An interesting trend is shaping up vis-a-vis foreign portfolio investment in the Indian stock markets. In the past one week, the markets have sunk despite foreign institutional investors (FIIs) having pumped in Rs 6,157 crore (about $1 billion) in the seven trading sessions.
Net inflow, albeit small, was positive every day except Monday. Yet the markets on Wednesday closed at a one-week low.
The counterforce has been the domestic institutional investors (DIIs) and the retail investors who have booked profits. In the same period the DIIs have pulled out a net Rs 5,340 crore from the equity markets. Last week, on Thursday, the markets rallied to close at near 3-year high when US Federal Reserve chief Ben Bernanke said he will continue with the monthly bond-buying programme worth $85 billion for some more time. The Indian markets rallied by over 3.5 per cent and was supported by FII inflow of Rs 3,556 crore during the day. But the rally switched off even though their support continued. The Sensex has fallen by 3.8 per cent or close to 800 points since Thursday even though the FII's continued with their inflows. Between Friday and Wednesday, the FIIs brought in another Rs 1,700 crore, yet the markets are down.
The behaviour of the DIIs has been entirely opposite to the foreign investors. Even on Thursday, when the FIIs came with big money, the DIIs were elsewhere selling a net Rs 1,829 crore during the day. Between Friday and Wednesday they have sold another net Rs 2,500 crore. Before this week wears out, a significant change could be in the offing for the Indian markets.
Finally, home prices begin to soften
Weak sentiments owing to the slowdown in the economy seems to have finally taken a toll on the demand in the residential real estate sector as house prices for the quarter ended June 2013 softened across the country. According to the data released by National Housing Bank (NHB), 22 out of 26 cities that are covered by the NHB Residex witnessed a fall in housing prices during the quarter ended June 2013, when compared with the previous quarter.
The Residex, prepared by the NHB, tracks movement in prices of residential properties on a quarterly basis. According to the index, during the period between April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall in prices. Ludhiana witnessed the biggest correction of 6 per cent while Indore and Vijaywada were next with prices falling by 5.6 and 5.4 per cent respectively. Prices in Delhi and Mumbai fell by 1.5 and 0.5 per cent respectively. Only four cities — Nagpur, Lucknow, Surat and Dehradun — saw a rise, with Nagpur witnessing the maximum rise of 3.1 per cent. The uniformity in the fall in residential prices is a recent phenomenon and when seen on a year-on-year basis, prices in only 9 out of 20 cities declined, with Indore and Ludhiana witnessing the biggest fall in a year by 9.4 and 8.2 per cent respectively. While Jaipur witnessed the biggest surge over the last one year at 41 per cent, Delhi and Mumbai saw prices rise by 15.7 and 12.2 per cent respectively in June 2013 over that in June 2012. But price fall may not be a real indicator of the ongoing slowdown say experts. "Prices are not down too much and in some cases they have not even fallen but sales are definitely going down," said Anshuman Magazine, chairman & MD of CB Richard Ellis India. The situation is, therefore, different for different cities. "Mumbai is in a much worse situation than Delhi and it has been witnessing a decline in transactions over the last two years," said Gulam Zia, national director, research and advisory services, Knight Frank India. The prices in Mumbai however rose by 12.2 per cent over the last one year. Reasons for the softening While the commercial real estate prices started to ease over the last couple of years amidst weakening economic fundamentals, the markets saw the coming softening in residential real estate prices. Industry insiders accept that there is decline, and blame it on several factors including a slowdown in the economy and the battered sentiments. "Real estate rides on economic growth and with a slowdown, the demand has gone down. Also in some cities the prices went up very high and therefore had to come down," said Anuj Puri, chairman and country head, Jones Lang LaSalle India. He added that while commercial prices started to come off in line with slowdown in the economy, the residential prices continued to remain high. "They have now caught up with the economic trend." There are others who agree with this observation, but add that oversupply and overpricing had reached a point that made it inevitable for the prices to soften. "There is clearly an oversupply situation and also the prices had reached a stage where they had to come down," said Zia. Experts also point out that in several cities there were micro areas where there is a supply bubble and it is far removed from where the actual demand lies. In addition, high interest rates have softened demand for housing. Will the fall continue? The market seems unanimous that prices are not going to harden in the near term. "With the current economic scenario, unstable political environment and elections round the corner, the uncertainty is very high, and in this environment, real estate prices won't see a rise," said Zia. While Magazine feels that the prices may soften further if the situation does not improve, Puri is of the view that prices are not going to harden in the near future. However the correction may not remain even across cities. For example, while both Delhi and Mumbai are witnessing a fall, experts say that developers in Mumbai tend to delay delivery and also wait for markets to improve thereby holding on to higher prices. A limit on supply further helps them. This may not be the case in other cities that are facing an oversupply situation. Developers in Mumbai argue that there is a limit to the reduction in price that a developer can offer. "Prices can't come down beyond a point as the cost of land is high, the taxes have gone up significantly and the overall cost for developers have risen," said Niranjan Hiranandani, co-founder and MD, Hiranandani Group. He, however, accepted that in the short-term, the market is going to remain slow but the prices will take off in the medium to long run because of high real demand. Should investors look at this market? While the price fall has only made things better for the first time buyer, it is a tricky market for the investors. There may be good deals available, but investors need to be careful about the quality, price and location. "Investors need to have a holding period of around two years," said Magazine, adding that investors will have to bring down expectation as returns available in the past may not be there going forward.
The Residex, prepared by the NHB, tracks movement in prices of residential properties on a quarterly basis. According to the index, during the period between April and June 2013 not only the tier I cities, but also the tier II cities witnessed a fall in prices. Ludhiana witnessed the biggest correction of 6 per cent while Indore and Vijaywada were next with prices falling by 5.6 and 5.4 per cent respectively. Prices in Delhi and Mumbai fell by 1.5 and 0.5 per cent respectively. Only four cities — Nagpur, Lucknow, Surat and Dehradun — saw a rise, with Nagpur witnessing the maximum rise of 3.1 per cent. The uniformity in the fall in residential prices is a recent phenomenon and when seen on a year-on-year basis, prices in only 9 out of 20 cities declined, with Indore and Ludhiana witnessing the biggest fall in a year by 9.4 and 8.2 per cent respectively. While Jaipur witnessed the biggest surge over the last one year at 41 per cent, Delhi and Mumbai saw prices rise by 15.7 and 12.2 per cent respectively in June 2013 over that in June 2012. But price fall may not be a real indicator of the ongoing slowdown say experts. "Prices are not down too much and in some cases they have not even fallen but sales are definitely going down," said Anshuman Magazine, chairman & MD of CB Richard Ellis India. The situation is, therefore, different for different cities. "Mumbai is in a much worse situation than Delhi and it has been witnessing a decline in transactions over the last two years," said Gulam Zia, national director, research and advisory services, Knight Frank India. The prices in Mumbai however rose by 12.2 per cent over the last one year. Reasons for the softening While the commercial real estate prices started to ease over the last couple of years amidst weakening economic fundamentals, the markets saw the coming softening in residential real estate prices. Industry insiders accept that there is decline, and blame it on several factors including a slowdown in the economy and the battered sentiments. "Real estate rides on economic growth and with a slowdown, the demand has gone down. Also in some cities the prices went up very high and therefore had to come down," said Anuj Puri, chairman and country head, Jones Lang LaSalle India. He added that while commercial prices started to come off in line with slowdown in the economy, the residential prices continued to remain high. "They have now caught up with the economic trend." There are others who agree with this observation, but add that oversupply and overpricing had reached a point that made it inevitable for the prices to soften. "There is clearly an oversupply situation and also the prices had reached a stage where they had to come down," said Zia. Experts also point out that in several cities there were micro areas where there is a supply bubble and it is far removed from where the actual demand lies. In addition, high interest rates have softened demand for housing. Will the fall continue? The market seems unanimous that prices are not going to harden in the near term. "With the current economic scenario, unstable political environment and elections round the corner, the uncertainty is very high, and in this environment, real estate prices won't see a rise," said Zia. While Magazine feels that the prices may soften further if the situation does not improve, Puri is of the view that prices are not going to harden in the near future. However the correction may not remain even across cities. For example, while both Delhi and Mumbai are witnessing a fall, experts say that developers in Mumbai tend to delay delivery and also wait for markets to improve thereby holding on to higher prices. A limit on supply further helps them. This may not be the case in other cities that are facing an oversupply situation. Developers in Mumbai argue that there is a limit to the reduction in price that a developer can offer. "Prices can't come down beyond a point as the cost of land is high, the taxes have gone up significantly and the overall cost for developers have risen," said Niranjan Hiranandani, co-founder and MD, Hiranandani Group. He, however, accepted that in the short-term, the market is going to remain slow but the prices will take off in the medium to long run because of high real demand. Should investors look at this market? While the price fall has only made things better for the first time buyer, it is a tricky market for the investors. There may be good deals available, but investors need to be careful about the quality, price and location. "Investors need to have a holding period of around two years," said Magazine, adding that investors will have to bring down expectation as returns available in the past may not be there going forward.
Watch out for pledged shares; they're key to a company's health
Companies with high amount of pledged promoter shareholding are susceptible to erosion in stock prices. The number of such companies has seen the highest quarterly jump in at least three years.
A close look into the finances of companies is a must for stock market investors, especially at a time when there has been a rise in uncertainty, volatility and dynamics around rupee, while interest rates and liquidity are fast altering the financial position of companies. As fund raising for companies is becoming a challenge, pledging of shares by promoters has been on the rise. For the quarter ended June 2013, the percentage of promoter holding pledged witnessed the highest quarterly jump in at least three years — 11.4 per cent in March 2013 to 12.4 per cent in June 2013 — with a large number of companies witnessing a sharp rise in their promoters holding being pledged. So as the environment opens up new challenges for the economy and the companies operating within the same, investors need to carefully analyse the companies before they enter them in search of high returns and fall into the valuation trap. A look into the share prices of the companies with market capital of over Rs 1,000 crore and with significant rise in their promoters holding pledged over the previous quarter, shows a significant fall in their prices. While the Sensex fell by 6 per cent between January 1 and August 29, the share price of several of these companies fell by over 40 per cent in the same period. Rise in share pledging According to a report prepared by ICICIdirect based on shareholding data made public by 3,935 companies, over the last couple of years the percentage of promoters holding pledged has risen sharply from 9.4 per cent in June 2011 and has now gone up to 12.4 per cent. There has also been a significant rise in the percentage of total equity pledged in the system. While the pledged shares stood at 6 per cent of the total equity in March 2013, it has gone up to 6.6 per cent in just one quarter. While there are various sources that companies and their promoters adopt to raise funds for their business needs or their personal needs, pledging of shares is one such source that gained prominence. Promoters in this method pledge their shares with lenders in the market to meet their requirement. "These loans typically have a tenure of one to three years and carry a margin requirement of two or three times," said the ICICIdirect report. This means that the promoters have to keep shares worth 2-3 times the money borrowed. Market experts say that in the current environment, banks have grown risk averse and are largely giving loans backed by collaterals which is also leading to a rise in pledging of shares. "Banks are going for largely collateral backed lending in the current environment and while it is getting tough to raise funds a lot of promoters are resorting to pledging of shares to raise funds," said Rikesh Parikh,VP, equity strategies, Motilal Oswal Securities. Rise in pledging is a result of overall stress in the system. While in some cases promoters may have pledged shares to fund their own contribution for any new project, in other cases their pledging would have gone up with fall in their share prices to make up for additional security requirement against the borrowing. While the overall system is witnessing the pressure, there are some sectors that are positioned much worse than others. The infrastructure and real estate sector are the worst positioned in terms of the promoters holding that is pledged. For Infrastructure sector 31.5 per cent of the promoters holding stands pledged while for real estate sector it stands at 30.3 per cent. Next in line are textile and the capital goods sector where it stands at 27.7 and 22.2 per cent respectively. Where does the risk lie? As the fund raised by way of pledging of shares come at a premium, higher pledging by the promoter reflects a weak financial health of the company and the promoter and his inability to get cheaper source of funding. The risks lie on several fronts. On the business front, such companies may find it tough to maintain their margins as most of the borrowing through pledging of shares is at a higher cost. In case of pledged shares, the lenders hold the right to sell the shares in case the promoter defaults on his repayment and the lender can sell the shares in the open market which may lead to fall in share prices. In certain cases, the promoters may also end up losing management control of the company. In a recent case, State Bank of India in April 2013 sold shares of United Spirits and Mangalore Chemicals and Fertilisers that were pledged to them by Vijay Mallya against money lent to Kingfisher Airlines. The bank moved to do so after the airlines failed to repay its loan. Also in a falling market scenario, like the one we are in now, if the share prices fall below a certain limit then the promoter is required to provide additional securities or make some payment. "Companies with a high proportion of pledged promoter holding are susceptible to such erosion in stock prices," said Pankaj Pandey, head of research at ICICI Securities. Stay away from such companies Valuation trap is something that investors may easily fall into when it comes to these companies. A number of these companies are trading lower as a result of a decline in their share prices but these companies may not be adding much value to their equity shareholders. While their interest outgo would be in double digit, experts say that their growth may be in single digit and therefore while their share prices may appear to be lower and available at cheaper prices, they may not bring value to the shareholders. Also, at a time when the Reserve Bank of India has taken measures to tighten the liquidity and the US may begin tapering of its quantitative easing programme in September, liquidity situation may further tighten making things even more worse for some of these companies. "In a situation like this, investors should avoid such companies," said Pandey. Parikh advises investors to go with companies that have good cash flow and have low debt-to-equity ratio in these times when liquidity is likely to remain tight and companies that are heavily leveraged may come under pressure. "Till the current environment prevails, such companies will find it increasingly tough to maintain their margins and therefore investors should stay away from them," said Parikh.Investors, however, need to check on various details of the pledging before they get into the stocks.
"If the pledging is less, up to one-third of the promoters holding and has been done for purposes linked to core business, then there is not much of an issue. But if it has been done for other purposes and the shares have been pledged with NBFCs who charge a higher rate then investors need to be careful," said Gaurav Dua, head of research at Sharekhan
A close look into the finances of companies is a must for stock market investors, especially at a time when there has been a rise in uncertainty, volatility and dynamics around rupee, while interest rates and liquidity are fast altering the financial position of companies. As fund raising for companies is becoming a challenge, pledging of shares by promoters has been on the rise. For the quarter ended June 2013, the percentage of promoter holding pledged witnessed the highest quarterly jump in at least three years — 11.4 per cent in March 2013 to 12.4 per cent in June 2013 — with a large number of companies witnessing a sharp rise in their promoters holding being pledged. So as the environment opens up new challenges for the economy and the companies operating within the same, investors need to carefully analyse the companies before they enter them in search of high returns and fall into the valuation trap. A look into the share prices of the companies with market capital of over Rs 1,000 crore and with significant rise in their promoters holding pledged over the previous quarter, shows a significant fall in their prices. While the Sensex fell by 6 per cent between January 1 and August 29, the share price of several of these companies fell by over 40 per cent in the same period. Rise in share pledging According to a report prepared by ICICIdirect based on shareholding data made public by 3,935 companies, over the last couple of years the percentage of promoters holding pledged has risen sharply from 9.4 per cent in June 2011 and has now gone up to 12.4 per cent. There has also been a significant rise in the percentage of total equity pledged in the system. While the pledged shares stood at 6 per cent of the total equity in March 2013, it has gone up to 6.6 per cent in just one quarter. While there are various sources that companies and their promoters adopt to raise funds for their business needs or their personal needs, pledging of shares is one such source that gained prominence. Promoters in this method pledge their shares with lenders in the market to meet their requirement. "These loans typically have a tenure of one to three years and carry a margin requirement of two or three times," said the ICICIdirect report. This means that the promoters have to keep shares worth 2-3 times the money borrowed. Market experts say that in the current environment, banks have grown risk averse and are largely giving loans backed by collaterals which is also leading to a rise in pledging of shares. "Banks are going for largely collateral backed lending in the current environment and while it is getting tough to raise funds a lot of promoters are resorting to pledging of shares to raise funds," said Rikesh Parikh,VP, equity strategies, Motilal Oswal Securities. Rise in pledging is a result of overall stress in the system. While in some cases promoters may have pledged shares to fund their own contribution for any new project, in other cases their pledging would have gone up with fall in their share prices to make up for additional security requirement against the borrowing. While the overall system is witnessing the pressure, there are some sectors that are positioned much worse than others. The infrastructure and real estate sector are the worst positioned in terms of the promoters holding that is pledged. For Infrastructure sector 31.5 per cent of the promoters holding stands pledged while for real estate sector it stands at 30.3 per cent. Next in line are textile and the capital goods sector where it stands at 27.7 and 22.2 per cent respectively. Where does the risk lie? As the fund raised by way of pledging of shares come at a premium, higher pledging by the promoter reflects a weak financial health of the company and the promoter and his inability to get cheaper source of funding. The risks lie on several fronts. On the business front, such companies may find it tough to maintain their margins as most of the borrowing through pledging of shares is at a higher cost. In case of pledged shares, the lenders hold the right to sell the shares in case the promoter defaults on his repayment and the lender can sell the shares in the open market which may lead to fall in share prices. In certain cases, the promoters may also end up losing management control of the company. In a recent case, State Bank of India in April 2013 sold shares of United Spirits and Mangalore Chemicals and Fertilisers that were pledged to them by Vijay Mallya against money lent to Kingfisher Airlines. The bank moved to do so after the airlines failed to repay its loan. Also in a falling market scenario, like the one we are in now, if the share prices fall below a certain limit then the promoter is required to provide additional securities or make some payment. "Companies with a high proportion of pledged promoter holding are susceptible to such erosion in stock prices," said Pankaj Pandey, head of research at ICICI Securities. Stay away from such companies Valuation trap is something that investors may easily fall into when it comes to these companies. A number of these companies are trading lower as a result of a decline in their share prices but these companies may not be adding much value to their equity shareholders. While their interest outgo would be in double digit, experts say that their growth may be in single digit and therefore while their share prices may appear to be lower and available at cheaper prices, they may not bring value to the shareholders. Also, at a time when the Reserve Bank of India has taken measures to tighten the liquidity and the US may begin tapering of its quantitative easing programme in September, liquidity situation may further tighten making things even more worse for some of these companies. "In a situation like this, investors should avoid such companies," said Pandey. Parikh advises investors to go with companies that have good cash flow and have low debt-to-equity ratio in these times when liquidity is likely to remain tight and companies that are heavily leveraged may come under pressure. "Till the current environment prevails, such companies will find it increasingly tough to maintain their margins and therefore investors should stay away from them," said Parikh.Investors, however, need to check on various details of the pledging before they get into the stocks.
"If the pledging is less, up to one-third of the promoters holding and has been done for purposes linked to core business, then there is not much of an issue. But if it has been done for other purposes and the shares have been pledged with NBFCs who charge a higher rate then investors need to be careful," said Gaurav Dua, head of research at Sharekhan
Flexible investments offer more returns
A week ago, the Insurance Regulatory and Development Authority (Irda) allowed insurance companies to invest funds in Category II Alternative Investment Funds (AIF) thereby providing them greater flexibility in managing their funds and giving them more room to generate better returns for investors.
While Insurance Regulatory and Development Authority in March 2013 through a circular permitted insurers to invest in Category I AIF and clarified that such investments would be restricted to infrastructure and small and medium enterprises (SMEs),on August 23 it allowed investment even in category II where at least 51 per cent of the funds of such Alternative Investment Funds can be invested in four classes — infrastructure entities, venture capital undertaking, SME entities or Social Venture entities. The Irda has imposed three restriction on such investments — they can't invest in fund of funds, overseas funds and it can't be a leveraged fund but insurers say that the small steps taken by the regulator are going to be beneficial in the long run. "The move encourages insurers to go for risk taking and while the limit has been put at 3 per cent of the insurers fund size and up to 10 per cent of the AIF/venture fund size, it will help generate higher return for the investors in the long run," said the chief investment officer of a leading life insurance company. How investors' benefit Industry insiders say that on an average, traditional plans currently are generating returns between 5 and 8.5 per cent depending upon the maturity period of the investment but with more flexibility at the hand of fund managers these returns may go up and benefit the investor. The illustration below tries to explain how the flexibility in investment of up to 3 per cent of the fund size may impact the returns on the investment. Under old norms If the fund size of the insurance company is 10,000 crore and earns 8.5 per cent (by investing in traditional instruments) every year over a 5-year period, then the fund grows to 15,036 crore. Result of new changes If the insurer invests Rs 9,700 crore in traditional instruments and earns 8.5 per cent on that and invests the remaining 3 per cent of the corpus or Rs 300 crore in venture capital funds that suppose earns 15 per cent every year then his corpus will grow to Rs 15,189 crore. This comes to a yield of 8.72 per cent. So this small step raises the earning per year by 22 basis point for the investor. For higher tenures the returns will be even higher because of the compounding benefit. Successful venture capital funds may earn returns several times the investment amount of 5-10 years. Insurers are hopeful that going forward with the experience of the industry, Irda will look to increase the investment component and may even open more channels. "The regulator has already allowed debt derivatives as an investment option and going forward we hope that it will allow investment into equity derivatives too," said the official." As of now, only 3 per cent has been permitted so a higher return on 3 per cent of the fund size will not alter the returns dramatically but as this component increases and more such steps are taken by the regulator, investors can hope for superior returns," said a top official with another life insurance company. Insurers, however, say that such investments will be for the long run as venture capital funds tend to generate superior returns than equity and debt in the long run and therefore investment into these funds will have to be for at least 5-10 years. The move is certainly going to be beneficial for investors. New norms * Irda, in March 2013, permitted insurers to invest in Category I AIF and clarified that such investments would be restricted to infrastructure and SMEs * On August 23, it allowed investment even in category II where at least 51% of the funds of such AIF can be invested in four classes — infrastructure entities, venture capital undertaking, SME entities or Social Venture entities. *Traditional plans currently are generating returns between 5-8.5% but with more flexibility these returns may go up and benefit the investor
While Insurance Regulatory and Development Authority in March 2013 through a circular permitted insurers to invest in Category I AIF and clarified that such investments would be restricted to infrastructure and small and medium enterprises (SMEs),on August 23 it allowed investment even in category II where at least 51 per cent of the funds of such Alternative Investment Funds can be invested in four classes — infrastructure entities, venture capital undertaking, SME entities or Social Venture entities. The Irda has imposed three restriction on such investments — they can't invest in fund of funds, overseas funds and it can't be a leveraged fund but insurers say that the small steps taken by the regulator are going to be beneficial in the long run. "The move encourages insurers to go for risk taking and while the limit has been put at 3 per cent of the insurers fund size and up to 10 per cent of the AIF/venture fund size, it will help generate higher return for the investors in the long run," said the chief investment officer of a leading life insurance company. How investors' benefit Industry insiders say that on an average, traditional plans currently are generating returns between 5 and 8.5 per cent depending upon the maturity period of the investment but with more flexibility at the hand of fund managers these returns may go up and benefit the investor. The illustration below tries to explain how the flexibility in investment of up to 3 per cent of the fund size may impact the returns on the investment. Under old norms If the fund size of the insurance company is 10,000 crore and earns 8.5 per cent (by investing in traditional instruments) every year over a 5-year period, then the fund grows to 15,036 crore. Result of new changes If the insurer invests Rs 9,700 crore in traditional instruments and earns 8.5 per cent on that and invests the remaining 3 per cent of the corpus or Rs 300 crore in venture capital funds that suppose earns 15 per cent every year then his corpus will grow to Rs 15,189 crore. This comes to a yield of 8.72 per cent. So this small step raises the earning per year by 22 basis point for the investor. For higher tenures the returns will be even higher because of the compounding benefit. Successful venture capital funds may earn returns several times the investment amount of 5-10 years. Insurers are hopeful that going forward with the experience of the industry, Irda will look to increase the investment component and may even open more channels. "The regulator has already allowed debt derivatives as an investment option and going forward we hope that it will allow investment into equity derivatives too," said the official." As of now, only 3 per cent has been permitted so a higher return on 3 per cent of the fund size will not alter the returns dramatically but as this component increases and more such steps are taken by the regulator, investors can hope for superior returns," said a top official with another life insurance company. Insurers, however, say that such investments will be for the long run as venture capital funds tend to generate superior returns than equity and debt in the long run and therefore investment into these funds will have to be for at least 5-10 years. The move is certainly going to be beneficial for investors. New norms * Irda, in March 2013, permitted insurers to invest in Category I AIF and clarified that such investments would be restricted to infrastructure and SMEs * On August 23, it allowed investment even in category II where at least 51% of the funds of such AIF can be invested in four classes — infrastructure entities, venture capital undertaking, SME entities or Social Venture entities. *Traditional plans currently are generating returns between 5-8.5% but with more flexibility these returns may go up and benefit the investor
Rajan pep talk fuels bank rally, rupee up 1.6% to close at 66.01
BSE Sensex up 412 points, banking index jumps over 9%; 'currency swap a big positive'.
The banking sector index at the stock market soared by over 9 per cent as new Reserve Bank of India Governor Raghuram Rajan's taking-over speech pushed it to its highest intra day gain in over four years. The banking stocks have been the biggest losers on the stock exchanges ever since the Reserve Bank of India announced its liquidity tightening measures from July onwards. The rupee, too, appreciated by 1.6 per cent on Thursday to close at 66.01 against the dollar, while the BSE Sensex rose by 2.2 per cent or 412 points to close at 18,979.76. After the Reserve Bank of India's announcement on July 15 that raised short term rates and tightened liquidity, bank stocks took a beating, slipping by as much as 50 per cent. "The Governor was affirmative, assertive and came with a positive tone. He was clear on his focus areas and announced a set of measures that will boost the foreign reserves of the country," said Nandkumar Surti, MD and CEO, JP Morgan AMC. Experts said that the currency swap facility announced is a big positive and the fact that all restrictions imposed by Reserve Bank of India over the last couple of months will be lifted brought some relief to the market. "Markets found comfort in the Governor's speech. There is expectation that the dollar-rupee volatility, which was hurting the banking segment, will stabilise and going forward that will lead to RBI rolling back its measures that pushed the short-term rates," said Ritesh Jain, CIO, Tata Mutual Fund. Others feel that the measures announced will have to be followed by more work, both by the Reserve Bank of India and the government in a bid to keep the momentum going. "More work needs to be done. The economic activity has to begin on building power projects, constructing roads and infrastructure and then we will see an overall revival of sentiments," said a top official with a leading private sector bank. New steps could help banks bring in $40 bn Mumbai: The Reserve Bank's new measures for the banking sector alone have the potential to bring $40 billion (around Rs 2.64 lakh crore) of inflows into the economy, say experts. On Wednesday, RBI Governor Raghuram Rajan announced a hike in the current overseas borrowing limit of banks from 50 per cent of unimpaired Tier I capital to 100 per cent. Banks can swap borrowing with the RBI at a concessional rate of 100 bps below the ongoing swap rate prevailing in the market. "This creates a potential room for the banking system to raise approximately $30 billion," says Shubhada Rao, chief economist, Yes Bank. Experts expect another $5-10 billion to flow in through the FCNR (B) swap scheme. Following the recent increase in FCNR (B) deposit rate, the RBI has offered a window to banks to swap their incremental FCNR (B) deposit, mobilised for a minimum period of 3-years, at a fixed rate of 3.5 per cent for the tenure of the deposit. These schemes will remain open up to November 30, 2013. Morgan Stanley said the RBI is trying to provide forex cover to banks at a reasonable cost so that they can collect dollar deposits in normal course and convert them into rupees using this forex cover. ENS Gold falls on heavy sell-off New Delhi: Gold on Thursday fell by Rs 1,250 per 10 grams to Rs 30,950 in New Delhi on heavy sell-off by stockists as rupee recovered after RBI's fresh measures amid a weakening trend overseas. Gold in overseas markets had dropped by 0.70 per cent to $1,381.35 an ounce as investors shifted to stocks. PTI
The banking sector index at the stock market soared by over 9 per cent as new Reserve Bank of India Governor Raghuram Rajan's taking-over speech pushed it to its highest intra day gain in over four years. The banking stocks have been the biggest losers on the stock exchanges ever since the Reserve Bank of India announced its liquidity tightening measures from July onwards. The rupee, too, appreciated by 1.6 per cent on Thursday to close at 66.01 against the dollar, while the BSE Sensex rose by 2.2 per cent or 412 points to close at 18,979.76. After the Reserve Bank of India's announcement on July 15 that raised short term rates and tightened liquidity, bank stocks took a beating, slipping by as much as 50 per cent. "The Governor was affirmative, assertive and came with a positive tone. He was clear on his focus areas and announced a set of measures that will boost the foreign reserves of the country," said Nandkumar Surti, MD and CEO, JP Morgan AMC. Experts said that the currency swap facility announced is a big positive and the fact that all restrictions imposed by Reserve Bank of India over the last couple of months will be lifted brought some relief to the market. "Markets found comfort in the Governor's speech. There is expectation that the dollar-rupee volatility, which was hurting the banking segment, will stabilise and going forward that will lead to RBI rolling back its measures that pushed the short-term rates," said Ritesh Jain, CIO, Tata Mutual Fund. Others feel that the measures announced will have to be followed by more work, both by the Reserve Bank of India and the government in a bid to keep the momentum going. "More work needs to be done. The economic activity has to begin on building power projects, constructing roads and infrastructure and then we will see an overall revival of sentiments," said a top official with a leading private sector bank. New steps could help banks bring in $40 bn Mumbai: The Reserve Bank's new measures for the banking sector alone have the potential to bring $40 billion (around Rs 2.64 lakh crore) of inflows into the economy, say experts. On Wednesday, RBI Governor Raghuram Rajan announced a hike in the current overseas borrowing limit of banks from 50 per cent of unimpaired Tier I capital to 100 per cent. Banks can swap borrowing with the RBI at a concessional rate of 100 bps below the ongoing swap rate prevailing in the market. "This creates a potential room for the banking system to raise approximately $30 billion," says Shubhada Rao, chief economist, Yes Bank. Experts expect another $5-10 billion to flow in through the FCNR (B) swap scheme. Following the recent increase in FCNR (B) deposit rate, the RBI has offered a window to banks to swap their incremental FCNR (B) deposit, mobilised for a minimum period of 3-years, at a fixed rate of 3.5 per cent for the tenure of the deposit. These schemes will remain open up to November 30, 2013. Morgan Stanley said the RBI is trying to provide forex cover to banks at a reasonable cost so that they can collect dollar deposits in normal course and convert them into rupees using this forex cover. ENS Gold falls on heavy sell-off New Delhi: Gold on Thursday fell by Rs 1,250 per 10 grams to Rs 30,950 in New Delhi on heavy sell-off by stockists as rupee recovered after RBI's fresh measures amid a weakening trend overseas. Gold in overseas markets had dropped by 0.70 per cent to $1,381.35 an ounce as investors shifted to stocks. PTI
Used car sales in top gear as economy slows down, rupee sputters
On Boulevard Road in West Delhi, prospective car buyers are given an unusual tour of choices by the salesmen these days. Among the models lined up are ones that have been used as well.
Many customers coming to buy a new car inevitably stop at his used car showroom too, located right next door, says Ajay Saxena, GM of Rana Motors. "In many cases, the customer ends up buying a used car if he gets one in good condition which is priced Rs 1-2 lakh lower than a new car. In some cases the customer says the savings from buying a used car can fund his fuel consumption for three years," Saxena said. The trend, it seems, is not a blip or limited to a particular market. The economic slowdown and the steep fall in the value of the rupee have erased the dividing line between those who scouted for a new car and those willing to settle for a well maintained used car. The depreciation of the rupee, among others, has also meant an increase in input costs, leading to prices of cars being raised even as demand was falling. As a result, for the first time in the history of the Indian automobile market, the used car segment has witnessed a 22-25 per cent rise in sales during April-July 2013 as against a 9.7 per cent decline in new car sales in the same period, industry experts said. According to one estimate, the used car market is expected to see sales of between 28 lakh and 30 lakh units this year, with the organised sector accounting for about 20 per cent of the market share. The economics are clear, says Saxena, as he shuffles between his Maruti showroom and the True Value dealership next door. "Between April and July, we have seen our used car sales grow by around 20 per cent." Business seems to be brisker in some pockets. For instance, Deepak Dogra, sales manager at Competent Automobiles in Gurgaon, says, "The growth can be seen from the fact that we are selling one used car for every new car we sell". Mahindra First Choice is expecting its sales for the year to be anywhere between 60,000 and 65,000 units, up from 46,000 units last year. Anticipating a jump in demand for used cars, Mahindra has increased its dealer network significantly over the last one year from 180 in August 2012 to 287 now. "Impact of the economy is a lot more muted on the used car business," says Nagendra Palle, CEO of Mahindra First Choice. Between May and August, his business has jumped 40 per cent to 17,000 units from 12,000 in the same period a year ago. Conversely, the rupee fell by 25 per cent against the dollar during the same period. Also, over the last couple of months, GM and Mahindra & Mahindra raised prices by up to Rs 10,000, contributing to a general feeling that new vehicles were getting expensive. Other manufacturers are expected to follow suit. "In a tough economic environment for new cars, used car prices are holding and sales are robust," Mahindra & Mahindra chairman Anand Mahindra tweeted on Monday. Auto Terrace, Honda's arm that sells pre-owned cars, saw 2012-13 sales jump 58 per cent. An official associated with Honda-Auto Terrace said demand is robust and the company is expecting to double its sales this year. The official said prices of petrol cars have begun to harden in the used car segment. "The residual price of a three-year-old petrol car had dipped from 64 per cent in 2010 to 54 per cent in 2012. It has, however, gone up to 61 per cent in 2013," the official said. Although players such as Mahindra, Maruti and Honda feel there is lots of room for them to grow, industry insiders said as new car prices rise and sales fall, there will be some supply constraint in the used car segment too and that will lead to a hardening in their prices as well.
Many customers coming to buy a new car inevitably stop at his used car showroom too, located right next door, says Ajay Saxena, GM of Rana Motors. "In many cases, the customer ends up buying a used car if he gets one in good condition which is priced Rs 1-2 lakh lower than a new car. In some cases the customer says the savings from buying a used car can fund his fuel consumption for three years," Saxena said. The trend, it seems, is not a blip or limited to a particular market. The economic slowdown and the steep fall in the value of the rupee have erased the dividing line between those who scouted for a new car and those willing to settle for a well maintained used car. The depreciation of the rupee, among others, has also meant an increase in input costs, leading to prices of cars being raised even as demand was falling. As a result, for the first time in the history of the Indian automobile market, the used car segment has witnessed a 22-25 per cent rise in sales during April-July 2013 as against a 9.7 per cent decline in new car sales in the same period, industry experts said. According to one estimate, the used car market is expected to see sales of between 28 lakh and 30 lakh units this year, with the organised sector accounting for about 20 per cent of the market share. The economics are clear, says Saxena, as he shuffles between his Maruti showroom and the True Value dealership next door. "Between April and July, we have seen our used car sales grow by around 20 per cent." Business seems to be brisker in some pockets. For instance, Deepak Dogra, sales manager at Competent Automobiles in Gurgaon, says, "The growth can be seen from the fact that we are selling one used car for every new car we sell". Mahindra First Choice is expecting its sales for the year to be anywhere between 60,000 and 65,000 units, up from 46,000 units last year. Anticipating a jump in demand for used cars, Mahindra has increased its dealer network significantly over the last one year from 180 in August 2012 to 287 now. "Impact of the economy is a lot more muted on the used car business," says Nagendra Palle, CEO of Mahindra First Choice. Between May and August, his business has jumped 40 per cent to 17,000 units from 12,000 in the same period a year ago. Conversely, the rupee fell by 25 per cent against the dollar during the same period. Also, over the last couple of months, GM and Mahindra & Mahindra raised prices by up to Rs 10,000, contributing to a general feeling that new vehicles were getting expensive. Other manufacturers are expected to follow suit. "In a tough economic environment for new cars, used car prices are holding and sales are robust," Mahindra & Mahindra chairman Anand Mahindra tweeted on Monday. Auto Terrace, Honda's arm that sells pre-owned cars, saw 2012-13 sales jump 58 per cent. An official associated with Honda-Auto Terrace said demand is robust and the company is expecting to double its sales this year. The official said prices of petrol cars have begun to harden in the used car segment. "The residual price of a three-year-old petrol car had dipped from 64 per cent in 2010 to 54 per cent in 2012. It has, however, gone up to 61 per cent in 2013," the official said. Although players such as Mahindra, Maruti and Honda feel there is lots of room for them to grow, industry insiders said as new car prices rise and sales fall, there will be some supply constraint in the used car segment too and that will lead to a hardening in their prices as well.
'2014 may pose a bigger challenge for real estate'
As the economy continues to weaken, the real estate market too has started showing signs of weakness, in line with other asset classes. Residential real estate prices across the country have started to soften, falling between 1 and 5 per cent across 22 cities out of the 26 that is tracked by the NHB Residex. Anshuman Magazine, chairman and managing director, South Asia, CB Richard Ellis, a global real estate consulting firm, told Sandeep Singh that the markets would continue to remain weak for a while and developers would have to put up with some pain too. Investors, however, will need to take informed
decisions and keep their expectations realistic. Excerpts: The NHB Residex showed a fall in residential real estate prices across the country in the last quarter. How do you see the trend going forward? While there is pain in 2013, 2014 may pose a bigger challenge for the real estate market. It is very difficult to forecast anything in India as the real estate market does not follow a logic. It will happen when the market matures, and then we will see longer periods of lull. Currently, the pace of sales has gone down and they are going to remain slow with the slowdown in the economy. The only positive is that while sales are down, they are still happening. The problems with the current phase are: high uncertainty (both economic and political), liquidity problem, high mortgage rates and sentiments are subdued. In what way is rupee depreciation impacting the real estate market? There was an expectation that with depreciation of the rupee, NRIs will rush in, but on the contrary it has become worse and people sitting outside are thinking that with rupee depreciation the property they are going to buy is 20 per cent cheaper, but since there is no stability in the rupee, it can go down to any levels and they will lose out. Even the private equity (PE) money has dried. A new investor would not come in till the rupee stabilises. PE investors who invested 3-4 years ago are sitting on either flat or negative positions. They are looking to cut down their losses and exit, and in several cases where they got options, they have made an exit. While there is a slowdown in the market, how is it impacting developers? Will some developers have to close down in times like these? Maybe some smaller developers may get impacted but historically that has never happened. It is only when the economy and markets mature, that in times of stress there is consolidation. Developers with a not-so-good record are already facing a decline in their sales as consumers are going only with those with better reputation and where they feel that even if there is some delay, the developer will finally deliver. If there is a developer with a decent reputation, decent location and the price point is right, they are getting sales. However, in markets like ours, a lot of small developers get away as several areas become unaffordable and people have to go to smaller developers as they do not have a choice. What are developers who neither have the financial strength nor sales to support their projects doing to sustain? There are several such cases and there the smaller developer who has control over land is going to a big developer who has brand equity and the financial strength to develop it. That is happening in Gurgaon, Noida, Pune and across the country. The reason is that a lot of developers are sitting on quite a bit of land and they had projections that sales would continue and they would be able to develop them, but with sales not happening, the cash flow and liquidity has gone down and since you don't have the ability to develop, you team up with another developer. Will Indian real estate see a situation like that in the US, where property prices crash when the economy goes down? It will take some time and the biggest reason is lack of infrastructure. While land is abundant in our country, there is a lack of developable land, and it is the slow implementation of infrastructure development has actually led to prices remaining high. Also in India, people hold on to their property because here they have huge confidence in real estate as an asset class that it will grow and that holding leads to price appreciation. In America, the prices don't go like crazy because there is abundant supply of developable land with roads, power, water, parking etc. While it will not happen in the near future, we are getting to that point where prices crash or markets remain subdued for longer periods. As our economy matures, infrastructure improves and developable land increases we will see crash in prices — it may happen in 10 years. Do you see a supply bubble emerging in the market? There is a situation like that in different pockets. On paper, there is oversupply, but all of it may not come up. In places like Noida Expressway, Yamuna Expressway no doubt there is huge supply but the advantage they have is the price point as many cannot afford Delhi or Gurgaon. What this large supply will do is that it won't allow prices to increase and it would be end-user driven. If that is the case, how does the situation look like for prospective investors? This is a market where you need to take an informed decision: who is the developer, what are the economics of the area, what is the price point, why would the prices go up, is infrastructure coming up and is the quality good. Also think of the longer term and enter with a minimum time horizon of 3-5 years. Now investors will have to be more realistic on the expectation of returns from property. You will not get unrealistic returns. So it is worth investing even today, but take an informed decision. How about big ticket deals in the housing market? Are enquiries rising with softening prices? Enquiries are not going up definitely. As the sentiment is low and there is uncertainty, the overall enquiries have gone down. The fact is that at the peak of the market you get 100 enquiries but when it is down, it shrinks to 10-20 or so. They have come down significantly. The RBI has restricted banks and housing finance companies to fund under the 80:20 scheme of developers. How is it going to impact the market? It is another dampener to the real estate market but I don't think that it will have a significant impact. Even though the scheme had become prevalent, it was not very common.
decisions and keep their expectations realistic. Excerpts: The NHB Residex showed a fall in residential real estate prices across the country in the last quarter. How do you see the trend going forward? While there is pain in 2013, 2014 may pose a bigger challenge for the real estate market. It is very difficult to forecast anything in India as the real estate market does not follow a logic. It will happen when the market matures, and then we will see longer periods of lull. Currently, the pace of sales has gone down and they are going to remain slow with the slowdown in the economy. The only positive is that while sales are down, they are still happening. The problems with the current phase are: high uncertainty (both economic and political), liquidity problem, high mortgage rates and sentiments are subdued. In what way is rupee depreciation impacting the real estate market? There was an expectation that with depreciation of the rupee, NRIs will rush in, but on the contrary it has become worse and people sitting outside are thinking that with rupee depreciation the property they are going to buy is 20 per cent cheaper, but since there is no stability in the rupee, it can go down to any levels and they will lose out. Even the private equity (PE) money has dried. A new investor would not come in till the rupee stabilises. PE investors who invested 3-4 years ago are sitting on either flat or negative positions. They are looking to cut down their losses and exit, and in several cases where they got options, they have made an exit. While there is a slowdown in the market, how is it impacting developers? Will some developers have to close down in times like these? Maybe some smaller developers may get impacted but historically that has never happened. It is only when the economy and markets mature, that in times of stress there is consolidation. Developers with a not-so-good record are already facing a decline in their sales as consumers are going only with those with better reputation and where they feel that even if there is some delay, the developer will finally deliver. If there is a developer with a decent reputation, decent location and the price point is right, they are getting sales. However, in markets like ours, a lot of small developers get away as several areas become unaffordable and people have to go to smaller developers as they do not have a choice. What are developers who neither have the financial strength nor sales to support their projects doing to sustain? There are several such cases and there the smaller developer who has control over land is going to a big developer who has brand equity and the financial strength to develop it. That is happening in Gurgaon, Noida, Pune and across the country. The reason is that a lot of developers are sitting on quite a bit of land and they had projections that sales would continue and they would be able to develop them, but with sales not happening, the cash flow and liquidity has gone down and since you don't have the ability to develop, you team up with another developer. Will Indian real estate see a situation like that in the US, where property prices crash when the economy goes down? It will take some time and the biggest reason is lack of infrastructure. While land is abundant in our country, there is a lack of developable land, and it is the slow implementation of infrastructure development has actually led to prices remaining high. Also in India, people hold on to their property because here they have huge confidence in real estate as an asset class that it will grow and that holding leads to price appreciation. In America, the prices don't go like crazy because there is abundant supply of developable land with roads, power, water, parking etc. While it will not happen in the near future, we are getting to that point where prices crash or markets remain subdued for longer periods. As our economy matures, infrastructure improves and developable land increases we will see crash in prices — it may happen in 10 years. Do you see a supply bubble emerging in the market? There is a situation like that in different pockets. On paper, there is oversupply, but all of it may not come up. In places like Noida Expressway, Yamuna Expressway no doubt there is huge supply but the advantage they have is the price point as many cannot afford Delhi or Gurgaon. What this large supply will do is that it won't allow prices to increase and it would be end-user driven. If that is the case, how does the situation look like for prospective investors? This is a market where you need to take an informed decision: who is the developer, what are the economics of the area, what is the price point, why would the prices go up, is infrastructure coming up and is the quality good. Also think of the longer term and enter with a minimum time horizon of 3-5 years. Now investors will have to be more realistic on the expectation of returns from property. You will not get unrealistic returns. So it is worth investing even today, but take an informed decision. How about big ticket deals in the housing market? Are enquiries rising with softening prices? Enquiries are not going up definitely. As the sentiment is low and there is uncertainty, the overall enquiries have gone down. The fact is that at the peak of the market you get 100 enquiries but when it is down, it shrinks to 10-20 or so. They have come down significantly. The RBI has restricted banks and housing finance companies to fund under the 80:20 scheme of developers. How is it going to impact the market? It is another dampener to the real estate market but I don't think that it will have a significant impact. Even though the scheme had become prevalent, it was not very common.
In boom and gloom some stocks have never ceased to grow
A look into the performance of Sensex companies since 2008 reveals that IT, Pharma, FMCG and auto sectors have generated substantial returns irrespective of the economic growth of the country, while some have always been losers
The growth in gross domestic product (GDP) for the quarter ended June 2013 hit a four-year-low of 4.4 per cent. This was much lower than market expectations and also in sharp contrast to the growth rate of 9.3 per cent that the economy registered just two years ago in 2010-11. On the back of a strong economic growth, net inflows from Foreign Institutional Investors (FII) was Rs 133,266 crore during the calendar 2010 and sentiment was on a high, the year saw Sensex closing at an all-time high of 21,005 at the Muhurat trading on November 5, 2010. Contrary to the situation in 2010-11, the economy is now witnessing a slowdown. Rupee is trading at much depreciated level of 65 against the dollar, net FII inflow for the calendar at Rs 61,051 crore (as on September 6) and sentiments in the equity market are on a low. But even in the two contrasting environments there are sectors which have performed consistently on the stock market front. In 2010, companies in the IT, pharma, FMCG, banking and auto sectors did well at the stock exchanges whereas those in the power, metal, capital goods and oil and gas sector trailed in performance. The situation is not different now, and companies in the same sectors continue to drive the market even as the economic fundamentals and environment are significantly different than they were in 2010 with the exception of banking that is reeling under currency pressure. In the calendar 2010, among the Sensex companies, Tata Motors rose by 89 per cent while Sun Pharma and TCS were up by 61 and 55 per cent respectively. However, in the same period Sesa Goa and NTPC were down by 16 and 15 per cent respectively. Even BHEL, Tata Power and Reliance Industries generated negative returns. For the calendar 2013, among the Sensex companies, TCS, Sun Pharma, Infosys and Wipro emerged as the biggest gainers while Sesa Goa, Jindal Steel and BHEL remain at the bottom of the table. The trend has been on similar lines since 2008. A look into the performance of Sensex companies since beginning of 2008 reveals that companies in metal, power, capital goods and oil & gas have been clear losers while IT, Pharma, FMCG and auto have generated substantial returns for investors in the same period. As a result of the same there has also been a notable change in the pecking order of Sensex companies. While NTPC, ICICI Bank, BHEL, SBI and L&T do not figure in the top 10 companies by market capitalisation now, they have been replaced ITC, HDFC Bank, HUL, Wipro and HDFC Ltd. What does it signify? The company's financial performance remains key to a stock's performance and stock markets track future earning of companies. While earning expectation for companies in the power, metal and infrastructure sector remained weak and deteriorated over the last few years, the situation has not witnessed any improvement even now. "The forward earning expectation for power, infrastructure and metal companies has shown no improvement and the growth has been coming from companies in the IT, pharma and FMCG sectors as they have sustained their earning growth," said Rikesh Parikh, VP, market strategy and equities at Motilal Oswal Financial Services. Market participants expect that IT, pharma and FMCG to continue with their performance in the current environment of slow growth and uncertainty. "While IT companies benefit from an uptick in the US economy and depreciation in rupee, FMCG and pharma, being defensive sectors, will not see a slowdown in growth even as the economy slows," said Alex Mathew, head of research at Geojit BNP Paribas Financial Services. So does that mean you should stay away from power, infrastructure and metal companies? Things are uncertain now and so even as most of the stocks within these sectors are available at significantly low valuations experts are not yet sure whether they have bottomed out. While metal prices are flat, government has not come out with any clear visibility on infrastructure and power projects. Several projects may have received approvals over the last few days by the Cabinet Committee on Investments, experts feel that it may still take some time for them to come on ground. "It will take some time before we know that stocks in these sectors have bottomed out," said Parikh. Mathew, however, feels that there are some good companies that can be bought for the long term when the market corrects. "Sectors like power, metals and infrastructure are directly linked to the economy and the economy will not continue to stay the same. Investors can look to invest in well run companies such as Tata Steel, Hindalco for the long term," said Mathew. The curious case of IT The recovery in the US economy has come as a big booster for the IT sector. A depreciation in the rupee by over 20 per cent over the last four months means higher revenues and better margins for these companies. TCS has been the biggest gainer this calendar. Its shares have risen by almost 60 per cent this calendar. Infosys and Wipro too have gained 31 per cent and 22 per cent respectively in the same period. While the stocks have had a sharp run experts feel that the prospects remain bright for the IT companies as a pick up of growth in the US economy will lead to more business and growth for the IT majors. "The growth in IT companies are hinged on two things, a broadbased recovery in the US and increase in penetration in Europe," said Abhishek Shindadkar, IT analyst at ICICIdirect. While TCS has risen by 271 per cent since 2008, growing at a compounded annual growth rate of 37 per cent since then, it only lags behind Sun Pharma among the Sensex companies in terms of performance. Sun Pharma has grown by 341 per cent in the same period. Experts say that TCS is one stock that investors should hold in their portfolio for the long run. "TCS is good performing stock with strong fundamentals and is expected to do well in the long run," said Mathew. With the recent run at the stock markets, TCS has surpassed the aggregate market capitalisation of the other four IT majors in the country — Infosys, Wipro, HCL Technologies and Tech Mahindra, but experts feel that the stock deserves the premium and is not overvalued. "TCS has several factors working for it. It is getting a bigger share of revenue in big deals where several global players such as Accenture and IBM are involved and it is getting more long-term projects. Its business is well spread across various geographies," said an IT expert who did not wish to be named, as he works as a consultant with leading IT companies. "For TCS the positives outweigh the negatives and while entry may be key, from a long-term perspective investors may start to accumulate with a staggered approach," said Shindadkar. However, there are others who feel that investors should not chase past returns generated by the company. "It is a quality company that has sound track record and has sustained even in adverse environment. Investors should look to hold the stock for 5-10 years," said Parikh.
The growth in gross domestic product (GDP) for the quarter ended June 2013 hit a four-year-low of 4.4 per cent. This was much lower than market expectations and also in sharp contrast to the growth rate of 9.3 per cent that the economy registered just two years ago in 2010-11. On the back of a strong economic growth, net inflows from Foreign Institutional Investors (FII) was Rs 133,266 crore during the calendar 2010 and sentiment was on a high, the year saw Sensex closing at an all-time high of 21,005 at the Muhurat trading on November 5, 2010. Contrary to the situation in 2010-11, the economy is now witnessing a slowdown. Rupee is trading at much depreciated level of 65 against the dollar, net FII inflow for the calendar at Rs 61,051 crore (as on September 6) and sentiments in the equity market are on a low. But even in the two contrasting environments there are sectors which have performed consistently on the stock market front. In 2010, companies in the IT, pharma, FMCG, banking and auto sectors did well at the stock exchanges whereas those in the power, metal, capital goods and oil and gas sector trailed in performance. The situation is not different now, and companies in the same sectors continue to drive the market even as the economic fundamentals and environment are significantly different than they were in 2010 with the exception of banking that is reeling under currency pressure. In the calendar 2010, among the Sensex companies, Tata Motors rose by 89 per cent while Sun Pharma and TCS were up by 61 and 55 per cent respectively. However, in the same period Sesa Goa and NTPC were down by 16 and 15 per cent respectively. Even BHEL, Tata Power and Reliance Industries generated negative returns. For the calendar 2013, among the Sensex companies, TCS, Sun Pharma, Infosys and Wipro emerged as the biggest gainers while Sesa Goa, Jindal Steel and BHEL remain at the bottom of the table. The trend has been on similar lines since 2008. A look into the performance of Sensex companies since beginning of 2008 reveals that companies in metal, power, capital goods and oil & gas have been clear losers while IT, Pharma, FMCG and auto have generated substantial returns for investors in the same period. As a result of the same there has also been a notable change in the pecking order of Sensex companies. While NTPC, ICICI Bank, BHEL, SBI and L&T do not figure in the top 10 companies by market capitalisation now, they have been replaced ITC, HDFC Bank, HUL, Wipro and HDFC Ltd. What does it signify? The company's financial performance remains key to a stock's performance and stock markets track future earning of companies. While earning expectation for companies in the power, metal and infrastructure sector remained weak and deteriorated over the last few years, the situation has not witnessed any improvement even now. "The forward earning expectation for power, infrastructure and metal companies has shown no improvement and the growth has been coming from companies in the IT, pharma and FMCG sectors as they have sustained their earning growth," said Rikesh Parikh, VP, market strategy and equities at Motilal Oswal Financial Services. Market participants expect that IT, pharma and FMCG to continue with their performance in the current environment of slow growth and uncertainty. "While IT companies benefit from an uptick in the US economy and depreciation in rupee, FMCG and pharma, being defensive sectors, will not see a slowdown in growth even as the economy slows," said Alex Mathew, head of research at Geojit BNP Paribas Financial Services. So does that mean you should stay away from power, infrastructure and metal companies? Things are uncertain now and so even as most of the stocks within these sectors are available at significantly low valuations experts are not yet sure whether they have bottomed out. While metal prices are flat, government has not come out with any clear visibility on infrastructure and power projects. Several projects may have received approvals over the last few days by the Cabinet Committee on Investments, experts feel that it may still take some time for them to come on ground. "It will take some time before we know that stocks in these sectors have bottomed out," said Parikh. Mathew, however, feels that there are some good companies that can be bought for the long term when the market corrects. "Sectors like power, metals and infrastructure are directly linked to the economy and the economy will not continue to stay the same. Investors can look to invest in well run companies such as Tata Steel, Hindalco for the long term," said Mathew. The curious case of IT The recovery in the US economy has come as a big booster for the IT sector. A depreciation in the rupee by over 20 per cent over the last four months means higher revenues and better margins for these companies. TCS has been the biggest gainer this calendar. Its shares have risen by almost 60 per cent this calendar. Infosys and Wipro too have gained 31 per cent and 22 per cent respectively in the same period. While the stocks have had a sharp run experts feel that the prospects remain bright for the IT companies as a pick up of growth in the US economy will lead to more business and growth for the IT majors. "The growth in IT companies are hinged on two things, a broadbased recovery in the US and increase in penetration in Europe," said Abhishek Shindadkar, IT analyst at ICICIdirect. While TCS has risen by 271 per cent since 2008, growing at a compounded annual growth rate of 37 per cent since then, it only lags behind Sun Pharma among the Sensex companies in terms of performance. Sun Pharma has grown by 341 per cent in the same period. Experts say that TCS is one stock that investors should hold in their portfolio for the long run. "TCS is good performing stock with strong fundamentals and is expected to do well in the long run," said Mathew. With the recent run at the stock markets, TCS has surpassed the aggregate market capitalisation of the other four IT majors in the country — Infosys, Wipro, HCL Technologies and Tech Mahindra, but experts feel that the stock deserves the premium and is not overvalued. "TCS has several factors working for it. It is getting a bigger share of revenue in big deals where several global players such as Accenture and IBM are involved and it is getting more long-term projects. Its business is well spread across various geographies," said an IT expert who did not wish to be named, as he works as a consultant with leading IT companies. "For TCS the positives outweigh the negatives and while entry may be key, from a long-term perspective investors may start to accumulate with a staggered approach," said Shindadkar. However, there are others who feel that investors should not chase past returns generated by the company. "It is a quality company that has sound track record and has sustained even in adverse environment. Investors should look to hold the stock for 5-10 years," said Parikh.
TCS bigger than Infy, HCL Tech, Wipro, Tech Mahindra put together
The pyramid at the top of the Indian IT sector has become very narrow. TCS is now not only the leader in the BSE charts but it has a market cap that surpasses the aggregate of the four IT majors — Infosys, Wipro, HCL Technologies and Tech Mahindra — making it a more valuable company than all of them combined. Last Wednesday for instance, amidst a revival in the US economy, falling rupee and volatile equity markets, while TCS closed with a market cap of Rs 4,04,352 crore, the aggregate market cap of Infosys, Wipro, HCL Tech and Tech Mahindra stood at Rs 4,02,020 crore.
However, in terms of revenue and profitability that is not the case. While TCS had a revenue and profit after tax of Rs 48,426 crore and Rs 12,786 crore respectively for the year ended March 2013, the aggregate revenue and PAT for the four companies stood at Rs 8,88,00 crore and Rs 19,122 crore which is significantly higher than TCS. Share prices of all IT companies have surged significantly over the last four months since the rupee started its decline. TCS, however, has emerged as the biggest beneficiary at the stock markets among the five IT majors. Since May 2013, while TCS has witnessed a jump in its share prices by 48.8 per cent, Infosys and Wipro gained 37.7 and 39 per cent respectively. HCL Tech and Tech Mahindra too rose by 43.8 and 44 per cent respectively. Industry experts say that the premium that market is giving to TCS is justified. "It is not just about rupee dollar movement but TCS has several factors working for it. It is getting a bigger share of revenue in big deals where several global players are involved, it is getting more long term projects and also its business is well spread across various regions of the world," said an IT expert who did not wish to be named as he works as a consultant with leading IT companies. Market experts feel that even in a correction phase, TCS will perform better than the rest. With the run TCS has had at the stock exchanges over the last four months, it has taken a significant lead in market capitalisation over Reliance Industries Limited which is the second largest company in terms of market capitalisation. As on Wednesday while TCS had a market cap of Rs 4,04,352 crore, RIL's market cap at Rs 2,74,301 crore put behind TCS by Rs 1,30,051 crore. Stocks up TCS closed last week with a market cap of Rs.4,04,352 crore, while the aggregate market cap of Infosys, Wipro, HCL Tech and Tech Mahindra stood at Rs.4,02,020 crore. Since May 2013, while TCS has witnessed a jump in its share prices by 48.8%, Infosys and Wipro gained 37.7% and 39% respectively. HCL Tech and Tech Mahindra too rose by 43.8%, 44% respectively
However, in terms of revenue and profitability that is not the case. While TCS had a revenue and profit after tax of Rs 48,426 crore and Rs 12,786 crore respectively for the year ended March 2013, the aggregate revenue and PAT for the four companies stood at Rs 8,88,00 crore and Rs 19,122 crore which is significantly higher than TCS. Share prices of all IT companies have surged significantly over the last four months since the rupee started its decline. TCS, however, has emerged as the biggest beneficiary at the stock markets among the five IT majors. Since May 2013, while TCS has witnessed a jump in its share prices by 48.8 per cent, Infosys and Wipro gained 37.7 and 39 per cent respectively. HCL Tech and Tech Mahindra too rose by 43.8 and 44 per cent respectively. Industry experts say that the premium that market is giving to TCS is justified. "It is not just about rupee dollar movement but TCS has several factors working for it. It is getting a bigger share of revenue in big deals where several global players are involved, it is getting more long term projects and also its business is well spread across various regions of the world," said an IT expert who did not wish to be named as he works as a consultant with leading IT companies. Market experts feel that even in a correction phase, TCS will perform better than the rest. With the run TCS has had at the stock exchanges over the last four months, it has taken a significant lead in market capitalisation over Reliance Industries Limited which is the second largest company in terms of market capitalisation. As on Wednesday while TCS had a market cap of Rs 4,04,352 crore, RIL's market cap at Rs 2,74,301 crore put behind TCS by Rs 1,30,051 crore. Stocks up TCS closed last week with a market cap of Rs.4,04,352 crore, while the aggregate market cap of Infosys, Wipro, HCL Tech and Tech Mahindra stood at Rs.4,02,020 crore. Since May 2013, while TCS has witnessed a jump in its share prices by 48.8%, Infosys and Wipro gained 37.7% and 39% respectively. HCL Tech and Tech Mahindra too rose by 43.8%, 44% respectively
Sebi set to ease entry norms for long-only foreign funds
Foreign institutional investors will be able to trade in Indian equity markets with minimal paperwork. The Securities and Exchange Board of India plans to come out with notifications to minimise the know your customer (KYC) requirement for FIIs that have established a strong track record of compliance with Indian rules.
"Last week the Government of India amended the anti-money laundering rules providing for risk based approach. Next week we are going to formulate our regulations implementing this and a large number of long-only funds will find it easier to invest in India now," according to UK Sinha, chairman of Sebi.
Under the risk-based approach the documentation requirement for well regulated entities will be minimal. The changes are in line with the recommendations of the KM Chandrasekhar Committee on 'Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments,' that were submitted to Sebi on June 12 and later accepted by Sebi board on June 25. "The approach to KYC will be risk based. The documents needed for registration and onboarding would be the simplest for Category I and most stringent for Category III. The requirement of submitting personal identification documents such as copy of passport, photograph, etc, of the designated officials of FPIs (Foreign Portfolio Investors) belonging to Category I and Category II shall be done away with," said the statement issued by Sebi after its board meeting on June 25. The change in regulations comes at a time when the FII's investments moved out of the country in large chunk. Between July and August 2013, FII's pulled out a net of $9.24 billion from the Indian debt market and Sinha feels that the reason for the problem in debt market is lack of diversification in the class of investors (FII's) in debt instruments in the country. "Our medium and long term aim should be to provide a wide dispersal of clients who are investing in debt market in India from abroad," said Sinha while speaking at Express Group's Idea Exchange in New Delhi on Monday. "While you can't stop people who are doing pure arbitrage, we should put in some mechanism in place to encourage long-term investors." Major steps to boost corporate bond market in a day or two: Sinha Mumbai: Sebi on Tuesday said it will announce some important measures for the corporate bond market in "a couple of days". "Sebi is trying to provide more liquidity into the corporate bond market and one or two measures are in the pipeline to improve trading mechanism. Hopefully, in the next couple of days we will be able to announce that," Sebi chairman UK Sinha said. PTI
"Last week the Government of India amended the anti-money laundering rules providing for risk based approach. Next week we are going to formulate our regulations implementing this and a large number of long-only funds will find it easier to invest in India now," according to UK Sinha, chairman of Sebi.
Under the risk-based approach the documentation requirement for well regulated entities will be minimal. The changes are in line with the recommendations of the KM Chandrasekhar Committee on 'Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments,' that were submitted to Sebi on June 12 and later accepted by Sebi board on June 25. "The approach to KYC will be risk based. The documents needed for registration and onboarding would be the simplest for Category I and most stringent for Category III. The requirement of submitting personal identification documents such as copy of passport, photograph, etc, of the designated officials of FPIs (Foreign Portfolio Investors) belonging to Category I and Category II shall be done away with," said the statement issued by Sebi after its board meeting on June 25. The change in regulations comes at a time when the FII's investments moved out of the country in large chunk. Between July and August 2013, FII's pulled out a net of $9.24 billion from the Indian debt market and Sinha feels that the reason for the problem in debt market is lack of diversification in the class of investors (FII's) in debt instruments in the country. "Our medium and long term aim should be to provide a wide dispersal of clients who are investing in debt market in India from abroad," said Sinha while speaking at Express Group's Idea Exchange in New Delhi on Monday. "While you can't stop people who are doing pure arbitrage, we should put in some mechanism in place to encourage long-term investors." Major steps to boost corporate bond market in a day or two: Sinha Mumbai: Sebi on Tuesday said it will announce some important measures for the corporate bond market in "a couple of days". "Sebi is trying to provide more liquidity into the corporate bond market and one or two measures are in the pipeline to improve trading mechanism. Hopefully, in the next couple of days we will be able to announce that," Sebi chairman UK Sinha said. PTI
The volatility and you: Debt may be a safer bet
For investors, there could be no better proof of the compelling need to tread cautiously in the equity markets than the wide swings seen in market movements between Thursday and Friday.
On Thursday, a market that is currently seen as fragile on sentiments, first rallied by 684 points (the BSE Sensex rally) to close at a three year high in the wake of the US Federal Reserve's decision to not tinker with its bond buying program. Just 24-hours later, it went on to fall by 1.9 per cent or 383 points (fall in the 30-share Sensex) on Friday, after Raghuram Rajan surprised the market and raised the repo rate (at which RBI lends to commercial banks) by 25 basis points, primarily with a view to bring inflation down to tolerable levels. The takeaway from the over-the-top market behaviour in the last two trading days — do not get excited by a sharp rally in the markets while not losing your heart and exit when it goes down. Investors should on the other hand follow the opposite, accumulate further when it falls and use the opportunity when it rises to book some profits. The uncertainty in the market is unprecedented and investors need to look at staying safe with debt — both short term and long term fixed income instruments or fixed maturity plans — and wait for the tide to settle down before venturing into equities. India and the global economy When it comes to the macroeconomic situation, both in India and the global economy, the outlook continues to be fragile. Since the RBI's first quarter review in July, a weak recovery has been taking hold in advanced economies, with growth picking up in Japan and the UK and the euro area exiting recession. However, activity has slowed in several emerging economies, buffeted by heightened financial market turbulence on the prospect of tapering of quantitative easing in the US. The decision by the US Federal Reserve to hold off tapering has buoyed financial markets but tapering is inevitable. On the domestic front, growth has weakened with continuing sluggishness in industrial activity and services. The pace of infrastructure project completion is subdued and new project starts remain muted. Consumption, while relatively firm so far, is starting to weaken even in rural areas, with durable goods consumption hit hard. Consequently, growth is trailing below potential and the output gap is widening. Some pick-up is expected on account of the brightening prospects for agriculture due to kharif output and the upturn in exports. Wholesale Price Index (WPI) inflation, which had eased in Q1 of 2013-14, has started rising again as the pass-through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices. The negative output gap will exercise downward pressure on inflation, and the process will be aided as supply side constraints, especially relating to food and infrastructure, ease. However, the current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year. What has been raised a worrisome is that inflation at the retail level, measured by the Consumer Price Index (CPI), has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence. On the external side, weakening domestic saving, subdued export demand and the rising value of oil imports — most recently due to geopolitical risks emanating from West Asia — have led to a larger current account deficit (CAD). Concerns about funding the CAD, amplified by capital outflows precipitated by anticipated tapering of asset purchases by the US Fed, increased the volatility in the foreign exchange market. The causes for uncertainty On the global front, the Fed will meet in December again and one will have to wait to see if it takes a call on tapering (or scaling back) of bond purchases worth $85 billion every month and the global crude prices continue to remain at elevated levels. The reason for the Fed putting off its tapering schedule was because the US economy continues to remain weak and there are a few potentially significant risks in doing so. The biggest impact of the Fed's tapering schedule is likely to be felt by financial markets in emerging markets, which have become so accustomed to the Fed's easy money policy that the addiction is deeply ingrained in the stock valuations. What is certain, though, is that the Fed cannot continue expanding the money supply at the current rate. The question, then, is when will the Fed begin to taper? Experts say December, but that's during the peak of the holiday season, a period when the economy typically does well. US-based fund analysts say this "seasonality" makes it difficult to determine if the economy is really improving or just experiencing a Christmas boost, thereby making the possibility of the Fed pushing it back until early 2014 a distinct possibility. The uncertainty of the entire exercise makes the possibility of more gyrations in the emerging economy markets, especially equities, a real concern. In fact, in Friday's monetary policy announcement, RBI Governor Raghuram Rajan asserted that the Fed's decision to put its $85 billion a month bond-buying programme was just "a postponement", even as he stressed on the need to prepare "a bullet-proof national balance sheet", especially in the context of the general elections looming large. On the domestic front, market experts maintain that structural uptrend in this sort of a market could precipitate when the interest rates are low and the return on equity rises, which will happen only when corporate profits go up. As nothing has changed fundamentally for the economy, and the rise in the markets seem to be only driven by sentiments, the sustenance of the surge in equity markets is unlikely. Therefore investors should not venture to play in the markets on a sharp rally. The research head of a leading global financial services firm said that the second quarter results will be disappointing and therefore the earnings of companies are not expected to witness any growth which can prove to be another major dampener for the markets. But experts suggest to book some profits when the markets rise and Thursday offered one such opportunity. The rise on Thursday, which took the Sensex to a near three year high and also much closer to its all time high levels, provided investors a good opportunity to book profits. While the market was enthused and rose swiftly after Fed's announcement, there is a broader sense in the market that the momentum cannot be sustained unless things start changing on ground for the Indian economy. The Short Term Bet There are hopes that the US Fed's decision to continue with easy money policy will lead to an inflow of funds in the emerging markets including India and will also stop the outflow of funds for now. However, while that may be true till the US announces to scale back of its bond purchase programme, the minute there is an indication of it happening, the outflow of funds could commence. Investors should therefore avoid falling into the lure of playing with stocks and wait for the structural improvement, such as interest rates going down and corporate earnings improving, before they go for big-ticket investments in the market. Try to be safe, continue with your equity SIPs and allocate higher component of your portfolio in the debt markets until structural changes happen.
On Thursday, a market that is currently seen as fragile on sentiments, first rallied by 684 points (the BSE Sensex rally) to close at a three year high in the wake of the US Federal Reserve's decision to not tinker with its bond buying program. Just 24-hours later, it went on to fall by 1.9 per cent or 383 points (fall in the 30-share Sensex) on Friday, after Raghuram Rajan surprised the market and raised the repo rate (at which RBI lends to commercial banks) by 25 basis points, primarily with a view to bring inflation down to tolerable levels. The takeaway from the over-the-top market behaviour in the last two trading days — do not get excited by a sharp rally in the markets while not losing your heart and exit when it goes down. Investors should on the other hand follow the opposite, accumulate further when it falls and use the opportunity when it rises to book some profits. The uncertainty in the market is unprecedented and investors need to look at staying safe with debt — both short term and long term fixed income instruments or fixed maturity plans — and wait for the tide to settle down before venturing into equities. India and the global economy When it comes to the macroeconomic situation, both in India and the global economy, the outlook continues to be fragile. Since the RBI's first quarter review in July, a weak recovery has been taking hold in advanced economies, with growth picking up in Japan and the UK and the euro area exiting recession. However, activity has slowed in several emerging economies, buffeted by heightened financial market turbulence on the prospect of tapering of quantitative easing in the US. The decision by the US Federal Reserve to hold off tapering has buoyed financial markets but tapering is inevitable. On the domestic front, growth has weakened with continuing sluggishness in industrial activity and services. The pace of infrastructure project completion is subdued and new project starts remain muted. Consumption, while relatively firm so far, is starting to weaken even in rural areas, with durable goods consumption hit hard. Consequently, growth is trailing below potential and the output gap is widening. Some pick-up is expected on account of the brightening prospects for agriculture due to kharif output and the upturn in exports. Wholesale Price Index (WPI) inflation, which had eased in Q1 of 2013-14, has started rising again as the pass-through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices. The negative output gap will exercise downward pressure on inflation, and the process will be aided as supply side constraints, especially relating to food and infrastructure, ease. However, the current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year. What has been raised a worrisome is that inflation at the retail level, measured by the Consumer Price Index (CPI), has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence. On the external side, weakening domestic saving, subdued export demand and the rising value of oil imports — most recently due to geopolitical risks emanating from West Asia — have led to a larger current account deficit (CAD). Concerns about funding the CAD, amplified by capital outflows precipitated by anticipated tapering of asset purchases by the US Fed, increased the volatility in the foreign exchange market. The causes for uncertainty On the global front, the Fed will meet in December again and one will have to wait to see if it takes a call on tapering (or scaling back) of bond purchases worth $85 billion every month and the global crude prices continue to remain at elevated levels. The reason for the Fed putting off its tapering schedule was because the US economy continues to remain weak and there are a few potentially significant risks in doing so. The biggest impact of the Fed's tapering schedule is likely to be felt by financial markets in emerging markets, which have become so accustomed to the Fed's easy money policy that the addiction is deeply ingrained in the stock valuations. What is certain, though, is that the Fed cannot continue expanding the money supply at the current rate. The question, then, is when will the Fed begin to taper? Experts say December, but that's during the peak of the holiday season, a period when the economy typically does well. US-based fund analysts say this "seasonality" makes it difficult to determine if the economy is really improving or just experiencing a Christmas boost, thereby making the possibility of the Fed pushing it back until early 2014 a distinct possibility. The uncertainty of the entire exercise makes the possibility of more gyrations in the emerging economy markets, especially equities, a real concern. In fact, in Friday's monetary policy announcement, RBI Governor Raghuram Rajan asserted that the Fed's decision to put its $85 billion a month bond-buying programme was just "a postponement", even as he stressed on the need to prepare "a bullet-proof national balance sheet", especially in the context of the general elections looming large. On the domestic front, market experts maintain that structural uptrend in this sort of a market could precipitate when the interest rates are low and the return on equity rises, which will happen only when corporate profits go up. As nothing has changed fundamentally for the economy, and the rise in the markets seem to be only driven by sentiments, the sustenance of the surge in equity markets is unlikely. Therefore investors should not venture to play in the markets on a sharp rally. The research head of a leading global financial services firm said that the second quarter results will be disappointing and therefore the earnings of companies are not expected to witness any growth which can prove to be another major dampener for the markets. But experts suggest to book some profits when the markets rise and Thursday offered one such opportunity. The rise on Thursday, which took the Sensex to a near three year high and also much closer to its all time high levels, provided investors a good opportunity to book profits. While the market was enthused and rose swiftly after Fed's announcement, there is a broader sense in the market that the momentum cannot be sustained unless things start changing on ground for the Indian economy. The Short Term Bet There are hopes that the US Fed's decision to continue with easy money policy will lead to an inflow of funds in the emerging markets including India and will also stop the outflow of funds for now. However, while that may be true till the US announces to scale back of its bond purchase programme, the minute there is an indication of it happening, the outflow of funds could commence. Investors should therefore avoid falling into the lure of playing with stocks and wait for the structural improvement, such as interest rates going down and corporate earnings improving, before they go for big-ticket investments in the market. Try to be safe, continue with your equity SIPs and allocate higher component of your portfolio in the debt markets until structural changes happen.
RBI action: Brace up for a hike in your home loan rate
The Reserve Bank of India on Friday surprised the market with a 25 basis points hike in the repo rate — at which the RBI lends to commercial banks — in its effort to tame the inflation which breached the 6 per cent mark to reach a six month high of 6.1 per cent in August. While the RBI Governor made it clear that repo rate would be the effective policy rate and would be consistent with the inflationary environment, there is no clarity on when the interest rates may start coming down and when home and car buyers can breathe easy.
The tone of the RBI seems more inclined towards fighting inflation than going for growth and since there are expectations that inflation is likely to remain higher on account of a likely hike in fuel prices, it raises some concern for existing and prospective home loan customers, and prospective car owners. The State Bank of India raised its base rate by 10 basis points thereby raising its lending rate and also raised the interest offering on deposits by 0.25-1 percentage point across various maturities. The bank's action came a day before the central bank was to announce its monetary policy. Leading housing finance company HDFC too did not deny a hike in interest rates going forward. "We will wait and watch for the next few days on how the rates move and will take a call on the same," said Keki Mistry, vice chairman and CEO, HDFC. He, however, added that he does not expect more repo rate hikes this fiscal and expects a correction in rates in the latter part of this fiscal. There are others who feel that the tight liquidity environment will continue and lending rates will also firm up. "Liquidity will continue to remain tight and while lending rates are already very high, they will continue to remain high," said Gagan Banga, CEO, Indiabulls Financial Services. Home buyers and existing home loan customers may therefore brace up for a hike in rates by their bank or housing finance company as they may not be very far from raising their rates. Some feel that a hike in repo rates have added pressure on lending rates though not immediately. "Clearly the cost of funds have been moving up in tandem with all the other macroeconomic factors that we are seeing around us. The current global and domestic macro economic scenario is critical. It is premature to assume that interest rates will go up immediately," said Kapil Wadhawan, CMD, DHFL. For an existing customer, if your floating rate loan at 10.5 per cent has a total outstanding of Rs 20 lakh for 18 years (216 months) then as a result of a hike of 25 basis points, the tenure of your loan will rise by 11 months to 227 months, keeping the EMI constant. It may be prudent to liquidate some savings (fixed deposits etc) and partly prepay the home loans so as to reduce the impact of any hike in interest rate. For a new customer, the EMI for a Rs 20 lakh, 20 year floating rate loan if the rates rise from 10.5 to 10.75 per cent, the EMI will go up from Rs 19,967 to Rs 20,304. At a time when the real estate market is under pressure and prices across cities are softening, home buyers will have to be careful about one more aspect now—which way are the interest rates headed and what should be their approach while buying a home. Real estate experts call for home buyers to be very prudent as of now. They suggest buyers to go for hard bargain along with going only for projects of credible developers at good locations. It is important to go with a developer that has the financial ability to deliver the project at this time when the industry is facing financial stress. Industry insiders say that RBI's move to raise the rates will further dampen investor sentiment and may slow the market. "The burden of inflated EMIs may deter buyer sentiments in the upcoming festive season too, perhaps prolonging the demand stasis in the real estate sector," said Anshuman Magazine, CMD, CBRE South Asia. But home buyers are not the only one to see the stress. Car buyers will also see their cost of purchasing a car going up. Several car manufacturers have already raised the prices of their cars by up to 5 per cent as their import costs have gone up on account of the depreciation in the rupee. A hike in interest rates will only raise their cost of owning a car and therefore prospective car buyers may look to reduce their loan component by increasing their own contribution.
The tone of the RBI seems more inclined towards fighting inflation than going for growth and since there are expectations that inflation is likely to remain higher on account of a likely hike in fuel prices, it raises some concern for existing and prospective home loan customers, and prospective car owners. The State Bank of India raised its base rate by 10 basis points thereby raising its lending rate and also raised the interest offering on deposits by 0.25-1 percentage point across various maturities. The bank's action came a day before the central bank was to announce its monetary policy. Leading housing finance company HDFC too did not deny a hike in interest rates going forward. "We will wait and watch for the next few days on how the rates move and will take a call on the same," said Keki Mistry, vice chairman and CEO, HDFC. He, however, added that he does not expect more repo rate hikes this fiscal and expects a correction in rates in the latter part of this fiscal. There are others who feel that the tight liquidity environment will continue and lending rates will also firm up. "Liquidity will continue to remain tight and while lending rates are already very high, they will continue to remain high," said Gagan Banga, CEO, Indiabulls Financial Services. Home buyers and existing home loan customers may therefore brace up for a hike in rates by their bank or housing finance company as they may not be very far from raising their rates. Some feel that a hike in repo rates have added pressure on lending rates though not immediately. "Clearly the cost of funds have been moving up in tandem with all the other macroeconomic factors that we are seeing around us. The current global and domestic macro economic scenario is critical. It is premature to assume that interest rates will go up immediately," said Kapil Wadhawan, CMD, DHFL. For an existing customer, if your floating rate loan at 10.5 per cent has a total outstanding of Rs 20 lakh for 18 years (216 months) then as a result of a hike of 25 basis points, the tenure of your loan will rise by 11 months to 227 months, keeping the EMI constant. It may be prudent to liquidate some savings (fixed deposits etc) and partly prepay the home loans so as to reduce the impact of any hike in interest rate. For a new customer, the EMI for a Rs 20 lakh, 20 year floating rate loan if the rates rise from 10.5 to 10.75 per cent, the EMI will go up from Rs 19,967 to Rs 20,304. At a time when the real estate market is under pressure and prices across cities are softening, home buyers will have to be careful about one more aspect now—which way are the interest rates headed and what should be their approach while buying a home. Real estate experts call for home buyers to be very prudent as of now. They suggest buyers to go for hard bargain along with going only for projects of credible developers at good locations. It is important to go with a developer that has the financial ability to deliver the project at this time when the industry is facing financial stress. Industry insiders say that RBI's move to raise the rates will further dampen investor sentiment and may slow the market. "The burden of inflated EMIs may deter buyer sentiments in the upcoming festive season too, perhaps prolonging the demand stasis in the real estate sector," said Anshuman Magazine, CMD, CBRE South Asia. But home buyers are not the only one to see the stress. Car buyers will also see their cost of purchasing a car going up. Several car manufacturers have already raised the prices of their cars by up to 5 per cent as their import costs have gone up on account of the depreciation in the rupee. A hike in interest rates will only raise their cost of owning a car and therefore prospective car buyers may look to reduce their loan component by increasing their own contribution.
Fresh Sensex rally more broad based
The markets are back again and the benchmark Sensex at the BSE has crossed the 20,000 mark following a 10 per cent rally for the third time in four months. However, unlike the previous rally in July, when the Sensex rose by 9.5 per cent and the mid-cap and the small-cap indices at BSE rose by only 2 and 1.6 per cent, respectively, this one seems more broad based. While the Sensex has gone up by 11.7 per cent since August 21, when it closed at 17,905, the mid-cap and the small-cap indices too have risen by 6.2 and 5.4 per cent, respectively.
It may be too soon to call that the markets are back for good, as there is an upcoming event of likely tapering of quantitative easing by the US and the markets will have to tread through that but the fact that the broader market has also witnessed a notable gain this time reflects the confidence of investors even away from the blue chips. The mid-cap and the small-cap indices have been battered down over the last eight months even as the Sensex has remained flat. Since January 21, when the Sensex closed at 20,101, it is down by only 0.5 per cent as on Wednesday's closing, however, the mid-cap and the small-cap indices have lost 28 per cent and 35 per cent of their value in the same period. The fall has been very systematic. In the 8-month period, on three occasions, the Sensex fell by 9.3, 8.6 and 11.8 per cent. But during the same periods the mid-cap index fell by 15, 11 and 12 per cent, respectively, and the small-cap index fell by 21, 10 and 9 per cent, respectively, opening up a gap in the relative performance of the three. The gap further widened when the Sensex rose. Each time the Sensex rallied by 10 per cent or more since April 2013 (on three occasions), the mid-cap and small-cap lagged significantly, opening a wide gap in the performance of the three benchmark indices. The latest rally, however, being more inclusive is indicative of the growing confidence of investors and market participants.
It may be too soon to call that the markets are back for good, as there is an upcoming event of likely tapering of quantitative easing by the US and the markets will have to tread through that but the fact that the broader market has also witnessed a notable gain this time reflects the confidence of investors even away from the blue chips. The mid-cap and the small-cap indices have been battered down over the last eight months even as the Sensex has remained flat. Since January 21, when the Sensex closed at 20,101, it is down by only 0.5 per cent as on Wednesday's closing, however, the mid-cap and the small-cap indices have lost 28 per cent and 35 per cent of their value in the same period. The fall has been very systematic. In the 8-month period, on three occasions, the Sensex fell by 9.3, 8.6 and 11.8 per cent. But during the same periods the mid-cap index fell by 15, 11 and 12 per cent, respectively, and the small-cap index fell by 21, 10 and 9 per cent, respectively, opening up a gap in the relative performance of the three. The gap further widened when the Sensex rose. Each time the Sensex rallied by 10 per cent or more since April 2013 (on three occasions), the mid-cap and small-cap lagged significantly, opening a wide gap in the performance of the three benchmark indices. The latest rally, however, being more inclusive is indicative of the growing confidence of investors and market participants.
Mutual funds: Entry load might make a comeback as fund houses battle downturn
The mutual fund industry is pushing for the return of the entry load. Even as Sebi does not deny the possibility of reversing the ban, there is a need to evolve better mechanisms to reward distributors and not burden new investors with levies
Having already seen various models being designed by the regulator and market players to remunerate the distributors, the mutual fund investors may again see a change in the way the industry charges them to keep themselves and the distribution community afloat. Four years have passed since the Securities and Exchange Board of India (Sebi) banned entry load on mutual fund sales and while the industry continues to languish on the growth front ever since, the discussions to reintroduce the entry load refuse to die down. The regulator too seems to have kept its options open to bring it back in order to boost growth and penetration of mutual funds in the country. Last week, while speaking at the Express Group's Idea Exchange in Mumbai, UK Sinha, chairman, Sebi, did accept that banning entry load was a mistake and it has affected the industry and its growth. Sinha, however, did not deny the possibility of a reversal of that decision. "I would wait for the investment climate to improve and watch for some more time before taking a call on the same," said Sinha when asked if the regulator is looking to bring back the entry load for mutual fund sales. Till July 31, 2009, mutual funds could charge entry load. That meant distributors received a direct commission of up to 2.5 per cent from fund houses for all investments into equity funds and up to 1 per cent for investments into debt funds. As the industry failed to grow after entry load was banned, Sebi, in August 2012, allowed mutual funds to charge an additional expense fee of 0.3 per cent if they manage to get atleast 30 per cent of their total sales from beyond the top 15 cities. Sinha is thinking on those lines even though he accepts that his decision to allow additional expense charge works out to be equal to that of the entry load that existed in the past. "We have tried to rectify the same," said Sinha. If entry load is one option that Sebi may explore to push growth within the industry, it is also looking to enforce mutual fund players to meet the criteria for sales in cities beyond the top 15. Sinha said that the new mutual fund policy will have obligations for players to get business from beyond the top 15 cities and also hinted at actions against the non-serious players. "Those who are non-serious players should not exist," said Sinha. Did Sebi move have an impact? The mutual fund industry had an asset under management of Rs 7,21,888 crore in July 2009. While the Sebi's no entry load norm came into force beginning August 2009, the industry has over the last four years not moved any farther. As on August 2013, the average AUM for the industry stood at Rs 7,66,103 crore as on Aug 2013. In the same period the equity AUM has come down from Rs 1,68,783 crore to Rs 1,36,066 crore. Sebi's recent steps in August 2012 have failed to arrest investors outflow from the industry. While the AMFI data shows that in the period between October 2012 and March 2012 the equity oriented schemes witnessed a decline in folio numbers by 23.8 lakh, according to an insider the outflow continues and in the period between April 2013 and August 2013 almost 14 lakh folios have moved out. Industry players, however, feel that the markets are undergoing a tough phase and the investor confidence is on a low, which is leading to their outflow. "The environment has improved after Sebi announced measures to allow fungibility of expenses and mutual funds to charge additional 30 basis points as expense ratio for sales in cities other than the top 15 thereby pushing for inclusive growth, but the industry is shrinking," said the CEO of a small-sized mutual fund. The murmurs in the industry While the regulator tried to attract the distributor community towards mutual fund sales by way of introducing a transaction fee of up to Rs 150 in the past and then allowing them to charge an additional fee of 30 basis points as expense ratio, the moves have not had any notable impact and have also failed to rejuvenate distributors. "Almost 85 per cent of the industry sales happen in the top 15 cities and there is hardly an incentive for distributors in the major markets," said the CEO of a leading mutual fund on condition of anonymity. "The fact that the industry has not grown even after measures taken by the regulator tells us that we need to think on other ways to oil the distribution system." There are others who feel that in the current times the motto should be to over-communicate with the investor and the frequency of interaction with investors needs to go up. "The outflow of folios suggest that investor confidence is very low and in these times the last mile communication is critical. Both manufacturers and distributors will have to interact with investor because if an investor leaves the industry it is tough to get him back," said the CEO of another mutual fund adding that it is the time to be with the investor and reassure him of his investment decision. Insiders say that the additional fee of 30 basis points will help the penetration of the mutual fund products beyond top cities and thereby is beneficial but they say that the majority of the benefit is to the large players who after crossing the threshold sales of 30 per cent beyond top 15 cities can claim the additional fee on their entire AUM. "The distributors in the top cities are getting nothing and even the smaller mutual fund players are at a disadvantage," said an industry insider who did not wish to be named. "While the entry load may not be the solution, a method needs to be framed that ensures everyone is nurtured." What it means for you? Under the existing rules, even if you are an old investor, if the AMC manages a revenue of 30 per cent from cities beyond the top 15, you will see fund houses deducting an additional expense charge of 30 basis points from your investment and thus putting a burden upon you. Consider this: If you invest Rs 1 lakh every year for 20 years and the investment grows at 10 per cent per annum. At an expense ratio of 2 per cent your total outgo stands at Rs 8.6 lakh over the 20 years but at an expense ratio of 2.3 per cent it will jump to Rs 9.9 lakh. Thus the burden of this additional expense ratio of 30 basis points is not a few thousands but Rs 1.3 lakh over the tenure of investment and you will be charged this even if your investment is an old one. However, if Sebi had introduced an entry load of 1 per cent then that would have gone only on the investment amount and it won't impact old investments. Further it would have gone to the distributors directly rather than benefiting large manufacturers. Also in this case, old investors won't be subsidising the new investors. While the manufacturers and distributors have learnt to live in the no entry load regime, it may not be necessary to bring back the entry load and put additional burden on new investors. However there is certainly a need to redesign the manner in which the distribution community is remunerated.
Having already seen various models being designed by the regulator and market players to remunerate the distributors, the mutual fund investors may again see a change in the way the industry charges them to keep themselves and the distribution community afloat. Four years have passed since the Securities and Exchange Board of India (Sebi) banned entry load on mutual fund sales and while the industry continues to languish on the growth front ever since, the discussions to reintroduce the entry load refuse to die down. The regulator too seems to have kept its options open to bring it back in order to boost growth and penetration of mutual funds in the country. Last week, while speaking at the Express Group's Idea Exchange in Mumbai, UK Sinha, chairman, Sebi, did accept that banning entry load was a mistake and it has affected the industry and its growth. Sinha, however, did not deny the possibility of a reversal of that decision. "I would wait for the investment climate to improve and watch for some more time before taking a call on the same," said Sinha when asked if the regulator is looking to bring back the entry load for mutual fund sales. Till July 31, 2009, mutual funds could charge entry load. That meant distributors received a direct commission of up to 2.5 per cent from fund houses for all investments into equity funds and up to 1 per cent for investments into debt funds. As the industry failed to grow after entry load was banned, Sebi, in August 2012, allowed mutual funds to charge an additional expense fee of 0.3 per cent if they manage to get atleast 30 per cent of their total sales from beyond the top 15 cities. Sinha is thinking on those lines even though he accepts that his decision to allow additional expense charge works out to be equal to that of the entry load that existed in the past. "We have tried to rectify the same," said Sinha. If entry load is one option that Sebi may explore to push growth within the industry, it is also looking to enforce mutual fund players to meet the criteria for sales in cities beyond the top 15. Sinha said that the new mutual fund policy will have obligations for players to get business from beyond the top 15 cities and also hinted at actions against the non-serious players. "Those who are non-serious players should not exist," said Sinha. Did Sebi move have an impact? The mutual fund industry had an asset under management of Rs 7,21,888 crore in July 2009. While the Sebi's no entry load norm came into force beginning August 2009, the industry has over the last four years not moved any farther. As on August 2013, the average AUM for the industry stood at Rs 7,66,103 crore as on Aug 2013. In the same period the equity AUM has come down from Rs 1,68,783 crore to Rs 1,36,066 crore. Sebi's recent steps in August 2012 have failed to arrest investors outflow from the industry. While the AMFI data shows that in the period between October 2012 and March 2012 the equity oriented schemes witnessed a decline in folio numbers by 23.8 lakh, according to an insider the outflow continues and in the period between April 2013 and August 2013 almost 14 lakh folios have moved out. Industry players, however, feel that the markets are undergoing a tough phase and the investor confidence is on a low, which is leading to their outflow. "The environment has improved after Sebi announced measures to allow fungibility of expenses and mutual funds to charge additional 30 basis points as expense ratio for sales in cities other than the top 15 thereby pushing for inclusive growth, but the industry is shrinking," said the CEO of a small-sized mutual fund. The murmurs in the industry While the regulator tried to attract the distributor community towards mutual fund sales by way of introducing a transaction fee of up to Rs 150 in the past and then allowing them to charge an additional fee of 30 basis points as expense ratio, the moves have not had any notable impact and have also failed to rejuvenate distributors. "Almost 85 per cent of the industry sales happen in the top 15 cities and there is hardly an incentive for distributors in the major markets," said the CEO of a leading mutual fund on condition of anonymity. "The fact that the industry has not grown even after measures taken by the regulator tells us that we need to think on other ways to oil the distribution system." There are others who feel that in the current times the motto should be to over-communicate with the investor and the frequency of interaction with investors needs to go up. "The outflow of folios suggest that investor confidence is very low and in these times the last mile communication is critical. Both manufacturers and distributors will have to interact with investor because if an investor leaves the industry it is tough to get him back," said the CEO of another mutual fund adding that it is the time to be with the investor and reassure him of his investment decision. Insiders say that the additional fee of 30 basis points will help the penetration of the mutual fund products beyond top cities and thereby is beneficial but they say that the majority of the benefit is to the large players who after crossing the threshold sales of 30 per cent beyond top 15 cities can claim the additional fee on their entire AUM. "The distributors in the top cities are getting nothing and even the smaller mutual fund players are at a disadvantage," said an industry insider who did not wish to be named. "While the entry load may not be the solution, a method needs to be framed that ensures everyone is nurtured." What it means for you? Under the existing rules, even if you are an old investor, if the AMC manages a revenue of 30 per cent from cities beyond the top 15, you will see fund houses deducting an additional expense charge of 30 basis points from your investment and thus putting a burden upon you. Consider this: If you invest Rs 1 lakh every year for 20 years and the investment grows at 10 per cent per annum. At an expense ratio of 2 per cent your total outgo stands at Rs 8.6 lakh over the 20 years but at an expense ratio of 2.3 per cent it will jump to Rs 9.9 lakh. Thus the burden of this additional expense ratio of 30 basis points is not a few thousands but Rs 1.3 lakh over the tenure of investment and you will be charged this even if your investment is an old one. However, if Sebi had introduced an entry load of 1 per cent then that would have gone only on the investment amount and it won't impact old investments. Further it would have gone to the distributors directly rather than benefiting large manufacturers. Also in this case, old investors won't be subsidising the new investors. While the manufacturers and distributors have learnt to live in the no entry load regime, it may not be necessary to bring back the entry load and put additional burden on new investors. However there is certainly a need to redesign the manner in which the distribution community is remunerated.
In tough times, used looks better
As the economy navigates a slowdown, consumers are moving away from the fancied car market and in the five-month period between April and August of the current financial year, it was only in August that the passenger vehicle segment witnessed a marginal rise in sales when compared with the same period last year.
In the first four months of this financial year, the sales witnessed a slowdown. For the five month period the sales of passenger vehicles stood at 9,82,847 units down by 5.5 per cent over that registered in the same period last year. The slowdown in the economy, rising car prices, high interest rates and rising high fuel cost are all having an impact on the buyers sentiment. The result has been a change in the consumption pattern of individuals when it comes to buying cars. If the new car sales are on a decline, the used car sales are on a rise as consumers feel that the saving on buying a used car would save them enough to fund their fuel consumption for atleast three years. Industry insiders say that in the five-month period when the aggregate sales have dipped by 5.5 per cent, the used car sales have gone up between 22 and 25 per cent. There has also been a change in the consumer's behaviour as insiders say that they are going for cheaper options in the same segments and not going for the ones that they may have planned to buy earlier. Financial planners say that car buyers in these times can either defer their plan and go high on savings or if they have decided to buy one then they should raise their own contribution and go for as less loan as possible. While consumers are not rushing to the dealer, the banks financing passenger vehicles too are facing a drag in the demand for auto loans. Ashok Khanna, business head, vehicle loans at HDFC Bank, which is the market leader with around a quarter of the market share, told The Indian Express that there is a definite slowdown in demand and he expects his growth to come down to around 5 per cent as against its average growth in the recent past of about 15 per cent. Excerpts: How do you see the stress on your auto loan business? Our growth is linked to the industry and while the growth of industry has declined we cannot continue to do well. The overall growth has suffered with decline in sales. We are working on strategies to maintain growth. While we were growing at over 15 per cent earlier, we now hope to grow by 4-5 per cent that too after putting in three times the effort. This is also leading a rise in our costs. How long do you think would the current environment prevail? Growth is going to be tough and pain will continue for at least one year and may extend to two years. If 2008 was bad, this is worse on all aspects. The current situation is more a self created one and even as the United States is coming out of recession, we are in problem. How do you see the rupee depreciation impacting the industry? With the value of rupee depreciating, the imports have become costlier for the manufacturers making their input costs higher. I see the prices of cars going up by atleast 10 per cent over the next one year. How have you seen the behaviour of buyers changing? With significant rise in prices of various cars, sales are getting affected and buyers are shifting towards cheaper options within the segment and that is happening in various cases. What are the reasons for this decline? While manufacturers put the blame on financiers, I don't buy that argument as 10.5-11 per cent rate of interest is not a very high rate that can deter the buyer from buying the product. While the broader slowdown and decline in sentiments has impacted auto sales, I think the manufacturers themselves too are responsible for the same to some extent as they have raised their prices significantly over the last few years. Every year in anticipation of the Budget, they raise the prices and every time there is dip in sales, they would raise the prices and the prices stand to high levels as of now. What measures can help revive the industry? Auto industry is the barometer of the economy and an overall revival is required. The government's increase in spending will be important. While the customer is bearing all the brunt — higher interest rates, higher cost of cars, higher fuel prices and even higher taxes and registration charges — he needs to be brought into the market.
In the first four months of this financial year, the sales witnessed a slowdown. For the five month period the sales of passenger vehicles stood at 9,82,847 units down by 5.5 per cent over that registered in the same period last year. The slowdown in the economy, rising car prices, high interest rates and rising high fuel cost are all having an impact on the buyers sentiment. The result has been a change in the consumption pattern of individuals when it comes to buying cars. If the new car sales are on a decline, the used car sales are on a rise as consumers feel that the saving on buying a used car would save them enough to fund their fuel consumption for atleast three years. Industry insiders say that in the five-month period when the aggregate sales have dipped by 5.5 per cent, the used car sales have gone up between 22 and 25 per cent. There has also been a change in the consumer's behaviour as insiders say that they are going for cheaper options in the same segments and not going for the ones that they may have planned to buy earlier. Financial planners say that car buyers in these times can either defer their plan and go high on savings or if they have decided to buy one then they should raise their own contribution and go for as less loan as possible. While consumers are not rushing to the dealer, the banks financing passenger vehicles too are facing a drag in the demand for auto loans. Ashok Khanna, business head, vehicle loans at HDFC Bank, which is the market leader with around a quarter of the market share, told The Indian Express that there is a definite slowdown in demand and he expects his growth to come down to around 5 per cent as against its average growth in the recent past of about 15 per cent. Excerpts: How do you see the stress on your auto loan business? Our growth is linked to the industry and while the growth of industry has declined we cannot continue to do well. The overall growth has suffered with decline in sales. We are working on strategies to maintain growth. While we were growing at over 15 per cent earlier, we now hope to grow by 4-5 per cent that too after putting in three times the effort. This is also leading a rise in our costs. How long do you think would the current environment prevail? Growth is going to be tough and pain will continue for at least one year and may extend to two years. If 2008 was bad, this is worse on all aspects. The current situation is more a self created one and even as the United States is coming out of recession, we are in problem. How do you see the rupee depreciation impacting the industry? With the value of rupee depreciating, the imports have become costlier for the manufacturers making their input costs higher. I see the prices of cars going up by atleast 10 per cent over the next one year. How have you seen the behaviour of buyers changing? With significant rise in prices of various cars, sales are getting affected and buyers are shifting towards cheaper options within the segment and that is happening in various cases. What are the reasons for this decline? While manufacturers put the blame on financiers, I don't buy that argument as 10.5-11 per cent rate of interest is not a very high rate that can deter the buyer from buying the product. While the broader slowdown and decline in sentiments has impacted auto sales, I think the manufacturers themselves too are responsible for the same to some extent as they have raised their prices significantly over the last few years. Every year in anticipation of the Budget, they raise the prices and every time there is dip in sales, they would raise the prices and the prices stand to high levels as of now. What measures can help revive the industry? Auto industry is the barometer of the economy and an overall revival is required. The government's increase in spending will be important. While the customer is bearing all the brunt — higher interest rates, higher cost of cars, higher fuel prices and even higher taxes and registration charges — he needs to be brought into the market.
Stocks that crashed in Lehman aftermath are now market favourites
Five years, almost to the day, after Lehman Brothers filed for bankruptcy, a majority of the 10 Sensex stocks that were hit the worst in the aftermath of the financial crisis in the US have bounced back sharply and are now trading at significant premiums.
On September 15, 2008, as the news of Lehman fall came, the BSE Sensex fell by 3.4 per cent and the same day the Dow Jones Industrial Average in the US fell by 4.4 per cent.As the fallout of the crisis panned out over the two days on September 15 and 16, 2008, when the enormity of the crisis slowly dawned on the Indian bourses, at least 10 Sensex companies fell by 5 per cent or more.
Metals and mining majors — Sesa Goa and Jindal Steel — that fell by 12.4 and 11.1 per cent, respectively, topped the list.
ICICI Bank, which had its American Depositary Receipts (ADRs) listed in the US, saw its shares fall 9.5 per cent, while TCS and Tata Steel, which depend on the developed economies for much of their revenues, too fell sharply by 7.2 and 6.9 per cent, respectively.
However, over the last five years, much of that has reversed and the Sensex itself is up by 46 per cent during that period and is trading at significantly higher levels.
The fact that the Sensex is currently trading at a price to earnings (PE) multiple of 17.2, which is lower than the PE of 18.2 that it was trading on September 16, 2008. This signifies that the market is not giving much premium as the outlook for earnings remains weak at this point in time.
A number of companies have generated extraordinary returns for their investors. If TCS is up by 407 per cent over the last five years, Dr Reddy's Labs has generated a return of 314 per cent in the same period. Wipro and Infosys have risen by 115 and 91 per cent respectively. Tata Motors has been another major gainer over the last five years. While its shares fell by 3.3 per cent in the two day period of Lehman fall, its shares are up by 335 per cent since then.
But this does not hold true for several companies especially those in the metals and mining industry and in the infrastructure sectors.
Tata Steel and Hindalco have not been able to come out of the red yet and others like Jindal Steel and Larsen & Toubro are almost flat.
The trend clearly reflects the fact that while they all fell under the global pressures, they have performed since then following the economic and their corporate fundamentals.
Outward remittances fall on account of dearer dollar
Outward remittances fall on account of dearer dollar
As the rupee depreciated sharply to breach 60 against the dollar in June, Indians were quick to limit their discretionary dollar expenditure.
According to the data with the Reserve Bank of India, there was over 70 per cent decline year-on-year in the dollars spent for foreign travel by resident Indians in the month of June, and around 40 per cent drop in remittances abroad for maintenance of close relatives. In June the forex spend for travel by resident Indians fell to $1.1 million in June 2013, from $3.8 million in June 2012 , which was also the lowest in 14 months. The average for the first five months for calendar 2013 stood at $3.9 million. Remittances under the head — maintenance of close relatives — saw a year-on-year decline of 38 per cent to hit a 28-month low of $9.3 million in June 2013. The average for the first five months of the calendar 2013 stood at $23.7 million and the June figure is 60 per cent lower than the calendar year average. “As rupee fell sharply in the months of May and June some cancelled their trips, some reduced the number of days of their vacation and there were many who took a cut on their miscellaneous expenses and carried fewer dollars than they otherwise would,” said Subhash Goyal, president, Indian Association of Tour Operators. Tour operators say that while bookings for foreign travel that were done earlier and paid for, did not see much change, those at the negotiation stage did not materialise as customers opted for domestic destinations. The rupee depreciated sharply in the months of May and June. While it depreciated by over 7 per cent in June alone, the fall in its value between May and June aggregated to around 13 per cent making travel and other dollar expenses that much more expensive. The total outward remittance in the month fell by 33 per cent to $92.1 million in June 2013 from $137.3 million in June 2012. Within that, the ‘others’ component — another remittance head — witnessed a sharp dip of 50 per cent to $29.4 million in June 2013 from $58.7 million in June 2012 . The year-on-year dip in remittances for education was 31 per cent. The only item which saw a rise in the outward remittances in the month of June over the previous year was for the purchase of immovable property which rose by 168 per cent to $8.6 million from from $3.2 million.
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