NEW ISSUES
The Moody's effect
Sandeep Singh
Posted online: Tuesday , March 20, 2007
Its credit rating and information services businesses are poised to do well. The kicker: Moody's, one of the two global biggies, assuming sole charge.
The main, sometimes the only, objective of most companies to go public is to raise money to expand their business. By that count, Icra (Investment Information and Credit Rating Agency) is a rarity. The company is not issuing any new shares. Rather, three of its many promoters are selling their shares, in part (SBI and UTI) or in full (IFCI), in what is called an ‘offer for sale’. The entire Rs 80-odd crore IPO proceeds will go to them, Icra will get nothing.
So, what's the point of the issue? Ask company officials that, and they say something about how being listed gives a company visibility. What they don’t say is that the exit of IFCI and reduction of SBI’s stake to below 10 per cent will put Moody’s, co-promoter and the world’s second-largest credit rating agency, in the driver’s seat at Icra, opening up more possibilities for the business and by extension, for investors. The prospectus is silent on these ‘possibilities’, but those are within the realm of the possible and make for good reasons to invest in the Icra IPO.
Upside in business…
The first possibility is that of growth in business. Promoted by a clutch of banks and financial institutions, Icra commenced operations in 1991 as a credit rating agency, assigning ratings (like ‘AAA’ and ‘A’) to debt issues of companies. Over the years, business has grown. The company has also diversified into related businesses, notably consultancy, IT-based services and information outsourcing. As a result, the revenue share of rating services is down from 70 per cent in 2003-04 to 56 per cent in 2005-06.
That share will keep falling, but it will still remain the mainstay for Icra. Demand for rating services is linked to the state of the economy. If the economy is doing well, companies look to expand, for which, they raise money through debt and equity issues. The more debt issues they make, the more business they provide rating agencies like Icra, which earns a one-time fee (for the initial rating) and an annual surveillance fees (for monitoring the rating through the issue’s tenure). In the last three years, the volume of debt paper being rated has steadily increased.
Over the years, credit rating has been made mandatory for several kinds of debt paper. These include corporate debt with tenures of more than 18 months, commercial paper issued by companies, fixed deposits of non-banking finance companies and debt paper of more than one year issued by listed companies on a private placement basis. It’s in the interest of companies to get their debt paper rated, as several institutional investors only look at rated paper.
Rating agencies are venturing into rating new segments like stockbrokers, developers and governance practices of companies. If two pending regulatory proposals are cleared, it will open up two more business lines. The first is IPO grading, the need and utility of which is being contested by many. The second is rating of loans and advances of banks. At present, banks have to maintain a standard capital of 9 per cent on all their advances. But under an RBI proposal, once Indian banks shift to Basel-II norms, the capital they will be required to put aside will be based on a risk assessment of their loan portfolio. So, banks will have to get their loans and advances rated. Elsewhere, Icra is looking to increase its presence in three related businesses.
…and promoter
Business for rating agencies is good: companies are issuing debt to expand and regulators are being kind Although the prospectus and company officials are, strangely, silent on the opportunities in these segments or Icra’s plans, these should benefit from the Moody’s taking sole charge. In terms of business and shareholder value, Crisil, India’s largest credit rating agency, came into its own after Standard and Poor (S&P) took charge. Post-issue, Moody’s will have a 28.5 per cent stake in Icra. In all probability, the US company will look to increase it beyond 50 per cent, which could be a trigger for the share price.
Even if that doesn’t happen or takes long to pan out, there’s enough happening in Icra to merit investment. Growth won’t be explosive, but it should be steady. In the last three years, Icra’s revenues have grown at a compounded annual rate of 26 per cent, net profit at 13.9 per cent. Icra is cash-rich and, since it is in a people-driven service business, doesn’t need cash infusion to grow.
Salaries have been increasing, but Icra still managed a net margin of 26 per cent in 2005-06, which is better than Crisil. Its issue price of Rs 275-330 discounts its 2005-06 earnings 16.7-20 times, again better than Crisil (See table: Financial performance). If the economy stays on the fast track, if Icra can keep growing its new businesses and not lose much in margins, that’s a good price to buy this stock for the long term. As if Moody’s increases its hold and influence over the company, it should look even better.
Source : Express Money
Big Talk- Subir Gokarn
BIG TALK:
SUBIR GOKARN, ED AND CHIEF ECONOMIST, CRISIL
‘Even Rs 39 may be a conservative estimate’ Avinash Singh And Sandeep Singh Posted online: Monday , July 23, 2007 at 1450 IST Updated: Wednesday, June 29, 2005 at 1257 hours IST --
An appreciating rupee is knocking the wind out of the sails of software companies. However, says Subir Gokarn, executive director and chief economist, Crisil, it’s not such knowledge-based industries, but labour-intensive, easily substitutable ones like textiles that will feel pinch of a rising rupee more. In a wide-ranging interview to our correspondents, Gokarn dwelled at length on the prospects and impact of the rupee, why he believes GDP growth will average 8-8.5 per cent a year for the next five years, and much more.
Q1 results are trickling in. What are your first impressions?
They are still too few to spot trends, but my first impression is that there isn’t a slowdown from the previous quarter, but there is no acceleration either. The numbers suggest plateauing, but without any clear indication of a slowdown.
The maximum results are in IT, where an appreciating rupee is taking its toll.An appreciating rupee will hurt any sector where exports account for a majority of revenues. But sectors that are domestically driven or have a balance between domestic revenues and exports won’t be affected. The trend for the IT sector is quite clear.
Some are saying a dollar rate of Rs 39 by mid-2008. What’s your outlook?
It depends on policy. Ever since our balance of payments (BoP) turned positive, four or five years ago, the RBI’s stance has been to resist appreciation. But in a BoP surplus situation, the natural tendency of a currency is to appreciate — it’s a simple demand-supply argument. In that sense, the RBI has kept the rupee undervalued during this entire period.If it decides to go back to that stance, the rupee will settle for some time. If it decides not to resist appreciation, there is no telling where the rupee will go. However, the more it appreciates, the probability of it appreciating further will reduce. What’s that point of equilibrium — Rs 39, 38 or 37 — is difficult to tell. The BoP numbers for the last quarter of 2006-07 show a significant surplus, both in the current and capital accounts. Even capital inflows are very high. So, even Rs 39 may be a conservative estimate, but the question is whether the RBI will let it go.
You feel the RBI will eventually step in.
The pressure from the export lobby will be there. Most of our exports, other than software, are very labour intensive, like jewellery, footwear and garments. They will get hurt, as they are easy to substitute. You can stop buying from India and, without disrupting your supply chain, start buying from Thailand, Vietnam or China. When there is ease of substitution, price competitiveness is important.The commerce and the finance minister tried to work out a package last week, and the signal was that we have to live with this for some time, so let’s try to find other offsets. In other words, the rupee might appreciate further. If I’m forced to take a call, as inflation numbers decline, they might resume a stance of resisting appreciation. But when that will happen is difficult to say.
So, export-driven sectors are in for a period of pain.
Typically, a sector that works entirely on domestic inputs and exports all its output is one that will be hurt the most, the extreme example being software. However, software is not easy to substitute, as clients tend to stick with their partners. However, a JCPenny or Wal-Mart, who are sourcing garments or footwear can easily terminate a contract and replace it with another one from some other country.
Is the manoeuvring room for such Indian exporters very small?
It is, as commodities like garments and footwear is completely replicable. There is no inherent advantage one country has over the other, and price is everything. A change of 2-3 percentage points in a currency can change the attractiveness of a location.It won’t happen in industries like software, or in knowledge-intensive industries like auto components or pharmacy. In auto components, it takes a long time and a lot of investment to set up a supply chain. If the rupee appreciates, GM or Ford, who are buying components from suppliers in India, can’t decide overnight that they are going to abandon them. They will take six months to a year to decide whether they need to source more from, say, Thailand and China, where the currency is to their advantage. But they can’t decide in one go that we are going to buy nothing from India because the capacity in other countries is not there, the quality control is not there and they can’t just abandon investments made in the supply chain. In such sectors, margins will fall, but not so much production.
Going beyond the rupee, is there enough investments and capital expansion happening to sustain 8-9 per cent GDP growth?
A lot of growth momentum came from sectors sensitive to interest rates like auto, construction and housing. If rates rise, some of this momentum will weaken, which will reduce the willingness of companies to set up new capacity. So, we expect to see some decline in investment activity. The numbers of capital goods manufacturers, or those of production and capital expenditure, still look buoyant. Simultaneously, there are signs of higher interest rates hurting housing, auto, especially commercial vehicles and two-wheelers, over the past six to nine months. But even then, it’s not a dramatic change. We still have substantial growth momentum.
The FM is talking of 10 per cent GDP growth rate, provided agriculture grows at 4 per cent.
In the current macroeconomic situation, 10 per cent is more of an aspiration than a forecast.
What is Crisil’s forecast?
An average of 8-8.5 per cent over the next five years.
What gives you the confidence that 8.5 per cent is realistic?Many bits and pieces of the reforms process over the last 15 years contributed to growth, but it never gained a critical mass till about three or four years ago. There were a couple of triggers. One was interest rates, which fell from 16 per cent in 1996 to 7.5 per cent about two years back. Currently, they are at 9.5-10. We can’t expect them to go back to 16 per cent, but now they are moving in a range of 6.5-10 per cent. That means something fundamentally happened in the financial sector to allow lenders to reduce rates from 16 per cent. Competition increased dramatically, efficiency of lending has increased dramatically, risk management has become quite efficient.This was supported by fund inflows, which started in 2002 and accelerated growth, and productivity gains. Our demographics present a big long-term opportunity. All these factors that held back growth have eased considerably.
In the context of growth, you seem to mention interest rates as the critical factor. Is it really that big?
No, I was referring to the structural change between the mid-nineties and today, when rates have fallen by 5 percentage points. Borrowing at 16 per cent versus borrowing at 7 per cent makes a huge difference in the affordability to borrow, and that’s where demographics come in. You have the potential, you convert it into reality.What’s happening with interest rates now is a cyclical change, not a trend change. When rates reach 10 per cent, you shut out few potential borrowers. But that’s not the same as 16 per cent, where you change the trend.
In the current interest cycle, are we close to peaking?
The moderation in growth rate does suggest the cycle is turning, which means there will be a reversion of growth rate towards the trend. Once a trend is identified, the objective of monetary policy is to minimise fluctuation. In a macroeconomic situation, the closer growth patterns are to the trend, the easier it is for investors to take long-term decisions. You are then more confident that your long-term forecast, assumption and expectations will more or less materialize.
Lastly, what’s happening at Crisil with IPO grading?The gradings we did as part of the pilot project painted a wrong picture. Stock exchanges sent us only those companies that they felt needed a grading. I think only one of them got 3 out of 5, the rest were 2 or less. If you are telling investors that all the companies graded are 2 or below, what does a good one look like? Unless investors have something to benchmark them against, the value of this product is limited.
http://www.expressmoney.in/news/Even-Rs-39-may-be-a-conservative-estimate/89884.html
SUBIR GOKARN, ED AND CHIEF ECONOMIST, CRISIL
‘Even Rs 39 may be a conservative estimate’ Avinash Singh And Sandeep Singh Posted online: Monday , July 23, 2007 at 1450 IST Updated: Wednesday, June 29, 2005 at 1257 hours IST --
An appreciating rupee is knocking the wind out of the sails of software companies. However, says Subir Gokarn, executive director and chief economist, Crisil, it’s not such knowledge-based industries, but labour-intensive, easily substitutable ones like textiles that will feel pinch of a rising rupee more. In a wide-ranging interview to our correspondents, Gokarn dwelled at length on the prospects and impact of the rupee, why he believes GDP growth will average 8-8.5 per cent a year for the next five years, and much more.
Q1 results are trickling in. What are your first impressions?
They are still too few to spot trends, but my first impression is that there isn’t a slowdown from the previous quarter, but there is no acceleration either. The numbers suggest plateauing, but without any clear indication of a slowdown.
The maximum results are in IT, where an appreciating rupee is taking its toll.An appreciating rupee will hurt any sector where exports account for a majority of revenues. But sectors that are domestically driven or have a balance between domestic revenues and exports won’t be affected. The trend for the IT sector is quite clear.
Some are saying a dollar rate of Rs 39 by mid-2008. What’s your outlook?
It depends on policy. Ever since our balance of payments (BoP) turned positive, four or five years ago, the RBI’s stance has been to resist appreciation. But in a BoP surplus situation, the natural tendency of a currency is to appreciate — it’s a simple demand-supply argument. In that sense, the RBI has kept the rupee undervalued during this entire period.If it decides to go back to that stance, the rupee will settle for some time. If it decides not to resist appreciation, there is no telling where the rupee will go. However, the more it appreciates, the probability of it appreciating further will reduce. What’s that point of equilibrium — Rs 39, 38 or 37 — is difficult to tell. The BoP numbers for the last quarter of 2006-07 show a significant surplus, both in the current and capital accounts. Even capital inflows are very high. So, even Rs 39 may be a conservative estimate, but the question is whether the RBI will let it go.
You feel the RBI will eventually step in.
The pressure from the export lobby will be there. Most of our exports, other than software, are very labour intensive, like jewellery, footwear and garments. They will get hurt, as they are easy to substitute. You can stop buying from India and, without disrupting your supply chain, start buying from Thailand, Vietnam or China. When there is ease of substitution, price competitiveness is important.The commerce and the finance minister tried to work out a package last week, and the signal was that we have to live with this for some time, so let’s try to find other offsets. In other words, the rupee might appreciate further. If I’m forced to take a call, as inflation numbers decline, they might resume a stance of resisting appreciation. But when that will happen is difficult to say.
So, export-driven sectors are in for a period of pain.
Typically, a sector that works entirely on domestic inputs and exports all its output is one that will be hurt the most, the extreme example being software. However, software is not easy to substitute, as clients tend to stick with their partners. However, a JCPenny or Wal-Mart, who are sourcing garments or footwear can easily terminate a contract and replace it with another one from some other country.
Is the manoeuvring room for such Indian exporters very small?
It is, as commodities like garments and footwear is completely replicable. There is no inherent advantage one country has over the other, and price is everything. A change of 2-3 percentage points in a currency can change the attractiveness of a location.It won’t happen in industries like software, or in knowledge-intensive industries like auto components or pharmacy. In auto components, it takes a long time and a lot of investment to set up a supply chain. If the rupee appreciates, GM or Ford, who are buying components from suppliers in India, can’t decide overnight that they are going to abandon them. They will take six months to a year to decide whether they need to source more from, say, Thailand and China, where the currency is to their advantage. But they can’t decide in one go that we are going to buy nothing from India because the capacity in other countries is not there, the quality control is not there and they can’t just abandon investments made in the supply chain. In such sectors, margins will fall, but not so much production.
Going beyond the rupee, is there enough investments and capital expansion happening to sustain 8-9 per cent GDP growth?
A lot of growth momentum came from sectors sensitive to interest rates like auto, construction and housing. If rates rise, some of this momentum will weaken, which will reduce the willingness of companies to set up new capacity. So, we expect to see some decline in investment activity. The numbers of capital goods manufacturers, or those of production and capital expenditure, still look buoyant. Simultaneously, there are signs of higher interest rates hurting housing, auto, especially commercial vehicles and two-wheelers, over the past six to nine months. But even then, it’s not a dramatic change. We still have substantial growth momentum.
The FM is talking of 10 per cent GDP growth rate, provided agriculture grows at 4 per cent.
In the current macroeconomic situation, 10 per cent is more of an aspiration than a forecast.
What is Crisil’s forecast?
An average of 8-8.5 per cent over the next five years.
What gives you the confidence that 8.5 per cent is realistic?Many bits and pieces of the reforms process over the last 15 years contributed to growth, but it never gained a critical mass till about three or four years ago. There were a couple of triggers. One was interest rates, which fell from 16 per cent in 1996 to 7.5 per cent about two years back. Currently, they are at 9.5-10. We can’t expect them to go back to 16 per cent, but now they are moving in a range of 6.5-10 per cent. That means something fundamentally happened in the financial sector to allow lenders to reduce rates from 16 per cent. Competition increased dramatically, efficiency of lending has increased dramatically, risk management has become quite efficient.This was supported by fund inflows, which started in 2002 and accelerated growth, and productivity gains. Our demographics present a big long-term opportunity. All these factors that held back growth have eased considerably.
In the context of growth, you seem to mention interest rates as the critical factor. Is it really that big?
No, I was referring to the structural change between the mid-nineties and today, when rates have fallen by 5 percentage points. Borrowing at 16 per cent versus borrowing at 7 per cent makes a huge difference in the affordability to borrow, and that’s where demographics come in. You have the potential, you convert it into reality.What’s happening with interest rates now is a cyclical change, not a trend change. When rates reach 10 per cent, you shut out few potential borrowers. But that’s not the same as 16 per cent, where you change the trend.
In the current interest cycle, are we close to peaking?
The moderation in growth rate does suggest the cycle is turning, which means there will be a reversion of growth rate towards the trend. Once a trend is identified, the objective of monetary policy is to minimise fluctuation. In a macroeconomic situation, the closer growth patterns are to the trend, the easier it is for investors to take long-term decisions. You are then more confident that your long-term forecast, assumption and expectations will more or less materialize.
Lastly, what’s happening at Crisil with IPO grading?The gradings we did as part of the pilot project painted a wrong picture. Stock exchanges sent us only those companies that they felt needed a grading. I think only one of them got 3 out of 5, the rest were 2 or less. If you are telling investors that all the companies graded are 2 or below, what does a good one look like? Unless investors have something to benchmark them against, the value of this product is limited.
http://www.expressmoney.in/news/Even-Rs-39-may-be-a-conservative-estimate/89884.html
IPO Analysis- Central Bank of India
Slow off the blocks
Sandeep Singh
Posted online: Monday , July 23, 2007
As investments go, Central Bank of India makes a good first impression. With the economic engines hurtling along, the banking business is poised to go places. The bank itself has the third-largest branch network in the country and is selling its shares at a relatively modest PE of 6.9-8.3. It has received an IPO Grade of 4 (the highest being 5) from credit rating agency CARE, signifying “above-average fundamentals”. But dig deeper, the subsequent impressions are, at best, average. They show a bank that is late off the blocks in reorienting itself to the new economic and business order, in the process under-utilising many of its strengths.
Below parIts biggest strength is reach. With 3,194 branches (1,094 urban, 759 semi-urban and 1,341 rural), Central Bank of India is ranked third, but productivity from these branches is woefully low. In terms of assets and revenues, the bank slips to number eight, and a distant 22 in net profit (one slot behind State Bank of Travancore, which has 694 branches).One of the reasons for this slippage in performance is its tardiness in embracing technology. At a time when full linkages are the norm for private banks, and the leading public sector banks are getting there, only 51 per cent of Central Bank of India branches are computerised. Worse, only 324 of its branches — or less than 10 per cent — offer centralised banking solutions. The bank plans to increase this number to 1,000 by March 2008. It trails most banks in ATM count also. As on March 31, 2007, it had 261 ATMs. That’s an ATM-to-branch ratio of 8 per cent, which compares dismally to the 25 per cent average of public sector banks.The one positive off its widespread branch network is the high percentage of current account and savings account (CASA), 42 per cent, in its total deposit base. A bank wants to have as much of these deposits as possible, as it pays zero interest on a current account and just 3.5 per cent on a savings account. A 42 per cent CASA reduces the cost of funds for Central Bank of India, helping it earn a spread of an impressive 3.2 per cent.However, once it starts accounting for its other expenses and bad debts, it doesn’t end up with as much surplus as it could end up with. The biggest of these outgoes is salaries. In 2006-07, 19 per cent of its income went in paying its employees across its 3,194 branches. Since those branches do not have as many loan assets, and are not generating as much in revenues and profits, as other banks of its size, its profitability is low.
The second biggest outgo for Central Bank of India is provisioning for bad loans. As on 31 March 2007, the bank had gross NPAs (non-performing assets) of Rs 2,571.9 crore, or 4.8 per cent of gross advances. On a net level (gross NPAs minus provisions made that year) stood at Rs 878.4 crore, or 1.7 per cent of its net advances. It was primarily because of provisioning of this level that the bank’s net profit got pared down from Rs 1,269.6 crore to Rs 498.2 crore in 2006-07.
Peer pressureThat’s what’s bogged it down in the past. Question is, what does the bank need to do to change this? And more importantly, is it doing enough to bring about that change? To start with, the bank needs to increase productivity. It can do that by investing more in linking its branches and setting up ATMs. The other front is lending more — and lending profitably.A rough calculation shows that even if every branch increases its revenues by Rs 50 lakh, the bank’s total revenues will increase by about 25 per cent. Since many of its branches are in semi-urban and rural areas, where industrial lending is low, it’s retail that can make an across-the-board difference. However, Central Bank of India has been weak in retail. In 2006-07, retail loans accounted for just 11 per cent of all its loans. By comparison, Bank of India was doing 22 per cent, PNB 24 per cent, even SBI 22 per cent.
The other challenge is to lend profitably. In the last two years, credit has grown at a compounded annualised rate of 35.4 per cent, while deposits have grown at 16.7 per cent. That shows that it is not able to mobilise as much deposits as it needs. If its dependence on CASA reduces and that on FDs increases, its cost of funds will increase — and put pressure on margins. Clearly, a lot of work lies ahead of Central Bank of India, and the management needs to show more intent and speed in transforming the bank into a nimble, modern, profitable business.
The banking sector should grow well, as should Central Bank of India. But why would you want to invest in a bank that is still doing the hard work when you can invest in public sector banks that have done more of that hard work, at the same or marginally higher valuations? Three such banks are Canara Bank, Punjab National Bank and Bank of India, and each one is significantly ahead in efficiency, technology, profitability and business sense (See table: ). Rather than invest in the Central Bank of India IPO, you should buy shares of these three banks from the stock market.
Sandeep Singh
Posted online: Monday , July 23, 2007
As investments go, Central Bank of India makes a good first impression. With the economic engines hurtling along, the banking business is poised to go places. The bank itself has the third-largest branch network in the country and is selling its shares at a relatively modest PE of 6.9-8.3. It has received an IPO Grade of 4 (the highest being 5) from credit rating agency CARE, signifying “above-average fundamentals”. But dig deeper, the subsequent impressions are, at best, average. They show a bank that is late off the blocks in reorienting itself to the new economic and business order, in the process under-utilising many of its strengths.
Below parIts biggest strength is reach. With 3,194 branches (1,094 urban, 759 semi-urban and 1,341 rural), Central Bank of India is ranked third, but productivity from these branches is woefully low. In terms of assets and revenues, the bank slips to number eight, and a distant 22 in net profit (one slot behind State Bank of Travancore, which has 694 branches).One of the reasons for this slippage in performance is its tardiness in embracing technology. At a time when full linkages are the norm for private banks, and the leading public sector banks are getting there, only 51 per cent of Central Bank of India branches are computerised. Worse, only 324 of its branches — or less than 10 per cent — offer centralised banking solutions. The bank plans to increase this number to 1,000 by March 2008. It trails most banks in ATM count also. As on March 31, 2007, it had 261 ATMs. That’s an ATM-to-branch ratio of 8 per cent, which compares dismally to the 25 per cent average of public sector banks.The one positive off its widespread branch network is the high percentage of current account and savings account (CASA), 42 per cent, in its total deposit base. A bank wants to have as much of these deposits as possible, as it pays zero interest on a current account and just 3.5 per cent on a savings account. A 42 per cent CASA reduces the cost of funds for Central Bank of India, helping it earn a spread of an impressive 3.2 per cent.However, once it starts accounting for its other expenses and bad debts, it doesn’t end up with as much surplus as it could end up with. The biggest of these outgoes is salaries. In 2006-07, 19 per cent of its income went in paying its employees across its 3,194 branches. Since those branches do not have as many loan assets, and are not generating as much in revenues and profits, as other banks of its size, its profitability is low.
The second biggest outgo for Central Bank of India is provisioning for bad loans. As on 31 March 2007, the bank had gross NPAs (non-performing assets) of Rs 2,571.9 crore, or 4.8 per cent of gross advances. On a net level (gross NPAs minus provisions made that year) stood at Rs 878.4 crore, or 1.7 per cent of its net advances. It was primarily because of provisioning of this level that the bank’s net profit got pared down from Rs 1,269.6 crore to Rs 498.2 crore in 2006-07.
Peer pressureThat’s what’s bogged it down in the past. Question is, what does the bank need to do to change this? And more importantly, is it doing enough to bring about that change? To start with, the bank needs to increase productivity. It can do that by investing more in linking its branches and setting up ATMs. The other front is lending more — and lending profitably.A rough calculation shows that even if every branch increases its revenues by Rs 50 lakh, the bank’s total revenues will increase by about 25 per cent. Since many of its branches are in semi-urban and rural areas, where industrial lending is low, it’s retail that can make an across-the-board difference. However, Central Bank of India has been weak in retail. In 2006-07, retail loans accounted for just 11 per cent of all its loans. By comparison, Bank of India was doing 22 per cent, PNB 24 per cent, even SBI 22 per cent.
The other challenge is to lend profitably. In the last two years, credit has grown at a compounded annualised rate of 35.4 per cent, while deposits have grown at 16.7 per cent. That shows that it is not able to mobilise as much deposits as it needs. If its dependence on CASA reduces and that on FDs increases, its cost of funds will increase — and put pressure on margins. Clearly, a lot of work lies ahead of Central Bank of India, and the management needs to show more intent and speed in transforming the bank into a nimble, modern, profitable business.
The banking sector should grow well, as should Central Bank of India. But why would you want to invest in a bank that is still doing the hard work when you can invest in public sector banks that have done more of that hard work, at the same or marginally higher valuations? Three such banks are Canara Bank, Punjab National Bank and Bank of India, and each one is significantly ahead in efficiency, technology, profitability and business sense (See table: ). Rather than invest in the Central Bank of India IPO, you should buy shares of these three banks from the stock market.
Currency appr and its impact
UP, UP AND AWRY
Sandeep Singh
Posted online: Tuesday , July 31, 2007
MindTree Consulting, which made an impressionable debut on the bourses earlier this year, increased its revenues by 35 per cent in the first quarter (April to June) of 2007-08. Yet, its net profit for the same period dipped 15 per cent. In another industry, auto ancillaries, Sundaram Brake Linings saw both its revenue and profit growth slip in Q1. As did GTN Textiles in textiles.These three companies are not random examples of corporate performance. They represent three sectors that carry India’s aspirations as a low-cost, high-quality export hub — software, auto ancillaries and textiles — and the hopes of millions of investors who have backed them to make a mark on the global landscape. MindTree got 88 per cent of its revenues from exports in 2006-07, Sundaram Brake 33.3 per cent and GTN Textiles 81.1 per cent in 2005-06 .
Rupee lossesFrom a blessing, this export orientation has become a curse. In the past year, the rupee has appreciated 14.1 per cent against the dollar, from Rs 46.85 to Rs 40.27 now. For Indian exporters selling in dollars, it’s a straight notional loss. If they sold a good for $100 a year ago, they would have repatriated Rs 4,685 into India. Today, if they sell the same good at $100, they will bring back only Rs 4,027.For some like the frontline software companies, it’s a loss in margins. Says Rostow Ravanan, chief financial officer, MindTree Consulting: “Every 1 per cent rise in the rupee lowers our net margin by 0.5 percentage point.” Down the ranks, the threat is of losing business to low-cost export hubs like China.Worrying as the dip in performance is, the forecast for the rupee against the dollar is a greater cause for concern for exporters in general and those from these three sectors in particular. Big dollars are being pumped into India, through the FII and FDI route, by private equity players, in the form of foreign currency loans. Says Abheek Barua, chief economist, HDFC Bank: “The dollar should be Rs 38-39 by next year. Rupee appreciation is here to stay, for four to five years.” Adds Subir Gokarn, executive director and chief economist, Crisil: “In a balance of payments surplus situation, the natural tendency of a currency is to appreciate. If the RBI decides not to intervene, there is no telling where — Rs 39, 38 or 37 — it may go.”A rising rupee impacts your finances in many ways. If you are working abroad and earning in dollars, you will repatriate fewer rupees into India. Conversely, if you are travelling abroad, you will need fewer rupees to buy the dollars. However, those who are affected in such forms are far more than the investors of companies that make a major part of their sales in dollars.Some of them also import raw materials or spend in dollars, which covers the loss on the export side.However, if a company’s exports are high and imports low, as is the case with software, textiles and auto ancillaries, they have some reorientation to do.
Software
In terms of export share, software leads the pack. Several companies are only doing work for foreign companies, that too mostly in the US, and are being paid in dollars. For the top 10 IT companies by revenues, exports comprise an average of 83 per cent of their revenues.During the rupee’s 14 per cent rise against the dollar, the sharp rise has been since March — 9 per cent in five months. So, though the 2006-07 numbers are strong, those for Q1 2007-08 show some after-effects. The big four — TCS, Infosys, Wipro and Satyam — have seen growth, both in revenues and net profit, in Q1 fall compared to 2006-07. For instance, after several successive quarters of above 25 per cent profit growth, Wipro’s year-on-year profit growth dropped to 8.4 per cent.However, experts say, the nature of the software business is such that Indian companies won’t lose out overnight. Says Gokarn: “Software is knowledge-intensive and not easy to substitute, as clients tend to stick with their partners.” Conversely, if business does shift to neighbouring low-cost countries like The Philippines, it might not come back easily.For now, the possibility of a shift is remote. Says Ravanan: “Software is profitable, its demand potential is huge, and it will find ways to recalibrate.”The biggies have room to play with and they are seeing robust demand for their services. Companies down the ranks will feel the pinch more, as they have less room to manoeuvre. Says an IT analyst: “The impact will be more on mid-sized and smaller players. Large companies have the flexibility to absorb the impact. Some of them even have pricing power to pass on the rupee appreciation to their clients.” The three biggies — TCS, Infosys and Wipro — are still good long-term picks.
TextilesUnlike software, the textile business is neither knowledge-intensive nor do companies in it operate at the top end of margins. Admits Rajendra J. Hinduja, executive director, finance and administration, Gokaldas Exports: “Net margin of apparel companies is 5-9 per cent. If the dollar takes away 8 percentage points, we are in trouble.”Eight of the top 10 textile companies that had declared their Q1 results have seen lower revenue growth, compared to the full-year numbers for 2007-08; five of these companies have shown negative growth. The profitability picture is no better (See table). Unlike software companies, Indian textile companies can’t absorb a margin loss. If the rupee keeps rising and realisations keep falling, they will be left with no choice but to hike product prices. The danger here is that the Wal-Marts and JC Penny’s might simply go to another country.Among the three sectors, textiles has the most to lose and the most to change. Says Hinduja: “We can improve productivity, charge higher product prices and move to value-added products, which offer greater pricing power.” The final word belongs to Chirag Khasgiwala, textiles analyst, Emkay Share & Stock Brokers: “A 10-20 per cent drop in profits is likely. I don’t see strong buying potential currently.”
Auto ancillariesAuto ancillaries fall in between IT and textiles. Average exports as a percentage of revenues have risen from 5-8 per cent to about 15 per cent in the past two to three years.Nine of the top 10 auto ancillary companies who have declared their Q1 numbers have reported a drop in net profit growth, compared to 2006-07. India faces competition from neighbouring countries like China, Vietnam, Mongolia and Bangladesh, but there are barriers to a shift. Says Gokarn: “Companies like GM invest a lot to set up a supply chain, which can’t be abandoned like that.”Since the industry imports some of its raw materials, it gets a natural hedge against the rupee. Also, the percentage of exports is still not as significant as textiles or software to press the panic button. Two stocks that are good buys even now are Bharat Forge and Minda Industries.
Sandeep Singh
Posted online: Tuesday , July 31, 2007
MindTree Consulting, which made an impressionable debut on the bourses earlier this year, increased its revenues by 35 per cent in the first quarter (April to June) of 2007-08. Yet, its net profit for the same period dipped 15 per cent. In another industry, auto ancillaries, Sundaram Brake Linings saw both its revenue and profit growth slip in Q1. As did GTN Textiles in textiles.These three companies are not random examples of corporate performance. They represent three sectors that carry India’s aspirations as a low-cost, high-quality export hub — software, auto ancillaries and textiles — and the hopes of millions of investors who have backed them to make a mark on the global landscape. MindTree got 88 per cent of its revenues from exports in 2006-07, Sundaram Brake 33.3 per cent and GTN Textiles 81.1 per cent in 2005-06 .
Rupee lossesFrom a blessing, this export orientation has become a curse. In the past year, the rupee has appreciated 14.1 per cent against the dollar, from Rs 46.85 to Rs 40.27 now. For Indian exporters selling in dollars, it’s a straight notional loss. If they sold a good for $100 a year ago, they would have repatriated Rs 4,685 into India. Today, if they sell the same good at $100, they will bring back only Rs 4,027.For some like the frontline software companies, it’s a loss in margins. Says Rostow Ravanan, chief financial officer, MindTree Consulting: “Every 1 per cent rise in the rupee lowers our net margin by 0.5 percentage point.” Down the ranks, the threat is of losing business to low-cost export hubs like China.Worrying as the dip in performance is, the forecast for the rupee against the dollar is a greater cause for concern for exporters in general and those from these three sectors in particular. Big dollars are being pumped into India, through the FII and FDI route, by private equity players, in the form of foreign currency loans. Says Abheek Barua, chief economist, HDFC Bank: “The dollar should be Rs 38-39 by next year. Rupee appreciation is here to stay, for four to five years.” Adds Subir Gokarn, executive director and chief economist, Crisil: “In a balance of payments surplus situation, the natural tendency of a currency is to appreciate. If the RBI decides not to intervene, there is no telling where — Rs 39, 38 or 37 — it may go.”A rising rupee impacts your finances in many ways. If you are working abroad and earning in dollars, you will repatriate fewer rupees into India. Conversely, if you are travelling abroad, you will need fewer rupees to buy the dollars. However, those who are affected in such forms are far more than the investors of companies that make a major part of their sales in dollars.Some of them also import raw materials or spend in dollars, which covers the loss on the export side.However, if a company’s exports are high and imports low, as is the case with software, textiles and auto ancillaries, they have some reorientation to do.
Software
In terms of export share, software leads the pack. Several companies are only doing work for foreign companies, that too mostly in the US, and are being paid in dollars. For the top 10 IT companies by revenues, exports comprise an average of 83 per cent of their revenues.During the rupee’s 14 per cent rise against the dollar, the sharp rise has been since March — 9 per cent in five months. So, though the 2006-07 numbers are strong, those for Q1 2007-08 show some after-effects. The big four — TCS, Infosys, Wipro and Satyam — have seen growth, both in revenues and net profit, in Q1 fall compared to 2006-07. For instance, after several successive quarters of above 25 per cent profit growth, Wipro’s year-on-year profit growth dropped to 8.4 per cent.However, experts say, the nature of the software business is such that Indian companies won’t lose out overnight. Says Gokarn: “Software is knowledge-intensive and not easy to substitute, as clients tend to stick with their partners.” Conversely, if business does shift to neighbouring low-cost countries like The Philippines, it might not come back easily.For now, the possibility of a shift is remote. Says Ravanan: “Software is profitable, its demand potential is huge, and it will find ways to recalibrate.”The biggies have room to play with and they are seeing robust demand for their services. Companies down the ranks will feel the pinch more, as they have less room to manoeuvre. Says an IT analyst: “The impact will be more on mid-sized and smaller players. Large companies have the flexibility to absorb the impact. Some of them even have pricing power to pass on the rupee appreciation to their clients.” The three biggies — TCS, Infosys and Wipro — are still good long-term picks.
TextilesUnlike software, the textile business is neither knowledge-intensive nor do companies in it operate at the top end of margins. Admits Rajendra J. Hinduja, executive director, finance and administration, Gokaldas Exports: “Net margin of apparel companies is 5-9 per cent. If the dollar takes away 8 percentage points, we are in trouble.”Eight of the top 10 textile companies that had declared their Q1 results have seen lower revenue growth, compared to the full-year numbers for 2007-08; five of these companies have shown negative growth. The profitability picture is no better (See table). Unlike software companies, Indian textile companies can’t absorb a margin loss. If the rupee keeps rising and realisations keep falling, they will be left with no choice but to hike product prices. The danger here is that the Wal-Marts and JC Penny’s might simply go to another country.Among the three sectors, textiles has the most to lose and the most to change. Says Hinduja: “We can improve productivity, charge higher product prices and move to value-added products, which offer greater pricing power.” The final word belongs to Chirag Khasgiwala, textiles analyst, Emkay Share & Stock Brokers: “A 10-20 per cent drop in profits is likely. I don’t see strong buying potential currently.”
Auto ancillariesAuto ancillaries fall in between IT and textiles. Average exports as a percentage of revenues have risen from 5-8 per cent to about 15 per cent in the past two to three years.Nine of the top 10 auto ancillary companies who have declared their Q1 numbers have reported a drop in net profit growth, compared to 2006-07. India faces competition from neighbouring countries like China, Vietnam, Mongolia and Bangladesh, but there are barriers to a shift. Says Gokarn: “Companies like GM invest a lot to set up a supply chain, which can’t be abandoned like that.”Since the industry imports some of its raw materials, it gets a natural hedge against the rupee. Also, the percentage of exports is still not as significant as textiles or software to press the panic button. Two stocks that are good buys even now are Bharat Forge and Minda Industries.
Stock Picks
SHOCK-PROOF!
Sandeep Singh
Posted online: Monday , August 20, 2007
Barely a week ago, this market could do no wrong. Now, it seems, it can do no right. The newest word in the Indian investor lexicon, sub-prime, has had a domino effect on all financial markets. It has gobbled up mortgage companies in the US, and hedge funds in the US and Europe. It has caused a credit squeeze and a flight of foreign funds from emerging markets of alarming proportions.Every market is down. Worse, it’s difficult to ascertain how deep and long this damage can run. Says Abheek Barua, chief economist, HDFC Bank: “India is not directly exposed, but we can’t avoid the contagion effect.” Indeed, there are businesses in India, or aspects of it, that are at risk from this complex tangle. Says Sanjay Sinha, chief investing officer, SBI Mutual Fund: “The financial sector is affected. If companies there reduce their IT spend, Indian IT companies with an exposure to the BFSI (banking, financial services and insurance) sector will lose business.” Adds Suman K. Bery, director general, NCAER: “Overseas financing will take a hit, which will hurt companies funding overseas acquisitions.”However, there are several businesses that are insulated or affected only marginally in an indirect way by the sub-prime mess. Says Sandeep Nanda, head of research, Sharekhan: “The long-term story is intact in engineering, capital goods and consumer goods.” With share prices being marked down indiscriminately, you will get juicy opportunities to buy these businesses.Perhaps, the best place to look for them is in the infrastructure space. We have identified five such shock-proof picks. Business for them is good and plotted out for two to three years, order books are flowing and they are shielded from the sub-prime fallout. There are risks like a squeeze in foreign capital and investments, but these companies can manage them. On to our picks…
Areva T&D
One infrastructure area still lagging is power. In the eleventh five-year plan (2007-12), the government is looking to add 68,869 mw of capacity; it also states a fund requirement of Rs 2,37,000 crore in the transmission and distribution (T&D) segment. Those numbers, and the investments unfolding in the power sector, should electrify French multinational Areva T&D, which supplies a range of T&D products and provides a range of T&D services.The sub-prime blowout is unlikely to scuttle these investments. In the T&D space, Areva competes with the likes of ABB and Siemens. Says Ajit Motwani of Emkay Stocks and Share Brokers: “Their parents do a lot of product research, which they are using to grow.” Valuations are high (the stock is quoting at a PE of 47), but justified by the pace of growth. Net profit has increased at a CAGR of 86 per cent in the last three years and, this year, it is looking good for 60 per cent at least.
Bharat Earth Movers Limited (BEML)
You might recognise it by the wagons that move on the Delhi Metro, but BEML is better known as the second-largest manufacturer of earth-moving equipment used in diverse sectors like defence, railways, mining, construction, power, steel and cement, among others. Several of these sectors are a beehive of activity. That’s rubbing off on BEML, which is growing this side of its business at 40 per cent a year.Rail wagons is shaping up to be a strong growth segment for BEML. The Delhi metro is expanding, projects are at various stages of clearance in Ahmedabad, Bangalore, Chennai, Hyderabad, Kochi and Mumbai, which BEML is likely to bid for. The company recently raised about Rs 500 crore through a follow-on public offer (FPO), of which, it has earmarked Rs 215 crore to expand its metro coach facility. With the objective of becoming more cost-efficient, Rs 90 crore each is assigned to upgradation of current facilities and for a VRS.As of February 2007, BEML had pending orders of Rs 824 crore in mining and construction, of Rs 236 crore in defence, and of 300 coaches worth Rs 102 crore and a letter of intent for another 875 coaches. The BEML stock has appreciated about 31 times in the past three years,but its PE has only doubled to 23.4, which reflects strong earnings growth. Its user industries are diverse. Even if some of them start to flag, BEML should still manage to sustain strong growth in the coming years.
Noida Toll Bridge
Even if sub-prime woes intensify, the 100,000 vehicles — and growing — that do a Noida-Delhi or Delhi-Noida via the Noida Toll Bridge every day will continue their to and fro. The toll road is a 30-year BOOT (built, own, operate, transfer) project, which means IL&FS should manage the project till 2031 and then hand it over to the New Okhla Industrial Development Authority (Noida).However, the transfer is unlikely to happen in 2031 or even the years after that. The concession agreement between the stakeholders assures the company a 20 per cent return on investment over the life of the project. The company retains control of the toll road till it earns that return, which is a long way away, as the shortfall every year gets added to the project cost.Meanwhile, traffic on the road is increasing at 15 per cent a year. At present, it’s about 90,000 vehicles per day, which is about half its designated capacity. Meanwhile, toll charges are increasing — the toll for a car has increased from Rs 15 to Rs 20 in six years, and yet the number of vehicles has increased. The new link road to Mayur Vihar will add more vehicles, as will the increasing occupancy in Greater Noida.The company also has 235 acres of land, which presents additional revenue possibilities. All in all, it’s a steady road.
Patel Engineering
Another company riding the infrastructure boom. Patel has an order book of Rs 5,000 crore, or about five times its 2006-07 revenues. About half of this is from hydro-power projects, a high-margin segment because of the complexities involved and where it is the second-largest player after Jai Prakash Associates. Patel does projects mainly for state irrigation departments, NHPC and NEEPCO. The government has fixed a hydro-power generation target of 15,285 mw for the eleventh five-year plan.Besides hydro-power, Patel also builds roads, tunnels, dams and bridges, among other things. More recently, the company has ventured into the real estate business, with a land bank of 500 acres. At its current PE of 22, Patel trades cheaper compared to competitors Jai Prakash (PE of 40) and Gammon (34.6) — and offers good scope for growth.
UltraTech Cement
Formerly part of L&T and now a Grasim subsidiary, Ultratech has a capacity of 17 million tonnes. Together, UltraTech and Grasim are the leading combine in India, controlling about 20 per cent of the installed capacity. Cement makers have posted triple-digit increases in net profit in the last three years, helped by strong demand and inadequate supply. Cement prices have soared, even withstood government moves to bring them down (from Rs 130 per 50 kg in March 2004 to 200 in March 2007).Projects that will lead to an overall increase of about 50 per cent in capacity are currently underway, must of which are likely to come up in mid-2009. That will bridge the deficit, even check prices. But if construction demand stays robust, as is expected, the cement cycle should stay up — as should UltraTech.
http://www.expressmoney.in/news/SHOCK-PROOF!/91083.html
Sandeep Singh
Posted online: Monday , August 20, 2007
Barely a week ago, this market could do no wrong. Now, it seems, it can do no right. The newest word in the Indian investor lexicon, sub-prime, has had a domino effect on all financial markets. It has gobbled up mortgage companies in the US, and hedge funds in the US and Europe. It has caused a credit squeeze and a flight of foreign funds from emerging markets of alarming proportions.Every market is down. Worse, it’s difficult to ascertain how deep and long this damage can run. Says Abheek Barua, chief economist, HDFC Bank: “India is not directly exposed, but we can’t avoid the contagion effect.” Indeed, there are businesses in India, or aspects of it, that are at risk from this complex tangle. Says Sanjay Sinha, chief investing officer, SBI Mutual Fund: “The financial sector is affected. If companies there reduce their IT spend, Indian IT companies with an exposure to the BFSI (banking, financial services and insurance) sector will lose business.” Adds Suman K. Bery, director general, NCAER: “Overseas financing will take a hit, which will hurt companies funding overseas acquisitions.”However, there are several businesses that are insulated or affected only marginally in an indirect way by the sub-prime mess. Says Sandeep Nanda, head of research, Sharekhan: “The long-term story is intact in engineering, capital goods and consumer goods.” With share prices being marked down indiscriminately, you will get juicy opportunities to buy these businesses.Perhaps, the best place to look for them is in the infrastructure space. We have identified five such shock-proof picks. Business for them is good and plotted out for two to three years, order books are flowing and they are shielded from the sub-prime fallout. There are risks like a squeeze in foreign capital and investments, but these companies can manage them. On to our picks…
Areva T&D
One infrastructure area still lagging is power. In the eleventh five-year plan (2007-12), the government is looking to add 68,869 mw of capacity; it also states a fund requirement of Rs 2,37,000 crore in the transmission and distribution (T&D) segment. Those numbers, and the investments unfolding in the power sector, should electrify French multinational Areva T&D, which supplies a range of T&D products and provides a range of T&D services.The sub-prime blowout is unlikely to scuttle these investments. In the T&D space, Areva competes with the likes of ABB and Siemens. Says Ajit Motwani of Emkay Stocks and Share Brokers: “Their parents do a lot of product research, which they are using to grow.” Valuations are high (the stock is quoting at a PE of 47), but justified by the pace of growth. Net profit has increased at a CAGR of 86 per cent in the last three years and, this year, it is looking good for 60 per cent at least.
Bharat Earth Movers Limited (BEML)
You might recognise it by the wagons that move on the Delhi Metro, but BEML is better known as the second-largest manufacturer of earth-moving equipment used in diverse sectors like defence, railways, mining, construction, power, steel and cement, among others. Several of these sectors are a beehive of activity. That’s rubbing off on BEML, which is growing this side of its business at 40 per cent a year.Rail wagons is shaping up to be a strong growth segment for BEML. The Delhi metro is expanding, projects are at various stages of clearance in Ahmedabad, Bangalore, Chennai, Hyderabad, Kochi and Mumbai, which BEML is likely to bid for. The company recently raised about Rs 500 crore through a follow-on public offer (FPO), of which, it has earmarked Rs 215 crore to expand its metro coach facility. With the objective of becoming more cost-efficient, Rs 90 crore each is assigned to upgradation of current facilities and for a VRS.As of February 2007, BEML had pending orders of Rs 824 crore in mining and construction, of Rs 236 crore in defence, and of 300 coaches worth Rs 102 crore and a letter of intent for another 875 coaches. The BEML stock has appreciated about 31 times in the past three years,but its PE has only doubled to 23.4, which reflects strong earnings growth. Its user industries are diverse. Even if some of them start to flag, BEML should still manage to sustain strong growth in the coming years.
Noida Toll Bridge
Even if sub-prime woes intensify, the 100,000 vehicles — and growing — that do a Noida-Delhi or Delhi-Noida via the Noida Toll Bridge every day will continue their to and fro. The toll road is a 30-year BOOT (built, own, operate, transfer) project, which means IL&FS should manage the project till 2031 and then hand it over to the New Okhla Industrial Development Authority (Noida).However, the transfer is unlikely to happen in 2031 or even the years after that. The concession agreement between the stakeholders assures the company a 20 per cent return on investment over the life of the project. The company retains control of the toll road till it earns that return, which is a long way away, as the shortfall every year gets added to the project cost.Meanwhile, traffic on the road is increasing at 15 per cent a year. At present, it’s about 90,000 vehicles per day, which is about half its designated capacity. Meanwhile, toll charges are increasing — the toll for a car has increased from Rs 15 to Rs 20 in six years, and yet the number of vehicles has increased. The new link road to Mayur Vihar will add more vehicles, as will the increasing occupancy in Greater Noida.The company also has 235 acres of land, which presents additional revenue possibilities. All in all, it’s a steady road.
Patel Engineering
Another company riding the infrastructure boom. Patel has an order book of Rs 5,000 crore, or about five times its 2006-07 revenues. About half of this is from hydro-power projects, a high-margin segment because of the complexities involved and where it is the second-largest player after Jai Prakash Associates. Patel does projects mainly for state irrigation departments, NHPC and NEEPCO. The government has fixed a hydro-power generation target of 15,285 mw for the eleventh five-year plan.Besides hydro-power, Patel also builds roads, tunnels, dams and bridges, among other things. More recently, the company has ventured into the real estate business, with a land bank of 500 acres. At its current PE of 22, Patel trades cheaper compared to competitors Jai Prakash (PE of 40) and Gammon (34.6) — and offers good scope for growth.
UltraTech Cement
Formerly part of L&T and now a Grasim subsidiary, Ultratech has a capacity of 17 million tonnes. Together, UltraTech and Grasim are the leading combine in India, controlling about 20 per cent of the installed capacity. Cement makers have posted triple-digit increases in net profit in the last three years, helped by strong demand and inadequate supply. Cement prices have soared, even withstood government moves to bring them down (from Rs 130 per 50 kg in March 2004 to 200 in March 2007).Projects that will lead to an overall increase of about 50 per cent in capacity are currently underway, must of which are likely to come up in mid-2009. That will bridge the deficit, even check prices. But if construction demand stays robust, as is expected, the cement cycle should stay up — as should UltraTech.
http://www.expressmoney.in/news/SHOCK-PROOF!/91083.html
Big Talk- Nilesh Shah
BIG TALK:
NILESH SHAH,
DEPUTY MANAGING DIRECTOR,
ICICI PRUDENTIAL MUTUAL FUND-->
‘We are buying on every fall’
Sandeep Singh
Monday , August 27, 2007
The US sub-prime crisis and political turmoil might push the stock market down, but it’s because of foreign money moving out, not because anything significant has changed in the economy or the way companies are doing business. So believes Nilesh Shah, Chief Investment Officer of ICICI Prudential Mutual Fund who has recently also been made Deputy Managing Director. In a conversation with our correspondent, Shah explains why he thinks India is in better shape to handle such surprises and gives his reading of the market.
How bad is the sub-prime problem and how much will it affect India?
The sub-prime issue will keep resurfacing over the next few months. Sub-prime is the result of falling housing prices, rising interest rates and higher EMIs in the US, after two soft years. So, unless the entire cycle reverses, it is unlikely the sub-prime issue will be settled quickly.One positive is that the US Federal Reserve has shown inclination to contain it by cutting some key interest rates in the next few months. That should take care of rising interest rates. What’s left is falling housing prices and accelerating EMIs. But once interest rates start falling, housing prices will start stabilising, and then accelerated payments won’t create much of a problem. Although the sub-prime problem persists, the market has more or less discounted the risk from it. Unless something dramatic and new happens, the market won’t be bothered much.
It won’t fall much from here…
At a Sensex level of 14,000, the market has substantially discounted political and global uncertainty. The monsoon has been very good, inflation is low and falling, interest rates are stabilising, industrial growth is continuing, the rupee overvaluation is correcting — there’s a lot going for India.For September 2008, a year on, we expect earnings per share (EPS) of Rs 900 for the BSE Sensex. Then, in the Sensex, there’s about 2,000 points of non-monetised businesses like Reliance Gas, which is not commercially operational, or the life insurance business of ICICI, SBI and Bajaj Auto, all of which have value. Remove 2,000 points from 14,000, and the market is trading at a PE of 13.5-14, which is a reasonable valuation to buy into.
Are you buying?
Certainly. We have been buying with every fall. It makes sense to buy when stocks are cheaper, rather than when they are expensive.
Where’s the value?
FMCG has been the most defensive, and hasn’t fallen much. Capital goods and IT too didn’t fall much, but some auto, banking and telecom stocks got butchered. In the current volatility, invest more in large- and mid-caps.
What about political uncertainty?
Won’t it hurt?Political uncertainty has greater ability to cause a short-term blip, rather than leave a long-term impact. Sentiment will be affected, as people across the world have invested in India, thinking of it as an economic powerhouse. Those perceptions may, rightfully or wrongfully, change, leading to money being pulled out. But I don’t think it will have a material, long-term impact on our economy. Today, we are in far better shape to handle this problem.
The sub-prime crisis and politics do affect Indian companies. For instance, overseas borrowing could get more expensive, even more difficult.The cost of foreign borrowing has gone up because of a widening in spread on Indian credit. However, our external commercial borrowings (ECBs) are $25 billion. If rates increase by 1 percentage point, that’s an extra interest outgo of $250 million. That’s manageable. Indian treasurers are smart: they will trade in currencies and interest rates to take care of this movement. And even if the US Fed cuts interest rates, spreads may widen, but the base rate will fall. So, net-net, the borrowing cost won’t be significantly higher for Indian companies.
How do you see the rupee moving in the next three years?
Currencies are difficult to predict on a longer tenure. There are several factors to it. If FII and FDI inflows, and remittances, keep pouring in, the rupee can only appreciate. If commercialised gas production increases in India, our dependence on oil reduces, which means outflows reduce. Again, long-term appreciation.In the short term, we see the rupee depreciating to 42 against the dollar because the credit risk has widened overseas, reducing demand for ECBs. In the long term, it might climb to Rs 40, even Rs 39 levels.
Coming to ICICI Prudential Mutual Fund, there have been some changes at the top. Will that change anything?
No. Our business is simple: we have to service our customers to the best of our abilities. We have always managed our products in a manner that gives investors the best, not just in terms of returns, but also in terms of suitability and expectations.For instance, take our new Indo Asia Equity Fund, which will invest 65 per cent in Indian stocks and 35 per cent in Asian stocks. This fund is unique and fulfils many needs. As it is, retail investors’ allocation to Indian equity is lower than what’s necessary or deserved. This fund ensures 65 per cent allocation to Indian equities and the tax advantage of an equity fund. Since the balance is in Asian equity, it gives them an exposure to business cycles different from that of India. It also gives them an exposure to industries not available in India like natural resources and semi-conductors.
Why not 100 per cent allocation to foreign equities, as most overseas funds are doing?
Retail investors have low exposure to Indian equities, and there’s no point in pushing a 100 per cent foreign fund to them. At the same time, country diversification makes sense, as business cycles in Asia are different from India, as are industries. Combining the two gives a less risky product and also a tax advantage.
Why restrict it to Asia?
Asia fits better with India. Growth in Asia is likely to be higher than the rest of the world. Globally, allocation will move to Asia because of its performance potential — $3.3 trillion reserves and two billion people.
NILESH SHAH,
DEPUTY MANAGING DIRECTOR,
ICICI PRUDENTIAL MUTUAL FUND-->
‘We are buying on every fall’
Sandeep Singh
Monday , August 27, 2007
The US sub-prime crisis and political turmoil might push the stock market down, but it’s because of foreign money moving out, not because anything significant has changed in the economy or the way companies are doing business. So believes Nilesh Shah, Chief Investment Officer of ICICI Prudential Mutual Fund who has recently also been made Deputy Managing Director. In a conversation with our correspondent, Shah explains why he thinks India is in better shape to handle such surprises and gives his reading of the market.
How bad is the sub-prime problem and how much will it affect India?
The sub-prime issue will keep resurfacing over the next few months. Sub-prime is the result of falling housing prices, rising interest rates and higher EMIs in the US, after two soft years. So, unless the entire cycle reverses, it is unlikely the sub-prime issue will be settled quickly.One positive is that the US Federal Reserve has shown inclination to contain it by cutting some key interest rates in the next few months. That should take care of rising interest rates. What’s left is falling housing prices and accelerating EMIs. But once interest rates start falling, housing prices will start stabilising, and then accelerated payments won’t create much of a problem. Although the sub-prime problem persists, the market has more or less discounted the risk from it. Unless something dramatic and new happens, the market won’t be bothered much.
It won’t fall much from here…
At a Sensex level of 14,000, the market has substantially discounted political and global uncertainty. The monsoon has been very good, inflation is low and falling, interest rates are stabilising, industrial growth is continuing, the rupee overvaluation is correcting — there’s a lot going for India.For September 2008, a year on, we expect earnings per share (EPS) of Rs 900 for the BSE Sensex. Then, in the Sensex, there’s about 2,000 points of non-monetised businesses like Reliance Gas, which is not commercially operational, or the life insurance business of ICICI, SBI and Bajaj Auto, all of which have value. Remove 2,000 points from 14,000, and the market is trading at a PE of 13.5-14, which is a reasonable valuation to buy into.
Are you buying?
Certainly. We have been buying with every fall. It makes sense to buy when stocks are cheaper, rather than when they are expensive.
Where’s the value?
FMCG has been the most defensive, and hasn’t fallen much. Capital goods and IT too didn’t fall much, but some auto, banking and telecom stocks got butchered. In the current volatility, invest more in large- and mid-caps.
What about political uncertainty?
Won’t it hurt?Political uncertainty has greater ability to cause a short-term blip, rather than leave a long-term impact. Sentiment will be affected, as people across the world have invested in India, thinking of it as an economic powerhouse. Those perceptions may, rightfully or wrongfully, change, leading to money being pulled out. But I don’t think it will have a material, long-term impact on our economy. Today, we are in far better shape to handle this problem.
The sub-prime crisis and politics do affect Indian companies. For instance, overseas borrowing could get more expensive, even more difficult.The cost of foreign borrowing has gone up because of a widening in spread on Indian credit. However, our external commercial borrowings (ECBs) are $25 billion. If rates increase by 1 percentage point, that’s an extra interest outgo of $250 million. That’s manageable. Indian treasurers are smart: they will trade in currencies and interest rates to take care of this movement. And even if the US Fed cuts interest rates, spreads may widen, but the base rate will fall. So, net-net, the borrowing cost won’t be significantly higher for Indian companies.
How do you see the rupee moving in the next three years?
Currencies are difficult to predict on a longer tenure. There are several factors to it. If FII and FDI inflows, and remittances, keep pouring in, the rupee can only appreciate. If commercialised gas production increases in India, our dependence on oil reduces, which means outflows reduce. Again, long-term appreciation.In the short term, we see the rupee depreciating to 42 against the dollar because the credit risk has widened overseas, reducing demand for ECBs. In the long term, it might climb to Rs 40, even Rs 39 levels.
Coming to ICICI Prudential Mutual Fund, there have been some changes at the top. Will that change anything?
No. Our business is simple: we have to service our customers to the best of our abilities. We have always managed our products in a manner that gives investors the best, not just in terms of returns, but also in terms of suitability and expectations.For instance, take our new Indo Asia Equity Fund, which will invest 65 per cent in Indian stocks and 35 per cent in Asian stocks. This fund is unique and fulfils many needs. As it is, retail investors’ allocation to Indian equity is lower than what’s necessary or deserved. This fund ensures 65 per cent allocation to Indian equities and the tax advantage of an equity fund. Since the balance is in Asian equity, it gives them an exposure to business cycles different from that of India. It also gives them an exposure to industries not available in India like natural resources and semi-conductors.
Why not 100 per cent allocation to foreign equities, as most overseas funds are doing?
Retail investors have low exposure to Indian equities, and there’s no point in pushing a 100 per cent foreign fund to them. At the same time, country diversification makes sense, as business cycles in Asia are different from India, as are industries. Combining the two gives a less risky product and also a tax advantage.
Why restrict it to Asia?
Asia fits better with India. Growth in Asia is likely to be higher than the rest of the world. Globally, allocation will move to Asia because of its performance potential — $3.3 trillion reserves and two billion people.
No Load
No distributor, no load
Sandeep Singh
Monday , August 27, 2007
Even as life insurers and the insurance regulator defend high agent commissions, capital market regulator Sebi is proposing to scrap entry loads on investments not made through an agent (that is, made directly or through the Internet).
Sebi regulations allow fund houses to charge you a total load (entry plus exit) of 7 per cent, which they use to pay their distributors. Typically, fund houses charge an entry load of 2.25 per cent in equity funds. So, if you invest Rs 10,000 in an equity fund, you are allotted units for Rs 9,775 — the rest the fund house gives to distributors.
Knowledgeable Investors like Gaurav Garg, a CA in Delhi, have been lamenting they get nothing in return for this outgo. “My distributor gives no advice. When I can use the Internet to identify schemes, and invest directly, why should I pay an entry load?” In the long run, the savings from the waiver of an entry load of 2.25 per cent add up (See table).
At present, only Quantum Mutual Fund, which doesn’t sell through distributors, works on a no-load model. All other funds levy a load, regardless of how you invest. This might change. Says A.P. Kurien, chairman, Association of Mutual Funds in India (Amfi): “It’s an investor-friendly step. Knowledgeable investors can invest by themselves, but others might still need help from distributors.”
Predictably, distributors, who face a potential loss of income, are opposed to this move. As an investor, if you want to present your views to Sebi, email to ruchic@sebi.gov.in or send a snail mail to Sebi, Investment Management Department, SEBI Bhavan, Plot number C-4A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai-400051 before September 12.
Load unloadMost equity funds charge an entry load of 2.25 per cent of investment. If you were investing 5,000 a month through an SIP (systematic investment plan), you would end up paying Rs 20,250 as load. Sebi has proposed to do away with this charge if you invest directly or through the Internet. Since more money goes to invest for you, you end up with a lot more over long periods of time.
http://www.expressmoney.in/news/No-distributor-no-load/91430.html
Sandeep Singh
Monday , August 27, 2007
Even as life insurers and the insurance regulator defend high agent commissions, capital market regulator Sebi is proposing to scrap entry loads on investments not made through an agent (that is, made directly or through the Internet).
Sebi regulations allow fund houses to charge you a total load (entry plus exit) of 7 per cent, which they use to pay their distributors. Typically, fund houses charge an entry load of 2.25 per cent in equity funds. So, if you invest Rs 10,000 in an equity fund, you are allotted units for Rs 9,775 — the rest the fund house gives to distributors.
Knowledgeable Investors like Gaurav Garg, a CA in Delhi, have been lamenting they get nothing in return for this outgo. “My distributor gives no advice. When I can use the Internet to identify schemes, and invest directly, why should I pay an entry load?” In the long run, the savings from the waiver of an entry load of 2.25 per cent add up (See table).
At present, only Quantum Mutual Fund, which doesn’t sell through distributors, works on a no-load model. All other funds levy a load, regardless of how you invest. This might change. Says A.P. Kurien, chairman, Association of Mutual Funds in India (Amfi): “It’s an investor-friendly step. Knowledgeable investors can invest by themselves, but others might still need help from distributors.”
Predictably, distributors, who face a potential loss of income, are opposed to this move. As an investor, if you want to present your views to Sebi, email to ruchic@sebi.gov.in or send a snail mail to Sebi, Investment Management Department, SEBI Bhavan, Plot number C-4A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai-400051 before September 12.
Load unloadMost equity funds charge an entry load of 2.25 per cent of investment. If you were investing 5,000 a month through an SIP (systematic investment plan), you would end up paying Rs 20,250 as load. Sebi has proposed to do away with this charge if you invest directly or through the Internet. Since more money goes to invest for you, you end up with a lot more over long periods of time.
http://www.expressmoney.in/news/No-distributor-no-load/91430.html
Emerging market funds
To gain from capitalism, this time just turn to nationalism - BIZ THE STORY
The US subprime crisis, faster economic and corporate growth, consistent markets, and the rising rupee have made India a lower-risk, higher- return haven for investors
SANDEEP SINGH
SIXTY years of political independence and 16 years of relative economic freedom have catapulted India to the top of the in vestment charts - only China's gross domestic product (GDP) is growing faster than India's and only Brazil's stock market has generated a higher five-year return. At such a time, when product sophistication and innovation mean creating opportunities for diversification of "country risk", it seems rather naive for an Indian household to invest its money outside India.
In April 2007, the RBI increased the limit on overseas investment for the mutual fund (MF) industry from $3 billion to $4 billion, and for individual fund houses (FHs) from $150 million to $200 million. Following this decision, FHs have started offering funds that plan to invest in emerging markets. But in a situation when the Indian economy is on a strong foothold and is shaping itself in a way that makes the developed nations depend on it for higher returns, should Indian investors venture abroad? More so in the context of the subprime mess, which has taken risk to a more dangerous level of uncertainty.
It makes sense for American, European and Japanese investors to invest in emerging markets considering the slow growth rate of their own economies - US (3.3 per cent), UK (2.7 per cent), Japan (2.8 per cent), and the low returns in their domestic markets (8.8 per cent, 8 per cent and 11.8 per cent respectively). It is justifiable for them to get out of their own markets and look for faster growing, greener pastures. For them, opportunity lies in emerging markets like India, Brazil and Mexico, which have generated five-year returns of more than 35 per cent per annum. Investors in developed markets are not entering these "risky" markets to diversify their country risk (minus the subprime fiasco, country risk in developed nations is less), but to fetch higher returns. But does this logic apply to Indian investors? Better Returns: Not quite . The Sensex has grown at a three-year compounded annual growth rate (CAGR) of 42.8 per cent and a five-year CAGR of 36.4 per cent. At this rate of return and a high GDP growth rate, both of which are strongly expected to sustain with slight moderation, the Indian market is expected to remain strong on the back of robust domestic consumption and infrastructure growth.
In comparison, the other emerging markets seem riskier. Mexico has a GDP growth rate of 4.5 per cent and its BOLSA index trades at a PE of 19.9; Egypt has a GDP growth rate of 6.9 per cent and its Hermes index has a PE of 21.5; Brazil has a GDP growth rate of 3.7 and its Bovespa index is trading at a PE of 13.5. Only China, with a GDP growth rate of 10.7 per cent, fares better than India but with its Shanghai Composite Index trading at a very high PE of 41.8, its market becomes high risk. Economic growth in India is also steadier - over the past 16 years many governments have changed but the growth momentum has been sustained. There are, however, factors other than the GDP growth rate. The stability and rate of returns of the Indian market make investing abroad less attractive. Tax Considerations: There are tax related considerations as well to take into account. Funds that are planning to invest most of their assets abroad will be treated as debt funds. Thus, any long-term capital gain on them will be taxed at the rate of 10 per cent without indexation benefits. Exchange Rate: This is another factor that those planning to invest abroad must factor in. Over the past few years, there has been a significant flow of funds into the Indian market, which has caused the rupee to appreciate. This is emerging as a big concern for dollar earners. At present, the rupee is trading at around 40.5 against the dollar. If it were to appreciate to 3637 to the dollar, investors would see a huge fall in returns. The rupee has already appreciated by 14 per cent in the past 12 months and a large section of economists feels that "the rupee appreciation is here to stay".
Thus, with a robust and sustained domestic growth rate, strengthening rupee and unfavourable tax rules which make rupee returns higher than dollar ones- this may not be the right time to invest abroad. The damage from the US subprime debacle is still being calculated. And Indian investors still need to be able to grapple with exotic products like securitised debt and its derivatives like collateralised debt obligations.
In fact, once the global subprime crisis gets over, international money will flow back to India.
Home sweet home ? The US subprime debacle's impact on global markets makes this an inopportune time to invest abroad ? On criteria like GDP growth and recent stock exchange returns, India is now more attractive than other emerging markets ? Funds investing abroad don't get indexation benefits ? An appreciating rupee will further diminish returns earned abroad
The US subprime crisis, faster economic and corporate growth, consistent markets, and the rising rupee have made India a lower-risk, higher- return haven for investors
SANDEEP SINGH
SIXTY years of political independence and 16 years of relative economic freedom have catapulted India to the top of the in vestment charts - only China's gross domestic product (GDP) is growing faster than India's and only Brazil's stock market has generated a higher five-year return. At such a time, when product sophistication and innovation mean creating opportunities for diversification of "country risk", it seems rather naive for an Indian household to invest its money outside India.
In April 2007, the RBI increased the limit on overseas investment for the mutual fund (MF) industry from $3 billion to $4 billion, and for individual fund houses (FHs) from $150 million to $200 million. Following this decision, FHs have started offering funds that plan to invest in emerging markets. But in a situation when the Indian economy is on a strong foothold and is shaping itself in a way that makes the developed nations depend on it for higher returns, should Indian investors venture abroad? More so in the context of the subprime mess, which has taken risk to a more dangerous level of uncertainty.
It makes sense for American, European and Japanese investors to invest in emerging markets considering the slow growth rate of their own economies - US (3.3 per cent), UK (2.7 per cent), Japan (2.8 per cent), and the low returns in their domestic markets (8.8 per cent, 8 per cent and 11.8 per cent respectively). It is justifiable for them to get out of their own markets and look for faster growing, greener pastures. For them, opportunity lies in emerging markets like India, Brazil and Mexico, which have generated five-year returns of more than 35 per cent per annum. Investors in developed markets are not entering these "risky" markets to diversify their country risk (minus the subprime fiasco, country risk in developed nations is less), but to fetch higher returns. But does this logic apply to Indian investors? Better Returns: Not quite . The Sensex has grown at a three-year compounded annual growth rate (CAGR) of 42.8 per cent and a five-year CAGR of 36.4 per cent. At this rate of return and a high GDP growth rate, both of which are strongly expected to sustain with slight moderation, the Indian market is expected to remain strong on the back of robust domestic consumption and infrastructure growth.
In comparison, the other emerging markets seem riskier. Mexico has a GDP growth rate of 4.5 per cent and its BOLSA index trades at a PE of 19.9; Egypt has a GDP growth rate of 6.9 per cent and its Hermes index has a PE of 21.5; Brazil has a GDP growth rate of 3.7 and its Bovespa index is trading at a PE of 13.5. Only China, with a GDP growth rate of 10.7 per cent, fares better than India but with its Shanghai Composite Index trading at a very high PE of 41.8, its market becomes high risk. Economic growth in India is also steadier - over the past 16 years many governments have changed but the growth momentum has been sustained. There are, however, factors other than the GDP growth rate. The stability and rate of returns of the Indian market make investing abroad less attractive. Tax Considerations: There are tax related considerations as well to take into account. Funds that are planning to invest most of their assets abroad will be treated as debt funds. Thus, any long-term capital gain on them will be taxed at the rate of 10 per cent without indexation benefits. Exchange Rate: This is another factor that those planning to invest abroad must factor in. Over the past few years, there has been a significant flow of funds into the Indian market, which has caused the rupee to appreciate. This is emerging as a big concern for dollar earners. At present, the rupee is trading at around 40.5 against the dollar. If it were to appreciate to 3637 to the dollar, investors would see a huge fall in returns. The rupee has already appreciated by 14 per cent in the past 12 months and a large section of economists feels that "the rupee appreciation is here to stay".
Thus, with a robust and sustained domestic growth rate, strengthening rupee and unfavourable tax rules which make rupee returns higher than dollar ones- this may not be the right time to invest abroad. The damage from the US subprime debacle is still being calculated. And Indian investors still need to be able to grapple with exotic products like securitised debt and its derivatives like collateralised debt obligations.
In fact, once the global subprime crisis gets over, international money will flow back to India.
Home sweet home ? The US subprime debacle's impact on global markets makes this an inopportune time to invest abroad ? On criteria like GDP growth and recent stock exchange returns, India is now more attractive than other emerging markets ? Funds investing abroad don't get indexation benefits ? An appreciating rupee will further diminish returns earned abroad
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