Author: Sanjeel Kothari

I am currently pursuing FinBridge program from Finnacle Investment Academy, Surat. I have cleared Investment Foundation exam by CFA. I want to become an Equity Research Analyst.

Summary of short video on Forensic Accounting

Here is the link to the video https://youtu.be/xigATYEOfiY

In this video, a case is taken of Clariant Chemicals (for Forensic Accounting).

Some related party transactions are shown. But there is no fraud in that. Rs. 240 cr. (almost 30-40% of sales) worth of goods is sold to Singapore entity.

Clariant Chemicals is operating in more than 100 countries. In India the company is private (Clariant India Private Limited) but in other countries it is listed.

This private company is owned by Singapore entity. Deepak Parikh is the KMP in parent company as well as in Clariant India Private Limited. But this information is not given in annual report of parent company.

If this information was available then investors could have sold their shares. From 2014 to 2019 stock price fell 60%.

Summary of Thomas Russo’s video on Value Investing

Here is the link to the video https://youtu.be/skrSif0vhOk

Thomas Russo is a preeminent investor of his times. As he speak with employees of Google and shares his experience and insight in value investing.

He says an investor is always at least in value investing which encourages to be invested for a long term. He talks about 2008 global financial crisis when he thought to leave and run when markets were in free fall but he didn’t left. If he left at that time he would have to face losses but he decided to stay invested. He explains this with his experience in Africa’s safari.

Thomas Russo talks about corporate culture. He takes the example of Nestle’s Japan’s head. He once told about a temple which was seven hundred years old but no wood is seven hundred years old. Thomas Russo connects this with Google’s employees saying that Google will remain Google even after the employees are gone.

While talking more about investing he shared that those businesses are selected which has capacity to reproduce over time. He also talks about Berkshire Hathaway’s share that traded around $900 per share which, over the time, grew at $200,000 per share. He talks about non-taxation of unrealized gains.

He mentions brand loyalty. He shares one incident of him when he was travelling by a plane and the passenger sitting next to him ordered Jack Daniels. Steward said they only have Jim Beam and the very moment the passenger said he will have water. This showed how customers have brand loyalty.

Talking more on investing, Thomas Russo shares that investor should find a business in which he is interested and can follow it. Also he says that managers should be owner-minded.

On family controlled business he says that family controlled business can be good because family holds major power and they take decisions which can be helpful for their upcoming generations.

He talks about capacity to suffer. He says that some investors look for people who have capacity to suffer. For this he shares examples of some companies which had capacity to suffer. One example was of alcohol business in which one entrepreneur refused to do further business in China due to economic downturn whereas one took this as opportunity and entered the market and today is successful.

Thomas Russo, on companies, says that company with good free cash flows have ability to expand. After checking cash flows investors look for companies which have good presence abroad because they can invest free cash flow in emerging markets which have rising GDP and rising disposable income.

He also tells that mangers should be multilingual and multicultural.

On asked by one of the audience about MasterCard he shares that how the business was having great opportunity to grow and this made him to remain invested.

Summary of Ramesh Damani talking with Manish Chokhani on CNBC-TV 18

Here is the link to the video https://www.youtube.com/watch?v=USPVHkNB4_M

Ramesh Damani asks where the market is exactly because first it was in bear market and then market rose 20% (technically bull market).

Manish Chokhani says that as this kind of crisis is not seen in the past it is difficult to say what’s going on as the resources are there all safe. About covid19 he believes that a vaccine will be created in the upcoming 12 months so what happens in these 12 months will decide how our country will come out of it.

NASDAQ is nearly 3% away from its all time high. Dow rallied more than 20% from the bottom.

What caused those markets to rise and emerging markets to some more follow them?

Manish tells about the game played by west – a game of printing more money and injecting it in economy to save itself from being bankrupt. He talks about global debt which is impossible to pay without injecting money into economy as the amounts are so huge. But this money ends up in financial markets. Also he said that theoretically US, Japan, Europe are bankrupt. But credit rating agencies don’t remove their ratings and put down countries like India. He assumes that this story will change in upcoming 12 months.

The bull market is there in west but it is technical and not real. Things will change because they have overused their brand power.

As the interest rates and oil are at record lows and China is no longer world’s friend. Isn’t this a good time for India to rise?

Manish Chokhani believes that coming 3 months will decide India’s emergence – either as an emerging market or making it into the big boy’s league. India has already missed its chance in 2008 where it was not able to understand the game but China did and they showed a tremendous growth. Also he talks about currencies of country ahead of India (in terms of GDP) that how they print money and keep their currencies pegged very close to each other. But this time game is not in favour of China as the voices from different countries are against China. He believes that if correct steps are taken then India will become a natural beneficiary. By increasing purchasing power of our people, allowing industry to get more competitive and working with government to ease the ease of doing business in India, India can become glorious just like 1991.

Will this crisis force India to change in so many ways?

As many companies have started slashing salaries of its employees and also started layoff people a different response is required this time. If the response doesn’t come this time India will face depression. Due to Bull Run of 2000’s decade everyone thought there will be consumption boom but most sectors even failed to double. Also the consumer debt is approaching nearly 20% of GDP. Supernormal profits need to be earned by keeping interest rates low and currency high.

India plays the game with the old colonial mindset while other countries play economic game.

On asking how to make a portfolio during such times of pandemic Manish Chokhani tells that after every crisis innovative companies emerge. Companies which think branding, margin and scale are companies that come out of crisis very well.

Summary of article on how Banking Sector works

Here is the link to the article https://www.cnbctv18.com/views/how-the-banking-system-works-and-money-is-created-an-explainer-5143971.htm

Banks have to maintain two types of reserve namely CRR and SLR. If the balance is excess than required then it is banking liquidity surplus.

If CRR’s amount is lower than what is required then SLR can be used to fulfil the required amount. Banks can do so by RBI’s LAF window. They pay LAF policy repo rate for this transformation.

In the same way, if SLR’s amount is lower than what is required then CRR can be used to fulfil the required amounts. For this banks have to pay LAF policy reverse repo rate.

Every time a fresh loan is given by bank it creates a fresh bank liability.

The constraint in bank capital is that with the increase in loan book size the requirement of capital also increases.

Liquidity in banks can be alter by RBI only through Open Market Operations (OMOs), Foreign Currency intervention,  government spending, currency in circulation, by setting minimum requirements of CRR and SLR.

Individual banks can only alter their own liquidity. If they have surplus than they will lend money and can buy risk-free securities, both of which will lead to decrease in short term rates. Through this banks are encouraging lending.

If they have deficit then they will accept deposits and will sell risk-free securities, both of which will lead in increase in short term rates. Through this banks are discouraging lending.

Summary of article on TLTRO

Here is the link to the article https://www.capitalmind.in/2020/04/what-is-a-tltro-and-why-does-it-impact-non-banking-financiers/

Due to lockdown businesses are closed and people have almost no source of income. Due to this RBI has provided moratorium to borrowers. Moratorium means borrowers can now delay their payments and pay it later with extra interest.

But problem here is with NBFC’s. NBFC’s will face liquidity problem as borrower will not pay them before 3 months and the banks from which NBFC has borrowed isn’t providing moratorium to them. This means NBFC has to pay (either through cash reserves or by issuing new bond) and if they fail to pay then this will lead to downfall in credit rating to ‘D’. This will destroy their borrowing power.

RBI intervened in between as it doesn’t want this market to freeze. Earlier RBI gave money to banks to fund this NBFC’s but this didn’t work. So RBI came with TLTRO (Targeted Long Term Repo Operations).

Under this scheme banks will borrow money from RBI at repo rate and will have to park that money into bonds. This investment is to be done within 30 days failing to which will lead banks in paying 2% higher interest.

Some key points of TLTRO:

  • Banks can buy maximum 10% of allocated amount to one entity.
  • 50% allocated amount should be used for fresh issues and 50% amount for secondary markets.
  • Banks have to return the money (which they availed from RBI) after 3 years with interest.
  • Bonds can be bought of any duration. There are no criteria for this. The only criterion is that banks have to reinvest the money until TLTRO expires.

Mutual funds can also sell under secondary markets.

NOTE: RBI DOESN’T GUARANTEE THESE BONDS.

The first phase didn’t work as banks deposited money with corporates (like Reliance Industries etc.) rather than depositing with NBFC due to risk associated with them.

So RBI came with version 2.

Some key points of Version 2 TLTRO –

  • Minimum time to deploy funds is increased from 30 days to 45 days.
  • Full amount should be used in buying NBFC’s bonds.
  • 10% amount i.e. Rs. 5000 crores should be allocated to Microfinanciers (MFIs).
  • 15% amount should be allocated in NBFC’s with asset size of Rs. 500 crore and below.
  • 25% amount should be allocated in NBFC’s with asset size of Rs. 500 crore to Rs. 5000 crore.
  • Rest 50% can be allocated according to their choice.
  • No criteria for primary and secondary markets.
  • Earlier cap of 10% with single entity removed.

According to these, large NBFC’s (with asset size more than Rs. 5000 crore) will see only Rs. 25000 crore. Also a couple of companies can eat up this whole amount. Even some NBFC’s which doesn’t need money can raise money.

The main risk is of default which has kept banks away from even large NBFC’s.  Thus TLTRO might help only large NBFC’s and RBI can step-up to take some risk.