IPO Analysis- Gammon Infrastructure

NEW ISSUES

Good but expensive

Sandeep Singh Posted online: Monday , March 10, 2008 at 1443 IST

The irrational exuberance over initial public offerings (IPOs) seems to be finally over. When the tide was high, nearly every company launching its IPO demanded a premium valuation. The market too responded with enthusiasm and all sorts of reasons were put forward to justify sky-high valuations. But after the correction in January that led to issues like Emaar and Wockhardt being withdrawn, the tables have turned. Investors are now taking a harder look at new issues. Only REC’s IPO in February, which was priced moderately, received a good response.

Next on the anvil is Gammon Infrastructure Projects Ltd (GIPL), a company promoted by Gammon India, which is looking to raise between Rs 276 crore to Rs 331 crore at the lower and higher ends of its price band. Operating in the growth-oriented infrastructure segment, the company looks well positioned to benefit from the massive growth in this sector over the next five to 10 years. But what investors need to check out is whether the pricing is fair.
High-growth sectorGIPL is currently developing projects in the road, port and bridge segment. It is now looking to diversify into the development of airports, mass rapid transit systems (Metro Rail), and water supply. It has already started bidding for these projects. Thus, in course of time, it will have a complete bouquet of infrastructure projects under its belt. At present it has in hand 14 projects. Of these four are operational and contributed to the revenue generated in 2006-07. GIPL is also the preferred bidder for two more projects and has qualified for the financial bids of 10 other projects. In addition to developing projects, it also provides operations and maintenance, and advisory services.Four of GIPL’s projects are annuity projects and the rest are traffic-oriented projects. On an average, the concession period for its projects is 20 years. Once all its 14 projects are operational by 2009-10, GIPL will enjoy a continuous revenue stream. While the annuity-based projects will receive constant revenue over the entire concession period, the revenue from traffic-based projects will depend on the actual traffic generated.
Will growth be high enough?

Currently, only four projects earn revenue. Once the 10 projects that are currently under development are commissioned (by 2009-10), revenue and profit should rise. The company’s prospects could improve further if more projects are added to its pipeline. And that’s where both the growth prospects and risk lie. If the company fails to add more projects, growth could suffer.
Value for money?Since no projects were commissioned in addition to the four that are already operational, revenue and profit did not rise in 2007-08. In fact, profits dipped as compared to 2006-07 because of the fall in ‘other income’. That’s because the company ploughed cash into its projects that are under development, and lost out on interest income.To get a rough estimate of the revenues and profits that the company is likely to generate in future, assume that it will maintain constant revenue to capitalisation ratio. The 14 projects that it has bagged command a total capitalisation of Rs 5,500 crore approximately. Of this almost 70 per cent belongs to GIPL. Eleven projects are expected to be operational by 2009-10 and so a significant stream of revenue will start coming in by that year. If we take the current revenue to capitalisation ratio (total revenue earned from the capital invested in the four projects) it stands at 19 per cent. By 2009 the company will see the commissioning of projects with capitalisation worth Rs 3,500 crore. At 70 per cent contribution and 19 per cent revenue to capitalisation ratio, its revenue should stand at Rs 470 crore. At current net margin of 13.3 per cent, the company should earn a profit of Rs 62 crore. At this profit the EPS will stand at 4.3 and the PE at the lower and higher ends of the price band stand at 38.6 and 46.2 respectively. At two year forward earnings (for 2009-10), these valuations appear to be on the higher side.GIPL already has a strong pipeline of projects and is into a safe business that will generate constant revenue over a long period. The commissioning of more projects and addition of new ones to its pipeline will augment profits further. However, the valuation the company is demanding seems to be on the higher side. Keep an eye on the stock after it lists, and buy whenever the pricing gets more attractive.

http://www.expressmoney.in/news/Good-but-expensive-/92944.html

Interview- V.P Chaturvedi

BIG TALK:

VED PRAKASH CHATURVEDI, TATA ASSET MANAGEMENT

‘Look for value-oriented buying opportunities’ Sandeep Singh Posted online: Monday , March 17, 2008 at 1329 IST

Tata Asset Management was among the first fund houses to launch a global infrastructure fund — the closed-end Indo Global Infrastructure Fund launched in October 2007. The fund house has now launched the Growing Economies Infrastructure Fund, the third fund in the infrastructure domain. Ved Prakash Chaturvedi, managing director, Tata Asset Management in this interview with our correspondent speaks about his bullishness on the infrastructure theme, his views on the current market, and how investors should deal with the current volatility.

You have recently launched your second global infrastructure fund and the third fund on this theme. What makes you so bullish on infrastructure globally?

In several economies, economic growth has been driven by huge investments in infrastructure. At the same time, quality infrastructure is also essential for growth. We see this happening in various parts of the world and also in our own country. Moreover, infrastructure has to be built by local companies that have expertise in this space. The experience of the last few years in India shows how investment in infrastructure benefits listed companies in this space. Hence, we were the first to launch a dedicated infrastructure scheme in India three years ago.
Will there be any difference in how this fund is managed vis-à-vis your existing global infrastructure fund?There are three key differences between this fund and Tata Indo-Global Infrastructure Fund (TIGIF). First, Tata Growing Economies Infrastructure Fund (TGEIF) is an open-ended fund while the other fund is close ended. Second, TGEIF has an option (Plan A) where we will invest a significant part of the assets in overseas listed equities in infrastructure. Finally, overseas investments in this fund are likely to be spread out over a wider range of geographies.

Will it be managed by Tata Mutual Fund or will you feed the money into a global scheme?

The fund will be managed by Tata Mutual Fund. We will take advice for investment in markets abroad where we don't have direct expertise.

How are Indian markets positioned vis-à-vis global markets after the recent sharp correction?

Four factors are driving the Indian markets. The first is the situation in the global markets and the slow down in the US economy, which is causing continuous flow of negative news. The second is concerns regarding slowdown in the growth of local companies. The third is fund flows into our markets, and the fourth is uncertainties caused by the forthcoming elections.All these factors will result in a period of consolidation and volatility. The markets will look at what earnings growth Indian companies can deliver. And once the elections are over by the middle of next year, the Indian markets should see another period of growth.

How will these four factors impact the markets?

While there is a global slowdown, the slowdown in the Indian economy will be marginal and not as dramatic as overseas. There will certainly be a slowdown in growth in local earnings, which have been high over the past few years. However, this slowdown (on a higher base) will not be so dramatic as to cause a dent in the long-term growth story.On account of depressed global sentiment, fund flows from overseas into Indian markets have had a rare negative phase. Domestic institutional flows, however, continue to be positive. As markets come down and as Indian companies continue to demonstrate good quarterly growth rates, focus will shift back to value oriented investing in quality companies. The concerns with respect to the elections will not go away. I guess we will have to live with uncertainty till elections are held and the results are known.

How do you see the markets behaving in the near term?

Markets will remain volatile for some more time. However, in future declines linked to overseas news flows may not be as significant as in the past. The market will move within a trading band.
What should investors do?People should analyse and invest in individual companies rather than be concerned about what the homeowner in the US is going through. Indian markets are already below their long-term median PE multiple. Gradually value is emerging here. Go for value oriented buying.Currently we have an overlay of negative global sentiment over robust domestic performance. This interplay will throw up high-quality opportunities which one can benefit from. The markets are expected to go through a period of news-driven despair with glimmers of hope on good performance in some companies. In the meantime, volatility will be the best friend of the long-term investor. Investors should look at opportunities for creating long-term value through judicious, diversified and disciplined investing.

http://www.expressmoney.in/news/Look-for-value-oriented-buying-opportunities/92976.html

IPO Analysis- Titagarh

On the growth path
Sandeep Singh
Posted online: Monday , March 24, 2008 at 1451 IST

With demand for wagons likely to grow steadily and valuation fair, Titagarh Wagons deserves your investmentThe railway minister’s announcement in his budget speech 2008-09 that the government would go in for replacement of wagons by 2009-10 brought optimism to many players in this segment. Among them is Titagarh Wagons which is currently in the market with an initial public offering to raise Rs 145 crore. While the company is well poised to benefit from the growth in demand for wagons, what needs to be checked is whether the valuation of the company is such as to benefit investors.
Sound prospectsThe company operates through its two manufacturing units which are located at Titagarh and Uttarpara. The company has a total manufacturing capacity of 5,000 wagons per annum. Over the past few years it has seen its business grow significantly. Wagon despatch by the company has grown from 644 in fiscal 2003 to 2,073 in fiscal 2007, which amounts to a compounded annual growth rate of 34 per cent. For the six-month period ending September 2008 the despatch of wagons stood at 1,394. The company’s biggest customer is Indian Railways. In addition, it also delivers wagons to the mining industry, nuclear power industry, to public sector companies like Concor and NTPC, and to private companies.Other than manufacturing wagons the company also manufactures bailey bridges and heavy earth moving and mining equipment. Though their contribution to total revenue is currently small, the company plans to expand its earth moving equipment business.On the business front the company has grown well and has closed in on some of the bigger operators in the industry. Texmaco, another major in the wagon-manufacturing business, had a significant advantage over Titagarh in terms of scale and size just a couple of years ago. But now Titagarh has narrowed the gap.
Steady growthThe company is well positioned to benefit from the recent announcement of the railway minister regarding replacement of old wagons with new ones. This is expected to bring in more demand into the industry, and Titagarh will have a fair chance to benefit from the same. The wagon business is already growing and the thrust on infrastructure and economic growth is expected to lead to demand growing further.The company has also finalised the acquisition of another wagon manufacturer and only the physical takeover remains to be completed. This will add to the company’s capacity as the acquired company has the capacity to manufacture around 2,500 wagons every year.
Competitive pressuresThe primary risk arises from the fact that there are ten wagon manufacturers operating in the market, four of them in the public sector. Thus the company will have to stand up to competitive pressures and can’t afford to be complacent. The other factor that currently goes against the company is rising steel prices. As steel is the primary raw material for the company, if Titagarh is not able to pass on the price hike to customers its own profitability will take a knocking. The company also has to ensure the constant and efficient supply of wheelsets, which comprise almost 35 per cent of the cost of wagon manufacturing.
Financials and valuationThe company’s finances are currently sound. Over the past three years its revenue has grown at a compounded annual growth rate of 57 per cent, and its profits at 75 per cent. The company has also increased its operational efficiency: its net margin has grown from 8.8 per cent in 2005 to 12.3 per cent in the half year of its operation in 2007-08. If we annualise the half-year figures from the six months of operation to the year 2007-08, the revenue of the company will stand at Rs 423 crore and profit at Rs 52 crore. At this profit the EPS for the company stands at 28.4. PE at the lower end of the price band of Rs 540 is 19. At the higher end of the price band of Rs 610 it stands at 21.5. This seems to be a fair valuation when you compare it to that of other players in the industry. For instance, Texmaco, another listed entity that manufactures wagons, is currently trading at a PE of 27.1.Titagarh Wagons’ profits have been growing at a CAGR of 75 per cent for three years. If we assume that profits will grow for the next two years at 50 per cent, the company’s PE in 2010 will stand at 8.5 and 9.6 respectively at the higher and lower ends of the price band. This is a good price for a business that is likely to see steady growth, and hence calls for investment.

http://www.expressmoney.in/news/On-the-growth-path--/93017.html

Equity Funds

STAY ON COURSE

Sandeep Singh

Posted online: Monday , March 17, 2008 at 1410 IST Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

The consistent decline in the value of equity mutual funds over the last two months has left investors jittery. Instead of exiting, this is the time to back your belief in equities with hard cash
Anil Kumar, a 28-year-old software engineer employed with a Noida-based firm, experiences periodic bouts of blues these days. That’s not because the rising rupee has taken a toll on his company’s profits and resulted in markedly lower salary increment this year. It’s not even because the four-month stint that he was to enjoy at his firm’s Florida office beginning this February has been postponed in the wake of the slow down in the US. The reason Kumar is in a funk these days is that his mutual fund portfolio has lost nearly 20 per cent of its value over the last two months. Says Kumar: “For the last three years since I began investing, times have been good and I have mostly seen my portfolio go up. This decline has caught me by surprise. If the pain continues for another couple of quarters, I might just quit equity funds altogether.” Like Kumar, many investors are re-evaluating their mutual fund investments: is it just their scheme that is performing badly? Should they change the scheme? Or should they exit their equity funds altogether?
The big pictureOver the past two months the Sensex has declined by 23.5 per cent after peaking at 20,827 on January 11, 2008. Among direct investors in the markets, sentiment has turned negative following steep losses. Companies that are part of the Sensex have been among the biggest losers. Reliance Energy has lost 49 per cent, DLF, 43.12 per cent, ICICI Bank, 39.5 per cent, L&T, 34.6 per cent and NTPC, 31.9 per cent. While mutual fund investors normally do not trade on a day-to-day basis and have long-term investment horizons, the all-round talk of declines and losses has left many shaken.But fund investors needn’t worry. No doubt the NAVs (net asset values) of equity funds have declined. But as a fund investor you are not exposed to the risk of margin calls, as investors in the Futures and Options (F&O) market faced. Being diversified investment vehicles, equity mutual funds weather such declines better than individual stocks. What should also give you peace of mind is that your funds are managed by the best professionals.
Short-term under-performanceIf one studies the performance of the 164 schemes that have been in existence for at least one year (total number of schemes is 194), among the top 25 performers (on the basis of one-year returns) only two have underperformed the Sensex over the six-month period. However, only four of these 25 schemes have outperformed the Sensex in the last one month.Moreover, of the 103 schemes that outperformed the Sensex over the one-year period, only 29 have done so over the past one month. And only seven schemes of the 194 studied have outperformed the Sensex across all periods — one month, six months, one year, three years, and five years. While one month is too short a period for judging a mutual fund’s performance, the significant underperformance vis-a-vis the Sensex does raise concerns. In fund managers’ defence, Sanjay Sinha, chief investment officer, SBI Funds Management says: “If you try to outperform the market in the short term you may not be able to generate wealth for investors over the long term. Over the medium and long term funds have been outperforming. That’s what investment strategy should be geared towards.” What this implies is that investors should not worry too much about falling NAVs and underperformance in the short term.The fundamentalsWhile in the short-term the stock market may be influenced by a host of external factors, over the long term it reflects economic fundamentals such as GDP growth and corporate earnings. And here the picture continues to be reassuring.According to government of India estimates, GDP rowth rate for the year ending March 2008 will be 8.7 per cent. This could moderate further under the impact of a slowdown in the US. Says Abheek Barua, chief economist, HDFC Bank: “We are anticipating a slowdown from 9 per cent earlier to below 9 per cent now. In the worst-case scenario, it may go down to 8 per cent or a little below 8 per cent for 2008-09.” But even 8 per cent is a good number. Investment on infrastructure development and rising domestic consumption are expected to keep the economic engine humming. Corporate performance is expected to remain robust. “Over the long term I expect corporate profits to grow at 15-20 per cent. You could expect returns from the markets to be in that range,” says Sandesh Kirkire, chief executive officer, Kotak Mahindra Asset Management Company (AMC). Adds Ashu Suyash, managing director and country head, Fidelity Fund Management: “The global uncertainty and moderating growth estimates have led to the sell off in global markets and the current volatility. While volatility is expected to continue in the short-term it won’t have any major long-term structural implications for the domestic growth story.” Since the growth story remains intact, there’s no immediate cause for investors to panic.
Investment strategiesFocus on the long term. The current reversal should not bother you. You need not press the panic button and book losses, as for you the loss is only a notional one. Once the market stabilises your mutual fund portfolio will bounce back.Invest in the right schemes. With NAVs quoting at lows and the outlook for the long term strong, continue to invest in mutual funds, instead of exiting now and waiting for markets to recover. If you stop your Systematic Investment Plans (SIPs) now, you will miss out on the opportunity thrown up by the market (lower NAVs mean more units are allocated to you). Besides, when themarkets come roaring back, you will miss out on the next rally.New investors should pick up consistent performers — those that have done well across the one-, three- and five-year horizons (check Funds Data and Fund Watch column on page three). Stick to diversified equity funds that invest across market caps and sectors. This diversified fund should form the core of your portfolio. Around it you can later buy funds with more focussed mandates — such as those investing in large-caps or mid-caps.
Chop and change only if necessary.Since mutual funds have been under-performing for the last one month, you might be tempted to dump your current funds. Do not do so in haste. Says Amar Pandit a Mumbai-based financial planner “Only if the fund has not done well over the past four quarters should you consider exiting it.”Go for global diversification. In these volatile months, the only category of funds that has generated positive returns and outperformed the Sensex consists of schemes that invest abroad. Suggests Surya Bhatia, Delhi-based financial planner: “Invest 10-15 per cent of your equity portfolio in schemes investing overseas.”
Pick up NFOs with good investment ideas.Though it is usually better to invest in a scheme with a proven track record, currently when the market is at a low, investing in a new fund offer (NFO) with a sound investment theme is a good idea. Says Anup Maheshwari, head of equities and corporate strategy, DSP Merrill Lynch Fund Managers: “Fund managers of NFOs have the cash to pick up stocks now when they are available at a bargain.” Existing funds have little spare cash and may not be able to take full benefit of the current downturn.
If you truly believe in the power of the stock market to create wealth over the long term, this is the time to back your beliefs with hard cash. Continue with your systematic investment plans (SIPs).In fact, if you have some spare cash, invest now when NAVs are low and a given sum of money will buy you more units. At the end of a 10-20 year investment span, such a temporary reversal in the market will appear as another inconsequential squiggle in the stock market’s upwardly inclined graph — something not worth losing sleep over.

http://www.expressmoney.in/news/STAY-ON-COURSE/92982.html

Rising Gold- Interview

BIG TALK: KEYUR SHAH, WORLD GOLD COUNCIL-->

‘Returns from gold become more attractive when markets are down’ Sandeep Singh Posted online: Monday , March 24, 2008 at 1423
Over the last two months, while the Sensex has declined by almost 30 per cent, the price of gold has appreciated by 20 per cent. Should investors be concerned about this sudden spurt? Keyur Shah, associate director, World Gold Council, spoke to our correspondent about the reasons behind the steep rise in gold prices, the best way to go about investing in gold, and the ideal investment horizon for investment in this asset class.

What, in your view, are the reasons for the steep rise in gold prices?

There are two reasons: one is the long-term fundamental reason, which we monitor, and that’s the growing demand-supply gap. Demand in several countries like India, China, and the Middle East is growing while supply is failing to keep pace. Hence, prices are going up.The current increase, which a lot many people are worried about, is due to temporary reasons—the main being the fear of inflation. The US economy is slowing down because of the sub-prime issue. The dollar has weakened, and this has led to an increase in demand for gold. Investors look at gold as a safe haven. Many investors are also looking for good returns over the shorter period. When there is inflation fear coupled with weakening of dollar, they shift their investments towards oil and gold. So, the price of gold is inversely correlated to that of the dollar and directly correlated to that of oil.

Is the steep rise in price over a short span of time a cause for concern?

Yes, the volatility in price movement is a cause for worry. If the price of gold goes up by $30 in a day and falls by the same amount another day, it does affect the domestic consumer who buys gold in physical form. If the price increases steadily there is no issue. The price needs to stabilise.
If you say that the volatility in price is a cause for concern, then would you advise investors not to enter gold in the current situation with a short-term horizon?

We have always maintained that gold gives healthy returns and it has never failed investors. This healthy returns becomes really good returns when the markets crash. For instance, in the current market scenario gold is the best-performing asset class. So for an ordinary investor gold is always a good buy. Short-term trading amounts to speculation and I wouldn’t like to comment on that. But gold is definitely meant for long-term investment and it will never fail you.
The slowdown in the US economy has led to a cut in interest rates and to the weakening of the dollar. Against this backdrop, how do you see gold performing in the near future?If you look at the long-term trend and at the demand-supply dynamics, then you can be bullish on gold. What no one can predict is exactly how much it will increase, as near-term price movements depend on short-term pressures. I would say, look at the long-term demand-supply dynamics. By that account one can be bullish on gold.
Do you envisage a scenario in which gold might not perform well?Gold can only perform badly in case of a scenario when there is no war, there is peace everywhere, and there is no inflation. But such a scenario does not exist. Gold has certain intrinsic characteristics: it is a safe-haven investment, a hedge against inflation, and it is the only global currency. So I don’t envisage a scenario when it will not do well.
What is happening on the supply side?

Any new gold mine takes 5-10 years to start producing. By the time the mine starts producing gold the demand for gold rises much higher. So the gap remains as supply lags behind demand. Even at present exploration is going on which will lead to new mines becoming active in 5-10 years. But by then demand would have risen much more.
How is gold correlated to the equity market?In India there is no correlation. Here gold is consumed by the masses who don’t invest in equity. There are gold ETFs (exchange traded funds), but they will take some time to pick up. But worldwide there is a correlation. If the equity market is not performing well, fund managers put their money in other asset classes that are doing well, such as gold or oil.

So can we say that internationally gold is negatively correlated to equity?

Yes we can. It’s a trend that has been observed: whenever stock markets crash investors move to gold.

What would be your advice to investors regarding the form in which they should invest in gold?

It is good to buy gold anytime if the person has a long-term investment horizon. Currently you can invest in gold in three forms: jewellery, bars and coins, and gold ETFs. The form in which an individual chooses to invest in gold will depend on his needs. One who wants jewellery will buy that. Others who want to possess gold in physical form will go for bars and coins. And modern day investors who want to avoid storage hassles will go for ETFs.

To ensure stable capital market growth, regulators must be held accountable

Sandeep K Singh
Posted online: Friday, February 29, 2008 at 0011 hrs

New Delhi, February 28: Calling for more financial reforms or steps to carry the growth momentum, the Economic Survey suggests non-inflationary credit expansion. It demands that productive sectors should get adequate credit at reasonable cost to facilitate the economy’s growth momentum. It also talks of developing interest rate futures market and corporate debt market.
For capital markets the Survey suggests policymakers should take responsibility to maintain stable market condition and regulators remain proactive and vigilant to avoid irregularities. It demands greater accountability on part of regulators and policymakers to ensure stable growth of capital markets.
Money mobilisation through primary market and mutual funds increased significantly. Primary markets mobilisation jumped by 31.5 per cent and mutual fund industry grew by 70 per cent.
The Survey credits the 47.1 and 54.8 per cent growth in Nifty and Sensex respectively in 2007 to higher GDP growth rate, corporate profits and high capital inflows. It, however, points out that the return in the Indian market has been more volatile as compared to indices abroad and Indian stocks are high on valuation among select emerging market economies like South Korea, Thailand, Malaysia and Taiwan.
According to SBI chief investment officer (SBI fundsmanagement) Sanjay Sinha, “This year will see moderation in capital market returns as corporate profits will moderate on the higher base, FII inflows are expected to be low after the record high in 2007 and GDP growth rate has also moderated.”
The Survey suggests that despite possible subdued global growth, strong fundamentals of the economy along with higher growth would help keep interests of domestic and foreign investors intact.
Investor awareness and growing importance of insurance and pension funds will provide stability to the market and broaden the government securities market’s horizon.
Not enough, say market participants. “Pension reform needs a huge kick-start but the political will is lacking,” said Lotus India AMC CEO Ajay Bagga. “It will take three to four years for it to make an incremental impact.”
Eventful Year
•Fast track issues permitted, Sebi allowed discount on issue price to retail investors
•Sebi approved introduction of seven new products, is working to implement a unified trading platform for corporate bonds
• Overseas investment limit for mutual fund industry and individual fund houses raised to $5 billion and $300 million respectively
•Introduction of no-load funds on direct mutual fund investments
•FMC initiated the process of disseminating futures and spot prices at various mandis, post offices, and rural branches of commercial banks to help cover risk

THE BIG BIZ STORY

Dipping GDP growth rate sign of slowdown?
Sandeep Singh
Posted online: Sunday, December 02, 2007 at 0000 hrs
Two fastest growing segments of GDP are showing slowdown in their growth numbers. How do we sustain the momentum?
The country’s gross domestic product (GDP) growth figures are out - 8.9 per cent for the quarter ending September 2007. As per the data released on Friday, hit by the sluggish growth in manufacturing the GDP growth rate has come down to the potential output estimates (the sustainable growth rate for the economy). For the same quarter last year, the GDP growth stood at 10.2 per cent.
The numbers are as per the expectations and are in line with the policies adopted by the Government. Says, Rajiv Kumar, director and chief executive, ICRIER, “This is an expected outcome of the design to cool down the economy a little and the Government policy has achieved the result it wanted.”
So where are we heading? Will we be able to sustain the momentum gained four years back?
With a growth rate of 8.6 per cent, the manufacturing segment has suffered a major setback. The sector has fallen 4.1 percentage points as it stood at 12.7 per cent for the same quarter the previous year. By comparison, the year-on-year fall for the first quarter estimates for manufacturing segment was only 0.4 percentage points.
While in 2006-07 Q2 growth figures (12.7) witnessed an increase of 0.4 percentage points over Q1 (12.3) of the same year, this year the segment showed a dismal performance. The growth figures in Q2 (8.6) dipped 3.3 percentage points as against 11.9 achieved in Q1. This implies that something has impacted this segment. According to Suman K Bery, director general, National Council of Applied Economic Research (NCAER), “Other than the monetary policy that has impacted the manufacturing sector, there has been a softening of demand in the consumer durable segment that has impacted it.”

The numbers suggest that other than the manufacturing segment, trade, hotels, transport and communication segment has also witnessed a slowdown in growth. The year-on-year decline for Q2 is 2.8 percentage points and the quarter-on-quarter decline is 0.6 percentage points. “The sector is bearing the brunt of the tightening monetary policy,” added Bery.
Other than these, there has been a slight decline in the financing, real estate and business services segments too. This is again an outcome of the tightening of monetary policy.
The recent fall in these two sectors has become a rising concern. Manufacturing and trade, hotels, transport and communication segment were growing fastest and pulling India’s GDP growth rate up. The two segments when combined have a weightage of 44.3 per cent in the GDP, as per the latest aggregate figures.
According to Rajeev Malik, Asia economic research, JP Morgan Chase, Singapore, “Growth is likely to moderate further owing to the more complete pass-through of monetary tightening. Additionally, rupee appreciation and softer external demand will also contribute to the anticipated moderation in economic growth.”
So, if there is a fall in growth rate and more so in the two fastest growing segments, how are we going to sustain our growth momentum?
According to Kumar, “We have almost reached the potential output of 8.5-8.7 per cent of the economy. Any further tightening of interest rates could lead to low credit availability and further downturn in demand.”
So what do we need now, if the slowdown is happening in the potential growth pullers, where will the sustenance come from? “We need a well calibrated policy that prevents further appreciation of rupee and makes sufficient credit available. For this, firstly the booming capital inflows should be constrained along with better planning of infrastructure development to increase the absorptive capacity of the economy. Along with this, we also need to increase export demand so that fall in domestic demand can be covered,” added Kumar.
Amidst all the worry on the manufacturing and trade, hotels, transport and communication segment, there lies the agriculture segment that has done significantly better this year. The average growth rate for agriculture from 1950 to 2006 has been 2.8 but the segment grew by 3.8 per cent in Q1 and 3.6 per cent in Q2 2007-08. According to Bery, “Better monsoon this year has helped the sector to do well and this will help in raising the consumption levels of rural India.”
So is there any positive that is emerging here? “The impact of interest rate and currency appreciation on manufacturing might get offset by the increasing consumption levels in the agriculture sector,” added Bery. Mining and Quarrying segment has also seen its growth numbers doubling from 3.9 per cent in Q2 2006-07 to 7.7 this quarter. But the weightage of the segment stands only at 1.9 per cent of the GDP and hence is of little help.
The strength of our economy has been domestic demand and the situation is not the same. The high-interest-rate regime that the RBI has been forced to adopt is a result of liquidity pressures and inflation. This is leading to a decline in domestic demand and seems to be there for some more time. “The key thing for policymakers is to manage inflation, liquidity and growth and I think we will remain at these interest rates till March 2008,” said Sandesh Kirkire, chief executive officer, Kotak Mahindra AMC.
So, is the slowdown in the GDP numbers bringing in any signs of worry for the economy? As Bery puts it, “There is nothing to worry, and we expect the GDP growth rate for the year 2007-08 to remain a little below 9.”

AMC Valuation: Pvt deals acting as benchmarks for AMC valuation

Sandeep Singh
Posted online: Monday, December 17, 2007 at 0000 hrs

The Rs 10,000-crore valuation of Reliance Capital Asset Management (RCAM) last week has implications for UTI Mutual Fund, which plans to float its IPO within this financial year. In an industry that has no benchmarks for valuing mutual fund companies, this is a financial debutante — in this Rs 501-crore deal, $10 billion US-based hedge fund Eton Park has bought 4.8 per cent of RCAM’s equity.
Earlier, UBS while acquiring the Indian arm of Standard Chartered Mutual Fund valued it at 5 per cent of its AUM, while Robeco valued Canbank Mutual Fund at 10 per cent of its AUM while acquiring a 49 per cent stake. The current deal, which values RCAM at 13 per cent of its AUM, is the highest such valuation offered till date for an Indian AMC.
According to Vikas Khemani, co-head institutional equities, Edelweiss, “In India there is no standard for AMC valuation and so these private deals act as the benchmark. This deal will impact the UTI AMC IPO as it has revised the benchmark.” But it’s not just RCAM’s high and growing AUM alone that has got the fund this valuation.
“Reliance has big size of AUM and has shown in the past that it has the ability to grow at a fast rate,” said Khemani. “We are the largest AMC and the most profitable one,” said Vikrant Gugnani, CEO, RCAM. The fund’s AUM have shot up by 124 per cent in the past 12 months and the momentum should continue, he feels. “Currently, we’re present in 300 locations and looking to expand to 500 by March 2008 and to 1,000 by March 2009 along with our global expansion plans.”
Typically an AMC is valued on three factors — the AUM that it holds, the break up of equity and debt in that AUM, and the growth rate of its assets. Globally, there’s another factor: the fee structure of the AMC, which currently is not applicable to Indian funds. In addition, factors like the growth rate of the industry itself — currently in fourth gear in India — takes the valuation of the companies higher.
RCAM’s relatively higher valuation, therefore, could also be because of the market re-rating the industry.
To compare, as on November 30, 2007, UTI AMC had total AUM of a little over Rs 52,000 crore, which has grown by 18.4 per cent in the past year, while RCAM has an AUM of over Rs 77,500 crore which grew by 124 per cent. But what goes in favour of UTI AMC is that its equity assets — on which the company earns a higher return through fund management fee — stand at 47 per cent of its AUM, while RCAM’s figure is 40 per cent. So, if RCAM has growth on its side, UTI has profitability, though RCAM’s growth is far higher than UTI’s profitability.
UTI will also benefit from the fact that it is an AMC with public sector companies (LIC, PNB, SBI and Bank of Baroda) as shareholders and, along with LIC and SBI, has got a hefty chunk of the pensions business last month. “I think UTI should get a valuation of somewhere between 10-15 per cent of its AUM,” said Khemani. At this rate, UTI should be worth about Rs 5,000-8,000 crore.
Meanwhile, the IPO plans of UTI AMC are well on course, UK Sinha, chairman and managing director, told The Indian Express: “I expect the whole IPO process to get completed by March 2008.” He declined to comment on valuations.

No-load funds to be Sebi’s ‘new year gift’

Sandeep Singh
Posted online: Monday, December 31, 2007 at 0000 hrs
Mutual Funds: To be introduced in first week of Jan
New Delhi, December 30: The year 2008 is all set to be the year of falling costs for financially aware mutual fund investors. “No-load funds are going to be the new year gift to mutual fund investors,” said a senior official at Securities and Exchange Board of India (Sebi), adding that they will be introduced “next week”.

As of now, all mutual fund investors, irrespective of the mode of investment, are required to pay entry load while buying a mutual fund. This load goes towards meeting distributors’ commissions. With this regulation in place, all investors who buy funds directly from the office of an asset management company, its collection centre or its website — and not through any distributor, agent or broker — will not be required to pay an entry load.
Asked if Sebi was planning to impose some kind of variable load, the official said, “We thought of variable loads but it would be tough for an investor to negotiate with the fund on how much load to pay and would have been a useless regulation.”
Apart from variable loads, the other idea the industry had been throwing up in response to Sebi’s proposal in August has been to introduce separate no-load funds. But finally, it is not separate no-load funds, but “a no load option on each and every scheme” that will be introduced, the officials said.
The proposal had set the cat among the pigeons, with many fund houses arguing that distributors worked in the larger benefit of the mutual fund industry and hence the industry needed them. On the defensive side, their argument was: Investors will come to the distributors for advice and then will go out and invest directly in which case the distributors will be at a loss.
But with this regulation, all set to become a reality in the year 2008, distributors will have to raise the level of the advice they provide and become financial planners rather than mere product sellers.

No Entry Load- Mutually beneficial

Sandeep Singh
Posted online: Friday, January 04, 2008 at 0000 hrs
The waiver of entry load on investments in mutual funds is a market friendly move. It will lower costs for aware investors and pressure distributors to improve the quality of services by becoming financial planners

From today, January 4, all investors buying mutual funds directly from an asset management company (AMC), through its office, website or collection centre, without the help and support of a distributor or agent will not have to pay any entry load. This landmark move is good news as far as direct mutual fund investors are concerned who don’t need the advice of a distributor.
This is yet another investor-friendly move towards making investing for households efficient. It follows a pattern that’s beginning to look at investors as if they mattered. In 2007 alone, Sebi can be credited with many — introducing gold exchange traded funds, allowing public issuers to offer a discount of upto 10 per cent to retail investors in IPOs, and issuing draft guidelines for real estate investment trusts (REITs) to help households invest in property with as little as Rs 1,000.
Coming to the current waiver, entry load on an equity fund today varies between 2.25 per cent and 2.5 per cent and is applicable to all investments in mutual funds, irrespective of whether they’ve been done directly or through a distributor. To illustrate, when an investor goes to a mutual fund to invest Rs 100 in its scheme, only Rs 97.5 goes for investment in the scheme and Rs 2.5 is deducted as entry load up front. This money gets paid to the distributor as commission even if he has had no role to play in the transaction.
What this regulation will do is that it will bring in multiple choices for investors and they can decide whether they need the advisory services of a distributor or not.
It will also act as a force on distributors to improve the quality of services they offer to an investor. The knowledgeable investor would definitely want to invest directly and save on the load. So the opportunity for the distributor lies with the huge mass of investors who require handholding while moving towards mutual funds.
Currently, India has around 40 million mutual fund accounts — less than 4 per cent of the population and about 4.8 per cent of household financial savings. This is insignificant when compared with the 56 per cent that go to banks and 14.6 per cent towards insurance.
What distributors will be required to do now is to work more aggressively to rope in the new investor class that is not yet comfortable in investing in equity markets. For this, they will have to raise the level of services they provide so as to convince investors to come to them for advice. There won’t be any fee by default for them any more and they will now have to work for it. Advisory will have to be made their unique selling proposition (USP) rather than just working as pick up and delivery agents. If this happens, and which is expected to be the case, the market as a whole will evolve on the learning curve.
India will have a larger class of investors who are more knowledgeable and have better understanding of the mutual funds industry. But before this, the distributor community will have to upgrade itself and will have to invest in creating talent.
This move will also reduce the huge churning of portfolios, which is a common phenomenon in the mutual fund industry. Frequent churning of portfolios has been a practice adopted by distributors just to earn the fee applicable on it. The churning also takes the investor away from the long-term investment philosophy of equity investing.
What should be expected now is a quality driven and more responsible distribution community. This move also seems to be the first step forward in the area of offering fee-based advisory services, which is the case internationally. When investors see value in the advice, they will pay the industry for its upgradation from agents to financial planners. In the interim, however, and as many heads of AMCs fear, there will be a shift in distributor recommendation from mutual funds to the high cost investment products like ULIPs from the insurance industry, where the first year commissions can be as high as 40 per cent, compared to 2.5 per cent in mutual funds. While a start was made by bringing in increased transparency in ULIPs by the insurance regulator yesterday, more needs to be done towards cutting costs.
sandeep.singh@expressindia.com

Small Cars: India to have smaller size but bigger ambitions

Sandeep Singh
Posted online: Thursday, January 10, 2008 at 0000 hrs

NEW DELHI, JANUARY 9: The small car segment in India is witnessing some widespread structural changes. After decades of being confined into the paradigm of a low cost no frill segment, the benchmark is being pushed from both ends. Today, Skoda Fabia with a price tag of over Rs 7 lakh plus stretched the bar higher. Tomorrow the Tata’s Rs 1 lakh car will push it a few notches lower. The story on small cars is still being written and with 200 journalists from abroad- a first for an Auto Expo in India—the world is watching.
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Fabia, has defined itself into a new segment— super hatchback segment, is priced between Rs 4.99 lakh to Rs 7.68 lakh, thus raising the bar for small cars. On the other side Tata will pull down the floor price of small cars by almost Rs 1 lakh.
The costliest hatchback till date has been Hyundai Getz Diesel that is priced at Rs 5.69 lakh. The segment this year will thus range between Rs 1 to 7.68 lakh.
Giving Fabia company would be Honda’s small car next year. The Japanese automaker is building its second plant that shall see the roll-out of its small car Jazz sometime in 2009. Jazz will also spice things up in the premium hatch segment.
“The small car segment started to broaden with the entry of Swift and Getz which created the foundation for cars like Jazz and Fabia. Going forward these cars will pave the way for even more premium small cars in the range of Rs 10-11 lakh,” said Honda Siel Cars India senior GM marketing Jnaneshwar Sen.
At the lower spectrum even Tata’s car will have a companion in Bajaj’s Lite that was showcased on Tuesday. This car may be priced a little more than Rs 1 lakh but will belong to the same segment and will be developed in collaboration with Renault-Nissan alliance. Even Hyundai is looking at entering this segment with their own ultra low cost car.
With a whole range of permutations and combinations possible the small car segment shall have more than a dozen products, very soon on the street corners. And almost every urban commuter shall hope to own a four wheeler of his own in the coming days, months or years to come here in India.

Tata Motors: People’s Car to decide the company’s stocks future

Sandeep Singh
Posted online: Friday, January 11, 2008 at 0006 hrs

New Delhi, January 10: Tata Motors stole the show at the Auto Expo today in New Delhi, with media from across the world striving hard to get a glimpse of the People’s Car. Contrary to the hype in Delhi, stock markets in Mumbai showed no strong gains for the company’s stock.

The stock closed 2.8 per cent down, almost double the percentage fall in Sensex of 1.4 per cent. “I don’t see any correlation of the share price correction with the unveiling of the car,” said Amar Ambani, vice president (research) India Infoline.
Tata Motors stock prices started to gain momentum over the past couple of weeks and its share price rose from Rs 695 on December 18, touching a high of Rs 816 on January 3, a rise of 17 per cent. It closed today at Rs 749. According to Amitabh Chakraborty, president (equity) Religare Securities, “The market looks ahead and so the stock went up on the optimism of the car over the past few days. Now that the car is unveiled, there has been some profit booking.”
The car definitely holds a stake in the future of the company, said, Ratan Tata, chairman, Tata Group, “It will be a profitable venture.” If it becomes a success on the road, it will definitely run the fortune for the company, “Depending on its success, the car can build strength for the stock,” said Chakraborty.
On the other hand, if the car fails, all the investment that has gone into the making of the People’s Car will go futile and may see the stock lose some shine.

Tata- THE MAN AND HIS DREAM MACHINE

Sandeep Singh

Posted online: Sunday, January 13, 2008 at 1223 hrs
Ratan Tata, a shock of grey on his head, a grim look on his face, shuns the limelight. But on Thursday, the industry patriarch perhaps did not mind the thousands of flashbulbs that popped in his face as the world took its first look at an astonishing Tata product: the Nano. His usual taciturn expression gave way to a smile as he threw a repartee at the environmentalists for their worries that the Rs 1 lakh “people’s car” would add to India’s emission woes.Ratan Tata’s quiet moment of triumph was deserved. Despite being born to luxury, he had felt for the Indian family, riding four to a bike. Their dream machine—his dream machine—was here now, having weathered the odds and the critics’ pessimism. To top it, there came news that the Government had allocated spectrum to his companies to operate GSM mobile services, a moment that harkened back to bitter wrangling with established GSM players. The initial response to the Nano has been overwhelming and the tiny, Noddy-land car is expected to help the company cross several milestones. With revenues at Rs 1,29,994 crore for the financial year 2006-7, and group companies enjoying a market capitalisation of Rs 2,51,487 crore as on January 10, 2008, the Tata Group is on a strong footing, contributing more than 3 per cent to India’s GDP. Nano, being the world’s cheapest car, has made international players sit up in amazement and the company has received proposals from some African, Latin American and Southeast Asian countries to manufacture the car there.The Nano will make millions of Indians mobile. But then, that has always been a Tata speciality: over the 138 years of the company’s existence, it has been helping India propel itself forward. It is emblematic of the company’s own recent push to become a proactive corporate mover, not the stolid doer it had been for generations. The acquisition of Tetley in 2000, the takeover of Corus to become the fifth largest steel company in the world and upping its stakes to become the frontrunner in acquiring the Jaguar and Land Rover brands from Ford, all make a statement for Tata as a company on the move. When Tata Tea bought Tetley, it made big news as Tetley was a much bigger company. Similarly when Tata Steel took over Corus, it did so without a hint of corporate bashfulness. When Tata Tea bought 30 per cent stake in Glaceau, it was looking for the international marketing acumen of the company to leverage for Tata Tea. But then with another company acquiring the majority stake in Glaceau, Tata was left with no option than to book the gains of its investment in Glaceau. But there was still a footnote to the episode and it stated that the Tata Group was aggressive about going global.The importance that the economic community puts on the Tatas is evident from the fact that three group companies form a part of the Sensex, the most to represent a corporate. RDAG (Reliance Dhirubhai Ambani Group) is represented by two companies in the benchmark stock market index. The combined weightage of the market cap of the three companies in the Sensex is 6.4 per cent. Tata has 13 other listed companies, excluding the three, that are a part of the Sensex.The future of the group will be defined by some of its flagship listed companies—TCS, Tata Steel, Tata Motors, Tata Power, Tata Teleservices and by Tata’s venture into financial services with Tata Capital. In the current market scenario, not only does Tata Motors stand tall after the Nano, but Tata Steel, on the back of growing demand for steel and rising metal prices, is also strongly positioned. Power is the buzzword in Tata circles these days. Tata Power has bagged the Mundra Ultra Mega Power Project and there are other projects to be undertaken by the company. As for its finance company, the entity Tata Capital has three companies within it, Tata AMC, Tata AIG Insurance and Tata Investment Corporation. As and when Tata Capital gets listed, it will unlock a lot of value for the company. How the company moves ahead will depend a lot on who takes over from Ratan Tata, a bachelor. Retirement, though, is not what is preoccupying Ratan Tata’s mind. In fact, he has another dream—for himself and his countrymen: availability of clean drinking water. He has already put his scientists on the job of finding the cheapest method of purifying water for drinking.The company has had a strong inheritance line and that has been an important aspect in the continuous evolution and growth of the company. Ever since Jamsetji Tata established the first textile unit in 1870, the company has rigorously moved ahead. Dorab Tata established Tata Steel and Tata Power and took the Tatas into new segments of operation. Then came the aviation pioneer JRD Tata, who brought commercial aviation to India under the name Tata Airlines, later nationalised into what became Air-India. He also has to his credit the tea business, hotels, trucks and locomotives, among others. The latest in the line of Tata patriarchs, Ratan Tata has not proved less than his predecessors. He was instrumental in producing India’s first indigenously designed and manufactured car, the Tata Indica, a new version of which was released a day before sibling Nano took centrestage. He has shown the aggressive face of the Tatas—as the acquisitions that it has gone for and successfully completed. And now he has delivered on his promise of launching the world’s cheapest car. While Ratan Tata is around, surely there will be little talk of a successor.
SUMANT BANERJI
The people’s car, also the cheapest in the world, is here with us and as we write this, it is being scrutinised by millions across the world. But not many know that the Nano is not only a work of art perfected by 50 engineers in Tata Motor’s plant in Pune—the character of this low-cost, cute-looking, four-wheeled vehicle has the stamp of Ratan Tata all over it.It was Tata, a trained architect himself, who wanted a car tall enough to hold his 6 ft tall frame. People say he once joked in the factory that he wanted to drive the car himself at the launch. That is how the car gets its tall boy looks.When the company was looking to cut costs, it was Tata who suggested the Nano have one windscreen wiper instead of two. The original blueprint for the design of the car, prepared by Italy’s Institute of Development in Automotive Design—which had also designed the Indica over a decade earlier—had a more sedate-looking car. Tata, with his eye for detail and aesthetic sense, made it look more revolutionary and, few will deny, more likeable. Along the way, it became less expensive as well.But the Nano is not a story of one product. It is not a story of Ratan Tata’s long pending dream. It is a story of the journey of Tata Motors itself. As the Tata patriarch himself admitted after the unveiling, it was the Indica that was a bigger risk. For a successful company, Nano is a means of achieving an ambition, not of survival.In many ways, the Nano story starts in 2000. That was the year when the company, despite its Indica, faced losses for the first time in its 55-year history. An economy that was in decline resulted in the company’s turnover receding by almost 9 per cent in 2000-1. Till then Tata Motors was the face of the Indian highways. Its sturdy trucks and buses were as ubiquitous on the dusty landscape as the roadside dhabas. The company was the unchallenged leader in the auto industry with an over 65 per cent market share. Things changed after 1992, when globalisation stepped in and Tata found itself wanting. A spate of technological joint ventures followed, first with Cummins Engine Co and then with UK’s Tata Holset Ltd and Tata entered the passenger car space with the Indica in 1998. The idea then was to entrench itself in a widely changing industry but the crisis at the turn of the century proved that Tata was in trouble. In 2000, Tata Motors was a bulging, slow-moving auto giant all set for decay.The company went back to the drawing board and the commercial vehicle division was the one that saw the first change. The head of the division, Ravi Kant (the current MD), decided to revolutionise the flow and inject young blood. Instead of depending on the grey heads, he asked the engineers to show the way. The solution he had in mind was to cut costs. It was in those times of distress that a saviour in the form of Girish Wagh emerged. Wagh was given the responsibility of a project so risky that at that time only a young man could have taken it. It was to build a small truck that would ensure last mile connectivity. Something that would work where the traditional trucks stopped. Today we know it as the Tata Ace—a mini truck that was such a runaway success that even passenger cars paled in comparison. Ace’s success convinced Tata that a small car, built frugally but practically, would sell. “Nano was a concept that was in Tata’s mind even as Ace was being developed. In many ways it is a precursor to Nano and its success convinced him of its saleability—an important facet for a listed entity with shareholders riding on it,” said a Bosch official, the company that supplies Nano engines.Wagh was the obvious and automatic choice for Nano as well. By the time Tata announced his wish to make a small car in 2003, the company was back to its money-making ways. After that slump in 2001, the company’s revenues went up in 2002-3 and by the next fiscal, the turnaround was complete. “In many ways I was more nervous with the Indica. That was a time when we were getting into a completely new area of passenger cars. Our CV business was also not in great shape. So there was pressure,” Tata himself admits. “Now both our divisions are doing well and making money.” But unlike the Ace, which had to be small and not necessarily inexpensive, Nano had to be both. Wagh knew that as the company challenged its own limitations, its component suppliers had to do the same. “The Nano was as much a dream for us as it was for our suppliers. They have challenged their own capabilities and have helped us in no small way in realising our dream,” says Tata Motors Managing Director Ravi Kant.The engine, alternators, management systems and brakes come from Bosch, transmission comes from Birla’s Avtec Ltd, steel from its own Tata Steel, castings from Tata Metallics, headlights from Lumax and batteries from Exide. All these components are different from the standard ones fitted in other small cars and the companies have made concessions and spent extra hours on R&D for the dream car. Some do not even expect to make money with the association.“Our association with the Nano project is more notional. We do not have major margins and will start making money only after 1-2 years,” said P.K. Kataky, Director (Automotive), Exide Industries Ltd.The challenges did not end with the product alone. In the wake of controversy surrounding the policy on SEZ, Singur in West Bengal, the site for the Nano factory, became a rallying point for protestors. Tata had won the technological battle but a political one still stared it in the face.Tata lost over four months and there were anxious moments when company officials sometime thought aloud if the project should be shifted. A belligerent monsoon last year did not help matters either. The low-lying factory site was flooded and work had to be stopped. “Thankfully we had not placed any equipment at that time or the loss and the delay would have been greater,” says Tata. With the passage of time, both the opposition and rain water receded.The dream came to the fore four years ago but no one knows how cherished or long standing it is for Tata. The sense of relief on his face was palpable and as he stood addressing the world with the car in the background, he looked the youngest 70-year-old ever. Ratan Tata’s dream has stepped out of its private domain and is awaiting mass approval. If it comes, Tata Motors will have well and truly arrived.

Don’t exit in panic, stay calm and look for opportunities, say experts

Sandeep Singh
Posted online: Tuesday, January 22, 2008 at 0035 hrs

NEW DELHI, JANUARY 21: If you are an investor, stay calm, firm. And don’t exit the market in panic. That’s the expert advice after the biggest single-day fall of the Sensex.
Anil Kaul, Head, ICICIdirect, said investors should not press the panic button. “Investors with long term perspective should not get moved by this fall. If you have a good advisor, search for a good opportunity to invest,” he said.
Another aspect that investors need to look at is revisiting their asset allocation, said Ajay Bagga, chief executive officer, Lotus India AMC. “The rise in equity market calls for an assessment of your portfolio.”
Bagga said the fall had in fact opened up opportunities for investors but these should not be taken up randomly. “Look for sectors and companies into domestic play, insulated from global factors like banking, construction, FMCG and media and avoid sectors which are export dominated and that get impacted by global factors like metals and technology.”
The essentials of investment and economy remain strong and corporate results are on track, said the CEO of an asset management company. “In the long term, the market will do well though over the next three to six months it is going to be choppy.”
On the negative side, this fall tells retail investors that the margin game is something they should avoid. “Retail investors should avoid margin trading as the losses can be huge and it needs lot of expertise and close watch,” said Arpit Agrawal, Head (Research), Arihant Capital.

Retail investors tethered by small brokers

Sandeep Singh
Posted online: Wednesday, January 23, 2008 at 0051 hrs

New Delhi, January 22: Adding salt to retail investors’ wounds were their brokers’ inability to help them take fresh buying positions in a market that seemed to have opened up opportunity. Many brokers asked their clients to bring money along in order to take fresh position.

“Almost 80 per cent of small brokers were not accepting the demand for buying from investors even on account of giving cheques,” said a senior executive from a leading brokerage house. Prior to yesterday’s fall, the same brokers used to take positions for their clients with the money following the next day.
“Relatively smaller brokerage houses do not have the financial power to meet these high margin requirements at one go and so the demand for buying was not being accepted by them,” said D D Sharma, vice president (retail equity), Anand Rathi, a brokerage. By comparison, large brokerages are better placed to execute orders in such trying situations.
“We stopped margin buying for clients who did not bring demand deposits or deposited money online,” said a senior official from Geojit Financial Services. “We did not accept demand on account of cheque as it takes two to three days for cheque clearance.”
The problem arose because of aggregation of margin calls to brokers. The broker is required to deposit the margin with a stock exchange, failing which, his positions are squared off by the exchange. In such a situation, the brokers can’t take fresh positions.
This came as a surprise to numerous investors. “This is a problem with many undercapitalised brokers as they are facing the pressure of meeting margin calls,” said R Venkataraman, co-promoter and executive director, India Infoline. “They had taken unlimited leveraged position which has put them under pressure.”
“We as an institution are very careful while taking leveraged positions,” said Vikas Khemani, head (institutional equities), Edelweiss. “By yesterday, we had cleared all our open positions and are comfortably placed now. Brokers who have taken high leverage positions are under pressure.”
Margin call
The margin call problem on the futures and options (F&O) positions - one of the main reasons for the current market fall - is coming under control. The 1,408-point fall in the Sensex on Monday saw open interest positions in F&O come down by 15 per cent, from Rs 1,31,000 crore to Rs 1,11,000 crore. Today’s 875 point correction led to a further decline in open interest positions which fell 18 per cent to Rs 91,000 by the end of the day.
The revival, after an intra-day fall of over 2,200 points, was due to the renewed buying into the market as investors tried to capitalise on opportunities. “I don’t see more liquidation happening on account of margin calls,” said Vikas Khemani of Edelweiss.

IPOs lose their sheen in volatile markets

Sandeep Singh
Posted online: Thursday, January 24, 2008 at 2357 hrs

New Delhi, January 23: As markets gather themselves after a two-day bloodbath with an 864-point rise — still over 3,200 points lower than its January 11 perch — the uncertainty is now moving to the primary market.
J Kumar Infraprojects, whose initial public offer (IPO) closed today, managed a subscription level of 1.76 times by 4.00 pm; Cords Cable Industries, on its second last day of issue closing remained undersubscribed.
No doubt, these are trying times for raising capital through IPOs. First, Reliance Power IPO, which was oversubscribed by 72 times, sucked out retail liquidity from the market. Then, foreign institutional investors pulled out. Finally, margin calls broke the Sensex’ back, leading to a fall of over 4,000 points (almost 20 per cent) in seven trading days.
While there are several IPOs gearing to mop up funds for their public issues, getting a subscription level of the kind that prevailed a couple of week back will be tough.
“If the market remains volatile for the next couple of days, many IPOs, open now or about to open, might have to either increase their public issue open period or go in for a downward revision of their price band,” said a senior official of a leading investment bank.
But companies, which should be concerned about their issues devolving, are putting up predictably brave faces. “As of now we are sticking to our plans and are confident of getting a good subscription,” said a top executive of OnMobile Global whose IPO opens for subscription on January 24. What if things don’t turn out as expected? “We will then take our call.”
“We are fully confident of getting subscribed even though the markets throws concerns,” said a senior executive of Emaar MGF, whose Rs 7,000-crore IPO opens for subscription next month.
This turnaround in the market and the related expectations is just two-days old. Only a week ago, the question among investors buying IPOs was how many times the issue would get subscribed by and hence how many shares will be allotted to retail investors.
Low subscription levels have another consequence: low, or perhaps negative, listing gains. Which, when looked at from the fundamental’s side, is good: long term investors, backed with research, buying companies with strong fundamentals get an opportunity to buy cheap.

RBI feels repo rate cut will push up inflation

Sandeep Singh
Posted online: Wednesday, January 30, 2008 at 2326 hrs
Market Analysis Credit growth is falling and may impact GDP
NEW DELHI, January 29: At a time when the US Federal Reserve has cut its rate three times since September 18, the Reserve Bank of India (RBI) has left its policy rates — CRR, repo, reverse repo and bank rate — untouched. Meanwhile, credit growth is falling, which is expected to impact GDP growth rate. Economists believe 2008-09 should see over a 100 basis points shaved off India’s GDP growth to 8 per cent or thereabouts. A cut in the repo rate (the rate at which RBI lends money to commercial banks, currently at 7.75 per cent) would have helped, but in the RBI’s and the government's opinion, that would have pushed inflation higher.
Already, the price of oil has been on the rise, as have been prices of other global commodities including food. RBI's cautious stand is: “The policy endeavour would be to contain inflation close to 5 per cent in 2007-08 while conditioning expectations in the range of 4-4.5 per cent.” The credit and deposit growth have flipped places from the previous year. In January 2007 credit growth and deposit growth stood at 31.9 and 21.5 per cent. Now they stand at 22.2 and 23.8 per cent. Thus, credit growth is down and stands below the deposit growth rate.
A concern that looms large is that if India's interest rate differential widens significantly with that of the US, it would head towards a situation where the RBI will have to go for steep cuts. Economists are of the view that the RBI does not need to cut rates the way the US has been doing. However, they also expect that the rates should move in the same direction. If past parallels between US Fed rate cuts and RBI cuts are seen, one can figure out that Indian interest rate cycles have lagged behind that of the US by two to 18 months.
The US Fed went in for its rate cut in January 2001 when it was hovering around a high 6.5 per cent. RBI followed the move and came up with its first repo rate cut two months later, in March. The repo rate at that time stood at 10 per cent. By the time RBI came with its rate cut the Federal
Reserve had cut its rate by three times — from 6.5 per cent to 5 per cent — and continued with its policy for more than two years till June 2003, when the rate went down to touch a low of 1 per cent. RBI continued with its repo rate cut till March 2004 to see the repo rate standing at 6 per cent.
The second set of changes came in June 2004 when the Federal Reserve reversed its policy and went in for an upward revision of interest rates. The Fed went on to raise its interest rate from 1 per cent in June 2004 to 5.25 in June 2006. Relatively speaking, RBI followed the Fed's move rather late — after 18 months. But, by then the Federal Reserve had raised its rates 11 times, from 1 per cent to 4 per cent. RBI followed the US interest rate cycle once again and went ahead with its upward revision from 6 per cent in October 2005 to 7.75 per cent February 2007.
The two instances suggest that there is no direct correlation between interest rate movements in the US and India. Though the RBI follows the US cycles broadly, it may not be immediate and depends on macroeconomic factors prevailing in India. The US has been on a rate cut mode to bring its economy out of a visible slowdown and to encourage people to borrow, spend and invest.
The economic situation in India is different. But the high interest rate regime has started to reflect now on credit growth. Sooner or later, RBI will have to go in for a rate cut to keep growth rates going and the exchange rate at a comfortable level.

3 IPO Stories

Wockhardt's IPO largest ever to be withdrawn
Sandeep Singh
Posted online: Friday, February 08, 2008 at 2354 hrs

New Delhi, February 7: Hit by the poor response to its IPO, Wockhardt Hospitals has withdrawn its public issue. The company that came with its public offering to initially raise Rs 777 crore at a price band of Rs 280 to 310 is the largest issue in history to have been withdrawn due to undersubscription.
The company has further clarified that it will complete all the refunds to investors who had applied for the issue within 15 days of the closing date, ie Febuary 7, 2008.
The company first revised its offer price between Rs 225 and 260 due to low market enthusiasm. With this step proving inefffective, the company went ahead to increase its offer period by two days. Even this could not hold it any further and by 5 pm on Wednesday, the issue managed a subscription level of just 20 per cent.
For an issue to be successful, the minimum subscription required is 90 per cent. “It is too early to talk on what will be the future course of action for Wockhardt. The company will decide over the next few days,” said an investment banker to the issue.
In 2007, three issues were cancelled or withdrawn due to undersubscription. These were Tubeknit Fashions, Ammana Bio Pharma and SVPCL. The sizes of the issues were Rs Rs 46.2 crore, Rs 20.1 crore and Rs 34.5 crore respectively. Against this, the Wockhardt issue was a major one that aimed to raise a revised figure of Rs 652 crore.
With the latest development, the company’s plans to expand and pay off its debt have suffered a setback. The company had proposed to invest the money raised in its 16 planned hospitals, which would take its total bed capacity from the present 1,374 to 4,793.
The company also planned to pay off its short-term debt, amounting to Rs 195 crore, of its total secured and unsecured loans of Rs 339 crore as on June 2007.

Spectre haunting IPOs: Bids at lower end of price bands
Sandeep Singh
Posted online: Wednesday, February 06, 2008 at 2341 hrs

New Delhi, February 5: As if low subscription numbers for initial public offerings (IPO) were not enough, companies raising money from the capital markets are now staring at a new animal: raising money at the lower end of the price band. All the IPOs currently open for subscription are getting a majority of bids at the lower end of their price bands.
Property developer Emaar MGF, which had managed a total subscription of just 40 per cent by today, saw only 32.5 per cent of the bids come at the cut-off price of Rs 630. Almost 58 per cent have been received at Rs 540, which is the lower end of the issue price; 67 per cent fall between Rs 540-550.
This shows that investors who are willing to invest in these low-sentiment times are going in for the lower end of the price band. If this trend continues till the closing date, allotment of shares will be somewhere towards the lower end of the issue price.
Healthcare company Wockhardt Hospital’s IPO, with a Rs 225-260 price band, is no different. The issue has till now received bids for only 10 per cent of the total issue size. Of these, 41 per cent bids fall in the price band of Rs 225 and Rs 240 and 59 per cent bids are at the higher price band of Rs 260.
“If a public issue receives a minimum of 90 per cent subscription, the allotment has to be made and if the issue is not fully subscribed at the higher end of the price band, whatever bids are received within the price band are taken into account,” said Religare country head (investment banking) Kamlesh Gandhi. “In case a majority of bids fall in the lower end of the issue price band, the allotment will be at a lower price.”
With toll roads developer and operator IRB Infrastructure, even with the 4.3 times subscription the company has received so far, only 25.6 per cent (or 1.1 times) is at the higher end of the Rs 185-210 price band. As high as 73.4 per cent of the bids have been received at around Rs 185-190.
The issue price for OnMobile Global, a telecom value added service provider that closed its issue on January 29 in the Rs 425-450 price band has been fixed at Rs 440. Wind energy equipment manufacturer Shriram EPC, which closed its issue on February 1 in the Rs 290-330 price band, fixed it at Rs 300.


As IPO mood turns negative, Emaar and Wockhardt revise issue prices
Sandeep Singh
Posted online: Friday, February 01, 2008 at 2340 hrs
Initial Public Offerings Poor response over past 7-10 days
New Delhi, January 31: With two medium- to large-sized issues cutting their IPO (initial public offering) prices by 10-20 per cent, the downturn in secondary markets is now visibly seeping into the primary market. While construction and real estate major Emaar MGF lowered its price band to Rs 540-630 from its earlier price band of Rs 610-690 (a fall of 9-11 per cent), healthcare company Wockhardt Hospitals slashed its issue price from Rs 280-310 to Rs 225-260 (a fall of 16-20 per cent).
With this, the post-listing market capitalisation that Emaar was eyeing has come down by Rs 5,915 crore to Rs 62,111 crore at the higher end of the price band. Similarly, the market capitalisation of Wockhardt is down Rs 521 crore to Rs 2,711 crore. The IPO of Wockhardt opened today, while Emaar opens on February 1.
The volatility in the secondary market over the past nine trading sessions holds the key to this correction. According to an investment banker of an issue open for subscription, “The prices are being revised because of the unexpected response to other issues that were open for subscription. It’s purely external factors that are impacting the enthusiasm and nothing related to the company.”
Strong are these external factors. The Sensex is down 7.2 per cent or 1,365 points since January 18. This market behaviour under the influence of global factors followed by liquidity squeeze by the mega issue of Reliance Power and squaring up off the domestic open interest positions is now impacting the IPO market.
The IPOs that opened for subscription in the past week to 10 days have received poor subscription response. Shriram EPC that closes for subscription on February 1, has got a total subscription of 2.17 times by January 31, but only 7 per cent of its retail portion has been subscribed.
Similarly, Bang Overseas that closed for subscription today got subscribed only 1.24 times while its retail portion barely managed to scrape through with a subscription level of 1.17 times. On the same lines, Cords Cable, which closed for subscription on January 24, and was a relatively smaller issue of Rs 40.5 crore, got subscribed five times (that’s small oversubscription for a small issue).
KNR Constructions, that closed on January 29, was subscribed 1.25 times, with retail subscription of just 61 per cent; the company has fixed the issue price at Rs 170, the lower end of its band.
Meanwhile, IRB Infrastructure Developers, that opened for subscription today, has managed a subscription of 0.44 times; but its retail portion got subscribed by 0.3 per cent.
“We have already opened for subscription and will not go for a revision in prices,” said Virendra D Mhaiskar, chairman and managing director of IRB Infrastructure. “Extending the issue closing date will depend on the subscription levels though I feel we are comfortably placed.”

Emaar- 3 days before bell rings, Emaar withdraws IPO

Sandeep Singh
Posted online: Saturday, February 09, 2008 at 2348 hrs
Pull Out Had subscription levels touched 90 per cent, Emaar would not have been able to withdraw its issue
New Delhi, February 8: Behind the withdrawal and postponement of Emaar MGF’s Rs 6,461 crore initial public offering (IPO) — one of the largest in India — lie two questions. One, why did Emaar need to withdraw its IPO today when barely two days ago it had sought a five-day extension?
Without waiting for the extension, the company withdrew three days before its closing date of February 11. Two, why has it withdrawn on a day when its subscription level had touched 85 per cent? Bad market sentiment is only part of the story.
The answer: had the subscription level touched 90 per cent, Emaar would not have been able to withdraw its issue. But why withdraw when the money is almost in the pocket? “Given the prevailing sentiments in the capital markets, it was unclear how we would trade post-listing,” a company release stated. “It has been considered wiser to revisit the markets only when the sentiment is stable and better providing greater value to the investor.” The company plans to return to the market at a later date “when sentiment and liquidity conditions are better.”
Emaar, that aggressively hit the news circuit when it announced its IPO, had a subscription level of 85 per cent by Friday morning. It had received full subscription from QIB (qualified institutional buyers) and high net worth individuals (HNI) segments. Together, they added up to applications worth Rs 5,779 crore against Rs 6,461 crore that it stood to collect at the higher end of the issue price.
So, how did subscription level fall to 43 per cent by Friday afternoon? “It was a decision taken after taking investors into confidence,” a source close to the developments told The Indian Express. In English that means, the company handheld investors as they withdrew their bids. With this, Emaar has become the India’s largest ever IPO to have been postponed as a result of low subscription.
The postponement of the issue however will not effect the company’s outlined projects and growth, a company official said. “Future course of action will be decided in a week’s time.”
As the accompanying table shows, Emaar is not alone in facing the IPO blues. Ten other issues that came up with their initial public offerings since the market corrected under the collective influence of the global economic slowdown, liquidity impact of Reliance IPO and settlement of huge F&O (futures and options) positions on January 21 and 22, have undergone the same fate of low subscriptions. Those IPOs that managed to scrape through have had to price them at the lower end of the price band.
THE IPO TRAIL
February 9:Emaar withdraws it IPO
February 7:Wockhardt withdraws its IPO
February 6: Emaar seeks 5-day extension, further reduces price band to Rs 530-630. IRB Infrastructure fixes price at Rs 185 on IPO band of Rs 185-220
February 5: Wockhardt extends its IPO by two days
February 1:Emaar reduces price band from Rs 540 to 630. Shriram EPS fixes price at Rs 300 on price band of Rs 290-330
January 31:OnMobile fixes price at Rs 440 on a price band of Rs 425-450. KNR Construction fixes price at Rs 170 on a price band of Rs 170-180
January 30:Wockhardt reduces price band from Rs 260-310 to Rs 225-260
January 24:J Kumar Infraprojects fixes price at Rs 110 on a price band of Rs 110-120

India ranks high on FII priority list: Fidelity

Sandeep Singh
Posted online: Monday, February 18, 2008 at 2208 hrs

New Delhi, February 17: The fact that the Indian economy is less export-oriented places it in a stronger position against China when it comes to global asset allocation of foreign institutional investors (FIIs), said Jeff Hochman, portfolio strategist and director (technical research), Fidelity International. This will lead to increased weightage on India for investments going forward. In the current situation where a slowdown in US economy seems eminent, India holds stronger ground even within the group of emerging markets, he said.
But even though India is well positioned to face and survive the economy onslaught, the current volatility in markets has thrown up concerns. “Volatility in global markets and concerns on subprime evolving in a bigger manner will see retrenchment of money from emerging markets to developed economies considered safer,” Hochman said.
For India though, the concerns come on account of a higher than expected currency appreciation and growth coming down because of infrastructure growth not keeping up — while growth of six infrastructure industries dropped to 4 per cent in December 2007 from 9 per cent a year ago, during April-December it fell to 5.7 per cent from 8.9 per cent. Other factors that will impact investments and markets in the short term are agriculture-led inflation and oil prices.
The current volatility prevailing in global markets on account of factors not related to India will ensure the markets remain volatile. “I expect volatility to prevail till June-July 2008,” Hochman said. “They will remain choppy for 2008 and things are expected to settle down in 2009.”
The Fed has cut interest rates five times in the past five months bringing it down from 5.25 per cent on September 18, 2007, to 3 per cent today. These cuts will boost the GDP growth rate for the US. The impact, however, will not be short term.
“By decreasing interest rate, they are trying to prevent a negative GDP growth rate,” Hochman said. “The impact of rate cuts won’t be visible now as it will take time but it will have a more positive impact in 2009 on the US GDP growth rate.” This will see things stabilise in the long term. As far as India is concerned, “There is nothing that will stop the growth curve,” he said.

Steel, cement, oil shares celebrate

Sandeep Singh
Posted online: Wednesday, February 27, 2008 at 2258 hrs
New Delhi, February 26: The market gave a thumbs up to the rail budget as companies in the steel, cement, oil and rail transport support services saw their share prices rise during the day. The railway minister’s declaration around freight rate cuts for some segments and keeping them constant for others have come up as a positive to several industries.
Steel stocks, in particular, saw a rise in prices across the board as the railway minister left iron ore freight prices untouched. Lalu’s declaration of manufacturing only stainless steel coaches from 2009-10 onwards saw the share prices of steel manufacturing companies move up steeply.
“It is a long term positive and adds to the global positivity on steel,” said Ketan Karani, vice president research, Kotak Securities. Jindal Stainless, which is the market leader in stainless steel production saw its share price rise by 7.2 per cent during the day to close at Rs 160. Other steel producers — Monnet Ispat, Jindal Steel, Bhushan Steel, SAIL and Tata Steel also saw their share prices go up.
Reduction in freight rate of fly ash by 14 per cent and of petrol and diesel by 5 per cent also pumped up the share prices of oil marketing companies and the cement companies. “Most Indian cement manufacturers mix fly ash for their cement production and hence the reduction in freight is important for them,” said Amitabh Chakraborty, president (equity), Religare Enterprises. Grasim went up by 5.1 per cent, India Cement was up 4.8 per cent, Binani Cement rose by 3.1 per cent, while Madras Cement and Mysore Cement were up by 2.2 and 2 per cent respectively.
Oil marketing companies also saw their share prices rise — BPCL up 5.4 per cent, HPCL up 4.8 per cent and Indian Oil up 4.2 per cent. This came on the back of Lalu announcing a 5 per cent cut in the freight of petrol and diesel. “Transportation cost is passed on to the consumers and any reduction in freight rate at this time will help oil companies as they are absorbing a lot of expenditure on themselves,” said Chakraborty.
Companies operating in the railway transport support services also saw their share prices rise as the market gave thumbs up to the rail budget. Concor and Gateway Distriparks among others saw their share prices rise by 1.6 and 6.3 per cent respectively. While BEML, one of the largest wagon makers also saw its price rise by 3.1 per cent with the Railway minister announcing 20,000 new wagons to be manufactured in the year 2008-09.
Other than the positive impact of the budget there was also a negativity that built up in the road transport segment as companies operating in the segment saw a decline in their share prices during the day. Transport Corporation, Patel Integrated Logistics and Frontline Corporation saw their prices dip by 0.7, 3.1 and 4.9 per cent respectively. “It is only an immediate reaction and in India, road transport companies mostly bring the materials to railway yards from where they are transported by trains, so it won’t impact much on the road transport companies,” said Chakraborty.

Steel, cement, oil shares celebrate

Sandeep Singh
Posted online: Wednesday, February 27, 2008 at 2258 hrs
New Delhi, February 26: The market gave a thumbs up to the rail budget as companies in the steel, cement, oil and rail transport support services saw their share prices rise during the day. The railway minister’s declaration around freight rate cuts for some segments and keeping them constant for others have come up as a positive to several industries.
Steel stocks, in particular, saw a rise in prices across the board as the railway minister left iron ore freight prices untouched. Lalu’s declaration of manufacturing only stainless steel coaches from 2009-10 onwards saw the share prices of steel manufacturing companies move up steeply.
“It is a long term positive and adds to the global positivity on steel,” said Ketan Karani, vice president research, Kotak Securities. Jindal Stainless, which is the market leader in stainless steel production saw its share price rise by 7.2 per cent during the day to close at Rs 160. Other steel producers — Monnet Ispat, Jindal Steel, Bhushan Steel, SAIL and Tata Steel also saw their share prices go up.
Reduction in freight rate of fly ash by 14 per cent and of petrol and diesel by 5 per cent also pumped up the share prices of oil marketing companies and the cement companies. “Most Indian cement manufacturers mix fly ash for their cement production and hence the reduction in freight is important for them,” said Amitabh Chakraborty, president (equity), Religare Enterprises. Grasim went up by 5.1 per cent, India Cement was up 4.8 per cent, Binani Cement rose by 3.1 per cent, while Madras Cement and Mysore Cement were up by 2.2 and 2 per cent respectively.
Oil marketing companies also saw their share prices rise — BPCL up 5.4 per cent, HPCL up 4.8 per cent and Indian Oil up 4.2 per cent. This came on the back of Lalu announcing a 5 per cent cut in the freight of petrol and diesel. “Transportation cost is passed on to the consumers and any reduction in freight rate at this time will help oil companies as they are absorbing a lot of expenditure on themselves,” said Chakraborty.
Companies operating in the railway transport support services also saw their share prices rise as the market gave thumbs up to the rail budget. Concor and Gateway Distriparks among others saw their share prices rise by 1.6 and 6.3 per cent respectively. While BEML, one of the largest wagon makers also saw its price rise by 3.1 per cent with the Railway minister announcing 20,000 new wagons to be manufactured in the year 2008-09.
Other than the positive impact of the budget there was also a negativity that built up in the road transport segment as companies operating in the segment saw a decline in their share prices during the day. Transport Corporation, Patel Integrated Logistics and Frontline Corporation saw their prices dip by 0.7, 3.1 and 4.9 per cent respectively. “It is only an immediate reaction and in India, road transport companies mostly bring the materials to railway yards from where they are transported by trains, so it won’t impact much on the road transport companies,” said Chakraborty.

Sebi to reduce gap between opening & listing of issues

Sandeep Singh
Posted online: Thursday, March 06, 2008 at 2336 hrs

New Delhi, March 5: The Sebi board today took the important decision to reduce the number of days between the opening of an initial public offering (IPO) and the listing of shares. Current regulations allow as many as 21 days within which an IPO must be listed. This is likely to go down. In his first public appearance after assuming office, Sebi chairman C B Bhave said, “If we collapse the timing between an IPO opening and its listing, the need for a grey market will diminish. There will be no incentive for grey market operators.”
According to ICICI Bank executive director Anup Bagchi, “The lower the number of days, the lower the settlement risk, lower the volatility and higher the cash rotation.” Citing the efficiency in secondary markets because of changeover from T+5 settlement (you get delivery of shares or cash when buying or selling shares within five days) to T+2, he said, “The number of days can be shortened in the primary market too. Sebi will have to streamline the process.”
Other market players welcomed the move. “It is a progressive step and is in the right direction that will take our markets in line with the global markets operations,” said Kotak Investment Banking chief operating officer S Ramesh.
At the Sebi board meeting today, finance minister P Chidambaram also emphasised the need for a greater investor protection, education and market development. “The FM said that our focus should be on investors who are in the market for the long term,” Bhave said. This is in line with the finance minister’s proposal in Budget 2008-09, under which he raised the short-term capital gains tax from 10 to 15 per cent to discourage short-term investors.
The board took three other important decisions. It formed a three-member committee headed by Mohan Gopal to oversee the conduct of all proceedings initiated by Sebi against National Securities Depository Ltd (NSDL). In his previous assignment, Bhave was chairman of NSDL.
In another important development that will benefit mutual fund houses and companies coming up with public issues, Sebi reduced the ad valorem fee for filing of an offer document, both for fund houses and companies, to one-sixth, from the existing 0.03 per cent to 0.005 per cent subject to a maximum of Rs 50 lakh in case of mutual funds and Rs 3 crore in case of public issues. The fee structure will come into effect from April 1, 2008.
The board also approved the proposal to permit Madras Stock Exchange members to trade on the National Stock Exchange (NSE) platform, subject to certain terms and conditions.

Loan Waiver Impact on Stocks

Bankex slides 6.7% on farm loan waiver fears
Sandeep Singh
Posted online: Tuesday, March 04, 2008 at 0004 hrs
Post-Budget PNB, Kotak, SBI biggest losers
New Delhi, March 3: Leading the 900 point fall in the Sensex today were banks whose future seems uncertain post-budget 2008. In his budget speech Last Friday, finance minister P Chidambaram had announced a Rs 60,000 crore loan write-off for farmers.

The BSE Bankex was down 6.7 per cent today, losing 679 points during the day to close at 9,434.
The three biggest losers were Punjab National Bank (down 9.7 per cent), Kotak Bank (9.1 per cent) and State Bank of India (8.8 per cent).
“The correction in banking stocks is both on account of the global correction and the lack of clarity on how the farm loan waiver will be compensated,” said Birla Sun Life AMC CIO A Balasubramanian. The finance minister had announced on February 29 a farm credit waiver of Rs 60,000 crore over the next three years.
“The market is not clear as to what kind of negative impact it will have on credit discipline among rural loan seekers,” said the CIO of a mid-sized mutual fund house.
While the development saw investors booking profits on banking shares, the low confidence level in banking stocks is likely to continue for some time. “The market’s perception will improve once clarity comes out on how the waiver will be compensated by the government,” said Balasubramanian.
The fall in prices has thrown open a discount of 5-10 per cent on most of the banking stocks. The BSE Bankex is down 24 per cent since its all time high on January 14, 2008.
These are good entry levels for the long-term, considering the fact that there is nothing drastically wrong that has happened with the banking sector and they are available at good discounts, say experts.
“All falls are good, and if the fundamentals of a stock remain strong, a correction opens up opportunity to invest,” said Anil Kaul, head of research with brokerage ICICIdirect.com. “A stock will continue to remain a good stock until something horrible happens.”

STRAIGHT TALK- Syed Shahabuddin, SBI Funds management

‘One cannot expect equity returns by investing money in fixed deposits’
Sandeep Singh
Posted online: Monday, December 10, 2007 at 0000 hrs

Three basis point charge in pension funds is the net charge and does not include expenses; any expense incurred, will be passed on.
State Bank of India (SBI), Life Insurance Corporation (LIC) and UTI-AMC will manage the Government’s new pension fund from June 2008. Of the Rs 2,000-crore fund, SBI that will manage 55 per cent and charge 3 basis points from the investors. In an interview to Sandeep Singh, SBI Funds Management managing director and chief executive officer Syed Shahabuddin explains the structure of the pension fund and talks about the company’s future plans.
• Are you planning to come up with a new company to manage the pension funds?
SBI will be floating a new company; in fact they have registered a company for managing the pension funds.
• What kind of investment structure will be followed?
The investment structure is being negotiated with the Government. After we get a benchmark rate from the Government, we will discuss and decide the investment pattern with them for a reasonable rate similar to the benchmark rate. The modalities will be worked out with the Government, as one cannot expect equity returns from us by investing the money in fixed deposits.
• SBI is talking of a 3 basis points charge. If you invest in equity funds that charge an entry load of 2.5 per cent, how will you manage?
We might not pay this 2.5 per cent charge upfront. Firstly, this three basis point is the net charge and does not include expenses. Any expense incurred, will be passed on. Secondly, the fund will not invest in any other equity scheme. The company itself will be an asset management company and will directly invest in equity. Even if it invests in fund of funds schemes, it will select funds where it may not have to pay this 2.5 per cent upfront charge.
• But still, do you think you can manage?
Initially, for the first two to three years, we might incur some losses. But if we see the schemes per say — today it covers government services, tomorrow it will cover private citizens and the size could be tremendous later. The whole investment pattern will be a unique investment pattern and it will not be on lines of mutual funds. The corpus will be large along with large monthly inflows. That will help. Also, there will be a cost of your infrastructure and your input to it.
• A lot has been talked about the schemes with no entry load. What is your view on the same?
We have a neutral stand. It is good for investors but the distributors play an important role in the expansion of mutual fund industry and customer education. For them, if the revenue stream goes away, they will sell insurance or other products where revenue exists. It will not be good for the industry, especially at a time when the industry is eyeing smaller towns for expansion.
• You were planning to launch your overseas fund but it has not come out yet.
We are not very clear with the tax treatment till now. Other players have gone out without waiting for the tax treatment. We are not sure whether the foreign equity will be treated at par with the Indian equity for tax purposes and so we are trying to get a clarification. We are also working on new schemes with our JV partner SGAM. These are the reasons why it is caught up and is delayed.
• Do you mean to say that tax exemption might become possible for foreign equity exposure too? If yes, then by when?
Yes, it could well happen. The request for the same has been submitted with the market regulator Sebi. If Sebi agrees, it will talk to the revenue ministry, which will then take it ahead. As these are regulatory issues, it might take time. So assigning a time frame won’t be possible.
• This is a new development that you are on. Is there any plan on micro systematic investment plan (SIP)?
We are in talks with some NGOs and are working on micro SIP scheme. It will provide some protection to the person who has no regular cash flow as he can invest Rs 15 one day and then Rs 15 again when he has it. This way, he can even invest Rs 500-600 sporadically in a year.
• What is the latest development regarding the real estate fund?
I am waiting for the Sebi Guidelines on real estate investment trusts. I expect the first set of Guidelines to be out by March and then within two months, we will launch our real estate fund.