Safety bondsThe offer document of the ICICI safety bonds issue may give a less than fair view to investors. It mentions that YTM (yield to maturity) is in the range of 13 to 22.3 per cent depending on the option chosen by the investor. The calculations are fine but the assumption is that the investor would be re-investing the interest received at a rate equal to the YTM. However, it is highly unlikely that the retail investor would be able to reinvest the interest receipts at 13 to 22.3 per cent. The realised yield (actual return earned) would be far lower than the YTM mentioned in the offer document.
Our calculations show that in case of the regular income bond, the realised yield for option three works out to 13 per cent, if the interest receipts are reinvested at 11 per cent per year. The YTM of 14 per cent is unattainable unless the interest rates shoot up. If interest rates rise, the reinvestment income would become higher but the price of the bond would fall. Hence the gain on one side couldresult in losses on the other.
The decision to invest in the bonds should be based on the investor's required return and investment horizon. Once the required rate of return is fixed, the duration for which investments need to be made in a particular bond, can be estimated. Duration is defined as the period in the life of the bond for which investments made in it are completely immunised from risks. Simply put, it is the period for which the investments made in the bond yield exactly the return required by the investor.
As far as the money multiplier bonds and the option two in the tax saving bond are concerned, the duration is the same as their period to maturity. In case of the regular income bond, the duration works out to 4 years if an investor wants a return of 15 per cent per annum. Similarly, for options one, three and five of the tax saving bonds, the durations are 2.8 years, 4 years and 5 years respectively.
For investors who wish to continuously trade in the bonds, the price risk associatedwith the various bonds is as follows. The money multiplier bonds have an average price risk. For each percentage increase in interest rate the price of these bonds would fall by around 4.6 per cent. Price in case of the option 2 of the tax saving scheme would fall by 5.7 per cent for each percentage rise in interest. The price risk is the highest for higher tenure money multiplier bonds.
Goodyear India
A 30 per cent dividend announced by Goodyear India has enthused the market. In the last few trading sessions, the scrip has moved up from Rs 48 to over Rs 58, the company's book value. Though the dividend for the year 1997 is attractive, Goodyear India's results can hardly be said to be impressive. Its sales have increased only marginally from Rs 535.09 crore to Rs 537.89 crore, not surprising as the economy was on a downturn.
It is well known that in periods of sluggish commercial activity, the transport sector does not do well. The replacement market for heavy commercial vehicle (HCV) tyresshrinks, making it difficult for tyre manufacturers to sell their products.
The HCV segment accounts for about 70 per cent of Goodyear's sales in value terms and the replacement market makes up for 68 per cent of all HCV tyre sales.
However, lower raw material cost in 1997 has enabled the company to curtail its expenses at the previous year's level. Rubber, the main raw material for tyres, has seen prices fall by about 20 per cent in the period December 1996 to December 1997. Thus, Goodyear India's operating profit has increased by over 7 per cent to Rs 39.16 crore and the operating margin has improved from 6.78 per cent to 7.28 per cent.
Though the company had a higher interest outgo, a 40 per cent rise in other income has helped. Gross margin has improved from 3.28 per cent to 3.74 per cent. A lower tax provision has further aided the increase in the tyre company's net profit from Rs 8.27 crore to Rs 10.32 crore.
Goodyear India's net worth has bloated up from Rs 59.78 crore to Rs 134.81 crore as aresult of a hike in stake by the parent company, Goodyear USA. As a consequence, its EPS has plummeted from Rs 5.52 to Rs 4.47 and the return on equity has declined from 17.26 per cent to 7.66 per cent. The funds infused are being used for an expansion cum modernisation at its Haryana plant and the market appears to be of the opinion that this will help the company to perform better this year.
Raasi Cement
The division bench of the Andhra Pradesh high court has vacated the stay given on open offer by India Cements. The court observed that Sec 108 A (which requires prior approval of central government in case the holding exceeds 25 per cent) is valid only in case of dominant undertaking as defined under MRTP Act. Incidentally, Sec 30 B of the MRTP Act dealing with restriction on acquisition of shares, was deleted way back in September 1991. This raises an interesting question. Since the matter has been dismissed on the ground that basis of appeal itself was baseless, will Raasi be allowed to make acounter offer, now that the period within which counter offer has to be made has lapsed? Stay orders can be obtained on all sorts of grounds, which may later turn out to be quite frivolous, and extension sought for making a counter offer.
Emcee (with contributions from Manish Saxena, Sarad Saraf andUrmik Chhaya)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
