RBI issues fresh directive on Gold imports

Earlier Reserve Bank of India (RBI) had restricted import of gold to consignment basis by banks to meet the genuine needs of jewellery exporters. Now, this provision has been extended to all authorised dealers, nominated agencies or star trading houses taken into account the demands of jewellery exporters. All Letters of Credit (LoCs) are to be issued by such agencies on 100% cash margin basis for all categories of gold imports. Futher, gold will be imported against Documents against Payment basis as against Documents against Aceeptance basis. This requirement willn't be exercised in case of exports of gold jwellery.

Effect of Gold on Current Account Deficit (CAD) of India

First I'll explain as to what exactly Current Account Deficit or CAD really is. Current Account Deficit happens when your export income isn't able to match your import liabilities. It happens when you earn dollars less than what you spend. Since, international trade happens in dollar denominations, earning dollars is primarily important which also reflects upon the strength of an economy.

Now, the question arises: Why're we earning less dollars? Its because global demand is lull post recession periods of 2009 and our export sector, whether its a manufacturing or services sector, isn't able to gather much business growth. Also, we're facing increased competition from other developing nations in terms of capturing demand at lower prices.

Shortcomings of Financial Statements

Financial statements are prepared by every company to gauge its performance, to report its performance to its shareholders and to comply by regulatory requirements. Though, financial statements provide wealth of information, but it has loads of shortcomings.

1. Financial statements rely everything on book value. They never give you a reflection of market value. They never tell you about the market value of assets it holds. Suppose, a company buys a fixed asset like land or building, it always gives the numbers in terms of original or historical cost. It never tells you  the present market value of that particular asset. Thus, for every asset, it always gives you the book value. It never gives you the market value.
2. Financial statement records the cost of the "bought" assets by the company in its statements. But it never records assets created by efforts of the company. For example, a company never records the value of the product or patent created by its Research and Development, though it'll record the value of a bought patent in its financial statements.
3. Financial statements categorise expenses as operating, financial and capital expenses. Financial statements often err while categorising a particular expense. For example, expenses made on fixed assets are considered as capital expenses by a company and are depreciated or amortised over a period of time. Patents are also assets, but expenses made on its R&D are considered as operating expenses. Similarly, operating leases are also considered as operating expenses which rather should be considered as financial expenses.
4. Financial statements report the assets on which investment has been already made, but they never tell us about assets on which investment is to be done. This later investment will open new growth avenues for the company. For example, fruits of R&D and patents can be considered as such assets.
5. Like assets, financial statements don't reflect the market value of liabilities, like debt and shareholders' equity. They simply reflect the book value as usual.
6. While financial statements are geared towards finding whether a company will be able to meet its obligations of debt and payments to suppliers, they don't throw any light on risk to equity investors.

Why stock market defies the natural law of economics?

In Economics, its stated that with higher prices, demand falls and when prices drops, demand increases. Its just the opposite when it comes to stock markets. People buy when prices are sky-rocket high and they stay away from stock markets when its cheap. People often turn a blind eye to stocks when the valuations are at dirt cheap and will rush to grab when the valuations are sheer nonsense. Its very difficult to comprehend this situation when people don't buy a dozen of banana at high prices, then why they happen to buy stocks at costly valuations. When people stop buying and consuming a kg of onion at Rs. 40-50 as part of their food, then how they were able to buy Suzlon Energy at Rs. 500, Educomp Solutions at Rs. 800 or DLF at Rs. 1200 prior to the recession of 2008-09. Currently, Suzlon Energy is trading at Rs. 15, Educomp Solutions at Rs. 158 and DLF at Rs. 205. And when people rush to buy a kg. of onion at Rs. 20-25, they were too sceptical to buy Hawkins Cookers at Rs. 130, TTK Prestige at Rs. 90 or Titan Industries at Rs. 35 during the downturn of 2008-09. Currently, Hawkins Cookers is trading at Rs. 1800, TTK Prestige at Rs. 3100 and Titan Industries at Rs. 275. This is where investors defy the basic law of Economics that with higher prices, demand falls and when prices drops, demand increases. People are all vice versa to that in respect to their stock investments. This is a question worth pondering over. I'm not able to find the answers. Perhaps people can. Kindly comment.

Dynamics of Profit and Loss Statement

The Profit and Loss Statement of a business or a company tells a lot about the business. Analysing the statement historically can give one important insights into the functioning of the business. The Profit and Loss statement tells us about what the business has done and what it has earned over a period of time. It tells us about the working dynamics of the business.

The Profit and Loss statement consists of following parts, in general:

1. Operating Revenue
2. Cost of Raw Materials
3. Purchase of Traded Goods
4. Salaries and Wages
5. Sales, Promotion and Marketing Expenditure
6. Other Expenditure
7. Depreciation
8. Financial Expenditure
9. Other Income
10. Taxation
11. Profit after Tax

Operating Margins

Every business has its characteristic Operating Margins. Operating Margins don't expand and retract radically with passing time. Its the level below which the business doesn't wish to sell. Operating margins are calculated after taking into account fixed operating costs. It simply can't be calculated straightaway. The level is reached after a number of internal assessments. In case of brands, supposed brand value is also incorporated into the margins. A healthy Operating Margin is essential for the growth of the business.

Operating Margin can't just be increased at will as it'll result in increment of prices taking into account that fixed operating costs is constant. Increased prices of products can result in your competition eating into your market share or customers turning away from you or cutting their discretionary spending. Increased Operating Margins from increase in prices shall be viewed with caution. Operating Margins can also improve from certain structural changes in fixed operating costs. Reduction in any kind of fixed operating costs can lead to improvement of Operating Margins which must be welcome.

Reliance Industries Limited - Steady and Still

Reliance Industries Limited (RIL) is one of the largest companies of India by market capitalization. The business has interests in petrochemicals, oil and gas exploration, textiles, retail. Reliance Industries has been a very dominant force in Indian industry circles. In March 2012, RIL did a sales of Rs. 3,58,501 crores, a growth of 34% over last year. RIL has Operating Margins of 11%. RoCE for RIL is 16.50%.

Despite such huge size and in engineering sector, RIL has excellent Operating Cash Flows. RIL gets its money from its customers within 17 days. RIL consumes its Inventories within 52 days. RIL pays its suppliers after 46 days. Overall, RIL is able to converts its money within 22 days, which most of the engineering goods companies in India will be jealous of. Debt/Equity for this company is at 0.48. This is possible because of the quick cash conversion by RIL as it provides liquidity at their hands.

RIL is sustaining and still growing stronger, despite its huge size, because of the quick cash conversion cycle. Its because of the positive Operating Cash Flows. Any company, big or small,  will suffer down the line if they fumble with their Operating Cash Flows. Thus, investors must pay dear attention to Operating Cash Flows.

Dish TV - sab par "Loss" sawaar hai - Dish karo yaa Ditch karo?

Dish TV was the first company in India to roll out DTH services in India. It roped in Shahrukh Khan as its brand ambassador. Ever since Dish TV initiated itself, it is beset with problems. For a long time, Dish TV suffered operating losses. In the mean time, they underwent equity dilution couple of times.

In financial year March 2012, revenue from operations was Rs. 1957 crores, an increase of over 36% on Rs. 1436 crores of revenues registered last year. Operating Profits greatly improved at Rs. 566.7 crores at a margin of 29% as compared to Rs. 360.66 crores at a margin of 25%. The Net Loss suffered by the company is mainly because of Depreciation and Interest costs. Loans have greatly increased to Rs. 1214 crores from Rs. 648 crores over last year, an increase of 87% which can be a bit of concern. RoCE is coming out to be 50% for this year, which is quiet impressive in terms of business returns. This is mainly because Dish TV operates on negative working capital. The company has good positive operating cash flows despite Net Loss, mainly on account of huge Depreciations in the Profit and Loss statements.

Which business will grow faster?

I'll give you case of two businesses. I'll first explain the situation around these businesses. 

Business 1: The revenue is growing at 25% annually. Similar is the growth of Profit After Tax. At present, the company has no debt. Return on Capital Employed (RoCE) is at 30%. Operating Cash Flows are 25% of the Operating Profits.

Business 2: The revenue is growing at 25% annually. Similar is the growth of Profit After Tax. At present, the company has no debt. Return on Capital Employed (RoCE) is at 30%. Operating Cash Flows are 120% of the Operating Profits. 

The difference between the above two instances is Operating Cash Flows. What is going to be the impact of Operating Cash Flows?

What Rakesh Jhunjhunwala saw in DB Realty?

Rakesh Jhunjhunwala recently made an investment into DB Realty. This is the same company whose Chairman, Shahid Balwa, was made a party to 2G accusations list a few months ago. The Chairman and the company was shown to have provided Mr. Sharad Pawar, Agriculture Minister with certain favours.

In financial year ending March 2012, DB Realty did an annual sales of Rs. 590.86 crores, almost half of what it did in the previous year. Operating Profit is at Rs. 124 crores at a margin of around 20%. Debt/Equity ratio is at 0.06. Total Assets of the company is at  Rs. 5191.08 crores. Working Capital of the company is Rs. 1363 crores. Fixed Assets is Rs. 245 crores. RoCE is 7.11%. Share price is Rs. 98.75.

What we can see from here id that DB Realty is very under-leveraged as compared to other real-estate companies. Debt is at a very comfortable situation. If we talk about Total Assets, Total Assets per share of the company is coming out to be Rs. 213.44 crores. If we talk about Capital Employed, Capital Employed per Share is at Rs. 66.11. In June quarter this year, the company did Sales of only Rs. 85 crores made a net loss. If we see just at Project Expenses only as a percentage of Sales, its ranging between 60-90% over several quarters.

So, what could have made Rakesh Jhunjhunwala commit an investment into this company. First, Total Assets per share of the company is way beyond the current Share price. Second, certain projects of the company have been recently completed and others are due completion in near months. Will one invest into it based upon these parameters? Will this company provide a steady stream of revenues, profits and operating cash flows?