Raoji's Corner

Mukeshbhai as a wealth destructor

There was an interesting article in Value Research Online on how Warren Buffett calculates ROE

Basically,he uses “owner’s earnings” to calculate ROE which is computed as below:

Owner earnings = Net income + Depreciation and Amortisation – Capital expenditures

The good folks at Value Research used this measure on Nifty companies and lo and behold, they found that Reliance has an ROE of -13.84% as opposed to a reported ROE of 11.92%

No doubt the heavy capex of Reliance is playing a role in having a negative ROE

But if the cash flows now don’t kick in, Mukeshbhai may well turn out to be the biggest wealth destructor India has ever seen.

Raoji's Corner

Bombay High Court as a source of alpha

In a country like India, judiciary plays a key role in deciding the fortunes of companies and sectors.

This was aptly illustrated recently in the case of DB Realty.

In the afternoon of 31 Dec,2014, DB Realty released an announcement to the exchanges in respect of certain properties proposed for development by the Company, its subsidiary and associates arising out of Orders passed by the Hon’ble High Court Bombay.

As soon as this press release hit the exchanges,all hell broke loose.The stock raced from Rs.58.05 to close at the highs of the day at Rs.69.95 -a gain of 20%

Even today the stock closed at Rs.76.85 a gain of around 9.85%

Effectively, the stock has gained 33% since it released its press release to the stock exchanges

The markets obviously got excited by the prospects of DB Realty in light of these favorable orders

Take for example,the Bandra (W) project of DB Realty:

From a CNBC interview:

So what will the revenue potential be for this particular project and when do you think the project will come on stream?
A: This should take about six months because now we will be submitting our plans in the next three months and may take about three months to get the approval. Unlike Mahalaxmi project or Marine Lines project where the designs, plans are already submitted. So, we expect those two projects to kind of receive the approval in about three months and Bandra project should be in about six months. So, that has a potential of 12 lakh square feet and again at about Rs 40,000 – 50,000 we have about Rs 5,000 crore potential there as well.

Now comes the interesting part-the orders passed by the Bombay High Court have come in much earlier.The order of the Bandra (W) project (Case No:WP/3152/2014(stamp) ) was passed on 18 December,2014 !

So it took nearly 2 weeks for the stock markets to realize and understand the implications of this order.It would have probably taken longer than that had the Company itself not informed the exchanges.

So is the Case List of the Bombay High Court a fertile area to ferret out stock ideas?