No Conflict, no Interest !!

One of the most talking points in the corporate and bureaucratic circles has been 'Conflicts of Interests" which bothers the guys in question, to a limit beyond measure. Conflict of interest means any situation, which may result in the person concerned, to take decisions that may not be in the best interests of the chair/designation that he/she occupies, due to his/her personal interests. Confused? Me too :)

 In simple 5th-class-guy-understanding words, conflict of interest occurs when Mr. X, who occupies a professional position, acts in a manner which is not beneficial to his professional position but is surely beneficial to himself personally...

Example? There are many...

1.  A teacher solving the answer sheet of a student who also happens to be his own son !!

2. Me taking the interview of my girlfriend for an important job-opening at my employer/company !!

and on a more complex note,

1. CEO of Manchester United Football Club being Vice-Chairman of England's Football Association (FA) which governs and regulates all football clubs in England !! Didn't understand this example? Ohkay, take your own game, what-do-you-say-that? Yes, Cricket !! Owner of Chennai IPL team being Secretary of BCCI !!

2. Independent Director of a Company (don't understand what's an ID? Well, I can't help much than advising you to go here or here or even here) being a pertner of an audit/legal firm which also happens to be the external auditor/legal advisor to that Company.

In all these cases, the person concerned will tend to be interested in maximization of personal benefit/ that of his own firm/company at the cost of the designation which he occupies when taking any decision that affects both.

Conflicts of interests are easy to detect, but hard to ascertain whether anybody has used it or not. Persons who are clean will deny allegations, people who are not clean will deny even more vehemently..

While it is imperative that conflict of interest situations are mostly harmful for the concerned company/ designation/ office, there seems a growing tendency that it is what motivates individuals..After all, somebody has told rightly that, "Where there's no conflict, there's surely no interest" !! This strengthens' Adam Smith's theory (watch this scene from 'A Beautiful Mind') that each man for himself leads to the society attaining its goal...

But Russell Crowe in his fantastic portrayal of John Nash in the same movie, says, "Adam Smith needs revision! It should rather be, "each man for himself and for the common greater good leads to the society attaining its goal"...

Similary, Conflict of Interest situations may be there at places, its important how you deal with them and come out clean...how you manage both your professional and personal position and do justice to both without harming anybody...each man for himself and the common greater good !!

Adam Smith needed revision in that movie, many persons abusing their positions while in conflict-of-interest situations, need a revision in their mindset too!! 

Setup a Power Plant without any investment of your own

Don't think I am joking, it's possible, very much possible !! Here I show how you can set up a power plant without a single paisa investment from your side !!

Say the cost of setting of the power plant is Rs. 100 crores which is to be financed by 30 equity and 70 debt, i.e., 30 crores equity funding and 70 crores loans from banks. As we know, 80% (i.e., 80 cr.) of the cost of a power plant project is in its EPC (Engineering, Procurement & Construction). So, we have to find a EPC  contractor such as BHEL, L&T or other small players. Its better to zero-in a small player EPC. Now, we ask the EPC firm to suggest a 25% higher bill, i.e., 100 cr. and we show the banks the quotation of EPC firm and say that the total project cost is Rs. 143 cr.. Banks will give us 70% (i.e., Rs. 100 cr.) of the amount as debt. Afterwards, we receive back the extra Rs. 20 cr. from the EPC firm and use it for other expenses of the power plant... Finally, we have our power plant with no investment from our side !!

As exciting as this may appear, let me warn you, legally, its illegal. But, not to name, many small power plant projects are setup in this way...believe it or not !!

Fake Profits, Inflated Statements !! Magic of Business !!

My founded company has posted a sales of Rs. 1 crores this month. Don't believe? Well, you have to, coz there's no other choice dear ;)

Jokes apart, the truth is that I don't have a company, so there are no sales. But assume I have registered a private limited company, its not hard for me to post such extravagant figure as sales or even profits ! How? Read below...

Lets say you have a service-imparting firm JootaPolish Pvt. Ltd., which takes contract of polishing shoes. Making dull shoes look shiny black, isn't that an interesting business !! You have big dreams regarding your company and plan to list it and file an IPO within 2 years. But there's a little problem....you are not getting any deserved contract, of shining anybody's shoes. So, how will you show the prospective investors that your company is doing good business and posting ample profits? Here's a way...

Contact a friend. Maybe me, why not !! I'll be happy to help !! Give me Rs. 100 and ask me to give you a contract of shining my shoes for Rs. 100. Only me and you know that neither I gave you any of my shoes nor you polished them. Also, you got your 100 rupees back. But you can show in your 'Sales' in  Profit Loss Statement that I availed a service from you for Rs. 100 and deducting your manual labour of Rs. 20 for the royal job of polishing shoes as 'expenses', your Profits are Rs. 80 !! Wow !!

Neither you did anything, nor I got anything, but as we are friends/relatives, we both kept our mouth shut and your profits rose by Rs. 80 and sales by Rs 100 !! Isn't that sexy??

Politics Promoters Play; How Promoters of Listed Companies increase their Bank Balances !!

It is legal, nobody can challenge it and it is profitable. That's why it is a game some promoters love to play.

In this post, I will highlight a common practice how promoters increase their 'net-worth' by creating nothing extra but by just doing certain adjustments, that is, moving some things from here to there. I will elucidate with a fictitious example.

Lets say, House Builders Ltd. is a listed company having a Market Capitalisation of Rs. 500 crores and a shareholding of 50% by its Promoter and the rest 50% by the public. It is engaged in the business of Construction and Real Estate Development. The construction business of House Builders is valued at Rs. 400 crores and real-estate business at Rs. 100 crores.

In order to increase his worth, Mr. Promoter plays a simple game. He creates a company Land Buyer Ltd. with the minimum required Rs. 1 lac share capital and makes it a wholly owned (100%) subsidiary of House Builders Ltd. Take notice that Land Buyer is not doing any business as yet and its Memorandum of Association says that it will be engaged in real estate business. Now, Mr. Promoter, as the Chairman of House Builders, takes approval from shareholders to transfer the Real Estate business of House Builders into its 100% subsidiary Land Buyer Ltd. for a consideration (payment) of Rs. 150 crores (approved by an independent valuer of-course). Shareholders won't have any apprehensions as both the companies belong to them (from a ownership viewpoint) and a fair value is being paid. Now, Land Buyer Ltd. avails a bank loan of Rs. 150 crores to finance the purchase, pays to Home Builders and thus, gets the real estate business.

After 6 months, Mr. promoter applies to list Land buyer Ltd. on the stock exchange and proposes to raise Rs. 500 crores from the public giving them a 50% shareholding in it. Thus, the market cap. of the newly listed company becomes Rs. 1,000 crores. Land Buyer Ltd. then pays off the Rs. 150 crores loan from the just raised Rs. 500 crores and uses the rest Rs. 350 crores in its further growth and corporate purposes.

What happened here? Mr. Promoter and the shareholders of Home Builder did nothing productive. Home Builder Ltd. didn't constructed an extra building or Land Buyer didn't sold an extra plot of land. But shareholders (including Promoter) of Home Builder got richer by Rs. 550 crores !! How?? Do the math !!

 They sold their real estate biz. of Rs. 100 crores for Rs. 150 crores: Profit - Rs. 50 crores.

Their shareholding in Land Buyer Ltd. is now worth Rs. 500 crores: Proft - Rs. 500 crores

Net Profit: Rs. 550 crores !! Isn't that a nice game??

Why KS Oils makes a good BUY?

K. S. Oils Limited (NSE: KSOILS, BSE: 526209) is engaged in the business of extraction and marketing of edible oil. Some of its popular brands includes Kalash, Double Sher, KS Gold etc. It is headed by Ramesh Chand Garg, a Promoter Chairman and MD of the company.

Its businesses are divided into 3 divisions;

i)      Solvent/Oil Division which produces Mustard oil, Refined oils and de-oiled cakes. (Brands: Kalash and Double Sher)

ii)     Vanaspati Division which produces Vanaspati Ghee (Brands: Kalash Soyabean,  Kalash Sunflower and KS Gold Palmolein) and

iii)        Power Division which is focussed on generation of power through windmills.

The company operates 5 manufacturing plants with the main plant at Morena district at Madhya Pradesh. It employs around 3,000 employees across its plants and Head-Office at New-Delhi. It also has a wholly owned subsidiary KS Natural Resources Pte. Ltd. Singapore and 7 step-down subsidiaries at Malaysia, Singapore and Indonesia.

Financials and ratios

Compared to last years’ net profits of Rs. 212 crores, KS Oils posted a net loss of Rs. 369 crores for a 15-month period ending June 30, 2011.  The reason for loss was primarily due to a 100% increase in finance costs(interest paid on term and working capital loans). However, total income has increased by 11% after adjusting the 15-month period against a 12-month period for last year.

As on January 20, 2011 market price of each share is Rs. 6.95. However, the equity shares of KS Oils commands a Book Value per share (Net worth to nos. of outstanding shares) of Rs. 27.06.

Conclusion

The demand and consumption of edible oils has shown a compounded growth of 4.5% over the last 10 years. KS Oils is one of the few leading edible oil companies in India along with fellow competitors Ruchi Soya and Agro Tech Foods .It is in need of further capital and is in talks with a few FIs for raising securities.

Comparing the Book value of Rs. 27 with market value of Rs. 6.95 per share, I recommend KS Oils shares are undervalued, and hence, recommend a BUY.

Welcome !!

Trying my baby steps into the world of Fundamental and Technical Analysis, I am going to start with fundamentally analysing various companies in this blog. Various takeovers, M&A's, share listings, IPOs will be covered here...So enjoy guys !!