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Thursday, May 21, 2009

SMCG - Trade Idea

This morning the India Financial Sector assumed with market weight rating at Credit Suisse.

Election Results Fuel Optimism For Economic Reforms in India
By Rama Lakshmi
Washington Post Foreign Service
Thursday, May 21, 2009

NEW DELHI, May 20 -- Two days after India's Congress party was returned to power with a strengthened mandate, the country's sagging stock market experienced a record surge Monday amid such euphoria that trading had to be suspended.

The joy in the market, which has barely abated since, was due not just to the surprise verdict, which defied exit-poll predictions of a period of fractious coalition-building. Business leaders and investors were also celebrating the fact that the new government would no longer have to lean on India's communist parties for support and would be able to try again to launch far-reaching economic reforms that they had opposed. Read Article

SMCG is an undervalued way to play this.

Read SMCG Research Report

A section from that research report (following 3 paragraphs):

"Millennium India Acquisition Company is a closed-end fund whose sole asset is a 14.44% equity stake in SMC Group, the fourth largest financial services company in India. As such, its stock price should reflect a direct correlation to value of SMC Group. SMC Group has been experiencing rapid growth in an expanding economy, representing an increase in perceived value. However, Millennium‘s stock price has been declining in recent months, indicating a counterintuitive inverse relationship between the two.

One possible explanation of the sell-off in the marketplace is general investor fear with regards to the slumping US economy and, more specifically, the banking sector. Much of this can be attributed to the credit crisis and the collapse of the sub-prime mortgage industry. SMC Group, however, has minimal expo- sure to credit risk as it has very little debt on its books and takes a conservative approach to leveraging its assets. They have virtually no exposure to sub-prime mortgage risk as the Indian banking industry does not trade mortgage derivatives or have a sub-prime mortgage industry.

The most recently reported Net Asset Value (NAV) per share of Millennium India Acquisition Company is $3.40. As a rule of thumb, most publicly traded closed-end funds trade at about a 5% discount to their NAV per share. By these calculations, Millennium should be trading around $3.06. On the date of this report (3/3/09), the company is trading at $0.95, or a 69% discount to its NAV as opposed to the industry standard of 5%. There is no rational explanation as to why the stock is trading at such a steep discount to the company‘s NAV. Furthermore, it can be argued that Millennium should be trading at a premium to its NAV as they are the only US listed company that mirrors a direct investment in an Indian financial firm." summary - SMCG trades at a discount to NAV. SMCG closed at $1.36 yesterday May 20, 2009. Based on the revived interest in the Indian economy/financial sector, the fact this is a unique way to play this on the nasdaq, and the discount to NAV, I think SMCG could trade to $2-$3.50 eventually from this level. Like JRJC was a way to play the Chinese financial makets, SMCG is a way to do the same in India.


T said...

Funny thing is that Granada miscalculated what the current share price should be. Instead of applying a 5% discount to NAV, they accidentally did 10%. Hence the real target price should be $3.23

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