Boundless Commerce

Flipping to the bank

2006-05-12T15:57:00.000-07:00

The laregly moribund US IPO market might flip around(pun intended) with the Burger King IPO next week.

As the article mentions -- Burger King faces intense competition from the likes of MDonalds, Wendys and Jack in the Box. However, its heartening to see some life in the U.S IPO market. Between, Burger King, Vonage and MasterCard we will hopefully see one huge 'home run' in 2006.

Namaste

Facebook rides social networking wave

2006-05-09T16:11:00.000-07:00

Another hot social networking startup, Facebook, recently announced it had been funded by Greylock Partners.

I'm surprised, and impressed, by the actual funding amount. Most Internet companies normally do not need tons of funding to expand -- since costs of hardware, broadband etc are in a perpetual downward trend. The only things that keeps rising in the Silicon Valley is the price of smart engineers.

Of course, the other side of the story is that Facebook is commanding an extremely high valuation and atleast a couple of VC's were in competition for the deal. The resulting auction might have played a large part in the funding amount.

Chances are Facebook will pump most of the money towards hiring people and adding cool features to it's site. They might advertise extensively to attract more users, to reach the all important critical mass so critical to explosive growth.

Cheers

An unusual marriage

2006-05-04T16:09:00.000-07:00

A most unusual partnership deal involvng two VC firms - Sequoia and Westbridge partners was consummated recently.

This is the first time ever I've heard two VC companies merging. I don't understand how they reconcile the interests of their limited partners or how the proceeds of exits of their portfolio companies are divided.

At any rate, it does highlight the dramatically growth of private equity in India. When a heavy-hitter like Sequoia chooses to enter a market by acquisition it would probably mean that they do no want to waste time setting up shop, hiring people etc. In other words they are keen to get on the ground quickly, and start raking in the dough.

Interesting times in the world economy..

A stake in India's highways

2006-05-02T08:52:00.000-07:00

Sify.com, a leading Indian news portal reported last week that a U.S based private equity fund was investing in an Indian construction company

This is the first deal that I have read about that pertains to the construction sector. It is heartening to note that U.S based private equity investors are beginning to invest in sectors outside of I.T. services and technology.

India's creaky infrastructure is crying for modernization. There is a lot of government investment in this sector -- most prominently, the construction of the Golden Quadrilateral linking Mumbai, Delhi, Madras and Calcutta. But,like most cases in India, success will come after the private industry gets directly involved - either in direct competition, or in partnership with the government.

Improving the infrastructure will reduce the cost of goods for many Indian companies -- directly affecting their bottom line. This will enable companies to invest more in growth, thereby boosting growth and stock prices.

Namaste.

On goes the Ethanol juggernaut

2006-04-27T10:10:00.001-07:00

Vinod Khosla, an esteemed Silicon Valley VC and a champion of cleaner energy
invested in an India-based startup

The investment highlights a few important points:

1) The continuation of seamless cross-border investments between U.S and India.
2) Growing importance of Ethanol in our energy landscape.
3) Maturing of the Indian market with respect to deal structure for VC investments -- the articles mentions the usage of "preferential shares". I'm not sure if this is the same as "preferred stock" as used in the U.S, but will try and research.

Cheers

Are you tubing yet?

2006-04-25T12:45:00.000-07:00

Youtube.com -- one of the hottest Web 2.0 companies announced earlier this month that Sequoia (a premier Bay Area VC) was funding their expansion by investing $8 million in a Series B investment.

Note, this is in addition to the $3.5 million Series A investment for YouTube.

Again, there are few details on how the money will be used, or the implied valuation. However, I have a few conjectures:

1) They will spend tons of money on building an infrastructure to facilitate serving bandwidth-intensive videos.
2) Will unleash marketing campaigns to attract users to sign on and invite friends and family to do the same.
3) Will build an large sales force to attract advertisers to their site.

Will be interesting to see how this one plays out. It will be one big test of how much advertisers are willing to pay for concepts like "in-video ads" and "pre-roll/post-roll formats". YouTube will probably promote the tagging and social networking to add to the edginess of their service.

Stay tuned...

Namaste

The economics of healthy diets

2006-04-20T17:18:00.000-07:00

Developed nations are fighting a worldwide epidemic against obesity. As the Economist(April,2006 edition) notes, about 50% of kids in England could be obese by 2020. The percentage of Americans with BMI over 25 grew to 62 around 2003 and has reached a plateau since.

When such numbers hit a 'tipping point' they drive a mass consumer shift towards health diets. People become inundated with reports that highlight the dangers of being overweight and as a result health diets, fitness centers, and weight loss scams start having a field day. Advertisers that specialize in demonizing the McDonalds of the world sprout out of nowhere with strident rhetoric against unhealthy eating.

As a result, large corporations that serve fast-food on a mass scale have to make significant investments to alter the mix of foods they offer. New-age, nimble juice stores and health food outlets burgeon in areas populated with weight-conscious denizens.

For an investor, this is important information as such societal changes causes shifts in demands for various underlying commodities - sugar, oils, orange juice, corn, cocoa etc. It also opens up new franchising opportunities.

Next time you think of commodity investments, keep in mind these social trends. Will help you make better investing decisions.

Cheers.

Gas at $3, Ethanol to the rescue?

2006-04-19T13:32:00.000-07:00

With gas prices hovering at $3/gallon, global warming showing no signs of abating and hefty price premiums on hybrid cars, investors as well as consumers are wondering if there is a better way out.

Enter Ethanol. A hitherto unknown alcohol traditionally used for alcoholic beverages, Ethanol is now a hot topic for investors.

The Washington Times, yesterday had an excellent article on the Green Technology Boom . The article describes how some ultra-rich VC's and business leaders -- Bill Gates, Vinod Khosla, John Doerr etc are committing some serious cash to investing in what they describe the next disruptive technology.

But, why Ethanol?

1. Ethanol is renewable and can be grown from fermenting sugars in corn and other grain products.
2. Ethanol reduces greenhouse gas emissions.
3. Ethanol lends itself to what are known as flex-fuel vehicles -- ones that run on gasoline, or a combination of gasoline and other alcohols.
and the list goes on

More Advantages of ethanol

Look for news on increasing government-industry partnerships that will exploit this great opportunity to make energy more affordable, and available.

For investors, I found a site that focuses on Investing in Ethanol . I will publish more options as I find...

Cheers

The I.T bulls stomp on

2006-04-18T12:31:00.000-07:00

The Indian stock market the Sensex has risen sharply by more than 5% over the last 2 trading sessions alone.

Catalysing this rise was the optimistic forecast provided by Infosys for the next fiscal year.

What has happened(as it often does) is that the entire SECTOR rises along with the market leader. This is because the leader often acts as a bellweather for the entire sector. As a result other I.T majors have also risen sharply over the last 2 days.

I took a look at basic statistics for major I.T companies that trade on the US exchanges: (PEG = P/E divided by expected growth rate for next 5 years)

IBM: Revenue 91 bilion, PEG ratio 1.34
EDS: Revenue 19.76 billion, PEG ratio 3.38
Accenture: 17.84 billion, PEG ratio 1.30

Infosys: Revenue 2.01 billion, PEG ratio 1.14
Satyam: Revenue 102 million, PEG ratio 2.79

The market seems to be highly optimistic for these I.T firms -- more so for EDS and Satyam than the others. Since Satyam is relatively small, it has a lot of room for growth. However, I would be cautious about a 20 billion company with a valuation that assigns a multiple of 3.3 to it's expected growth rate in the future.

Happy investing

Another 650 million pours into India

2006-04-17T16:46:00.000-07:00

The Economic Times noted recently that Norwest Venture Partners were raising a new fund targeted at Technology funds in the U.S and India.

As a reminder, Norwest is headed by Pramod Haque, a renowned VC in the Silicon Valley. Norwest has already invested in India firms like Yaatra Online and Persistent systems.

The article mentions that the fund will focus on cross border investments -- firms based in the U.S with presence in India. it will focus on investments in the consumer, mobile and media sectors in India.

Cheers.

Rating one's professor and exiting in London

2006-04-17T16:09:00.000-07:00

The PE Week wire on April 17 threw up a couple of interesting stories:

1. There is a new website -- Rate My Professor that allows you to post miscellaneous comments. Not sure how much value this has, but those that went through untold boredom in economics classes now have an avenue to vent their pain. What amazes me is that the wire mentions that they have hired an agency to help them get venture funding!.

2. BurstMedia, a Burlington, Massachusets based firm is no planning to file an IPO on the AIM stock exchange in London. Burstmedia has been funded by Summit Partners in the U.S. Here, we have another solid endorsement against Sarbanes Oxley and other stringent listing requirements in the U.S.

Also, Today's markets:
Dow down 0.57%, Nasdaq down 0.64%, Infosys(INFY) up 13%

Interesting times!

Namaste

U.S IPO markets decline further

2006-04-15T10:07:00.000-07:00

Here's a quick post to mull over on the weekend..

The latest reports from the VC community(courtesy: PE week wire, April 3) continue to show a non-flattering picture for VC backed exits in the U.S

IPO: The number of Venture-backed IPO's in the U.S declined from 93 in 2004 to 56 in 2005 to 10 in Q1 of 2006.

M&A: Total value of exit was $15.4 billion in 2004; $15.8 billion in 2005 and $4.8 billion in Q1 of 2006. The number of deals fell from 186 in 2004 to 167 in 2005; and 43 in Q1 of 2006.

Another notable item was that the Carlyle Group has raised is raising another fund of $1.5 bn for investing in Asian companies.

As noted in earlier blog entries, the overall trend in private equity continues: fewer IPO's, steady number of acquistions with a slight uptick in valuations, greater role for other private equity players, and increasing interest in the Asian markets.

Have a good weekend!

The Sensex de-mystified

2006-04-13T17:37:00.000-07:00

We read regularly about stock markets going up and down. But what is a stock market? and what determines it's value(or Index)?

A couple quick definitions:

Market capitalization: This is the number of outstanding shares multiplied by the stock price at any point in time.
Base Value - a starting point for measuring the value of the stock market index.
Par value - the value of the shares of a company when they are first issued.

The Indian Stock Exchange(Sensex ) consists of 6300 actively traded stocks. India, incidentally has the largest number of stocks traded in the world. So, what determines the actual value of the Sensex?

The 'base value' of the market was 100 on April 1, 1979. Let's simplify and assume there were 2 companies -- A and B, each with 100 outstanding shares priced at 10 Rupees each, at a par value of 1. Both have a market cap of 100*10 = 1000. Sum of market cap's is 2000

Now let us assume on May 1, A was trading at 15 Rupees and B at 20 Rupees. A's market capitalization is 1500 and B's is at 2000. Total market cap is 3500.

And, the new value of the Sensex is 3500/2000 * 100 = 175.

In reality, the Sensex is the weighted average of 30 prominent companies, with the index anchored back to April 1, 1979. The index also takes into account various stock splits and bonus shares -- events that make the arithmetic more complicated.

One key takeaway from all this is that the Sensex just represents 30 of the 6000 odd public companies in India. So, it does not necessarily represent the business conditions surrounding all sectors of the economy. Often there are interesting sectors represented by small-cap stocks that do not move with the overall direction of the market.

Namaste.

Venture Capital's Indian journey

2006-04-11T09:30:00.000-07:00

Recently, there has been a spate of investments in Indian companies that provide online travel services. This is probably one of the earliest forays by VC's into an an entire Internet sector in India.

Kleiner Perkins in Cleartrip
WestBrige in Travel Guru
Reliance, Norwest and TV18 in Yaatra Online
SAIF in MakeMyTrip

These investments make perfect sense. India's burgeoning middle class is keen to spend on travel. Moreover, tourists worldwide are also keen on spending their annual vacations at Indian locales. Both these groups are keen to study varied aspects of India' cultural heritage - Temples, Minars, the Taj Mahal, forts, rivers etc; as well as experience its economic might - thriving software industries, bustling cities with a splurging middle-class, pubs, mouth-watering delicacies and so on.

Often, planning a trip involves dealing with various intermediaries and agents, and that too over a non-electronic medium. A good online travel service will remove many of the frustrations inherent in planning trips to India. It will also leverage aspects of electronic communication --timeliness, transparency and better organization.

I will not be surprised if a good percentage of these firms go public by 2010. But competition in this sector is fierce and relentless; players will have to innovate continuously to survive.

May the journey begin!

Consolidation on a global scale

2006-04-10T11:17:00.000-07:00

I read three articles recently(courtesy: Outsource reporter) that vividly depict the GLOBAL nature I.T services and how it is trending towards inevitable consolidation

Donnelley set to buy Office Tiger
Wipro buying U.S based cMango
Wipro acquires New logic

These are just 3 instances in a massive trend towards consolidation in the IT services industry. But, What is consolidation and why is it inevitable?

When we heard of consolidation, it mainly pertains to people combining their personal loans and refinancing it though a new creditor. The idea is that this works as a 'win-win' for both parties -- lower interest rates for the debtor and more business for the creditor.

Consolidation in the I.T services industry can often work out to be a win-win for both parties. Smaller firms often hit a ceiling in terms of the amount of new business they can accrue. Bigger firms often realize that the fastest way to grow is by acquiring smaller firms.

If they consolidate, then the founders of the small firm can quickly become rich and play golf for the rest of their lives! The bigger player, Well, becomes even bigger.

Cheers

The dollar on a precipice?

2006-04-09T15:18:00.000-07:00

A debate raging among the financial world is whether the U.S dollar is overvalued.

You might have read stuff in the financial press about this. Most of this rages around the sustainability of America's current account deficit and whether foreigners will keep financing this deficit with capital investments. Read more about Current and Capital accounts at one of my previous posts.

So, what does the expected decline in the Dollar mean to YOU?

For those with an appetite for risk, one should consider trading on the foreign exchange(FOREX) markets. If you think the dollar is overvalued, you should SHORT it against other currencies for example the Japanese Yen or British Pound. Alternatively, you could go LONG on currencies that may appreciate against the U.S dollar. There are brokerages that cater exclusively to such investments.

An alternative is to buy stocks in companies that will benefit from a dollar decline -- like American exporters. These firms will gain as foreigners will find it cheaper to buy American goods as the dollar falls.

In the US-India context, since most of India's IT revenue comes from exports, you might want to tread with caution when investing in IT firms like Infosys and Satyam. If you are aggressive, you might consider shorting them - if you are sure the Rupee will appreciate against the Dollar.

Disclaimer: I am NOT an investment advisor, nor do I represent any financial institution. Any investing should be done with caution and after significant DUE DILIGENCE.

The march of the Venture Capitalists

2006-04-08T11:05:00.000-07:00

Hi folks

I found this extremely informative article on Private Equity in India (Courtesy: Ernst and Young).

Some highlights:

Reasons for optimism

1.Attractive demographic profile: 54% of population below age of 25
2. Intellectual horsepower: Over 23 million trained professionals Â doctors, engineers, lawyers etc, and growing by half a million/year
3. Government moves towards deregulation
4. Billions of dollars of Private equity: which in turn invigorates entrepreneurial talents, the stock market and M&A activity. For example: in 2005 the cumulative value of all exits exceeded 1 billion dollars.

Trends
1. I.T and IT enabled services still constitute the bulk of private equity activity.
2. Emergence of the sunrise sector -- Textiles, Biotechnology, Telecom and Energy
3. Moving up the value chain from back office work to R&D and Knowledge Process Outsourcing(KPO)

The article contains a lot of other information on tax laws, India's compliance with Intellectual Property rights under GATT, routers for foreign investments in India and more. A MUST read.

Cheers

Stocks: Split and Shine

2006-04-07T12:25:00.000-07:00

Ever wondered why a stock goes up on announcing a stock split?

This phenomenon continuously amazes me. The purported explanation is that as a stock becomes 'cheaper' it has a greater upside potential. This is pure financial chicanery!

Remember what matters is the market capitalization of a company. So for e.g. Intel has 200 shares trading at 100. Market Cap is 200*100 = 20,000. Now it announces a 2:1 stock split - so it has 400 shares. The theoretical trading price for Intel should be 100/2 or 50. This is because unless the fundamentals for the company change the market cap should stay the same, i.e. 20,000.

However, empirical evidence has shown that the market cap of firms goes up as a result of a stock split! Many investors think that as the stock price is low, there is necessarily more upside potential. Also, there are computer programs that scan the investment landscape for low priced stocks, and as a result of the split these stocks magically appear on the radar. And investors buy!

So, there my friend is a simple explanation for why a stock rises when a split is announced. You decide how you want to play the game...

Raging bull or hibernating bear?

2006-04-06T23:40:00.000-07:00

When a Stock market rises as rapidly as the Sensex , the reporting tends to get polarized. Some business writers become unabashedly bullish - saying India's day in the Sun has finally come; others become unforgivingly bearish predicting that bears will come out of hibernation(mind you most of India, especially Mumbai does not really have a winter).

Consider this article in the Business Week . It's hard to say if the author is in the bullish or bearish camp. So how should you distill out all the information you read about stock markets?

One good rule of thumbs is: The PEG ratio. That is the Price/Earnings ratio looking forward divided by the expected growth rate in earnings(or net income). This ratio should be roughly at 1. If it is MUCH above 1, then one should think twice before investing in a stock. If it is MUCH, below 1, then it might be a diamond in the rough.

Again, this is a simplification of ONE way to value a stock(and an index of stocks). But it is a start. Next time you see an articles that compares 'multiples' to growth rates, you know what they are talking about.

Happy Investing.

The Babu and The Market

2006-04-05T18:29:00.000-07:00

What is a Babu?

A Babu is an Indianised term for a government official. In recent times, it has taken a disparaging connotation -- for someone who is slow and inefficient. Here is how The Webster Dictionary defines it.

There is a general consensus that excessive bureaucracy was to blame for India's slow growth since Independence in 1947 to the early nineties. But how exactly, does any inefficient bureaucracy stymie growth?

The answer is surprisingly complex. What a lethargic bureaucracy does is increase the government deficit. This in turn, causes interest rates to rise. In other words, borrowing costs for corporations also rise. [Lot of macroeconomics deleted to come to this conclusion]

Thus a corporation that intends to borrow money for buying expensive equipment might put off this decision till later. Corporations that are already paying interest might pay higher amounts due to higher rates(not dissimilar to a variable rate student loan).

Therefore their net income(income - costs) drops, as costs increase. Thus the stock price (P/E * net income) also drops, as does the overall stock market.

This is an oversimplifications, but it gives you an idea why the voting in of a socialistic/left-leaning government is accompanied by a drop in the stock market.

Namaste

Roads to prosperity

2006-04-05T09:37:00.000-07:00

Economic analysts have gone into paroxysms in recent times writing articles that compare the two Asian giants - India and China. But, what does all this mean to YOU as a potential investor in India?

Let's start off with a theme talked about ad-nauseum: infrastructure. Since most people know that the infrastructure in India is poor, it is somehow bad for the economy. But what is important is there is serious commitment from the Government to dramatically improve the infrastructure. So there are ways one can BENEFIT from a bad infrastructure that is on the road (pardon the pun) to improvement. Invest in companies that directly benefit from a booming infrastructure -- cement, steel and constructions firms.

Another sector that stands to gain is the aviation sector. A domestic industry that was monopolized by state run carriers till a few years ago is now facing cut-throat competition and price wars. Since roads and the rail service is below par, business people prefer to travel by the faster (and in some case, cheaper!) air routes. The industry will also flourish on account of the expanding parcel service industry in India.

I’ll talk about the growth of the middle class in India, and implications for the world economy, in the next post.

Ciao

A Himalayan majesty

2006-04-03T21:41:00.000-07:00

Dear Friend

Look at this picture -- Sensex

Does it not tell a (twelve)thousand words?

This is the graph of the Indian stock market over the last 5 years. Yes, a near quadrupling of the Index! Bookmark this link, for it will climb more peaks.

Dear reader,please interact with the blog if you like or dislike a post. Add comments, criticisms, or link to the blog from your own site. Remember blogging is inclusive - "participatory journalism" as someone wisely said.

Looking forward to your feedback.

Ciao

The Rupee unleashed

2006-04-02T19:07:00.000-07:00

As promised, this article is going to focus on the proposed full convertibility of the Indian currency(Rupee).

True to form, I'll start with a couple definitions:

Current Account: Arithmetic difference between the money spent on imports and that gained from exports.

Capital Account: Arithmetic difference between investments flowing into and out of a country.

These two accounts balance each other: A capital account surplus equals a current account deficit. Thus the U.S, imports most of it's stuff from abroad(current account deficit), and can do this because foreigners invest a lot in dollar-denominated stocks and bonds(capital account surplus).

The Indian Rupee is a 'hybrid' or managed floating' currency in that it is tradeable with other currencies. However, the Reserve Bank of India(RBI) - the Indian equivalent of the Federal Reserve can step in to stabilize the currency.

The Indian currency is full-floating on the current account - thus one can use Indian Rupees to buy foreign goods, for educational expenses, etc. One can use a credit card in the USA and pay off the balance with Indian Rupees in India! (C'mon , how many of you knew that?)

However, the Rupee is not fully convertible on the capital account. There are restrictions, for example, on how much money Indian companies can raise through bonds from foreign investors. But once the Rupee floats freely, all these restrictions will vanish. NRI's will be be able to invest unlimited money in Indian assets, and Indian corporations will be able to buy companies based outside of India.

I think a move towards full convertibility will greatly benefit India due to the tremendous confidence it will instill in investors worldwide. It will provide one great way to leverage large reserves of foreign exchange (an estimated $150 BILLION by end-2006) that India boasts of.

If all this piques your interest, read this article in the Economic Times

Namaste

How Indian investments diversify your portfolio

2006-04-01T16:31:00.000-08:00

Any investment advisor will tell you that one should diversify one's investment portfolio. But what exactly does this mean?.

An example: say you have $100 to invest and you are considering two stocks - an oil company and an airline firm. If you put all your money on the oil stock, then you will loose a lot of money if the price of crude oil falls. On the other hand, if the price of oil goes up, the airline stock will fall as it's energy costs rise. If however, you put $50 in each the paper value of your portfolio will fluctuate much lesser with variations in the price of crude oil. If you sell at the right time, you will make profits, while reducing the downside risk to your portfolio.

How does this apply to the India-US scenario?. Simple -> currency diversification. By most estimates of economists the US dollar is overvalued(on account of various macroeconomic dynamics). What happens of the dollar falls? The value of the other currencies like the Rupee and the Yuan will rise, and your investments in stocks denominated in these currencies will also rise. (without necessarily any changes in the fundamentals of the companies themselves).

The India-US scenario is growing particularly exciting on account of recent statements by the Prime Minister favoring the 'full convertibility' of the Rupee on the capital account.

I'll write about this in the next post...

Happy Investing!

Currency strength - pros and cons

2006-03-30T11:18:00.000-08:00

I had a long discussion with a friend yesterday about the impact of full convertibility of the Rupee on Indian I.T companies.

The comparion of a free-floating curreny(like the $) with a 'hybrid' one like the Rupee or the Yuan - where the Central bank intervenes to maintain stability, is long and for macroeconomics buffs. It is important to understand the impact of currency change on various sectors of the Indian economy.

Indian I.T companies like Infosys, Wipro etc earn the bulk of their money from exports. Thus, a weaker domestic currency is better for them since foreign companies get more bank for their outsourcing dollars(check out my postings on March 28). These I.T firms make more money while keeping their costs more or less the same, and hence earn higher profits.

On the other hand, Companies that depend on imports from foreign countries suffer since they have to foot a larger bill on account of a stronger foreign currency. Again, in India since the oil companies are not entirely market-driven on account of various government interventions, this correlation is not 'directly arithmetical'. But, you get the idea.

If one does have the time to study Forex markets, then be cognisant of the dynamics between currency markets and their impact on different sectors of the economy. Will help you make better investing decisions.

Namaste.