Category Archives: Case Study

Why I Still Don’t Like MCX



Disclosure: No position in MCX.


The Ashiana Housing Lecture Revisited

I had earlier blogged about Ashiana Housing and this lecture on 21 December, 2013.

Varun Gupta, who is Wholetime Director at Ashiana Housing delivered this lecture to my students at MDI on 31 December, 2013.

Finally I got the time today to upload the edited lecture video on YouTube. I have spliced the lecture video into 25 segments. You can view the playlist here.

Before Varun delivered the lecture, students saw two videos. These were:

The lecture was organized with the help of my ex-student and colleague, Arpit Ranka. Thanks Arpit!

Note: I am long Ashiana Housing and hence you should assume I am positively biased in its favor.


The Final Relaxo Lecture

My BFBV course @ MDI got over in January 2014. One of the highlights of the course was a live case on Relaxo Footwear, a company in which I am invested. The case was initiated at the beginning of the course.

On 15 September 2013, I posted a mail (The Relaxo Cinderella Project) to my students about the company. At the time, the stock price of the company was Rs 144 (on a 5:1 split adjusted basis).

Then, on 22 September 2013, my friend Ravi Purohit and I gave a joint lecture on the company (The Relaxo Lecture) in which we explained our investment thesis. At the time, the stock was quoting at Rs 150. Finally, I spoke about the company again in my class on 10 January 2014. By that time, Relaxo’s stock price had increased to Rs 224.

As I write this, it now stands at Rs 254. In this note, I am reproducing from my memory what I spoke on my 10 January class with some updated thoughts on the subject.

You can find the transcript here.


The Ashiana Housing Lecture

I had sent this to my BFBV students on 23 September when the stock was quoting at Rs 204 on a pre-split (5 for 1) basis.

Unfortunately, the lecture could not take place as scheduled on 27 September. It is now scheduled to take place on 31 December. Note: I am long Ashiana Housing and hence you should assume I am positively biased in its favor.

Why I Bought Thomas Cook

thomas-cook-logo Lecture delivered at MDI yesterday based on work done as of July 2013.


Note: I am long Thomas Cook, and hence you should assume I am biased in its favor.

A Killer Puzzle

A few minutes ago, I asked my BFBV students to start work on a killer puzzle.”

You are invited to participate and, if you want, help my students do a good job.


“Castrol India Won’t Stop Investing in India”

DNA reports “Castrol India says it won’t stop investing despite slowdown

Huh? When did it start? Not for the last 16 years, no!

Castrol India's Investment in India

You can’t really stop what you haven’t started for last 16 years, can you?


Nevertheless, over those 16 years, Castrol India paid its shareholders dividends aggregating INR 28 billion and to top it all, as of the end of 2012, the company had Rs 6 billion in cash on its balance sheet.

Castrol is a cow that doesn’t need much grass but boy has it been milked!


Those Warehouse Receipts Again and What to Do About Them?

story on Financial Technologies (a stock which dropped 65% yesterday and then another 20% today) in today’s Livemint mentions “warehouse receipts.”

Financial Technologies vs. Sensex


What’s the fear?

That there is no underlying commodity is the fear. NSEL says it will sell the commodity and meet its payment obligations, but what if there are no commodities?

Surely, there are warehouse receipts?

Yes, but these have been issued by a group company and there’s no clarity on the presence of commodities.


Die-hard Warren Buffett fans would remember the Salad Oil Scandal involving warehouse receipts too.

In an earlier post on floats and moats I had re-told that story, but let me do it here all over again.

Warren Buffett’s Amex Story

The story starts in 1964. Warren Buffett is a young, dynamic investment manager and he is about to make his first big bet— a 5% stake in American Express.  That’s 40% of his assets under management. Amex is embroiled in a scandal involving of things, salad oil.

Tino De Angelis, who is a convicted fraudster, is unable to get credit from a bank. So he comes up with a neat plan. Amex is a prosperous company with a stellar reputation. It also has a division that would specialize in “Field Warehousing”— a way for Amex to loan a business money based on inventory of goods and commodities.

Tino goes to Amex with many millions of pounds of very valuable salad oil and deposits it in one of Amex’s warehouses. Amex writes him a warehouse receipt, which he takes to a bank and uses it as a collateral to take out a loan.

There is a problem however. Tino’s “valuable salad oil” is actually seawater with no value. No one at Amex has bothered to check out Tino or opened the tank to see what’s inside. I guess there were issues with KYC even back in 1964.

Tino then takes the money from the bank and gambles it all away in— you guessed it— in commodity futures and options. He immediately files for bankruptcy. His bank goes to Amex with the warehouse receipt to recover his loan and oops do they have a problem when they open the tank containing sea water!

Amex discovers it has  that it has a problem subsidiary. The extent of the problem? About $150 mil. That’s a very large sum of money in 1964. Amex’s Warehouse subsidiary files for bankruptcy but for Amex trust is everything. Its CEO says that Amex has a moral obligation to pay the bank even though its not legally obliged.

The market gets spooked. Amex’s stock drops from 60 to 35.

Ok, now let’s look at the magnitude of the problem— the way Warren Buffett sees it and the way the stock market sees it. First, from the market’s viewpoint.

As of the end of 1964, Amex’s consolidated balance sheet reveals that the company has no bank debt or bonds outstanding. Moreover the company has cash amounting to $263 Mil and a largely liquid securities portfolio having valued at $515 Mil. So, it appears that the loss of $150 mil on account of what now is being called as the “salad oil scandal” is not so huge that it can impair the company’s ability to survive and prosper. Until, of course, you look at $526 million dollars of travelers cheques outstanding and representing money taken by Amex in exchange of pieces of paper it has issued to millions of Americans which they can redeem for cash on demand.

What if there’s a run on Amex? The consequences could easily be devastating as the company would be forced to liquidate its assets to generate the cash to redeem half a billion dollars worth of travelers cheques.

Amex has not a missed a dividend in 94 years and now the stock market is pricing it for a potential insolvency.

We know that Warren Buffett disagreed with the market because over the next two years, he invests $13 million into Amex for a 5% stake and that is 40% of his partnership’s money. You don’t put 40% of you money into an idea unless you have deep conviction. So, what was Buffett thinking? Let’s speculate on that.

First, imagine that instead of $526 million of travelers cheques,  Amex had bank debt of an equal amount outstanding. Would Buffett have invested? No. because the bankers would have immediately recalled their loans forcing Amex to get into a “fire sale mode” which could easily result in the decimation of its equity value. Clearly the bank debt of $526 million would be too risky but travelers cheques of the same amount instead, maybe not.

Second, how likely is that the millions of customers who hold the Amex travelers cheques will panic at the same time because of the “salad oil scandal” and will not only stop buying them, but will line up out Amex offices throughout the world to redeem them? Buffett goes investigating. He goes to shopping malls and observes customer behavior. He also asks an assistant to do the same in other parts of USA. Together they find that customers don’t care about the salad oil scandal and continue to buy and use travelers cheques.

The scandal’s tarnish is reflect in Wall Street’s valuation of Amex stock but has not spread to Main Street. He buys the stock.

He sells out by 1968 making a $20 million profit on his $13 million investment.

Is Financial Technologies (FT) another Amex Type of a Situation?

Unfortunately, no. Two key reasons.

  1. First, in the Amex situation, Mr. Buffett’s analysis showed that the problem subsidiary was not going to impair the core operations of the company. That’s not the case with FT.
  2. Second, in the Amex case, all of the liabilities were represented by travellers cheques issues to tens of thousands of people, most of whom didn’t even know about the salad oil scandal, or even if they did, they didn’t care. That’s not the situation with FT where its liabilities represent money to be paid immediately to a handful of brokers who very much care about the money they are owed by the company because they owe the same money to their clients.

If you bought the stock at its low price yesterday, using the “it-has-fallen-65%-so-how-much-more-can-it-fall?” “logic” you will be regretting your decision today.

There is no way a public market investor can intelligently estimate whether FT will be solvent or not a month from now. The needed information about the collateral behind those “warehouse receipts” simply isn’t there.

There are at least two more problems. First, when collaterals are sold off in a fire sale, typically they realise far less than their estimated value during normal times. The next few days for FT will not be normal.

Second, capitalism works on trust, and in an exchange business like that of FT, trust in the integrity of the system attracts buyers and sellers in the first place and their increased business volumes attracts more buyers and sellers and so a virtuous circle of “network effects” delivers the exchange owners with a moat. That trust now lies in tatters. So, even if FT remains solvent, its moat is now massively impaired, if not destroyed.

I have no position in FT or MCX or in any derivatives in either of these two stocks.


Yes Bank moves to recall Deccan loan


“The Deccan account is still not an NPA.”


Just an example of Psychological denial amongst bankers.

If an unpaid loan is not an NPA, what is it?

Reminds me of similar words once penned by Warren Buffett many years ago. He questioned the logic of companies not treating stock options as expense by asking three questions:

“If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”