Notes on Indian equities, sectors and economy

Archive for the ‘Anal(yst) Humour’ Category

Shareholder Value Maximisation & Executive Pay hurting real returns, says paper

Posted by fairval on December 4, 2014

A  radical new paper is doing the rounds of the analyst community, and it makes some strongly counter-intuitive assertions. It says the focus on Shareholder Value Maximisation (SVM), which has caught on since the ’90s, is the dumbest idea ever, and it is screwing up real returns. The paper presents some impressive data to support this claim.

It further claims the focus on SVM has also distorted executive pay structures, and the two together are throttling real economy.

Attached here are 2 interesting charts.


Out of control Executive Pay

Out of control Executive Pay

The paper calls the pre-’90s era, the phase of ‘managerialism’. Quoting the paper – ‘During the era of managerialsim, the vast majority (i.e., over 90%) of the total compensation for CEOs came through salary and bonus. In the last two decades one can see the increasing dominance of stock-related pay. In the last decade some two-thirds of total CEO compensation has come through stock and options. This kind of compensation strucutre gives executives all of the upside and none of the downside of equity ownership. Effectively they create a heads I win, tails you lose situation.

Another reflection of the role of SVM in creating inequality can be seen by examining the ratio of CEO-to-worker compensation. Before you look at the evidence, ask yourself what you think that ratio is today and what you think is “fair.” A recent study by Kiatpongsan and Norton (2014) asked these exact questions. The average American thought the ratio was around 30x, and that “fair” would be around 7x.
The actual ratio is shown in Exhibit 16. It turns out the average American was off by an order to magnitude! If we measure CEO compensation including salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts then the ratio has increased from 20x in 1965 to a peak of 383x in 2000, and today sits somewhere just short of 300x!

The actual paper has lots more interesting stuff. For ex, as a pre-amble it trashes most holy cows of modern finance:  CAPM, Efficient Market Hypothesis, Beta, VaR, portfolio insurance, tail risk hedging, smart beta, leverage, structured finance products, benchmarks, hedge funds, risk premia, and risk parity to name but a few.



Posted in Anal(yst) Humour, Corporate Finance, The Science of Investing | Tagged: , , , , , , , , , , , , | 2 Comments »

A new example of analyst creativity

Posted by fairval on February 15, 2013

What share prices move sharply, either up or down, it does create a problem for the analyst if there is a reco and target price out. Adani Ports  seems to created some problems recently, as we found from this report. The stock rose 20% in 2 weeks.

This leading foreign broker seems to have been caught in a bind. They appeared to have have used DCF for their earlier target price of Rs 149. Now this was set on 27 Jan 2013, when the closing market price was Rs 130.60. I haven’t read this report, so dont know if the sale of Abbot Coal was covered in it or not (unlikely). The company announced on Jan 28, that it would divest almost the entire stake in Australia’s Abbot Point Coal Terminal to the Adani family. The market seems to have liked this, and the stock jumped 20% in less than 2 weeks, reaching Rs 156 on Feb 8.

As you well know, it is a little hard to justify tinkering around with DCF in 8-10 days. So either you put a Sell, or neutral, or you have to figure out a way to increase the target price, and retain you buy call. This analyst has gone for the latter, with what one must admit, some real creative flexibility.


Reiterate Buy — Despite the stock’s sharp rise (+20% in ~2 weeks) after the 28 Jan 2013 announcement of a sale of Abbot Point to the Adani Family, we believe
there is scope for further rerating based on the underlying business momentum, potential deleveraging and forecast improvements in RoE and RoCE

Increasing target price to Rs183 from Rs149 — We now use a blend of 50% DCF value (Rs151) and 50% EV/EBITDA value (Rs216), from 100% DCF earlier. In our view, the 50-50% mix of DCF and EV/EBITDA better captures the long-term nature of the port’s cash flow and near-term strong earnings growth. The 15x EV/EBITDA we use for our TP is supported by a 19% EBITDA CAGR over FY13-15E and 11% RoCE, and is at a 30% discount to the historical average.

Posted in Anal(yst) Humour, Valuation, What was that Again? | Tagged: , , , | 2 Comments »

JP Morgan’s report on DB Realty

Posted by fairval on February 10, 2011

This report is as recent as 14 October 2010

We have a Neutral rating on DB Realty with Mar-11 PT of Rs 480 (12x Mar-11 normalized FCF).

The price at the time of writing the report was Rs 435. The price now is about Rs 130. Since then DB Realty has been involved in the LIC bribery scam, and now the 2G scam.

The JP Morgan report also say this —

Organizational build out is happening… with the company hiring a number of expats to build out project management /execution capacity. We believe that many of these professionals have had good experience in high rise construction in middle-east. The company has also engaged Deloitte /SAP for project implementation and monitoring purposes.

Posted in Anal(yst) Humour, Real Estate / Construction, What was that Again? | Leave a Comment »

What about the f**king decimals?

Posted by fairval on January 5, 2011

I got this mail from ICICI Direct —

Market Strategy 2011 : Sensex target of 23165 for the new year

An analyst needs to be accurate. 23165? what about the decimals, guys, forgot them?

and check the language — this is meant the be a mail to a retail investor..

We expect the CY11 Indian equity performance to be growth induced and would mirror the trajectory of economic and corporate growth. We expect sectors levered to the consumption theme to continue finding favour and infra/capex related participation likely to be back-ended as elevated interest rates, inflation, commodity prices and tight liquidity would mute the confidence during the first half of CY11 despite compelling arguments in terms of need for infrastructure creation and valuations.



Posted in Anal(yst) Humour, What was that Again? | 1 Comment »

The Paul Chronicles

Posted by fairval on July 12, 2010

As the Paul fever sweeps across the globe, here’s a rundown on key Paul events in the last 24 hours:

Goldman is believed to have hired Paul as the chief market strategist. Morgan shares were down 20% in early trading. Pandit under renewed pressure to resign.

Mckinsey has authored a paper called ‘The new Paul paradigm – Eight steps to improved forecasting for global corporations’. Tata Motors has hired Mckinsey to build a ten year global demand model for Nano.  Analysts we spoke to deride the move. “Now how will they price it under $2500?” says an analyst who declined to be named.

Google and Microsoft have intensified efforts to build the worlds’ first true predictive browser. Both have codenamed the project ‘Paul’. Actually Microsoft is calling it Paul Version 10.  Market research commissioned by Microsoft has shown consumers believe first nine versions of any Microsoft version are no good. Microsoft may also release Windows 10 and Office 10 later this year.

Several Octopus farms have started coming up in special economic zones in China. Chinese leaders see a scope for transforming China’s manufacturing outsourcing led export model. “China aims to occupy the leading place in the global knowledge economy” said premier Hu Jintao. Chinese dissidents are wary of this new move. It could lead to food shortages, some say.

Harvard opened its MBA program to octopuses yesterday. “We educate leaders. The best talent always comes to Harvard” said the new Harvard dean Nohria. “And how will an octopus do a case study?” asked the Wharton dean. “The world will see why the Wharton method is better. Octopuses will surely come to Wharton” he added.

General Motors announced an all new car platform for Octopuses. “Why? asked the BMW chief. “Are they phasing out Chevrolet?” he wanted to know.

Indra Nooyi, the Pepsi chief is reported to be ecstatic at the new global fascination for Paul. She plans to hire him as the sole global brand ambassador for Pepsi. “He has eight hands. We can show our entire product line” she is believed to have said at an internal budget meeting. Some Pepsi brand managers are not amused. They fear budget cuts. “Never make an accountant the CEO” said the global brand head for Frawg, declining to reveal her name. She feels her brand will get cannibalised in the new policy. The global brand head for 7-Up is more hopeful. “Umm…which is the seventh hand?” she wanted to know.

(apologies to people or corporations named, take it in good humor..couldnt resist writing this)

Posted in Anal(yst) Humour | Leave a Comment »

Wolf in sheep’s clothing!

Posted by fairval on July 10, 2010

Reco Distribution (skewed)

(this is from a book ‘Ahead of the Market‘)

An analyst’s recommendation is supposed to boil all his research down into one simple actionable piece of advice, the answer to the
question, “Nice ten-page report, but what should I do about the stock?”
Not surprisingly, the recommendation is probably the most widelyused piece of information contained in the analysts’ research reports simply because it is, at face value, easy to understand and appears to be straight-forward. Do not be fooled. An analyst’s recommendation is a wolf in sheep’s clothing.

  • It is simple.
  • It is straightforward.
  • And invariably it is wrong.

In fact, if you had bought those stocks that were the most highly recommended by analysts over the two-and-a-half-year period from April 2000 to September 2002, you would have lost a phenomenal 47%.

Posted in Anal(yst) Humour | Leave a Comment »

The Science of Investing – 2

Posted by fairval on June 24, 2010

Are institutional broking analysts not used to tracking high yield stocks? Or so it seems.

Look how they are tying themselves in knots here..

Assuming investors prefer high-yield stocks because of their lower uncertainties, we believe factors that reflect the reliability of dividends can be complementary to a high dividend yield strategy. We conduct a two-dimensional grouping simulation to identify factors that have significant effects on high-yield stocks. By creating a composite score based on select reliability factors, we propose a high dividend yield strategy that has proved to generate consistent return over the past 10 years based on our back testing. Even during times where the dividend yield factor is not effective, consideration of the extra reliability screening in a high dividend yield strategy delivers better performance. The composite score is best utilised as a complementary factor to a high dividend yield strategy for stock selection, but not as a standalone factor to generate return.

Posted in Anal(yst) Humour | Leave a Comment »