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Ice Age: Are we there yet ?

Published by Octron on July 19, 2009

Note: This article has been submitted by Third Eye (Mr. Samrat Maharjan), if you also want to share good articles self written then please mail us to editor@nepseguide.com

The recent unexpected quick fall of NEPSE (after 10 days of rise), despite capital gain reduction has made me think – are we there yet ?
Trade pundits are once again blaming the politicians, while some wearing smart caps are eager enough to deduct overflow of sellers (due to reduced CGT). Well, in Nepal we say – Kura ra kulo lai jata lage pani huncha….

But, I do think, we are nearing the first Ice Age of Stock Market. Now what is an Ice Age ?

Ice Age is a period of time, when earth come to standstill, while previous era species get completely abolished and no new generation of species could come to life due to cold climate.

If you are new to the market or if you haven’t checked the current market capitalization, quantity of shares floating and bulk of new ones which will be floated then its time for you to do some math. The recent marathon of IPOs and much bigger list of IPOs coming soon from finance companies, development banks, insurance companies, hospitals, etc the secondary market will soon be flooded with enormous amount of scrip’s. The major question then will be;

Will the player find a buyer in near future?

Lets do basic math;

Most companies (especially financial institutions) list their company share for around Rs. 500 (which is 5 times (5x) the IPO price). There will be automatically two cost price prevailing in the market one who bought in IPO (Rs. 100) & other the one who bought in secondary market (Rs. 500).

The cash flow pattern for any company share would look something like the below;

i. Company (Paid up Capital: Rs. 100) <-> IPO Shareholder (Cost Price: Rs. 100) -> Secondary Market Share Holder (Cost Price: Rs. 500)

ii. Company ( Profit: [10% - 30%] of Rs. 100) -> IPO Shareholder
-> Secondary Shareholder

Normally, a company shares 10% to 30% profit with its shareholders, if it ever makes good NET profit (deducting hefty salaries, operating cost, branch expansion & ATM setup expenditures). Normally in Nepali market, profit sharing could take any one of three forms (or sometimes more than one form); Dividend/Bonus, Right Shares & Bonus Shares.

i. Dividend: Good for shareholders. If you are planning to buy a company share for long term, then people should actually buy the shares of that company which gives better returns (dividend). In Nepal, SCB , Nabil, EBL popular for good dividend.

Company will have to share profit to share holders, which means cash outflow from the company. But here comes the twist.; for IPO buyer shareholder (10% – 30%) is not at all bad compared to other investment opportunities (BANK Savings/CDs), but what about Shareholder who bought in Secondary Market (bought at Rs. 500) or who paid premium price (like NTC Rs. 610) for them its (2% – 6%) return. Who in the right mind would like to waste his/her time and money in buying such stocks, which repays just 2% per annum? More over when he/she knows, its IPO price is just Rs. 100, then why would he/she want to buy it. So in future, either most of the FIs share price will come down or transactions will go down until there remain no buyers, just sellers.

ii. Right Share: Excellent scheme for the companies, who instead of giving away the profit to share holders, once again tactfully snatch money from the existing shareholders to increase their paid up capital for whatever reason. Right share is actually not the good criteria to buy a company share, which unfortunately, most people in the Nepali market follow.

Logic behind right shares is pretty same as in the olden days jamindars & sahus, why need to share the profit among thousands of hard working civilians, when they can share between just few top managers (in name of remuneration, bonus)?. More the people, less will be the individual share. So, its better to announce right share and once again get the money out from the people to fill up the cater created due to Bad Loan, Debt (NPL), extravagant operational losses (bank expansion in unfeasible area) . The recent under subscriptions to various company right shares; NBB, NHPC, Pokhara Finance, etc clearly indicates people slowly understand the game of right share and are not anymore lured by the offers.

Here is an eg. NIB was playing the field around Rs. 2600 in September 2008. The news got leaked, the company will be giving out right shares, as a result the herd natured people jumped over the NIB shares, after all it was 2:1. So, anyone who bought then paid nothing less than 2600. Lets assume, Mr. ABC bought 10 units of NIB shares for 26,000 (plus broker taxes, name transfer charges) Making it ard. 27,000. Luckily the rumor came true, Mr. ABC was happy enough to buy 5 shares for Rs. 500. Who wouldn’t be after all, its an IPO price. So for toal 15 shares (including right shares) he shed off Rs. 27,500, which makes his cost price per unit Rs. 1833. Look the market since the book closure for Right share. The price never rose more than Rs. 1400. So Mr. ABC, who thought he was lucky enough still made loss of Rs. 433/share.

iii. Bonus Share: Looks like win-win situation for both the company & shareholder. Both of them don’t have to shed off single penny, but in truth it is just a penny wiser than Right Share for the shareholder. Yes, you wont have to pay a penny for it, but you never realize the increase of number (quantity) of shareholders due to release of new bonus shares. With same paid up capital, there is will huge surge of number of share holders & shares in the market. That means in the future there will be high chance of getting less profit per share (as the number of shareholders has increased not working capital or business).

Bonus share concept is good for any company, which makes billions of profit like NTC but has few shareholders like small finance companies. Which is very rare in the market these days, may be Chilime could pass for such shares and even Arun if it completes its ambitious hydroprojects and starts selling power to NEA?

Both bonus share and right share have very negative impact upon the secondary market. As soon as book closes for these kinds of shares, the price hits the bottom. For e.g. 19th July, 2009; trading of Malika Bikas Bank (Rs. 397, -Rs. 830) in a day after book closure for Right Share. People had bought the shares of Malika for Rs. 1500 – Rs. 1700 in hope of Right Share (1:3). So, once again lets do math;

Mrs. ABC (lets give chance to ladies too), so its Mrs. ABC not Mr. ABC this time; Mrs. ABC bought 10 units of Malika for Rs. 1600 (average) in September 2008. Now, after nearly 10 months, she will be getting 30 units more for (Rs. 3000). So, her total cost for 40 (10 + 30) will be 19,000 (16,000 + 3,000), which gives Rs. 475/share. Market price is Rs. 397, so Mrs. ABC despite winning lottery of 1:3 shares is still in loss of Rs. 78/share and remember she now has 40 shares not just 10.

Looking over all three profit distribution, we are clearly seeing losses in each of them if we try to buy from the secondary market. Only way people can profit from either of three profit distribution market is like Mr. Warren Buffett says; Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.

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