What was that again? RCom now

Here's the next one in the 'What was that again?' series (to see the previous post, click here)

This one though, the analyst has been smart enough to own it upfront, so sympathies for the brave act. This is an analyst revising reco on Reliance Communications

Downgrade to REDUCE – where were we wrong?
Suggesting a BUY at INR300 levels and now a REDUCE at INR180 levels is not ideal from our perspective and was not expected either. We focussed on business fundamentals like upside in its fixed business, spectrum advantage in mobiles, sale of towers and declining debt profile; however, these have been overshadowed by rising competitive intensity, regulatory overhangs, constant concerns over the quality of earnings and audit on subscriber numbers. We had normalised for various one-offs using 20-30% lower numbers than the reported for our forecasts, but these proved conservative. We believe operational/regulatory overhangs will continue to be a drag on shares; hence, we downgrade to REDUCE

Central Bank could provide support to gold prices

Article by Quantum on RBI's gold purchase

International Monetary Fund (IMF) announced on its website that India has bought 200 tonnes of gold from a total of 403.3 tonnes that they had planned to sell. This transaction was completed during the period of October 19th - 30th 2009 with daily purchases at the prevailing market prices.
The point to note is that not only has the Reserve Bank of India (RBI) purchased gold - but it has done so at a price that was not at a discount to the spot prices.

The reason for buying
According to a Reuters report, an IMF official quoted that the sale took place at an average price of about $1,045 an ounce. The payment for the same would be made in "hard" currency - and not in SDRs, the currency of the IMF.
This means that the purchase of nearly $6.7 billion of gold would be made from RBI’s dollar reserves.
The message: the RBI is diversifying - it is moving some of its money from US dollar paper notes to gold.
The RBI says: "This was done as part of the Reserve Bank's foreign exchange reserves management operations."
Hmm... The RBI, as a central bank, is the fund manager of India’s reserves. Given the uncertainty surrounding the dollar, the RBI seems to think that it is prudent to diversify some of its dollar reserves to gold.

Learning from the past
During the balance of payment crisis in 1991, India mobilized its gold reserves to serve as collateral against a $400 million loan from the Bank of England. India shipped a total of 47 tonnes of the country’s gold reserves to the Bank of England as collateral. It also leased a further 20 tonnes of confiscated gold to Union Bank of Switzerland with a six month buyback option to raise a $200 million loan. The funds were used to help India meet its short-term debt obligations - and its rising import bill.
A central bank of a country serves as a lender of last resort. We saw this happen in the severe financial crisis of 2008. But, as seen above, gold has many a times served as an asset of last resort for these central bankers - just like it did for India in 1991.
Central bankers see gold as the ultimate currency and have often in the past acknowledged this fact by words and by actions.
The debasement of currencies by central bankers around the world - especially in the U.S and in UK - has led to an erosion of confidence in paper currencies. This has ignited a need to diversify reserves away from the US Dollar. Countries like Russia, China and the Middle East have often voiced their concerns and were amongst the likely nations to grab the IMF gold for sale.
India buying almost half of IMF’s available gold for sale has come as a surprise to many. Especially since, the gold markets never placed India anywhere near the top of the list of prospective buyers. Also, this has come at a time when prices are ruling near record highs.
India’s total forex reserves have grown significantly over the years whereas gold holdings (in tonnes) were unchanged. This led to a steep fall in gold reserves when expressed as a percentage of total reserves. India’s gold holdings declined from more than 8% of total forex reserves at the beginning of 2000 to less than 4% before this purchase from IMF.

This purchase of 200 tonnes of gold will lift the proportion of gold expressed as a percentage of total reserves to almost 6%.

Who's next?
India has moved swiftly. China and Russia were considered more likely to grab the IMF gold.
There are chances that China might rush to grab the remaining gold for sale by the IMF, without any further delay. China’s gold reserve as a percentage of total reserves stands at 1.6%. While China has huge dollar reserves which are increasing each day, it has also voiced its concerns regarding the uncertainty surrounding the U.S dollar.
This potential sale of gold by the IMF was one of the lingering threats for gold prices. Now we have real takers for the IMF gold: 50% swallowed by India in one gulp. This will certainly lift the sentiments amongst those that believe in gold as the ultimate form of currency.
(A Quantum MF article)

Insurance value creation

Most investors companies in India are part of larger conglomerates. For ex, Aditya Birla Nuvo is the holding company for Birla Sunlife. Figuring what value to attach to the insurance business is often a tough task for the lay investor.

Here's some info from a recent I Sec report. There are 2 bits of data - value estimation of a few companies and a graph which shows how much total capital has been invested in the business.

The first table shows values created. For ex, I Sec calculates that I-Pru is worth about Rs 32,000 crore and HDFC Standard Life is worth a litte more than Rs 14,000 crore.

The following chart shows capital invested. For ex, I-Pru has invested almost Rs 5000 crore, while HDFC Standard Life seems to have invested around Rs 1500 crore.

So the key part is this. For I Pru, the capital invested has multiplied about 6-7x. For HDFC, it seems to have gone up by maybe 9x. SBI has done better than most, Rs 1 invested by the parent is perhaps Rs 20 now, since it has leveraged its distribution network.
Of course, for a new entrant, these multipliers wont work. The companies mentioned here have been in the business for about 9-10 years now.

Steel prices bottom out

So says a recent Moody's documents. The above chart is HRC prices from China.

FII holding at 10 quarter high

FIIs have generally tended to call the Indian markets right, better than perhaps other classes of investors like MFs or HNI or retail. One big reason is that FIIs are largely the cause of Indian market cycles. When they buy, the market goes up and vice versa. FII holding is now at a 10 quarter high for Nifty. One nmore bit of data which suggests the market will remain flat for a while, or correct a bit. Some kind of correction seems on at this point. Market has falled 6 days in a row, and we are heading into a liquidity tightening phase.

Growth a large part of valuations now

Another interesting chart from the Citi report. This clearly shows that growth forms a large part of valuations for MSCI global companies. What is worrying is - the growth component in valuations is more than even in Dec07 or Dec06, the earlier market peaks.

This is what the report says about the chart --

It displays the PE multiple as the sum of two parts — the base component that reflects the value of the existing earnings stream, and a growth component that captures the value of the expected future earnings growth. Prior to the crisis, MSCI constituent companies typically derived two-thirds of their value from their current earnings stream and one-third from expected growth prospects. Since October 2008 and continuing into the spring of 2009, the expected value of growth essentially disappeared as investors focused primarily on survival.

As valuations and market confidence have rebounded over the past few months, the importance of growth has returned sharply. In fact, given the relatively low current earnings of many companies, the growth premium is a bigger component of the P/E multiple than ever before, accounting for 40% of overall value.

Valuation premium for liquidity

Most investors like firms which have better liquidity position. How much are they willing to pay for liquid balance sheets?
A recent Citi report has an interesting chart. It says - valuations of companies with higher on-balance sheet liquidity than their industry peers outperformed those with below-industry liquidity by 15.7%. This, in effect, is the liquidity premium, implies the report