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Sunday, 24 September, 2006

United Western Bank Ltd.

Company Details: Kotak Research

Much has been said, written, talked about UWB but here are my two cents on the entire issue. talks about "affectionate people !". I was touched by their affection when I made 42% returns in less than a month "speculating" on the stock.

The RBI places UWB under moratorium till December 1 2006 since UWB's net non-performing assets were 5.66% (as compared to peer group figure of 1.97%).

In one of the statements, the RBI said, "During this (moratorium) period, RBI will consider various options, including amalgamation of United Western Bank with any other bank and finalize the plans in public interest with a view to ensure that the public deposits are protected...".

RBI further said, the depositors could withdraw upto Rs. 10,000 from any of the ATMs. Bank had 75 ATMs spread over Maharashtra. (Reminds me of few keywords: Denial, Scarcity, Authority, Social Proof, Negative Feedback Loop and last but not the least Lollapalooza)

2 Sep was a Saturday. There was a gap of almost two days before the markets would open again and trading would start. People got into a mad-rush and started thinking. The issue augmented when they thought a bit too much. There were scenes of people standing anxiously outside UWB ATMs and trying to withdraw cash. Many ATMs were reported to be out of cash. Things stared getting ugly when every news channel was talking of nothing but UWB and problems faced by the depositors and the shareholders. News channels invited specialists and experts in the studios for their opinions and what shareholders should do when the markets open on Monday. As expected, the experts opined that it should be sold off to cut on the loss that investors would make. None of the experts however pointed that moratorium was will December only and after that things can and shall return to normal.

UWB closed at 22.7 on 01-SEP-06. As expected it opened 13.2% down at 19.7. Went down to 5.25 (76% down from previous close). Finally it closed at 16.15 (down 48%). Before I rant further, I have a question. I thought there was a concept of circuit and it's generally 10 to 20% change. Why didn't UWB hit the lower circuit on 04-SEP-06?

All of a sudden there was some news that ICICI was having a board meeting to mull over the amalgamation of UWB. And then there were more people interested in buying it out - Canara Bank, Maharashtra Govt with HDFC, IDFC, Andhra Bank to name a few. Ideally this should have helped the stock price retain a decent level but it did not. And in the next few days, there were more organization of all kinds (public banks, private banks, NBFCs, Govt bodies, individual investors) who stated showing interest in UWB. Pradeep Bhavnani, One of the members of the National Stock Exchange actually picked up about 15% stake in the bank and said that he was doing this because, "(I) want to protect and bail out the shareholders and deposit holders".

The Climax
I have lost track of timelines but in the end, there were about 17 different parties in fray for the bank, each trying to out smart each other. RBI awarded the prized possession to IDBI. IDBI further said they would buy the outstanding shares of UWB @ 28. The price according to me is bound to reach 28 and might just go above it (with people over-expecting). The order book for UWB started getting skewed with all the buy orders and no sell orders.

I caught this news a bit late. It was trading at 5.25 for only a short amount of time (frankly you cannot expect to get the timing right). I bought it at 17.5. I discussed with few other people but everyone thought I was being rash and speculative. I agree it was speculative but if the returns are guaranteed with minimal or zero risk, would I still be called speculative ...? I sold my shares at 25.50. I could have waited for it to reach 28 but then I decided even if I leave some money on the table, in the end I would have gained. I did not like the look of things (call it sixth sense) but I decided I would sell.

And after everything IDBI can happily munch on their latest prize, depositors can now rest in peace and most importantly I can enjoy the 42.86% ROI (excluding taxes and brokerage) I made.


Thursday, 21 September, 2006

PVR Ltd. - The Moats Around Castles

Company Details: Google Finance, Kotak Research
Company Website:

The Moats Around Castles
If noblemen were asked key characterestics of a good castle, they would say it should first of all serve the county it is in, it should then be able to provide food and shelter to the occupants, then it should be secure enough with thick walls and moats built around it, then it should have a regular supply or stock of essential things (food, water, toilet paper, internet connection ...) and finally it should have a good leader in command to run the place.

PVR Ltd is a company that in my humble opinion has big wide moats built around it castle. It is operating in an industry that is growing leaps and bounds (the castle has enough meat to not allow the occupants - shareholders die of starvation). They have the pricing power (the walls around the castle are huge and rock solid). The customers are loyal (there are people bringing in bread and butter in the castle without fail everyday). The purchasing power of the customers is increasing and more than that they are coming out in open andd beginning to spend it (every one is bringing larger potions). The brand is impeccable (people are voluntarily giving meat and they would not go anywhere else). And most critical of them all - they have the negotiating power with the suppliers. If they decide not to screen any movie, nationwide collections for that movie hit the rock bottom. The producers and the financers come literally begging on the doors of Bijlis (the county that this castle was supposed to serve - the film industry, is instead serving this castle).

Management is as good as it gets. Initially a family run business with Ajjay (with two Js) Bijli managing things. The promotors own more than 40% shares in the company. They have very very high incentives and punishments to work hard to increase the shareholder value.

Growth Story
In past few years they have grown from a one-screen theatre (Priya) to the largest number of screens in the country with presence in all major metros. Future plans include foray into film production, small one-screen theatres in category B and C cities, use of technology to enhance the movie-watching experience, use of technology to cut costs among other things. The only thing that remains to be seen before an investment decision is made is the price. If we buy, we would be part owners in a good company and good business and good growth industry but we would not have made a good investment decision. Buying a good business at high price is like packing loads and loads of money into gunny bags and forgetting it for years. The same money when unpacked after years would not be as useful as it would have been when it was packed (remember our dear friend called Inflation ..?).

The Financials
Before picking up a partnership in this company, the only thing now left worth consideration is the price. It should be cheap (we should get more value for investment). Please note cheap does not mean a low P/E or low P/BV. It has more to it. For example if someone read the reports published by PVR, few things stand out. The most striking thing is the "Film Distributor's Share" accounts for as much as 33% (and increasing) of the total expenditure of the company. We would assume FDS as raw material for PVR Ltd. Second, "Rent" is also very high. It accounts for 14% (and increasing) of expenditure.

Certainly worth spending some time on PVR and identifying the reason to buy.

"Just another person" posted the following comment ...


I read ur post and found it quite interesting..
but i have a few comments/questions
1. a little bit deeper analysis would show that the seat occupany/load factore for PVR is only healthy on weekends..On weekdays u can get a ticket at the 12th hour also and u find 30-40% of the theatre empty. How sustainable is the revnue of this company??? can u guys forget about the indirect competitors like Home theatres who will be eating into the share of this compay. A person who can afford a ticket of 560(180*4) for his family can also afford to buy a home theatre. Lets assume currently only 10% of people of this kindaa are available. but in India where showoff is a must and junta will buy home theatres just to make "Neighbour's Envy" will slowly move to watching movies at home.
3. I don't have numbers to support this but there has been few movies that actually make good profits. Most of them are just above break even.Beyond this whatever profit the movie makes, the major share is taken by smebody else and very little comes in the kitty of the theatre (u ave already covered this point)

So I m not very sure f the MOAT around this castle.

And here is our reply to the same ...

Thanks for the comments. Without wasting words, here are my views ...

1. The point you raised about occupancy is very valid. In fact we completely ignored that aspect. We focused only on increasing number of seats and how market share is going to tilt towards PVR in the long run. You have mentioned that on the weekdays almost half the theater is empty. True. But in my opinion (and I might be wrong), the cost for the company (PVR) is only the cost of the master-print. From what I understand, they buy a master copy and then negotiate the prices for number of screens and then they just duplicate the number of copies. Yes the costs are there but this also gives them negotiating power. Recently for the launch of Lage Raho Munnabhai, the multiplexes did not agree to the prices quoted by distributors and hence there was a delay. That's why the moat. I still don't know a lot of things about movie screening business. If you know, please share ... it would be of great help.

2. Again a very valid point. Indirect competition is there. You mentioned about Home Theatre Systems. Then there are things like DTH, dramatics etc. In fact when I first thought about PVR, I thought of it as a player in entire entertainment industry (indirect competition includes things like books, television, radio etc - basically what people do for killing spare time). But when I talked to a few people who actually go to movie halls (I don’t watch movies – last movie I saw in theatre was in 2005), I realized the experience of watching movie in a hall is something that can't be replicated by even best of systems. I would thus agree to disagree to what you have said. The number of people watching movies would NOT come down. (I am open to debate on this .. :)).

3. Finally the last point is also very valid. May be less than half of the movies do break even, but I think even if a movie is a flop, the screening can be profitable. May be the collections are not high enough to compensate the cost incurred in making the film but if a certain percentage of the hall is occupied, the cinema hall might recover operating cost (if not the capex). There are two different parties involved here – film producer and the screener (PVR). Again I don’t have data to support this argument ... so can be fallacious.

And you gave me a bonus point by saying that I covered the fact that most of the profits are taken by someone else not the screener – I don't think I covered it :). You seem interested in entertainment; can you please tell me your opinion on PVR guys entering movie production and distribution business too? What are the scopes and how would it affect the performance of the business.. ? And there is one thing that I have ignored all along. The revenues from the F&B business in the intervals, advertisements in the hall before the movie - all that also contributes to the bottomline .. !!!

Comments? (Last updated on Sep 23 06 1302 IST)

Tuesday, 19 September, 2006

Can Fin Homes Ltd.

Company Details: Kotak Research
Company Website:

The Home Dream

Actually this company came in our notice while trying to look for lowest home loan rates. No this company does not offer the lowest home loan rates. Rather, we believe it offers much more than that.

For starters the interest rates are rising as far as the current scenario is concerned. Though the interest rates may again start declining from next week or sometime in future or continue to rise for some time in the future. These are scenarios on which we have not based this investment as we are not sure of the time period till when the rates will go up or go down. But rates going up will definitely mean higher income for the company but at the same time it will lead to lesser revenue growth as more customers will wait for lower interest rates before taking on a fresh loan and vice versa. This is one of those rare combinations of negative and positive feedback loops in action.

The company's main source of revenue is the spread between the interest rates paid on the loans which it takes from various banking and non-banking companies and the rates it receives from its customers. Interest rates going up can lead to another scenario where property prices are going down and people waiting to buy in such a case rush in and this leads to more loans been given out.

As far as the current scenario of the company, it is a Canara Bank promoted company dealing in Home loans. The company has shown a decent profit over the last 5 years. The profit has been in a range from 17 crores to 26 crores but mainly it has been around that 20 crores mark. If you consider this in relation to the Market Cap of the company which is currently 104 crores (share price @ Rs 50.50) the profits looks to be around 20% return on capital. Just exploring a further, the company has been paying a dividend of 2.5 Rs for the last 5 years. A book value of Rs 84 also provides an opportunity to buy a company trading at around 0.64 of the book value.

Though the kind of capital we employ in a single stock right now is not very large but we do not diversify much. This does not mean we invest all our proceeds in a single stock but we still keep a substantial portion of our portfolio in one stock. The maximum we have ever placed in one stock is 50% of our total portfolio. We will follow the same principle for this one too and hope that the share price goes down rather than going up as we can buy more of it around month end or beginning of a new month. (we get our salaries then). A quote from WEB shall make things clear ...

The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.