letters (G for Genpact).

In India, SEBI has standardized a number of things across exchanges. For instance, the reporting standard for financial results has been made standard - the exact headings have been determined and each company has to produce the same information - Revenue, Total Expenditure, Net Profit, and Diluted Earnings per Share and so on. (Note: the actual headings are longer and unintuitive but at least we have a standard) Before these rules each company would have a different format - some called it Revenue, others called it Income, yet others called it Sales. The standardization process helps in keeping companies comparable.

Secondly, they have standardized, to an extent, the filing of certain types of transactions. Insider trading information - where company management or promoters buy or sell stock - were reported by different companies in different ways, which made it difficult for anyone to know what really was going on. The standard now ensures that companies file such information in a standard format - telling us when they bought or sold, how many shares were involved and what was their holding after the transaction.

Similar standardization has occurred in reporting of promoter share pledges, shareholder details (released every quarter), substantial acquisitions (above 5% of holding) and so on.

Soon, with a shift to XBRL (an XML based report that has a predefined structure) this will go a step further in terms of standardization across exchanges - and indeed, with SEBI, The Ministry of Corporate Affairs and the Reserve Bank of India adopting XBRL together, a single unified standard of reporting across different regulators.

With that level of standardization, it is indeed a shame that we can't have a common "ticker symbol" for each company. Sure, they have a long name which is unique, but who uses that? It would be terribly difficult to have a conversation about Carborundum Universal Limited if you weren't allowed to use some sort of abbreviation; and its best that we have a unique abbreviation as well.

Note that I don't call for SEBI to choose a symbol - the companies must have that choice. But certain ground rules must apply - a maximum number of characters, for instance, so an abbreviation doesn't become alphabet soup, and an element of relevance - so an ABC Toilet Seat Paint Manufacturers Limited doesn't take the symbol "WIPRO".

The change is simple, but never really thought of as important. Only brokers needed to care about symbols earlier, since you'd call and mumble the name of the company you wanted to buy. But now, you get a terminal to make your own trades, websites to research and TV channels and running tickers on your mobile phones; a common "short name" would be quite useful.

A rose by any name will smell as sweet, but even if you're a card carrying BJP member you're going to find it difficult to deeply connect with a Nelumbo nucifera.

Network 18 has something funny going on. According to me, the company is helping its own promoters buy more shares.

Let me put forth some evidence.

1. A promoter entity called “Network 18 Group Senior Professional Welfare Trust” recently buys shares in Network 18.

2. I now wonder what this is. I check the NSE, and it shows the trust as a “Promoter company”, holding (now) 11.15% of the company.

3. Now I check the Network18 annual report. It reconfirms the fact that this is part of the promoter group, but has a few very important notes.

4.  Network 18 has given as security, part of its investments, to lenders who have lent over 255 crores to this promoter group entity.

Security provided given in favour of lenders in connection with loans to NT18Group Senior Professional Welfare Trust Rs. 2552 million.

What security?

16,344,118 (Nil) equity shares in Television Eighteen India Limited are provided as security in connection with loans availed by Network18 Group Senior Professional Welfare Trust and 13,800,000 (Nil) equity shares in IBN18 Broad cast Limited are provided as security in connection with loans availed by the NT18 Group Senior Professional Welfare Trust .

(The NT18 and Network 18 prefixes point to the same company – there’s only one such company mentioned in the promoter list.)

To clarify: Network 18 has given the shares that it owns – in the TV 18 and IBN18 subsidiaries – as collateral for loans that were taken by a promoter group entity. If you consider that Network18 can pledge the shares to get money for itself, this amounts to Network18 lending the promoter group entity money.

Note that this is also not entirely legal. Promoters giving money to companies = okay. Companies giving their money to promoters = not okay. Because other investors must question why that money isn't available to them.

5. Why the heck should a company give 255 crores of its own investments, as security, against a loan to a promoter entity? It is usually the opposite – promoters pledge their shares so the company can get a loan. Often, promoters do give their shares as collateral when the company needs a loan, because they are in control of the company and can ensure that the loan will be repaid.

But the other way - the company giving collateral for a loan taken by promoters - is very shady. Because there is no control that the company exerts over its promoters. Other investors must be wary.

6. And the promoter company is using that money to buy more shares! You might say they use they money for something else but buying shares from other sources of income, but phooey – money is fungible.

7. Effectively, Network 18 is helping its own promoters buy more of its shares.Remember:

a) the shares being bought are not "fresh issue" from the company. Companies are allowed to issue promoters "warrants" that involve the promoter putting up some money in return for more equity. In this case money flows to the company, equity goes to the promoter.

b) But no, not here. Here, the promoter entity bought directly from the market. Meaning, it bought from someone else. Meaning, the company gets none of the proceeds. Effectively the company's money was used to help the promoters buy more shares from someone else.

This is brazen. I don’t know if it’s illegal, but it sure as hell should be. The investments that are pledged are the property of all shareholders – why should the company use them to help the promoters buy more shares?

8. Yes, some of you might think this is standard practice for an ESOP trust – which should buy shares in the market to cover ESOPs which, when exercised, will return money back to the company.

Buzz! Wrong again.

I checked the ESOP situation, and they have around 7 ESOP plans in place. Added up, their own report shows:

(I) Total no. of options in force 1,446,398

That’s 14.46 lakh (1.446 million) shares, at the most.

The total ownership of this trust is : 1.5 crore (15 million) shares.

The trust owns more than 10x the number of ESOP options outstanding. No, this purchase is way beyond the ESOP requirement, so why is the company funding it?

9. But there’s even more. In 2010-11, according to the annual report, Network 18 gave Rs. 55.25 crores to the trust as a “Loan/Advance”. The trust, which had in the previous year taken over 147 crores as a loan, has then returned 202.83 crores back, leaving it with zero balance. This is strange, but stranger is this declaration:

The financials of Network 18 Group Senior Professional Welfare Trust , a trust formed for the welfare of past and present employees (including Directors) of the Company and its subsidiaries have not been consolidated since ,as per the management , it is not likely that any economic benefit will flow to the group from that trust.

Er…now I understand. Perhaps the economic benefit is only designed to flow in the other direction.

A quickly done flow chart to describe the situation:

Other murky stuff out there involves a loan of Rs. 25 cr. to “BK Media Private Limited”, a promoter owned entity.

The 8% Cumulative Redeemable Non Convertible Preference Shares of Rs. 100 each in BK Media Pvt Ltd, an entity owned and controlled by the Managing Director of Network 18 Media and Investments Limited are (a) redeemable at the end of 5 years from the date of issue, unless otherwise agreed by the Company and the issuer company and (b) proposed to be secured either by a personal guarantee of the promoters or by way of a first charge on all assets created or acquired by the issuer company.Note Non impairment .The investee
company is incurring losses and has a negative Net Worth. However, having regard to the continued long term strategic involvement, management is of the view that no provision is considered necessary for diminution in the value of these investments.

I suppose this will also be palmed off as standard; but a company making a loan to a promoter group entity, which is incurring losses, and then saying that it won’t even take the hit on its balance sheet – this is really sad stuff.

Is it a wonder, then, that people think of India as a corrupt nation? I’m sure there is some legal loophole that allows this practice but as an investor, you should be very very wary of such companies that, directly or indirectly, loan money to their promoter owned entities which then buy more of the company’s shares. It’s a shame they run a business channel that is supposed to unearth such practices.

(Oh, btw, if someone knows a better explanation for the above facts, please let me know)

Disclosure: I have no positions (long or short) in Network18 or any of it's subsidiaries.

The Infosys stock is down 3.5% to 2,500 as we speak, and it’s a result day tomorrow. Result days are big for the INFY stock; the chart of the day shows the movement of the INFY stock the day before, and on the result day itself.

The last five quarters have seen huge negative moves on result announcements. Probably this has spooked investors already? But honestly the day before has little predictive value: of the last 17 quarters only 8 quarters have seen the earlier day move in same direction as the results day – and even there, magnitudes haven’t been enough for prediction.

TTK Prestige threw in a fantastic set of results today, with 55% EPS growth, and 51% revenue growth, year on year.

The stock closed up 7% at 2818.

The chart has shown signs of peaking. I have no positions anymore, as I exited on a sharp reversal around 2650. But the stock might be worth picking up if it breaks through the key levels I’ve talked about. It’s already through the 50DMA on good volume, a positive sign.

Interestingly, the forward P/E of this company is still around 30, while it grows EPS more than 50%. It’s a highly priced stock but apparently, not high enough. But given the recent volatility – it’s corrected 20% – I would not take a large position; the stop loss has to be the 200 DMA.

Sintex announced results post market hours, at 3:45 pm today. While revenues are up 25% to 1154 cr., the net profit has dropped 61% to just 38 cr. from 101 cr. Much of this loss was due to Foreign Currency Convertible Bonds (FCCBs) based losses. Companies that borrow through FCCBs (in foreign currency) have to make an allowance for the exchange rate changes. A fall in the rupee means they have to pay more in rupees than earlier and this is considered a loss.

At the current price of Rs. 115, the P/E comes to 8.1, which isn’t very expensive.

FCCBs: Sintex issued $225m of FCCBs in 2008, payable or convertable in 2013. The conversion price is Rs. 247, said their group president, Sunil Kanojia. The yield is 5.2% which means a total payment of $290M in 2013, which at today’s USD-INR price amounts to Rs. 1450 cr. Including this, their total debt is 2900 cr.

It might be noted that Sintex has 25% higher revenues and FCCB losses are “exceptional items”. In fact Sintex’s press release embodies that fact:

But since Sintex has revenues in Europe and the US their revenues would go up in rupees simply because of the exchange rate – so some of the higher revenue in rupees also comes from the higher exchange rate.

Fundamentally, this stock doesn’t show great signs, though I’ve heard of a few people looking to “buy on dips”. (I think that’s a dangerous term)

The stock has declined a lot, so it’s not a great technical buy either:

Perhaps there needs to be serious strength – beyond the 160 high – for a purchase to be worthwhile.

Markets are down 1.5% in a sudden move after Moody’s downgraded SBI, India’s largest bank. The Rating goes to D+ from C-.

"Moody's Investors Service has downgraded the State Bank of India's (SBI) bank financial strength rating (BFSR), or stand-alone rating, to D+ from C-. The revised rating maps to a baseline credit assessment (BCA) of Baa3. As a result of the lower BCA, the Hybrid debt rating was downgraded to Ba3(hyb) from Ba2(hyb)," a statement from the ratings agency said.

The stock is down 5% on reasonable volumes, at 1765.