Financial Wisdom – By Kalidas

Radical Solution for Credit Crisis from Kalidas

Posts Tagged ‘Indian Stocks

How good is the Reliance Petroleum (RPL) for Investors?

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How good is the RPL for investors?


Mukesh Ambani, a Chemical Engineer and MBA from Stanford, spent billions of dollars to build one of the classiest and greenest refinery complex in the world, considered world’s sixth largest, with a capacity of 580,000 bpsd (barrels per streaming day) and 900,000 tons of Polypropylene plant which is nearly completed. Note the following: It was about to come on stream in December 08, but it has been delayed until January 09. Almost US$ 5.5 billions or Rs 24000 crores has been spent so far.


The stock prices have gyrated in sheer speculation from Rs 80 to Rs 250 without anyone knowing what , when and how much the company being invested in will make money. This baby almost 5 years in mother’s womb will come into this world when

1. Oil prices were riding high – a positive for the company to enlarge the margin in absolute terms

2. Polypropylene prices were falling flat

3. Unprecedented credit crisis was catching every businessman by the throat

4. Easy money was disappearing fast .

5. Debt market was getting extremely difficult when its debt rose to almost 12000 crores

6. Equity market collapsed which was the easiest source to replace debt.

7. Interest rates are rising when the debt load was becoming burdensome on its own

8. Credit Default Swaps, Interest Rate Swaps and Forex swaps have become almost dead when RPL’s exposure has increased to almost 7000 crores, although Mr. Mukesh Ambani was very specific in asserting that it was only for its own hedge position.

9. RPL was investing almost Rs 2400 crores in FMP other Mutual Funds to earn daily dividend when the redemption pressure was building on them at the fastest pace. There is no guarantee that he will get the cash as and when needed.

10. RPL was having only Rs 2 crores in kitty against its investment of over Rs 24000 crores in the plant.

11. The parent company Reliance Industries Ltd. (RIL) that own 70% of shares of RPL, is finding marked slowdown in its business at Patalganga, Maharashtra. 400 employees have taken up VRS (Voluntary Retirement) and 800 more are about to take.

12. All 5 plants at Patalganga were closed down recently – though RIL says it was for maintenance purpose. No one closes all plants at same time for maintenance. And it never happened in the past. This news caused sharpest fall in stock prices of RIL over – 10% in a day.

13. The positive news is the plant comes on stream when the world is lacking refining capacity, especially in USA. It will take 3 to 6 years to build similar factory. The plant is situated in Special Economic Zone ready to export to USA if needed for next 5 years at higher margin.

14. The product mix of this refinery is also in conformity with the recent green regulations. Like organic food, the products like Jet-Kero command higher margin. How long we do not know.

15. In short, this baby is borne when there is no more milk around, neither with the mother RIL nor with the foster parents – Investors nor at the hospital (banks). No one wants to play with this soon to cry baby or kiss her with playful message like Aa loo loo, Aa loo loo, gili gili gili gili.


For the convenience of the readers here, I have kept RPL Report for YE 31-03-2008 in the download section (side bar). Readers are also encouraged to download POKAT Reader, a flipping type of PDF reader (free), by which you can read the entire report like a book flipping pages on the computer effortlessly and zooming only the page you want to read. The link is



Let us take the earnings of the company which is the key for the support of share prices. So far, the stock prices of RPL were based on the name of Reliance, Ambani, past successes and penchant of Ambani’s family to give bonus shares from time to time (Indian investors are mad at the bonus event which is nothing but stock price neutral event).

Full production capacity of 580,000 bpsd

(GRM = Gross Refining Margin)

GRM @ $ 12.50/brl as per press report (RPL says only $5.20/brls as per old report. Essar Oil reported GRM at 6.59 for Sep 08 and $12.54 for June 08 in Q2 report)





For 360 days = C3 * 360





900,000 Capacity

Presuming working at 90% capacity = 810,000 MT @ 1450/Mt (Ruling price $1600 – 10% for recession effect)




ADD Bye Product Sales @ 15% of Refining Operation




Gross Revenue (treating GRM part as Revenue)




LESS Cost of Sales and exp. for Polypropylene @ 80%




LESS Cost of Sales, Admin & Misc for refining @ 80%




Earning before dep+Int+Taxes =EBDIT




TOTAL in Rupee terms ($ 1 = Rs 48)




In crores of Rupees =


6,765 cr

6,765 cr

LESS: Depreciation on straight Line basis @ 10%


2,400 cr

2,400 cr

Interest Cost – Long Term

(Earlier the interest during construction stage was capitalized. Once the plant become operational, it will have to be debited to P/L account.)


Provision for Exchange Loss on LT Loans in F/Currencies

(Rupee has devalued by 8% (average) since the loans raised)

Interest Cost (Short Term)

Until now, there was no working capital (WC) requirement. Once the plant become operational, WC will be

US$ 1.392 Bln or Rs 6.682 Cr for 1 month

(10 days for transportation of crude + 20 days of production and distribution and credit)


US$ 218 Mln or Rs 1,047 Cr @2 months for Polypropylene

= Rs 7,729 Cr – Bank Finance 7000 cr

Interest Cost @ 14% at current rate = 980 cr



















1,200 cr





800 cr












980 cr


















2,980 cr

Net Profit before Taxes


1,385 cr



LESS Taxation @ 0 % (Corporate tax) due to extra depreciation allowed from income tax of view (Straight line depreciation is added with extra depreciation of 50% for Initial depreciation and two more shift allowance). The income on PP being in SEZ may not be subject to tax



Profit After Tax (PAT) attributable to Share Holders



1,385 cr

No of shares outstanding



450 cr

Earning per Share (EPS) on full capacity basis



Rs 3.08 /share

PE ratio allowable for RPL

Industry wise PE ratio is 7 to 8 times

Allowing max 20% premium for private company

Maximum P/E ratio allowable for RPL is 9.6 times


9.6 times


Maximum Fair Value Equity Price (PE x EPS) for RPL




Margin of Error




Possible Fair Value Price of RPL on Upside




Possible Fair value Price of RPL on Downside




Momentum Price on Upside/.Downside (Factor +/- 1.5)

When the momentum gains on upside or downside, the stock overshoots by 30% to 50% on either side minimum. On low value stocks (below Rs 35) the volatility is more towards 50%



Rs 31 to Rs 54

Key Numbers and Ratio of Listed Companies in Oil Refining Industry

All figures are for Year ended 31-Mar-2008

In Crores Rs

Essar Oil






Gross Revenue







Gross Revenue per Share














Taxes paid







Profit after Taxes







PAT % of Gross Revenue







Net Worth







No. of Shares







Total Debt







Total Debt to Equity







Market Cap on 08/11/07







Book Value







Stock Price 2008/11/07







EPS 2008/03/31







PE Ratio 2008/11/07







Projected Revenue







Projected EPS







Both Essar and RPL will have to charge significant interest on their debt to P/L account. Until now, it was capitalized. There will also be interest payable on working capital requirements from this year onward due to refineries having become operational. Taking 2 months of Gross Revenue as new Working Capital related debt, it may work out to Rs 1000 crores per year considering high PLR in India today. This is in addition to interest payable on Long Term loans. While arriving at RPL’s profit earlier, we have accounted for Rs 980 crores as interest on working capital

2. RIL will be extremely pressured to raise more capital in difficult market. Essar too will be under pressure but to less extent.

3. Both Essar and RPL will have to provide depreciation chargeable to P/L from this year onwards due to their plant having become operational. No Depreciation was provided earlier.

4. Gross Revenue for RPL is based on average crude price of $80/barrels + PP business.

5. Gross Revenue per share for Essar and RPL is projected one based on full 12 months of operation




It may be noted that RIL may not clock as much revenue as projected. We do not know yet, whether PP facility will be fully operational this year or made operational due to price pressure.


Derivative Exposure of Reliance Petroleum Ltd

Refer to the annual report for 31-03-2008. It is available for download from Company’s website. Its PDF copy is kept in download section of the side bar. Before jumping to any conclusion, please read the official report.


Until 31-03-2008, the RPL was having twin liability under Term Loans. – Foreign Currency Term Loans equivalent of over Rs 10,000 crores (see the report for exact numbers) and Term Loan in Indian Rupees up to Rs 2200 crores. At the same time, the Derivative exposures amounted to over Rs 7700 crores in the form of Interest Rate Swaps (4413 crores), Currency Swaps (1447 crores), Options (1205 crores) and Forward Contracts (667 crores).


It also says the company had unrealized gains on 31-03-2008 (how much we do not know). It also says that Foreign Currency Exposures of over Rs 10,807 crores was NOT hedged. The question arises, when Term Loan in Rupee exposure on 31-03-2008 was just 2200 crores, and the company was not even operational, where was the need for the company to have derivative exposures of Rs 7700 crores?

rpl-derivatives11 Source: Annual Report for Year ended 31-03-2008 of Reliance Petroleum Limited



Let us not speculate and hope that everything is well on derivative fronts. It would be better if the company reports the latest status in Quarterly report preferably with Auditor’s comments, whether these contracts have been valued on MTM (Marked to Market) or HTM (Held Till Maturity) basis. What is the latest valuation? This is important due to acute credit crisis brewing on derivative front.

Where Mukesh Ambani could have possibly gone wrong?

Dhirubhai Ambani, Mukesh’s father, built Reliance group on “equity”. It resorted to temporary debt during construction process in the form of mandatorily fully convertible debentures that had maturity time roughly coinciding with the relative Plant coming on stream. He also realized that the Indian Investors were crazy for Bonus shares (which are neutral event everywhere in the world), so instead of paying hefty cash dividend, he used to distribute paper – Bonus shares. And it worked the magic.


When RIL set up its first Petroleum refinery (not RPL), it was financed based on Fully Convertible Debentures (FCD). At the same time, Birla floated MRPL and it was financed by high fixed rate bonds. The result was that MRPL was almost broke. It was finally sold over to ONGC for just Rs 2/share (current price Rs 40 or having seen much higher price)


Mukesh Ambani made the same error as Birla did. He relied more on debt than equity. He was also enticed by low rate foreign currency loans which amount to Rs 10000 crores or more. He is now caught in a dilemma

1. The oil prices have moved North in last 18 months – almost trebled

2. He could not have anticipated the kind of credit crisis unfolding now.

3. The Debt market is almost dead. It is difficult to raise new money. Jindal, Birla (Hindalco) and Tata (TISCO and Tata Motor) made high end acquisitions at the height of the market and at the height of product cycle.

4. Banks and Brokers collapsed

5. Equity market is almost dead. So much of money has been demanded by banks themselves that nothing is left for the other industries.

6. He has no doubt built one of the finest and classiest refineries, a grand achievement in his technical career of Chemical Engineer, he appear to have faltered on financial front. His MBA did not come to his help. He did not have intelligent and forward looking finance professionals who could have foreseen at least 50% of current events.


He does have advantage of having extra ordinary refinery when the world is facing shortage and there is not enough financial muscle for anyone to go for such refinery in near future of 5 to 7 years. There is no financing available except from Arabs and some sovereign funds. It is possible that he may override the restrictions on refining margins by processing the crude for US which severely lacks the refining capacity.
What could happen to RPL stock – Will it make money?


The product market, currency market, debt market and equity market are all against him. Howsoever capable he may be, he will be running uphill battle for a long time from now on. The best days for Reliance group are nearly over – nothing regrettable – all are in same boat. He has found Patalganga plant unviable, that is why, he is encouraging employees to leave RIL on VRS basis. His retail ventures have also failed; hi petrol stations have also closed down due to price control ( that means that old magic of influencing Government is now waning).


Look at the comparative numbers in the table. RPL has largest number of shares – 450 crores against 34 to 36 crores for BPCL and HPCL, 120 crores for IOC and Essar Oil, 176 crores for MRPL for almost similar size or higher size of operation. With huge yet manageable debt load, the effect on EPS is substantial.


Further, he will be forced to reverse split the shares (4 to 1) to reduce the floating share size ( he alone owns 70% through RIL). When Reliance was in habit of giving Bonus shares to boost its share value, he will be forced to change that practice. If share prices go too low, the stock becomes “Penny Stock” that does not permit US Pension and Retirement Funds to invest into this company.

He has to ensure that the stock price remains above US$ 5 level, that is Rs 250 or more ($ 8 or Rs 400 is better due to down market that we are in) to ensure that it does not degenerate into a penny stock – A Giant company with a Penny Stock?. It will hurt the image when he needs it most.


Even without derivative contracts (presuming all is well), the stock’s earnings do not give me enough confidence,. Why should I pay 27 times earnings, if others are trading at 6 to 7 times. May be we can consider 8 to 9 times, but not beyond. The stock is suitable for trading in Rs 30 to Rs 60 range.


Am I correct in my Assessment?

My assessment is reasonable, but I did not have the luxury of having full knowledge of the proper product mix and the precise time table for placing the entire plant into production. I have relied on macro factors that are usually ignored by others, like potential damaging effects of derivative contracts if they are not what is stated to be in nature. Further, read RPL Annual Report. It is sketchy and dwells into the glory of the past and its promoters. We know that already – go a bit further, Mukesh– give us some specifics what is going to be the product mix, capacity of each product, indicative time table and the markets.


What I would suggest, and not many may be equipped with that, is to read some industry standard research report on RPL from one of the leading brokers with this opinion, and then arrive at reasonable conclusion. If my assessment is found to be flawed, just amend it or ignore it altogether. Do not press panic button on the stock and run for the exit.



If I were you, I would do the following:

1. Reduce the position by 50% at least without waiting for anyone. If your cost is over Rs 120, may be you can hold and think of averaging later.

2. If you hear anything negative on derivative front, simply run for exit. It is really a cause of concern. There is nothing evident if we accept the company’s written statement at face value. Check the latest Quarterly report, and read the notes on accounts and Auditor’s comments.

3. Try to check the prospective EPS on RPL for the coming year from 2 or 3 leading bank or broker’s reports. If the projected EPS is more than Rs 15, stay with it – otherwise think of reducing the position in your portfolio. The time is so good, that there are hundreds of more valuable stocks than RPL in the market place today, and that list increasing day by day.

4. Do not invest too heavily into this counter, unless you have fairly reliable information from brokers or banks or company itself.

5. This is one of the finest Refining company in India, but the value is more important than name. Yes, with equal fundamentals, I would still trust Mukesh Ambani and not Essar Oil. But the things are beginning to become clear. At the moment, I believe Essar Oil is better choice than RPL

6. Even big names fail to perform – look at Birla (Hindalco), Ratan Tata (TISCO and Tata Motor). Easy money pushed these industrialists to venture into unknown with disastrous result. Even Warren Buffet is failing. His Berkshire profits were down by 77% and the derivatives have begun to hurt his insurance outfit as well. His best days are also over. No one is infallible in this market catastrophy.

7. Try to buy back this stock only after some positive news come out and other unknowns like derivatives are known to you. It is better to pay little more with full knowledge, than paying very low in total darkness.

8. If your investment is substantial, better contact RIL’s PR and seek necessary clarifications.



1. Reduce the position by 50% and buy back only after the stock falls below 50.

2. If your investment is over Rs 10 lacs, better consult your Investment advisor or broker who has more information on this stock.

3. Try to sell now even if you want to stay with the stock, with a view to buying back after 20-Nov because of Oil Futures are coming to settlement and huge short position is likely to be unwound. There are over 282000 contracts outstanding on NYMEX alone. (= 282 million barrels of Crude Oil Sweet). If oil rises, the refineries, airlines and auto may fall still further.

4. OPEC may reduce the output again in next 2 or 3 days. Already OPEC chief made this statement yesterday about production cut.

5. Buy back the stock after 20/24 Nov 2008 and see how the oil behaved or mis-behaved.

6. Raise the cash now and think of re-entering after 24 Nov. Meanwhile, take a few days off and spend the weekend with your family



Kalidas Ref: 08-013l

Hong Kong, 10-Nov-2008


India’s ON and OFF Policy

with 21 comments

In today’s uncertain world, a few countries stand out on their own, of which India is one. There is everything one can think of finding – higher education, high savings rate, less papers or derivatives, huge population, efficient stock market, several millions of rich middle class wage earners, less debt, huge savings in real wealth like Gold and Silver, classy high tech manpower, world’s best design source, above average entrepreneurs, great creative and entertaining industry, least gambling resources, and a great democracy.

And yet, this giant dinosaur has been unable to find a single genuine pace bowler for its Cricket team, enough players to win the Olympic gold medals, really creative Prime Minister, Finance Minister, and Chief Operating Officers for SEBI (equivalent of SEC), and RBI (equivalent of FED in USA) from its thriving millions of population running across the country in every street and corner, sweating, smothering, bothering and yet smiling amid all odds against its existence.
What is wrong with this country? Its culture, Nay; Collectivism, partly; education, Nay; poverty, Nay; democracy, Nay; Contentment, yeah and lack of Killing Spirit – certainly Yes. Indians are notorious for self egoism, false patriotism and above all “eternal contentment” for whatever it has. Its desire for yearning is least. “Why do we need this? It is enough. We are happy with what we have” And that sets it apart from the rest of the dynamic western world.


India’s Info tech Glory and Visionary Jawaharlal Nehru

Indians have the extremely bad habit of not giving the credit where it is due. Take the example of its InfoTech Industry – now on the lips of every technocrat all around the world. It’s main creator and originator is forgotten as “Cause” and the “Result” is worshipped like a demi-god.

The seeds of high end Info tech were sawn by its first and most charming Prime Minister, Jawaharlal Nehru, a great visionary. With extremely limited sources at his command in early 50s, he maneuvered to obtain the great alliance with prestigious MIT in the United States, to set up 4 finest technical institutes – Indian Institute of Technology. And in remaining 60 years, the successive governments with almost 50 times monetary and ample human resources at their command could set up only 3 such institutes. He made the technical and engineering education so cheap and affordable, that India could produce talents at the cheapest cost.

His investment by way of subsidies in education, basic industries and oil refineries returned 100 times return in recent years. What he spent in millions on IIT brought in billions of dollars in Forex through thriving Info Tech industries. Even this author got 4 degrees for just Rs 4000 or $80 in 4 years.

When the British left India in 1947, they built 9 platforms at Bombay VT railway station when India’s population stood at 300 million; whereas in next 60 years, the successive Indian governments could build only 4 platforms at Bombay’s Church gate railway station with over 1 billion population! It is said that India is always on “Auto Pilot”. No one knows how it runs – it just walks in the wilderness.

Nehru dynasty gave leadership in the form of Jawaharlal Nehru itself, then Mrs. Indira Gandhi, Rajeev Gandhi (Son of Indira Gandhi) and now Mrs. Sonia Gandhi, head of ruling Congress party, and wife of Mrs. Gandhi’s elder son Rajeev Gandhi.

Even the Kennedy dynasty nowhere stands near the Nehru dynasty. The greatest contribution that Mrs. Indira Gandhi made was the green revolution and killing of all strength of pre-1947 Pakistan into two separate nations – Pakistan and Bangladesh.

And yet, all credits are given today to the likes of BJP Leader Vajpayee, the charismatic Prime Minister who merely exploded the Nuclear Bomb (It was built only with the vision of Nehru and Mrs. Indira Gandhi), Man Mohan Singh, the Prime Minister and P Chidambaram, the Finance Minister today for doing nothing substantially positive and lots of negative.

India has come a long way since 1950. Knowledge is no longer a power of a few. However, the kind of progress expected has not been achieved by India, and in fact, it is on the verge of losing major advantage if nothing is done now.

India’s disastrous policy measures in past, its effects and how that can be reversed with ease?

India’s de facto Central Bank – Reserve Bank of India – similar to FED in USA or Bank of England in UK, is a most revered institution in India. So also, Security and Exchange Board of India known as SEBI, equivalent of SEC in other countries, and stock exchanges like Bombay Stock Exchange – BSE and National Stock Exchange (NSE). They are given the status of demi-god by the admiring and ignorant semi educated urban class in India. The result is that these institutions, with possible exception of NSE in some cases, have become monolithic and inefficient organizations, with RBI leading the pack.

The officials of these bodies do not have experience in global money market, how certain powers manipulate the word market with ease, and therefore are very dogmatic in their views. They blindly follow the theories and practices of western and eastern world. As result, the economic, monetary and social policies fell far short of desired goals in last 50 years.

They do not realize that if certain standards with reference to which their policies are tailored are not yielding desired result, the standard itself must be wrong. As result, the measures initiated to adjust the imbalance often fail. Let us see the measures that failed India:

Belief, Policy Measures, Expectations and Final Result with Causes

Actuator: Finance Ministry, Reserve Bank of India, SEBI

Policy: Exchange Rate

BELIEF & PARADOX (In Blue prints)

1. Weaker Rupee helps exports and earns FOREX

2. Domestic Industries are protected against excessive and expensive imports

3. Jobs in domestic industries are protected and also promoted

4. Foreign Debt reduces due to FOREX earnings out of exports


Weaken Rupee by all means

1. RBI: Reduce NRE deposit rates – pay them much less than domestic deposit rates (6% less)

Even if NRI came to the country’s rescue in 1992 FOREX crisis, when India had to pledge Gold to Bank of England. NRI were treated like disposable towel

2. RBI: Do not let FII to buy Rupee from the market. Let them come to RBI directly to reward them with much higher rupee rate as enticement not to go to the market.

Even if it costs national exchequer hundreds of crores of rupees

3. FM, RBI: Sterilize any rise in the market by buying back dollar against rupee

Even at the cost of higher money supply leading to inflation

4. FM, RBI: Allow Indian Businessmen to invest overseas so that they buy dollars and sell rupee to cause it weaker and weaker.

While Foreign Investors were keen to invest in India, India was telling its businessmen NOT to invest in India but invest overseas, as though India had become one of the richest countries in the world. Even China after receiving almost $500 billion never thought of stopping the inward money flow and permitted Chinese to invest overseas

5. FM, RBI: Allow Indian citizens to remit overseas US$ 100,000 without RBI approval, so that pressure on rupee is reduced by letting them sell rupee and buy dollars.

While permission was not given to individual foreign investor to invest into Indian stock market as logical step further to widen the Indian markets or for direct investment, domestic Indians were asked to invest overseas, even when India was facing dearth of capital for building power plants, ports, Airports, national artery roads, sewerage, water filtration plants to reach every nook and corner of the country

6. SEBI, RBI: They introduced P-Note measures to scare away the foreign investors from India so that upward pressure on rupee is diminished.

7. SEBI: introduced arbitrary circuit breakers for market and individual stocks in the name of maintaining order which again scared the foreign investors who were faced with illiquidity in the invested counters. Some stocks had 5, 10, 15 or 20% up or down circuits that were fixed arbitrarily.

SEBI forgot main principle of free market that every investor has right to invest or disinvest in any stock at any time without hindrance. Even in market crash such as now, and in January 2008, the foreign and domestic investors were not able to sell the stocks at market because there was no market.

8. FM, RBI, SEBI: prohibited short selling on selected counters to arrest the market fall

If there were no restrictions on Long Buying of any stock, that lead to huge rise in Sensex from 2800 to 21000 (over 700%) in 5 years, why should there be ban on Short Selling of stocks or index?

Dogmas, False Policies and Misplaced Priorities

I have said often that if certain policies do not work with reference to standard for long time, there is something wrong with the standard itself. Such erroneous standard has to be abandoned. However, most of the policy makers and economists have been groomed in high end business schools that rely on outdated textbooks. These guys are not wise men but guys, who never worked on the front line, gained first hand experience, always sat behind the back bench, followed the books in full literary sense, and almost forgot that they too have common sense that was distributed by the God equally regardless of class, religion or nationality.

Why Rupee should be allowed to appreciate?

The weaker rupee policy did not work for 60 years, and yet the Prime Ministers, Finance Ministers, Reserve Bank of India’ Governors, followed the same policy 247365 or 24 hours a day, 7 days a week and 365 days a year for over 60 years. Rupee was devalued from Rs 4/$ to Rs 50/$ today with no tangible result.

Currency is an Ambassador of a Nation – it has to be strong

Currency is the first sign of strength of any country. Currency is a child of the nation by which a nation is recognized, same way the parents are recognized by their own children. Ask your self – Do you want strong children or weak children? You always say my son is this; my son is that, my daughter did well here; my children became engineer, doctor or MBA who will get us decent life from their earnings.

And what the same guys are doing while in charge of the country? They want their currency Rupee weak, so that it earns less, expends more, exports undersells country’s assets, imports overpays for the good, and the external debt soars only because of depreciation of the currency. These smart guys in RBI, SEBI, Finance Ministry and Prime Minister’s office know nothing, absolutely nothing. They are monkeys imitating blindly the western world, who want your national currency weaker so that they can buy cheaper from you and keep their inflation in check.

Weaker Rupee may help Exports, what about Imports?

Oh no, it will hurt exports! Really? What about imports? Are you not overpaying for the gigantic oil bill. Are you not overpaying for debt servicing? If Rupee is at Rs 45 and foreign debt is $100 billion, the national external debt is Rs 450,000 crores. If the rupee goes to Rs 39 as it did, the national debt reduces to Rs 390,000 crores. If rupee was allowed onward journey, it would have gone to Rs 26, and in that case, national debt would have come down to Rs 260,000 crores. You therefore saved Rs 190,000 crores just by letting the Rupee getting stronger.

And I do not say that manipulate rupee to get stronger (the way US does for dollar). What I want to say is that let it find its own level. Do not intervene when there is natural tendency to get stronger. Do not sterilize its rise. The sterilization operation is antibiotic. Continued practice of sterilization will kill its natural power to grow and get stronger. It is more like a person not wanting a child uses condom or birth control pill to sterilize the fertility for over 10 years. finds difficult to have child when he wants to, because the body has become immune to its natural power to produce. Treat economy like a body, and RBI’s sterilization and SEBI’s P-Note measures like birth control pills, and you will understand complex economics in a flash.

A person in a gym uses all equipments and tools to make every part of his muscle beautifully contoured and in shape. He then takes in healthy food, without which entire body will not respond to various form of physical exercise. Consider body as economy, policy measures as various tools for exercise and Rupee as lifeline food. If the food is weak or debilitating, the whole body is destroyed. It is a job of Finance Minister to imitate that practice to make every section of the economy well contoured and strong. The currency policy should be conceived and directed as suitable to the national needs, not international or IMF demand.

How External Debt gets reduced by Stronger Rupee?

If you want to earn Rs 190,000 crores by way of FOREX earnings out of exports, and if the export margin is 10%, the exports have to be additional 1,900,000 crores, provided none of the debt going bad. Further, if rupee had gone higher, Government could have reduced the external debt by simply selling rupee, buying dollars and liquidating the debt say, $ 15 billions.

False Praise leads to Wholesale Destruction

Often the names of financial officials in the country were mentioned on the top covers of magazines like Forbes, Fortune, International Banker, IFR, IMF Review etc. Whenever their names appear on such magazines, take for granted that they are least qualified for that post. Those who do not get proper jobs in their own country lend up at world Bank and IMF, where decisions were never taken and such posts were official retirement with full pay every month. It is a warehouse of inefficient. That resume however works in India.

India is a country that believes in enormous adulation. Gods, Goddesses, Gurus, Cricketers, Hollywood actors, high court judges, politicians and officials in RBI, SEBI, NSE and BSE are all elevated to the extreme status. Gods and Goddesses never listen, Gurus always need bhakta jan to wash their feet and drink that holy water, Cricketers and Actors are easy pass time, and inefficient judges in various courts who have been caging justice for over 20 years, take 3 times vacation, larger than your own children, never deliver justice in time prompting citizens to approach for alternative judiciary of Mafias or Bhais to give them “Supari”, politicians like Advani go on blurting about building Ram Temple, instead of building mass housing for the poor Indians, and officials in RBI go on having “condom sex” with economy by sterilizing operation, and officials in SEBI go on inventing rules like P-Notes how to drive out the Foreign Investors. When they were coming, they were asking why you are coming, and when they are going, they are asking why they are leaving. What the hell do you want, you fickle minded babus?

Indians never saw Lower Oil Prices at Rs 10/ltr when Oil fell all time low to $10/brl

Due to consistent weaker rupee, the petrol prices always rose like mercury in thermometer. When the oil fell all time low to $10 per barrel or Rs 400 per 159 liters or Rs 2.33 per liter, Indian never saw petrol or diesel prices falling to Rs 10 per liter. This is what the misguided Rupee policy did for Indian consumers

Currency (Rupee) Never Remain at Same Level – like Water, it finds its own level

The currency movement is always dynamic. The sum total of entire economy is represented by currency. If it does not go down, it goes up; and if it does not go up, it goes down.

During BJP administration, Rupee was allowed to appreciate to Rs 43 from Rs 48. It continued to Rs 39 when the officials in RBI and Finance Ministry were alarmed. SEBI started talking about Rupee when it was none of its business. These are fiscal and monetary matters, not stock market that is the domain of RBI and Finance Ministry. They invented P-Note related measures that were the harbinger of downward movement of Rupee. It just dropped from Rs 39 to Rs 50 yesterday, when Indian economy was supposed to be having highest growth in the world, Forex reserve at over $300 billions, and every sector of the economy was on four cylinders.

These wise guys applied screeching brake with the result that money simply evaporated, stock markets crashed, rupee crashed, interest rates rose, inflation rose to over 13%, oil subsidies went through the roof, and many other countless collateral damage such as recession, lower home prices, higher food prices, and what not.

If Islamic punishment of stoning to death was allowed in India, the officials in finance Ministry, Reserve Bank of India and SEBI fully deserved that capital punishment. They destroyed vibrant economy; they dealt death blow to the aspirations of Indian people, they sank India into deeper external debt (by additional at least Rs 60,000 crores), they caused Oil bill to rise by Rs 16000 crores due to depreciation effect of the Rupee, they caused first time home owners life miserable by increasing their EMI by over 6% per year or Rs 3000 per month per Rs 100,000 of mortgage loan, they raised the borrowing cost of almost all business enterprises by minimum 3% , cost of energy rose by 20%, and only the life of human (Made in India) became cheaper.

Due to single most reason – Weaker Rupee

(To be continued further that will be appended here. Full article will then be converted into PDF file for download)

Kalidas, Hong Kong

Ref: 08-010 – India’s ON and OFF policy

Note: Due to problem with the WordPress software, the article can not be properly formatted earlier. It has been withdrawn and substituted with this one. The comments associated with the previous one may not be available here, but I will try to put them if possible.


Rebalancing Portfolio in Depressed Market

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Everyone makes money in Bull markets. It is said that the bulls are the friends of the fools. This is why when the bulls get slaughtered in the market crash; the fools are the first victims. They are the most hopefuls of the lots. They tend to believe that there will be always sunshine. They ignore the earnings and warning signs, garland the high flyers in the name of growth, and greet the Mergers and Acquisitions as the sign of positive interest in their economies.


However, regardless of the pains, they enjoyed the journey and whatever minor gains they earned for their smartness. The market correction comes from nowhere, without notice, without anything appearing on CNBC or other business channels, and that is what called the “Market surprise”. Often the media blurts on both horns that “market says this, market says that, market will go here, market will go there etc”. This is very amusing. The market never talks; it just behaves the way it wants to. The innocent investors, who are normally late entrants; read, hear and watch 100 times same item and get carried away.


I always used to teach my customers that you never make investments by reading newspapers or watching CNBC, NDTV or other stocks channels. When the news is known to everyone, there is no more secrecy left, and the stock pattern reverses itself.


Now that one has burnt his finger as a speculator, he qualifies to become an Investor. The losses are the tuition fees that one pays to learn from the bears. The bulls just kick, bears never do. This is why there is always a “Bear Hug’. Only those hug who are our friends or well wishers. Those who invest in bear market make the most money by design and planning with lots of thoughts. Those who invest in bull market make small money many times by accident. However, when they lose, all of their past gains disappear in a flash. It is the bull’s nature to kick. Have you ever heard the term “Bull Hug”? 


Not many cope with the stress and the problem. They begin to distrust everyone, same way the banks do not trust each other today. All are in same boat.

Learn this Primer before you proceed further
When you were in normal or bull market…

You were perhaps entering after watching others making money (that they falsely claim – never believe them). Your entry level is perhaps high. Do the following:

  1. Treat each transaction (A1, A2, and A3) of each stock (A, B C) as separate transaction. Never count the Average Cost
    1. Sell the transaction whenever you are in profit by at least 11%.
    2. Thus if you are losing in A1 but making money in A2 and the stock is not going further, sell A2 and retain cash – do not employ elsewhere.
    3. If the stock A goes higher, do not regret your decision for selling A2. You still have A1, so sell it if the stock has made big move recently.
    4. If the stock goes down, buy back the same stock, if you believe that its full potential is not reached as yet.
  2. NEVER hate yourself for any mistake. It is natural. You are your best friend and worst enemy. You decide what you want.
  3. Never ignore your mainstay business while investing in stock market. Remember, you got money to invest only from your mainstay business.  
  4. Keep two boxes – RED and GREEN.

When you make money, deposit 10 Cents/Paisa per 100 (0.10%) in either box if you booked losses or gains. For example, if you make 1,000, deposit Rs/$1 in your green box. If you have booked loss, put it in red box. At the end of any period, see how many units are in Red and Green. If Red contains 20 and Green 30, you made a gain of 10 x 1000 – 10,000



  1. Avoid buying IPO in bull market because they are always hyped up and valuation is rich. When the stock does not have history, do not touch it as far as possible unless you have special reasons to do so. The idea of becoming instant money on opening day of the trading is dangerous. I never bought IPO in my life.


EXAMPLE: Look what happened to Reliance Power IPO (in India). While it is at depressed level, in this market crash, Goldman Sachs has come up with the negative recommendation lowering the target even further. Where was the Goldman at IPO stage? All brokers are suckers in the game – When it is good, they call it best; and when it is bad, they call it worst. When they want to see the price higher, they talk about the company vs GDP, Infrastructure, and growth etc – all big things. When their call goes wrong or the market crashes, they start talking about the fundamentals.

  1. Read, listen and watch everything and everybody but make your own decision. God has given you a tiny little brain which is thousand times more powerful that Intel dual core chips. Use it while you are human, otherwise in next birth (if you believe in reincarnation), the God will make you an insect or animal that does not need a versatile brain of human. The same way a banker cancels customers’ credit line if he no longer uses it.
  2. Reverse the transaction as soon as possible if you ever thought that you made a mistake due to impulse. For instance, you bought a stock by error, just sell it right in the market, regardless of loss you have. Similarly, if you have sold something by mistake, buy back immediately. (The reason is that if you continue, it stings you even at night and you will continue to blame yourself.  This is the biggest mistake an investor makes.) In stock market, the only thing that counts is the Decision, Decision and only Decision, just in case of property where the rule for selection is Location, Location and only Location. How much you lose in reversing your faulty decision immediately – only 1% to 3%? Just take it, instead of losing 20% to 70% later.


In stock market or for that matter, in any market, only decision makers make money in the long run. The indecisive person  always tend to lose and they blame their own fate or lady luck for their loss. Both fate and lady luck amuse themselves. They know their job is thankless.


Restructuring the troubled Portfolio for quick Turnaround

Remember, the market is an ocean. Anything you throw into the ocean always comes back. The ocean is large hearted – it never retains anything for its own use. Similarly, what you throw into the market will ultimately come back, provided you follow the market discipline. All the points mentioned under 1 to 7 apply to the depressed market as well.


  Now that you have lost heavily, do not brood over it. It is a fact. The loss is a history. You can not roll it back. Your aim should be how to recover and turn this cheaper opportunity into good profit. This is the art you will have to learn and practice.


At any time, you feel that you are indecisive, follow the mentioned rules in two parts – Actual and Demo. When you are unable to decide with physical involvement, play it out on paper in demo exercise. Write down the date, time and index when you took the actions. It is provided in this Article’s PDF copy with excel in the download center on right bar.



  1. If your portfolio is very large, more than 12 stocks, you will have to prune down the list to 12 or less. Check your list and determine what you hate and would not have. (Example – Watch the growing plant; if some shoots are blackened, the gardener prune them out to save the whole plant. He also prunes the healthy shoots to promote the growth. An investor should also take the profit in same stock occasionally)
  2. When the market recovers, the large cap stocks recover first. So determine, whether you have any large cap stocks. If you do not have any, buy some first. When the market is sufficiently advanced, sell the large caps and focus on the mid or small caps held by you.
  3. NEVER think that if the stock at 100 is expensive and at 30 it is cheap. All prices are relative to earnings. See the price relative to earnings (P/E)
  4. If the market sentiment is negative to extreme, DO NOT invest fresh money;  instead do the following:
  5. Re-Check which stocks you want to retain for long haul.
  6. If you own high priced stock, and loss is not much, sell it to raise the cash for redeployment later.
  7. Identify the sector that might benefit more on recovery. You will be buying stocks in those sectors first. Within that sector, you have to identify top 2 or 3 stocks. The selection of stock is more like a beauty contest. They eliminate 45 contestants to come to final 5, then 3 and then the final one.
  8. Identify which stock has the least loss and one has maximum loss. Sell the stock with least loss (say 20%) and buy the one with greater loss (say 50% or more). By doing so, you are averaging down the cost of the bigger loser with same amount of money, without pumping new money.
  9. If the stock has come down by 70%, (say 30 from 100), the stock has to more than triple from low level. So, buy 3 times more than original quantity (if you own 300 @100, buy 1200@30). My rule is simple; if the stock has become 1/3rd, buy 3 times; if 1/4th, buy 4 times and 1/5th buy 5 times. Of course, you do not buy all at same time, but in 3 stages; 2 on way down and one on way up so that you know that the bottom has finally reached.
  10. When you swap from one stock to another, always ensure that you are getting into smaller value stock from higher value (not other way round). The low value stocks (not penny stocks, but the stocks above 8 and below 20) tend to rise fast due to low base. They make more % gains. It works other way too. They tend to go down faster as well in down market. For instance, if stock A (at 300 ) has come down to 160, and other stock B in same industry has dropped from 100 to 20, then in that case, provided there are no stock specific news, sell the stock A and use the proceeds (160) to buy 8 shares of stock B @20. Since the industry is same, the stock B may show better gains than stock A due to rise in that sector. Please note that this arithmetic is an approximate science, but works all the time. There is nothing to replace earnings as key driver to stock prices. Do demo exercise to start with to understand this game.
  11. When you have a choice, avoid buying holding company’s stock. Instead buy the major subsidiaries stock. The reason is that if the parents (holding company) run into troubles, they sell Children (subsidiaries) that become takeover play giving you more than average return. For instance, when Ford (US Automaker) ran into trouble, it sold Jaguar in UK and is trying to sell 30% stake in Mazda. Big companies are also bigger fools – they do not cut the losses but allowed it to run, like most investors in stock market. The correct strategy is to let the profit run and cut the losses immediately. Normally, people take the profit first and let the losses run. When some one says that he is having portfolio of 1 Million, presume that in 80% he is losing. When he makes money quickly, he admires himself as smart investor; and when he loses, he calls him Warren Buffet – a long term investor.
  12. Bring down the list to 12 or below. Do not focus on other stocks unless they offer better value. How many children you have? 2 to 5 or more than 20? Keep the inventory list to the extent you can effectively manage.
  13. After doing above adjustments, relax, have a coffee, go for a movie in Cinema (not at home) and have a fresh look at the reformed portfolio. Just as the pruned plant needs time, but it does prosper very fast, your portfolio will bloom soon.
  14. Study those stocks in details, paying special attention to their behavior, how they move up or down, in size and speed, and its volume. If the price rise or fall is not accompanied by volume, the movement is erratic.
  15. Remember you will not use the law of averages while making decision. Each purchase is a separate deal. If that deal makes money, you should be prepared to sell.
  16. Do not try to make money in every deal. It is impossible. See the overall position, whether you made money in the portfolio (not individual stocks) or not.
  17. Watch the market movement, government policy, concerned industry, and the industry that may benefit
  18. Invest new funds only when you feel that the market has stabilized and may not go down more. Allow the market to come up by 15% from all time low before deciding to invest more new money.
  19. It is always more profitable to average up than average down. In such case, your average cost is always below the market. For instance, if A 200 cost in bull market was 100 for 200 shares, and then crashed to 20, you buy 3 times at 20, 18 and 25. Then when it reaches to 40 and retraces to 35, buy some more. The idea is to catch the upward trend. Please note that this imperfect science. It all depends on the mental make up of an investor, and circumstances prevailing at that time.
  20. Always be alert and agile even if you are not participating in the market due to bad conditions. Always keep the market conditions right under your eyes. You never know when the screaming opportunity would arise.
  21. Be stock specific rather than market specific. If certain stocks go down more due to reasons peculiar to the industry, buy that stock regardless of the market conditions.
  22. EXAMPLE: When the oil prices were very high, near 145, the Airline stocks were very low, so also the refineries. They would have come down more due to industry specific reasons. Buy them.
  23. DO NOT sit over the stock like a Chicken hatching an Egg. If the stock has gone up higher and slows down, simply sell that stock at the market even if recent high could not be reached. When it comes down, buy it back. Do not use that money for other stocks. In other words, in bear market you float with the stocks.
  24. EVEN IF you make wrong decisions, do not worry. It is better to make 3 wrong decisions than not making any at all. Once you start making decisions, you will improve progressively with the result that you may one day make a big killing that will compensate you for all past losses. It will also improve your character. In every form of business or personal life, you will begin to make decisions rather than keeping the issues on back burner. Delay is gone from your life forever.


  1. Sit before Candle at night for 10 minutes.. .  When you lose money, you do not get sleep easily. What you must do is to sit before a lighted candle for 10 to 15 minutes just before you go to bed. Focus only on light. Deep breathing also help you focus better. Inhale from left nostril and exhale from right. Presume that gains are coming in when you breathe and losses are moving out when you exhale. This has nothing to do with finance or stock market. It just makes you focus on trade as well when you transact. Secondly, it costs you nothing and gets everything.
  2. And finally, Dress Up at your Best during Bear phase… When you dress up well, you feel good and charming. You will begin to respect yourself. This is what you need. Money comes to those who are neat and clean. Good things always bring in good result – that is the rule of the nature. So do it.


I enclose the Hypothetical Portfolio and how is it restructured (go to the side bar – Download Center, scroll down to excel file – Rebalancing portfolio – 08-008 and download this file). This applies to all markets. Replace the names and indices as appropriate to your country. It is an excel spreadsheet where you can replace my entries with your stock name and quantity and price. You can modify to your needs as the time passes by.


Please remember, the Gains and Losses are the form of day and night. They come and go all the time. Face them like a Lion, not a Lamb. You are your best friend and your worst enemy. Pick up what you want.



This reminds me of a friend who died some time back. He used to display a banner in his home as under ( English translation from Gujarati – an Indian language)


These Days shall Never Be Forever


I asked him what it meant. He said:


In good days, it forewarns me not to overspend.

Good days never last forever.  Save something when there is sunshine.


In bad days, it encourages me not to despair.

Do not spare your efforts.  Double up.  After all, these bad days too do not  last forever.


Kalidas, Hong Kong

14-Oct-2008  Article ref: 08-008-Rebalancing Portfolio