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When will India’s BSE go public?

(Disclosure:I am market making in the shares of BSE)

Last week, Canadian investor Thomas Caldwell sent a combative letter to Indian Finance Minister Arun Jaitley, copying both Modi and the head of SEBI to protest excessive delay in listing the exchange. Caldwell, chairman of Toronto-based Caldwell Investment Management, bought 4.8% of BSE in 2007 for roughly $47 million not long after BSE demutualized. Caldwell was also a major investor in New York Stock Exchange before it went public in 2005, and has invested in 36 other exchanges around the world. “As Canadian investors we felt comfortable investing in a country with a British common law basis,” Caldwell wrote Jaitley. “We all laud the rhetoric of the past several months, but, as we move from this ‘honeymoon’ period, substantive steps are now hoped for.”

The paradox isn’t lost on investors: One of India’s most promising stocks – and the operator of its booming stock market, no less – isn’t itself on the market. Across the world, publicly-listed exchanges are the norm rather than the exception, and Caldwell, who shared a copy of his June 16 letter with Barron’s, said it was “ironic” that India is encouraging companies to go public to democratize capital markets, but the exchanges aren’t allowed to do the same.

BSE was founded in 1875, and came to be the jewel of India’s 22 exchanges. Then India launched the National Stock Exchange in 1992, a modern exchange that would let investors trade shares listed anywhere from anywhere else in India, and whose benchmark is the CNX 50 index. BSE rapidly lost share, but its strong brand kept it alive. Under Chauhan, the BSE began its revival. Today, it is still India’s best-known exchange, with the benchmark S&P BSE Sensex Index. It has 5,672 companies listed – the most in the world—and their combined market value of more than $1.57 trillion makes it the planet’s 11th largest. It’s also the world’s largest for currency options, and third largest for currency futures. Its technology – from Deutsche Boerse, which owns 5% – is advanced, and about 30% of the exchange is owned by foreign investors

So what might a publicly-listed BSE be worth? India’s benchmark Sensex index trades at 22 times what its components had earned. Applying a price-to-earnings multiple of 20 – 25 times to the $24.5 million BSE earned would peg its value roughly at $490 million to $613 million.

But that’s just a start, and the BSE could be worth much more in time. Stock markets are growing in Earth’s second most populous nation, and just a small fraction of India’s savings is invested in equities, so trading volumes are poised to expand. In a recent interview, Chauhan forecast that the Indian stock market could help companies raise $150 billion a year over the next five to seven years. Just look at BSE’s peers: Hong Kong Exchanges & Clearing ( 388.HK ) has become one of the best-performing stocks within Hong Kong’s Hang Seng Index, commanding a market value of $43.4 billion, and fetching 36 times 2015 earnings. The Intercontinental Exchange ( ICE ), which owns NYSE, has a market value of $25.6 billion and trades at 23 times earnings. The Singapore Exchange (SGX.Singapore), which owns 5% of BSE, has a market value of $6.3 billion and trades at 24 times earnings.

–from Barrons

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RBL Bank files for IPO

(Disclosure:I am market making in the shares of RBL Bank)

Private sector lender RBL Bank (formerly Ratnakar Bank) on Tuesday filed its draft red herring prospectus (DRHP) with market regulator Securities and Exchange Board of India (Sebi) to raise Rs 1,100 crore by issue of fresh shares through an initial public offering (IPO).

Apart from the fresh equity, two existing shareholders of the bank — Beacon India Private Equity Fund and Gpe (India) will also divest 9.5 million and 3.5 million equity shares, respectively in the IPO.

The bank is also looking at private placement of up to 25 million equity shares for cash consideration aggregating up to Rs 500 crore. In case the pre-IPO placement is completed, the size of the IPO will come down accordingly.

The RBL Bank issue is being managed by Kotak Mahindra Capital, Axis Capital, Citigroup, Morgan Stanley, HDFC Bank, ICICI Securities, IDFC Securities, IIFL Holdings and SBI Capital Markets.

-from BS

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RBL Bank set to file for IPO within a week

Hat Tip: Shivam Bose

(Disclosure:I am market making in the shares of RBL Bank)

RBL Bank Ltd, a privately held lender backed by a clutch of private equity funds, is set to file its draft red herring prospectus (DRHP) with the markets regulator within a week, said three people familiar with the development.

“The bank is looking to raise Rs.1,450 through its initial public offering (IPO), of which Rs.1,100 crore will be raised to increase the capital adequacy ratio of the bank and the rest to give exit to a few private equity funds,” said the first investment banker mentioned above.

The bank has hired around nine investment banks to run the process. The IPO would help the bank comply with the Reserve Bank of India (RBI) guidelines issued last year that directed all banks to list within three years of starting business.

Over the last three years, global and local private equity and development funds have invested over Rs.1,400 crore in the bank in three tranches. Housing Development Finance Corp. Ltd (HDFC), Norwest Venture Partners, Samara Capital, Beacon Capital, Faering Capital, TVS Shriram, Cartica Capital, Ascent Capital, Aditya Birla Private Equity, IDFC’s Spice Fund and ICICI’s Emerging India Fund are among its shareholders.

The share sale will make RBL the 41st publicly traded bank in India.-from Mint
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The case of the other Rakesh Jhunjhunwala

Shares in Surana Solar went on a tear over the past few days after it appeared from NSE data that ace investor Rakesh Jhunjhunwala had picked up 2.5 lakh shares in the firm on June 9.

But it soon turned out to be a case of a namesake of the Big Bull who had invested in the company rather than the billionnaire investor himself. This was confirmed to CNBC-TV18’s Varinder Bansal by the Big Bull himself who denied picking up any stake in the firm.

CNBC-TV18 learns that this bulk deal was brokered by Rajkot-based Sun Flower Broking and that the account bearing the name Rakesh Jhunjhunwala was opened by a Kolkata-based client of this firm. This account is not more than a month old. ADVERTISING The volumes in the Surana counter, which averaged about 1.5-2 lakh in the past two-three weeks, surged to about 75 lakh today.

Interestingly, the stock was up about 9.1 percent for most part of the day, before turning 20 percent lower, soon after CNBC-TV18 broke the news. The trade appears to be a classic pump-and-dump operation and sources said the trick may be repeated with other stocks.

–from MoneyControl
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Mid-cap investing in India

Now, let us take a look at the list of contenders in 2007, i.e., mid-cap stocks with a market capitalization in the range of $2 to $5 billion, which had the promise to grow into large-caps by now. Out of the 73 contenders, only 14 have managed to move up the ranks to become large-caps, while 41 stocks actually slipped below the threshold of $2 billion market capitalization.

 

Stocks lose momentum for a variety of reasons. Many are able to grow spectacularly well when they start off from a small base. As size catches up, it becomes difficult to maintain the elevated rates of growth. Often constraints are imposed by the size of the business opportunity, the competitive intensity or the need to continuously reinvest cash flows. In some cases a de-rating may be caused by management action such as a bad acquisition or unrelated diversification. Or some stocks may just fall victim to cyclical swings in the economy.

 

Many mid-cap funds are launched with the marketing pitch that smaller companies will be able to compound their market caps faster. However, a look at the mid-cap indices suggests that over the last five and 10 years, the mid-cap indices in India have barely managed to outperform the frontline large-cap indices. On a risk-adjusted basis (as measured by the Sharpe ratio—a ratio used to evaluate the performance of an investment while adjusting for risk) the large-cap indices have given similar returns with lower volatility than the mid-cap indices.

 

This raises the question of whether mid-cap investing in India is more about getting the sector themes right rather than buying stocks with a view that they will secularly graduate to becoming large-caps.

 

The data quoted earlier does prove that linear extrapolation of stocks from mid-caps to large-caps is more an exception rather than a rule. If an investor is able to make early bets in themes that catch the fancy of the markets, and rotate out of them into newer themes before the old one fades out, one can make outsized returns. But this involves superior insight and great timing. And of course, if one is able to pick the secular winners from this group, the rewards are spectacular.

 

But more often than not, investors end up chasing mid-caps that are already “hot” where the odds are low that future returns will continue to sustain for the medium to long term.

 

To conclude, investors should recognize that attrition is often the rule rather than the exception when they seek to discover the giant sequoias in the stock market.-wrote Amay Hattangadi/Swanand Kelkar,Morgan Stanley Investment Management