Gambit Posted March 24, 2015 Posted March 24, 2015 Question to ICFers... Mr. Sukhiram started a company called 'Sabkabhalakaro public limited'. With all his savings he bought 10 units of machinery each of it worth Rs.1 lakh. Each Unit of the machinery can process 1 lakh worth of raw material in a year to produce an end product that can be sold for 1.3 lakh. The business is such that it can pass on any raw material cost increase to customers so that the 30% EBIDTA ( Earnings before Depreciation and Tax ) can be maintained for a long time.... So 10 units give Mr. Sukhiram 10*30K = 3 lakh profit each year on his investment of 10 lakh...He is happy. His company is listed and he sold shares to public through IPO and personally now holds only 40% of shares...His world is his company though and he can never part with his beloved Sabkabhalakaro public limited... Now... Number of shares in the company = 1 lakh ( each with face value of 10 rupees) Profit per share in a year = INR 3 rupees. Post taxes and depreciation, it is say 2.5 rupees So for 10 rupees investment, you get 2.5 rupees as RoE ( no debt )... So share value as per P/E should be P=P/E*E = 25 * 2.5 = 62.5... ..... Unknown to Sukhiram, Mr.Sabkolootungaa is waiting for a bear market.....It has come and share price of Sabkabhalakaro is now depressed at 30 rupees per share... Mr.Sabkolootungaa is planning to make an offer to all shareholders at price of 40 rupees per share. His idea is to acquire 51% of Sabkabhalakaro and reap all future profits.... Mr. Sukhiram does not have money to buy 11% more but he is still the management and can decide what the company can do... What should/can Mr. Sukhiram do? Good thread. I am not sure how you calculated the P/E though. Regarding what he should do, he could get a PE investor through the CCPS route with conversion based on performance. If company does well, stake for all existing investors will increase.
Kalia_Test Posted March 24, 2015 Author Posted March 24, 2015 Good answers... Firstly - for a sustained earnings growth of 25% p.a ( which I assumed and specified ), normal P/E should be 25 ( in real world it can be less or more depending on the predictability of earnings - look at Nestle - it grows 15-18% pa but always trades at PE > 35-40 ). Second, I gave this example as a defense against the Leveraged Buyout ( LBO) through Leveraged Recapitalization. What Sukhiram can do is make the company ( not himself) take debt against its assets ( machinery and cashflows ) . Unlike stock markets, Banks will lend money based on fair value of assets. Use that cash to :- 1. Declare a nice dividend which will push the share price near to fair value OR ( much better ) 2. Offer a buyback of shares at prices above what Mr.Sabkolootunga is offering at say 50 or so. Whether or not shareholders will tender the shares or not, market price will NOT go below 50 when the company has an open offer at 50. Shares bought by Company through buyback are cancelled so % stake of existing shareholders goes up. As we have seen in earlier post, LBOs are good when the shareholders of the acquired company are pro-sale. If they are not and still predator companies try and use LBO to buy shares through Open Offer, then Leveraged Recapitalization(LR) is one form of defense. One extremely interesting case was Dell Inc a couple of years ago. Here the Management ( Michael Dell ) wanted to buyout ( through LBO and more specifically Management Buyout ) the company and take it private ( along with one more investor ) but some shareholders wanted the company to take the LR route and reward shareholders :haha: Extremely interesting case that went on and on... Can anyone add on that?
Sachin=GOD Posted March 25, 2015 Posted March 25, 2015 http://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/ This explains the Dell buyout in detail and in simple language.
Kalia_Test Posted March 25, 2015 Author Posted March 25, 2015 ^^^^^ Absolutely wonderful article...TFS :two_thumbs_up: Yes. This Dell incident will go down as a textbook study on LBO and LR...
Sachin=GOD Posted March 25, 2015 Posted March 25, 2015 Talking of mergers/buyouts etc, Kraft Foods is merging with Heinz - http://www.reuters.com/article/2015/03/25/us-kraft-m-a-heinz-idUSKBN0ML0YK20150325
Kalia_Test Posted March 29, 2015 Author Posted March 29, 2015 Can anyone explain the below? Why so much difference in current interest rate on FDs by ICICI Bank?
Kalia_Test Posted March 29, 2015 Author Posted March 29, 2015 ^^^ Specifically look at difference between 389 days and 390 days So by keeping your money with Bank for 1 more day, you get 0.75% extra ? Surely the Bank is not stupid right?
Kalia_Test Posted March 29, 2015 Author Posted March 29, 2015 Anyone before I give my own take ? Mysterious Indian Banks or crooked ? :((
amiret Posted March 29, 2015 Posted March 29, 2015 Anyone before I give my own take ? Mysterious Indian Banks or crooked ? :(( kotak has similar 0.75 difference between 90 and 91 days term deposit. never thought much of it
Kalia_Test Posted March 29, 2015 Author Posted March 29, 2015 ^^^ Since you mentioned Kotak, look below and notice the interest rates till 389 days, 390 days and then 391. Effectively you will get less money if you keep it for 1 more day with the Bank :haha: Why do Banks even have so many durations? Some of them very odd ones? Will let people ponder over this for a while.... Throw in your thoughts :two_thumbs_up:
Kalia_Test Posted March 29, 2015 Author Posted March 29, 2015 Hint : Banks want to get more money from existing customers
randomGuy Posted March 30, 2015 Posted March 30, 2015 Hint : Banks want to get more money from existing customers Ab bata do sir. Is it for Maintaining a somewhat predictable CASA ratio?
Kalia_Test Posted March 30, 2015 Author Posted March 30, 2015 OK...Here you go...Since our private Banks are always striving to offer best services to its customers i.e 'Khayaal aapka' they had decided that poor customers might forget to renew their FDs :(( As your friendly Bank that cares for you, they had decided to provide an auto-renew option for your convenience - my eyes are moist seeing how much they care about us :(( http://www.icicibank.com/managed-assets/docs/terms-condition/faqsonautorenewalofFD.pdf Q1) What is the Fixed Deposit (FD) auto-renewal policy with effect from (wef) February 15, 2010? A1) The FD auto renewal policy that comes into force from February 15, 2010 entails that: All FDs with ICICI Bank, without any maturity instruction from the customer, shall be instructed for auto-renewal on maturity, for the original tenure. This renewal will be at the interest rate prevailing on the date of maturity. All FDs with ICICI Bank, lying in overdue status on February 15, 2010 shall be auto renewed on February 15, 2010, for the original tenure. This renewal will be at the interest rate prevailing on the date of auto-renewal. Now the game begins :two_thumbs_up: - How to make use of this seemingly innocuous option of auto-renew and screw customers?:nervous: - How could we do good to customers? Thats not in our DNA...O Devil show us a crooked path The devil obliged :devil_smile: and showed the path - Enter differential tenure FDs which seem absolutely ridiculous like 366 days different from 365 days, 389 days, 390 days and some ranges. Don't worry this is all part of the setup - Now let me take example of ICICI Bank rates that I posted above. Assume that this was the tenture ( 1 year to 389 days ) with the best interest rate. They continued to offer best interest for this tenure till enough people were suckered :yay: - Now most people don't renew/close their FDs on time ( they forget or in case they know it is on auto-renew, they wont even bother ). - ICICI Bank needs more customers for new deposits and needs to offer more interest in view of competition but why to give more money to customers already acquired? Does not make any sense to their crooked mind :dontknow: - They thought and thought...got it...time to make use of the 'setup' of different tenures. :two_thumbs_up::two_thumbs_up: - Let us make interest rate less for the lakhs of fools who are on auto-renew and offer more for the new customers on a tenure difference of one day or so ( FDs on auto-renew will be renewed for the same duration as original FD and will get the new rate for that tenure ) Mission accomplished :--D New customers will be on 390 day FDs with much better interest rates . 1 year to 389 day existing customers :finger: So how long can this go on? It can go on forever. At any point in time, a Bank has full details of how many customers are on auto-renew for what tenure so they will know exactly how to structure their interest rates for different tenures. This is exactly why you might see differences in rates for Banks for same tenure slightly as each Bank works according to its own captive customers . Financial innovation :hatsoff:
Kalia_Test Posted March 30, 2015 Author Posted March 30, 2015 Ab bata do sir. Is it for Maintaining a somewhat predictable CASA ratio? Bata diyaa... FDs dont count towards CASA - CASA is Current Account Savings Account :two_thumbs_up:
randomGuy Posted March 30, 2015 Posted March 30, 2015 Bata diyaa... FDs dont count towards CASA - CASA is Current Account Savings Account :two_thumbs_up: Ok. Thanks. If I had to guess, I'd have said most auto-renewal FDs would be of shorter tenure Like 2 months - 6 months.
Kalia_Test Posted March 30, 2015 Author Posted March 30, 2015 Ok. Thanks. If I had to guess' date=' I'd have said most auto-renewal FDs would be of shorter tenure Like 2 months - 6 months.[/quote'] No sir - look at the below :- http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/304T_BSR421014F.pdf Max deposits across rural, semi-urban, urban and metropolitan are for the duration 1 to 2 years...90 days deposits are very very less and would have been for some specific purpose and chances of auto renewal will also be less ( the duration of deposit somehow implies that you know you need the money shortly ). 1 year or so deposits are most popular because ( generally ) banks offer highest interest for 1 year or so. They will not commit to higher interest for longer duration as interest rates might come down.
randomGuy Posted March 30, 2015 Posted March 30, 2015 No sir - look at the below :- http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/304T_BSR421014F.pdf Max deposits across rural, semi-urban, urban and metropolitan are for the duration 1 to 2 years...90 days deposits are very very less and would have been for some specific purpose and chances of auto renewal will also be less ( the duration of deposit somehow implies that you know you need the money shortly ). 1 year or so deposits are most popular because ( generally ) banks offer highest interest for 1 year or so. They will not commit to higher interest for longer duration as interest rates might come down. Ok then thats my personal choice i guess. My FDs with auto-renewals used to be of short duration. EDIT: if i had to make long duration FD, i would not turn auto-renewal off (Btw, there is 10% TDS on FD interest above a threshold but no TDS on saving account interest. Yes bank gives 7% (TDS free) interest on savings, so no need of FDs, one has liquid money all the time.)
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