Investment Hub

Real Estate Mutual Fund

2008-05-01T22:44:00.000-07:00

Own a piece of CP for Rs 5,000
Sandeep Singh
Posted online: Sunday, December 30,

With the issue of Sebi’s draft guidelines, REITs will now debut in a few months and give small investors a role in India’s realty growth story.
The Securities and Exchange Board of India’s (Sebi) draft rules on real estate investment trusts, popularly known as REITs, are out and investors can now expect REITs to debut in the Indian market in a matter of months. Association of Mutual Funds of India (AMFI) chairman A P Kurien said, “I expect the final guidelines to come by January-end. Fund houses will be able to launch their schemes within four to six weeks thereafter.” This step opens the window for small-ticket investors to participate in the Indian real estate sector’s growth story.
REITs: The concept
REITs are trusts that are allowed to invest directly in real estate properties, mostly commercial. They earn a regular revenue in the form of lease rentals from the buildings they own and pass this income on to their investors.
Internationally, REITs are companies listed on exchanges and investors buy their shares. The Reit owns and manages properties and earns rentals from them, while investors get a share of the rentals in the form of dividends. According to Vineet K Vohra, managing director and chief investment officer of ING Investment Management, which recently launched its global real estate fund, “Globally REITs pay out almost 85-90 per cent of the revenue they generate in the form of dividends. So they are like high dividend-yielding equity stocks.”
Structurally, what is being proposed in India is different from the international model of REITs. Kurien added, “Internationally, shares of REIT companies are held by investors. But we will issue units of mutual funds. MFs will collect funds by issuing units and the funds collected will be invested in the manner prescribed in the offer document.”
Sebi’s proposal
According to Sebi’s guidelines, only registered real estate investment management companies (REIMC) will be allowed to manage the schemes of a real estate investment trust. The trust can be a scheduled commercial bank or its subsidiary trust, a public financial institution, an insurance company or a corporate body.
All schemes launched should have a rating, and there will be an evaluation by an appraising agency. Most of a REIT’s investments will have to be in income-generating real estate, though up to 20 per cent of the NAV of the scheme can be used to acquire incomplete units in a building, which is unoccupied and non-income producing.
To ensure a diversified portfolio, Sebi has proposed that no REIT under any of its schemes will have more than 15 per cent of its corpus invested a single real estate project, or more than 25 per cent invested in the projects of a single real estate group. Also the units of every scheme must be listed within six weeks of the date of closure. Every scheme will have an independent property valuer who will value the real estate. The schemes will have to declare at least 90 per cent of net annual income as dividends. Also, any capital gains on disposal of real estate will form part of the net income for distribution to unit holders.
Issues in Indian REITs
The country’s property sector is still developing and has several weak areas. However, “the Indian real estate market is not totally disorganised and opaque”, pointed out Kurien. “There are fragments that are transparent and follow standards. Fund houses will have to deal with only those properties and developers that are transparent and follow standards.”
So, in future, if developers want to attract funds from REITs, they will have to improve their transparency levels and accounting procedures. Thus, REITs are expected to provide the impetus for greater transparency in the sector.
Another issue before REITs will be that there aren’t too many ready, investment-grade projects around. According to CB Richard Ellis managing director Anshuman Magazine, “There are limited income-generating developments in the residential space. In the commercial space, too, there are very limited options where the complete development is owned by one person.” But in a year or two, he added, there should be sufficient properties available to be bought as FII money is coming in. REITs will allow developers the much-needed exit option for the buildings they develop, he noted.
Benefits and risks
The biggest advantage of REITs is that one now doesn’t need several lakh or crore rupees to invest in real estate. A sum as small as Rs 5,000 or Rs 10,000 will enable an investor to buy a stake in a commercial property, which will then generate a constant stream of revenue for him. Usually, since commercial buildings are rented for a minimum of three years and inflation is factored in at the time of lease renewal, an investment in a REIT provides the investor a steady, inflation-protected return.
However, REITs have some risks as well, the biggest being the risk of a slowdown in the real estate market, and of the property not being fully leased out.
Returns expectation
Since the investor’s income stream will depend on the rental income that the REIT earns, the yield generated in the real estate market will form the basis of his return. Magazine stated, “Currently the commercial yield is between 9 and11 per cent on an average and in case of the residential segment, it is between 4 and 6 per cent.” So the mix of residential and commercial developments that REIT holds will also determine the investor’s yield.
Finally, for investors who have watched the current real estate boom from the sidelines because they lacked the capital to participate in it, this new year brings a chance for them to join the party.
REITs snapshot
• Sebi issues first guideline;final guidelines expected by January-end.
• First REIT fund likely to debut by Feb-March
• Structure different from that of international REITs
• Limited developments available that can be bought up by REITs
• REITs provide small-ticket investors a chance to hold a stake in high-value commercial property
• Yield on commercial real estate currently 9-11%

http://www.indianexpress.com/story/255681._.html

IPO Analysis- Gammon Infrastructure

2008-03-24T23:05:00.000-07:00

NEW ISSUES

Good but expensive

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

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

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

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

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

Interview- V.P Chaturvedi

2008-03-24T23:00:00.000-07:00

BIG TALK:

VED PRAKASH CHATURVEDI, TATA ASSET MANAGEMENT

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

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

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

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

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

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

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

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

How will these four factors impact the markets?

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

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

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

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

IPO Analysis- Titagarh

2008-03-24T22:54:00.000-07:00

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

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

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

Equity Funds

2008-03-24T22:50:00.000-07:00

STAY ON COURSE

Sandeep Singh

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

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

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

Rising Gold- Interview

2008-03-24T22:45:00.000-07:00

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

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

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

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

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

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

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

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

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

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

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

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

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

2008-03-15T04:53:00.000-07:00

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

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

THE BIG BIZ STORY

2008-03-15T04:52:00.000-07:00

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

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

AMC Valuation: Pvt deals acting as benchmarks for AMC valuation

2008-03-15T04:51:00.000-07:00

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

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

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

2008-03-15T04:50:00.000-07:00

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

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

No Entry Load- Mutually beneficial

2008-03-15T04:48:00.000-07:00

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

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

Small Cars: India to have smaller size but bigger ambitions

2008-03-15T04:47:00.000-07:00

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

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

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

2008-03-15T04:46:00.000-07:00

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

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

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

Tata- THE MAN AND HIS DREAM MACHINE

2008-03-15T04:44:00.000-07:00

Sandeep Singh

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

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

2008-03-15T04:42:00.000-07:00

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

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

Retail investors tethered by small brokers

2008-03-15T04:41:00.000-07:00

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

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

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

IPOs lose their sheen in volatile markets

2008-03-15T04:40:00.000-07:00

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

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

RBI feels repo rate cut will push up inflation

2008-03-15T04:39:00.001-07:00

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

3 IPO Stories

2008-03-15T04:37:00.000-07:00

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

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

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

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

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

Emaar- 3 days before bell rings, Emaar withdraws IPO

2008-03-15T04:36:00.001-07:00

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

India ranks high on FII priority list: Fidelity

2008-03-15T04:34:00.000-07:00

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

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

Steel, cement, oil shares celebrate

2008-03-15T04:32:00.001-07:00

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

Steel, cement, oil shares celebrate

2008-03-15T04:32:00.000-07:00

Sebi to reduce gap between opening & listing of issues

2008-03-15T04:31:00.000-07:00

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

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

Loan Waiver Impact on Stocks

2008-03-15T04:29:00.000-07:00

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

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

STRAIGHT TALK- Syed Shahabuddin, SBI Funds management

2008-03-15T04:25:00.000-07:00

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

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

EXPLAINED- Futures & Options

2008-03-15T04:22:00.000-07:00

Answering all your questions on the market... simply

Sandeep Singh
Posted online: Tuesday, January 22, 2008 at 1353 hrs

Whose future, which options? If these are the questions that come to your mind when you hear about one of the culprits that pushed the Sensex down, Sandeep Singh explains what futures and options (F&O) are all about, how they work and how they pushed the market down by over 1,400 points today.

Why is the market falling?
Over the past 12 days, since the market hit a high of 21,200 on January 10, it has been in correction mode. But, there is no one reason for this correction - liquidity absorption by Reliance Power IPO and profit booking by investors, foreign and Indian.
What happened today?
In two words: the unexpected. The market literally bled - the Sensex fell by 7.4 per cent and mid cap and small cap index by 11.4 and 10.3 per cent respectively. The main reason being cited behind this correction was the winding up of the open position in the F&O segment.
What is the F&O segment all about?
Futures are contracts traded on exchanges where an investor can make a contract to buy or sell an underlying asset (stocks in this case) at a specified price on a specified date (the delivery date) by just investing a margin amount of 5-15 per cent of the contract value.
In futures, the buyer and seller are obliged to meet the contract. If the investor wants to exit the commitment before the settlement date, he will have to sell his long position (contract to buy on a future date) or buy back the short position (sell position without holding the stock) in order to close the futures position.
In options, the investor has two choices, the call option (the right to buy) and put option (the right to sell). The buyer of the option pays a premium to the seller of the option. Here too, the buyer and the seller of the contract decide on a price and date for delivery. The buyer has no obligation to meet the commitment and he foregoes the premium in that case.
For example, if a buyer enters a long call option to purchase 100 stocks of a company at Rs 100 for which he pays a premium of Rs 5 per share, he is in the money if the share price on the desired date is above Rs 105 as that will recover his cost and he will make profits. If the price falls below Rs 100, he will not meet the commitment and will lose Rs 5 that has been paid as premium.
So, what happened today?
In a bull market when the euphoria is running strong, investors generally go for long positions on call options in the expectation that prices will rise higher and they will benefit by exercising the right at a later date as they will gain from the rising market, but when the market falls they have to forego the premium paid. In case of futures, investors are required to maintain margins at marked to market.
For example, if an investor has taken a buy position for a stock at Rs 100 for 1,000 shares, his commitment is for Rs 100,000. At 10 per cent margin requirement, the investor can enter the position with Rs 10,000. If the share price goes down by Rs 5, the investor is required to fill the margin by Rs 5,000. He can other wise book his loss and get out of the market.
What happened today was that when the market started to correct itself, brokers started giving margin calls. This led investors to panic and start booking losses. This eventually created a cascade effect and the market went on a steep correction. Sentiments don’t take time to change and the balance shifted in no time.
What should the investors do?
Retail investors should avoid taking derivatives positions and instead take long-term position in the market. It is time for cherry pickings for investors as the markets have fallen significantly. Investors would be happy as there are many stocks that have come in the striking zone.

Interview- Kotak Investment banking

2008-03-15T04:13:00.000-07:00

'In bull market investors bought IPOs not cos, now they should buy cos, not IPOs'

Sandeep Singh
Posted online: Saturday, February 09, 2008 at 2351 hrs

Were IPOs overpriced? Were investment bankers and promoters too ‘greedy’? Lead manager to the two IPOs (Emaar MGF and Wockhardt Hospitals) that have been withdrawn in the last two days, S Ramesh, chief operating officer, Kotak Investment Bank spoke to Sandeep Singh about aggressive valuation in the primary market and what lies ahead.
Is the withdrawal of Emaar and Wockhardt a trend that's here to stay for now?
I don't see all IPOs not getting subscribed. Better companies, that are priced well, will do well.
Why have they not been able to get subscriptions?
Primary market to some extent is dependent on the secondary market. They are also dependent on the sentiments of investors. Both of which are currently volatile. To that extent these factors will impact the response to primary market. Secondly, primary markets have 'off seasons' and 'on seasons' and probably what we are witnessing today is more on the off season. We have seen in the past that issues that have come in such periods have not got the best response.
Why is there a bad response from retail investors?
Retail and HNI have clearly got impacted by the secondary market in the past couple of weeks and so they are significantly and substantially abstaining from investing in the primary market.
What about and qualified institutional buyers (QIB) who take more rational calls?
QIBs have not been staying out but they have started becoming choosey. They are clearly making a rational call on valuations. If they were taking more aggressive calls on valuations a month back, they definitely have become more choosey. And all the factors that they scrutinise be it valuations, size of issue and the liquidity, the greatest scrutiny is the market response.
Merchant bankers have been asking for higher valuations in the bull market, and now when the tide has turned they are saying that they will get better priced. Why not have rational view on fair pricing at all times?
Now there will be greater scrutiny. There is going to be greater accountability on the part of issuer and market participant. In a bull market, pricing tends to be a little aggressive. It is not that IPOs have been priced aggressively and people did not get returns. It is a typical bull market syndrome when everything is looked at as good and negatives are forgotten. The market tends to accept the valuation. In a bear market there is greater scrutiny. This is the syndrome that goes in any part of the world. I see more rationality coming in the pricing of the IPOs now.
How do you see the market behaviour and the impact on coming issues?
When the market is bullish all capital market participants -- issuers, investors, merchant bankers -- do tend to get a little aggressive on pricing and as the market turns, everyone raises concern on valuations. What we are witnessing today is no different. Till January 11 or 12, a lot of issues were bending towards the more aggressive side of pricing and even investors picked them up.
What should investors do?
When the market was doing well investors were choosing IPOs over companies. Now, investors should choose companies and not IPOs. For the primary market in the near term, investors need to be cautious. Quality issues with good track records should be looked at.

Interview- Rajiv Anand

2007-11-25T22:05:00.000-08:00

Buying into such upheavals pays off in the medium term
Sandeep Singh Posted online: Monday , October 22, 2007

The fund managers of Standard Chartered Premier Equity must be doing something right, as the scheme has delivered the second-highest return among all diversified equity funds over the past year. It’s why we caught up with Rajiv Anand, head of investments, Standard Chartered Asset Management Company, and asked him to make sense of what was going on in the market and to look ahead. Our correspondent put the questions to Anand, and this is what he said.

What’s your take on Sebi’s proposed change in regulations for participatory notes (PNs)?
We have been seeing unprecedented foreign capital inflows, and these flows are not being absorbed into the economy fast enough. As a result, the rupee has been appreciating. The pace of appreciation is being controlled by the Reserve Bank of India through regular intervention in the foreign exchange market. This action, however, creates huge liquidity in the banking system, which, in turn, needs to be sterilised by the RBI through various measures like issuance of MSS bonds, increase in CRR and the daily repo window.The current measure is just one more instrument being used to manage or control capital flows, especially those that are speculative, rather than of a long-term nature. Earlier, we have also seen curbs on inflows through the external commercial borrowings route. The impact of that on inflows has been minimal.Flows into India will remain strong as long as global investors seek out compelling long-term growth stories. The question is how can we increase the absorption capacity of the Indian economy. This is very critical as we are in a situation where the huge inflows are having a negative impact on certain parts of the economy, resulting from an appreciating rupee. On the other hand, we also need foreign inflows to fund growth. Managing these two aspects is a key challenge going forward.

As fund managers, do such upheavals change the way you manage your equity funds?
We believe that corporate earnings will continue to remain strong and the macro fundamentals remain robust. History has shown that buying into such upheavals pays off in the medium term.
Even at 19,000, the Sensex is discounting its expected March 2008 earnings at about 20 times, which is not bad. However, deeper, there are stocks, especially those who have driven this rally, whose valuations have doubled in a short period of time. For instance, ABB is quoting at a PE of 70-odd. Aren’t many stocks overvalued?As fund managers, we don’t buy the market. We buy into companies with strong growth potential. Therefore, one needs to look at PEs not on a standalone basis, but in conjunction with the growth potential of the company. Having said that, clearly, there are pockets of overvaluation in the market, where earnings expectations look rather optimistic.Current valuations don’t factor in the execution risk over the next few years. Therefore, one needs to closely monitor the execution of expansion plans on a company to company basis. Only those companies that don’t disappoint on this front will be rewarded by investors.

What’s your advice to small investors now?
What are the checks and balances they should employ? And what are the excesses they should guard against?Investors need to manage their return expectations to more realistic levels. They also need to have a long-term perspective to equity investing, as short-term volatility can hurt their financial health. Lastly, avoid leverage positions unless you are a seasoned investor, as the impact of short-term volatility gets exaggerated for investors who have taken leveraged positions.

The first batch of Q2 results are out. On a year-on-year basis, revenues of 150 companies have grown 24 per cent, net profit 40 per cent, which is pretty good. Is that an ‘early bird’ surge or is it representative of the larger set also?
We believe that corporate India is in fine fettle. Barring a few sectors like pharma, auto and auto ancillaries and, perhaps, cement, it should, by and large, meet the expectations of the market. And this strong earnings growth should sustain.

Which are the sectors and stories you are bullish on?
And which are the ones losing steam?We believe the Indian economy will be driven by two key growth engines: infrastructure spending and consumption driven by changing demographics. Therefore, we are bullish on stocks that are within these two themes or sectors that cater to these two themes. These would include the entire power landscape, construction, capital goods, financial services and telecom, to name a few.By the same token, we are more cautious on themes whose success is driven by global considerations, given the headwinds from slowing US growth and an appreciating rupee. Basically, all export-oriented sectors like IT, textiles and auto ancillaries.

The rupee just keeps appreciating. Will the restrictions on PNs reduce the pace of that rise? What’s your outlook on IT stocks now?
The restrictions may reduce inflows in the short term, but given the strength of global capital flows and visibility of growth of the Indian economy, it is inevitable that flows will reassert themselves in the medium term. IT is currently facing headwinds from an appreciating rupee and wage inflation. One will need to see how these businesses cope in such a situation, and manage growth and margins.

http://www.expressmoney.in/news/Buying-into-such-upheavals--pays-off-in-the-medium-term/92339.html

Overseas Investment $ 2 Lakh

2007-10-22T00:44:00.000-07:00

BUY GOOGLE ON NASDAQ...

Sandeep Singh

Posted online: Monday , October 15, 2007

Earlier this year, when Tata Steel was looking to acquire Corus, many Indian investors were more than just bystanders to a defining moment in Indian business. Several among them were buying and selling shares of not just Tata Steel, but also shares of Corus listed on the London Stock Exchange and the New York Stock Exchange (NYSE), something they couldn’t have done barely a couple of months back.
That new-found range in choice came from the progressive easing of rules relating to overseas investment. First, the Reserve Bank of India increased the limit Indians could remit abroad, from $25,000 to $50,000 to $1,00,000 and, last month, to $2,00,000. Then, it eased norms for where all Indians could invest. Financial services providers have been working on putting the cross-border transaction linkages, and it is gradually coming together, more in some asset classes than in others.
StocksLast week, ICICIdirect, started giving its subscribers the option to transact on the three leading US stock exchanges, namely NYSE, Nasdaq and the American Stock Exchange. Reliance Money has had this option since January, not just on US exchanges, but also on several other stock exchanges through its partner, CMC Capital Markets.
To start, ICICIdirect subscribers, for instance, have to fill up a registration form and a tax exemption form (so that your capital gains are taxed only in India and not is the US too), and pay a one-time fee of Rs 999. Within three days, ICICIdirect will open an account for you with its foreign partner, Penson Financial Services, on the ICICIdirect platform itself.
In order to buy shares, you need to first transfer dollars into your overseas account with Penson. This transfer, which can be done through ICICI or any other bank, normally takes one to three days, with the bank levying a nominal charge for converting your rupees into dollars and remitting it. For every transaction, ICICIdirect will charge a brokerage of 0.75 per cent of the transaction value or $9, whichever is higher. Reliance Money, as in the domestic market, is dirt-cheap. Says Sudip Bandyopadhyay, director and chief executive officer, Reliance Money “Through CMC Capital Markets, we are charging just 0.05 per cent of transaction value.”
Besides a transaction platform, Indian brokerages also give investors financial information on companies. This is, however, purely of information nature, not advisory. Says Anil Kaul, head-retail, ICICIdirect: “In developed markets, there are rules on who can give advice and who can’t.”
The RBI’s rules let you invest in financial securities provided you take delivery in them. So, for instance, in shares, ICICIdirect lets you buy and sell stocks, American Depository Shares (ADS), index options for hedging, and exchange-traded funds (ETFs). Your universe of stocks has suddenly expanded manifold. Indicatively, there are 3,612 listed securities on the NYSE, several of them from companies whose products and services you might have used and admired.
The US dominates with 3,128 companies. Other geographies are also represented, with companies from other geographies having ADS listings. From India, there are 11 companies who have ADS listed on the NYSE, including one that is not listed in India, namely BPO major WNS Holdings. Says Kaul: “This product will grow as people will look to diversify their equity exposure. But it will also require educating investors.”
Besides product knowledge, two such issues are taxation and currency movement. Overseas share and mutual fund transactions are taxed at a higher rate than those done in India. Long-term capital gains tax is 20 per cent with indexation benefits, short-term capital gains tax at the marginal rate. The other variable is currency. If the rupee appreciates against the dollar, you get fewer rupees when you bring back your dollar.
Mutual FundsIn mutual funds, educating investors is the second step. At the moment, mutual funds and distributors are busy educating themselves on how they can sell the idea of foreign mutual funds to Indian investors. On a parallel track, mutual funds registered in India with Sebi have been launching overseas funds, but these are investments made in rupees, and are hence outside the $200,000 limit. Also, the range in this is rather limited and the themes very broad, centred primarily around geographies.
What will form part of the $2,00,000 limit are funds floated abroad. In the US alone, there are about 8,000 schemes, which can either be inviting or intimidating. Says Amar Pandit, financial planner, “If you are not savvy, choosing a scheme can be a tough task.”Even if you are able to choose a scheme, investing in it is an arduous process. Overseas mutual funds — for instance, Vanguard — can’t come to India and offer their overseas schemes because they need to be registered with Sebi. A chief executive officer of a fund house told us that a proposal to this effect has been lying with Sebi for two-and-a-half years.
Mutual funds in India and distributors can go ahead, but they are still working things out. So, for instance, Fidelity Mutual Fund in India can offer schemes of its US parent. Or, a distributor like Bajaj Capital can tie up with a foreign distributor. Says Rajiv Deep Bajaj, managing director, Bajaj Capital: “We are still studying the modalities.” Adds Kaul: “Regulations allow it. We need to see if there is enough demand.” For now, the only way you can invest in foreign funds is if you do the spadework yourself. That means contacting a fund house abroad, opening an account with it and remitting money to it to buy units.
Real estateReal estate too is a work-in-progress. Several European and Southeast Asian countries allow non-residents to buy property, which doesn’t come cheap. Even if you have the purchasing power, your choices are limited. There are some real estate advisory firms who facilitate land purchase abroad, but for earmarked parcels only.
One such firm is UK Land Investment, which is facilitating the purchase of ex-agricultural land in New Addington, Bromley, Kent. Says Subash Bhat, director (legal and commercial), UK Land Investment India: “You have to comply with KYC norms. If your purchase price exceeds the per year remittance limit of $2,00,000, you can even make deferred payments.”
On your part, there are many rules to conform to. The payment is remitted from your bank account in India to a bank account in UK. At the time of transfer, the bank will ask you to fill up FEMA Form A2, provide your PAN card, and give a certificate from a CA verifying the source of your funds. You might even have to make a personal visit to get the land registered and complete the paperwork.
What’s needed is one-stop shops, who have a range of properties to offer and the wherewithal to carry out the transaction for you. Sandalwood Residential Property Consultants, a division of Jones Lang Lasalle Meghraj, is eyeing a mid-2008 start. Says Raminder Grover, chief executive officer, Sandalwood: “We have been getting inquiries for Malaysia, Dubai and the UK. We will provide residential property consultancy across the globe. We will help identify properties and facilitate processes, including legalities.”
CommoditiesOne of the conditions laid down by the RBI for overseas investing is that trades have to lead to delivery, which makes commodity investing unfeasible. In time, as markets open up further and more players enter the fray, even these norms will be relaxed and access will increase. The day is not far when you won’t just be able to buy and sell Corus shares, but also take a position on steel prices.
STOCK MARKETWhat now?On August 21, when the sub-prime tremors intensified, the BSE Sensex fell to 13,989, and experts forecast a period of lull. Fifty days on, 18,000 has been scaled, and new all-time highs touched. On its Friday closing of 18,419, the Sensex is up 32 per cent since its August low, as an abundance of liquidity has followed favourable currency movement and strong fundamentals into India.The burning question: is irrational exuberance setting in or is this the India story at work? Even at 18,500, the Sensex PE, based on projected 2007-08 earnings, works out to about 22. That’s not ridiculous, but fair value.The movement is more in the frontline companies. In the BSE-500, of the 85 companies that have a market cap of above Rs 10,000 crore, 53 touched their highs since October 1. By contrast, of the 92 companies with a market cap of less than Rs 1,000 crore, only seven hit their highs during this period. Metals, real estate, oil and gas, and capital goods gained big, pharma and IT crawled. While the growth can’t be denied, what might be of concern is the speed of this rise. But if you are in it for long haul, fits and starts shouldn’t bother you.
http://www.expressmoney.in/news/BUY-GOOGLE-ON-NASDAQ.../92306.html

Interviews on Sharp market rise

2007-10-22T00:41:00.000-07:00

HAS THE MARKET LOST ITS MIND?

Sandeep Singh
Posted online: Monday , October 15, 2007 at 1332 IST

TUSHAR PRADHAN, Chief investment officer, AIG Mutual Fund
‘No, this rise is backed by growth’It’s neither a bubble nor an overstatement. The rise is backed by growth. That reading is backed by numbers. By conservative estimates, I expect earnings of Sensex companies to grow 17 per cent in 2007-08, 15 per cent in 2008-09. At 18,500 levels, the Sensex is discounting its 2007-08 earnings 22.3 times, 2008-09 earnings 19.2 times. Those valuations might look marginally only on the higher side, but consider this: for 2005-06, we had projected Sensex companies to post earnings growth of 13 per cent; they managed 31 per cent. The market knows all.However, we are still in the boom-bust mindset. In that state, one starts to ignore the GDP growth forecast of 8.5-9 per cent a year for the next five years. In fact, 9 per cent GDP growth suggests the earnings potential of this market has been understated. The market is not an arbiter of reality, but of perception. Today, utility companies are growth companies, as they are helping build infrastructure. However, I do feel the excitement on them is a little more than they merit. What I also don’t like about this market is that people are talking too much in general terms. More than the index, the focus should be on companies, as there are many businesses that have not experienced the current surge.There are risks. If the political situation gets volatile, we might see market reducing its intensity, but only for a while. There is a lot of FII money coming in. Even if interest rates are reduced in India, hedge funds might move out, but not FIIs. Yes, mutual funds have been net sellers, but that’s primarily to meet redemptions.I continue to believe in Indian equities as a long-term investment.Investors need to look at long-term opportunities in equities to build wealth, which is something that doesn’t change with market movement. Invest regularly, for five, 10, 15 years, which is best done through a mutual fund.

AMITABH CHAKRABORTY, President, equities, Religare
‘No, it’s being driven by liquidity, fundamentals’The two major reasons for the market rally are fundamentals and liquidity. FIIs (foreign institutional investors) are pumping in big money into India and China — both markets that held their own even as other markets reeled under the impact of the sub-prime contagion. The appreciation in the rupee against the dollar has aided this trend, because FIIs are also making an additional return on the currency exchange on exit.Drilling down, the second-quarter results have started trickling in.For 2007-08, we expect revenue growth of the Sensex companies to be around 21 per cent, operating profit growth at 17 per cent and net profit growth at 19 per cent. We believe the Sensex EPS for 2008-09 will be Rs 1,010. That gives a forward PE of about 18, which suggests there is scope for further growth. Among sectors, we are bullish on construction, telecom and cement.Elsewhere, DLF will replace Dr Reddy’s in the Sensex from November 19, which should see increased investor participation in the real estate scrip. Some strong IPOs have also hit the market and done well, the most noticeable being PowerGrid. So, there are many factors behind the rise. There are risks, but even if those eventualities materialise — the political situation and high oil prices — the damage will be limited and cause only a slight stagnation in the market.Still, a long-term approach to investing is a must. Small investors should not indulge in day trading, as intra-day volatility in the Sensex is expected to average 600 points. Invest only in stocks you know and companies you understand, not because someone has asked you to.Invest for a five- to 10-year period, and don’t get flustered by periodic market volatility.

PARAG PARIKH, Chairman, Parag Parikh Financial Advisory Services
‘Yes, prices are running way ahead of the story’The reasons for the current rise in the market go beyond fundamentals. Bull runs are not led by fundamentals; in fact, fundamentals follow the run. Right now, the market is being pulled primarily by liquidity and sentiment. There is a lot of irrationality in the market. People are willing to pay sky-high valuations, and some of this thinking can be attributed to inexperience. There are no retail investors in this market, there are only retail punters. For now, every one believes the market can only go up and can’t come down. The market is currently filled with people who have never seen a bear market, and so they don’t know how a market can come crashing down.In such a scenario, where everyone believes the market can’t be derailed, even a small change or a touch of negativity or a random event can pull the trigger. It could be, for instance, political instability, recession in the US; economic growth in Europe is also slowing down. This market hasn’t discounted those situations. In the past few days, we saw the Left threatening to withdraw support to the government, but the market ignored it. India is a great economic story, but this market might be getting ahead, way too ahead, of that story.It’s also a changing market. This market has little for ‘value’ investors, who typically buy when valuations are down. There are very few stocks trading at a discount to their intrinsic value. There are stocks available at fair valuations. Invest in them, but only if you are here to stay. If you are simply looking to ride the wave, be warned, the stakes are high — the market can punish you bad.
http://www.expressmoney.in/news/HAS-THE-MARKET-LOST-ITS-MIND/92303.html

Interview- Rajat Jain

2007-10-22T00:39:00.000-07:00

‘Don’t invest more than 10-15% abroad’

Sandeep Singh

Posted online: Monday , October 08, 2007

International funds are the flavour of the season, with several funds targeting specific geographies — emerging markets, Asia, India and China, and so on — hitting, or waiting to hit, the market. While the deluge is recent, Principal Mutual Fund was one of the first to launch an overseas fund, PNB Global Opportunities, in March 2004. Chief investment officer Rajat Jain expects a lot of activity in this overseas investing space. In an interview to our correspondent, Jain spoke about a range of issues related to overseas investing.
Principal Global Opportunities Fund, was among the first overseas funds to be launched. How is it doing and do you have any plans to launch more international funds?The scheme is doing well. When we launched it, it was a Rs 15 crore fund. Today, its corpus is Rs 610 crore. Since only the amount invested is considered to calculate the overseas limit of $300 million for a fund house, and the scheme has grown a lot on performance, it can still take on more investments. This fund invests fully in international markets. As of now, we don’t have any plans to launch a fund where 65 per cent is invested in India and the rest overseas.
Recently, the overseas investment limit for a fund house was increased from $200 million to $300 million. Are you happy with such gradual hikes? Or, would you like to see a higher limit or be completely done away with?We welcome the recent hike in limits for offshore investment by Indian mutual Funds. The industry is yet to utilise the current investment limits for such investments. However, my sense is that the limits will get up used faster now as investors see the benefits of diversification and investing in offshore investments using mutual funds.
What is the breadth of overseas products investors can expect from your fund house?Globally, Principal manages funds in different categories like US equities, global equity, emerging markets equity, fixed income and real estate, among others. We will look to launch products in India that give value to investors here and which are likely to find good demand. However, there is currently no product on the anvil in this space.
How much of an investor’s portfolio should go into overseas funds?It can’t be a very large part of your equity allocation. Although emerging markets are growing well, I would suggest capping overseas exposure at 10-15 per cent. Also, only existing investors should invest in overseas funds. New investors should stick to domestic funds.
But aren’t domestic share valuations stretched?I look at the market in two parts. The first is performance of the Indian economy and government spending. The second is the flow of funds. As far as the economy goes, there is a gradual slowdown. Still, GDP growth of 8.5 per cent is expected, and there’s not much concern on that front. Corporate profit growth is expected to remain at about 15 per cent a year over the next five years.India moves in tandem with global markets now. In the long run, though, the differentiation in performance comes in. India has a strong capital expenditure cycle and strong visibility. Infrastructure sectors will continue to do well.At the same time, there will be meaningful volatility, which will create opportunities.
Which infrastructure sectors in particular?The highest growth is expected in power, roads and telecom. Regulations in these sectors have matured and are stable. Earlier, regulations were evolving, but now we have workable model in these sectors, and things are working well. Demand is not an issue. Also, funding is, by and large, coming through. I see a lot of value creation in these three sectors.
Even the power sector can be divided further. Which segment will see the maximum growth?Suppliers to companies in the power industry. A lot of investment is needed in transmission and distribution. So, companies who go down the chain have good potential to grow.
What are the risks that this may not pan out as planned?It can only be regulatory changes. Regulations need to be stable. If any stringent regulations come in, people putting money will get wary.
Still, one has to pick the right companies. What parameters do you focus on while picking stocks?We give the maximum importance to management, as they are the trustees to our investment.So, we look for good, competent managements. Then, comes the business. Here, we try to see if the company has any unique edge — for example, the cheapest product, efficiency of scale for a commodity business. We try to see if there is a fundamental change happening in the company that could make it better. Is the company getting into new areas, which will impact it positively and help it better the market? Finally, we look at valuations.
What’s your take on the proposal to waive entry loads on investments made directly and through the Internet?It will be good for investors, but the advisory role of distributors will be missed.
But not all advice offered by distributors is of the highest quality. And neither do all investors seek advice.The quality of advice is gradually changing. Increasingly, new distributors are coming in, and giving good long-term advice. I meet distributors in my capacity as a fund manager or chief investment officer, and I can see the quality of questions they ask. Their level of knowledge is good. They ask questions on behalf of investors.
Now, there are reports that Sebi might ask mutual funds to not just waive loads for certain types of investments, but also ask funds to charge less as expenses?We feel the fee structure for mutual funds in India is competitive and in line with that in developed markets. Besides, the fund industry has managed to spread the investment culture in the country, and the cost of reaching out to the customer is high on account of infrastructural issues and technology costs.
http://www.expressmoney.in/news/Dont-invest-more-than-10-15-abroad/92271.html

GOLD Investment

2007-10-22T00:38:00.000-07:00

SHINING THROUGH

Sandeep Singh

Posted online: Monday , October 08, 2007 at 1521 IST

In the universe of gold investing, two significant things happened last month. One, gold prices, the world over, hit levels last seen in 1980. Two, back home, DSP Merrill Lynch World Gold Fund, a recently-launched mutual fund that invests in shares of gold mining companies overseas, opened for repurchase. Its return between August 23, when its new fund offer (NFO) closed, and October 3: a stunning 28.8 per cent.
Investment outlookThe scheme has, of course, benefited from the upward trend in gold. Since September 3, the per ounce price of gold has increased by 10.4 per cent, from $672 to $742. The trigger for this latest surge came on September 18, when the US Federal Reserve cut interest rates. The dollar took another tumble, as lower interest rates made it less profitable to hold the US currency.
Investors started trimming their dollar assets and started stocking up on other currencies and assets, including gold, which is widely seen as an alternative for dollar. Says Abheek Barua, chief economist, HDFC Bank: “With the dollar depreciating, gold seems to be emerging as the asset of choice, and is expected to remain fairly strong.”
This is not a new story. The dollar has been in decline since mid-2001, as the financial excesses of the US started catching up with it. The US is nursing a massive current account deficit, due to which the dollar’s stock is falling. Central banks and institutions that once stocked up on dollars are now dumping it in favour of gold (See graphic: The reasons). Says Anup Maheshwari, head of equities and corporate strategy, DSP Merrill Lynch Fund Managers: “Generally, bull runs in commodities last 13-15 years. The current run has been on for seven years now. It hit a peak in 1980, of $800 per ounce. Adjusted for inflation, the equivalent value would be $1,600, which I expect in three years.”
Not everyone shares Maheshwari’s bullishness. Madan Sabnavis, chief economist, National Commodity and Derivatives Exchange Limited, is guarded. “The dollar can’t just keep on depreciating against the Euro, as it hurts European exporters. Europe cutting rates will lend some stability to the dollar.” Bhargava Vaidya, gold analyst, is on the other end. “Demand won’t be strong at this price. Moreover, Gold is its biggest enemy, as it never gets destroyed. It can be reused, which acts as a constraint on demand,” he says. Depending on whom you believe, the outlook ranges from bullish to mild. That hasn’t changed.
Investment optionsWhat has changed is the ways in which you can invest in gold. Barely 10 months ago, investing in gold meant buying jewellery, bars and coins, which entailed hassles like assessing it for purity and storing it safely. Since then, we have seen the mutual fund industry offer innovative products to invest in gold. On cost and convenience, they are the best way to invest in gold, much superior than traditional modes, especially if you are investing only a small sum.
Jewellery. The only reason to buy jewellery is if you plan to use it. The traditional form of investment suffers from many shortcomings. You have to be a judge of purity. Not only there’s no standard pricing, you pay the jeweller a premium at the time of purchase and see a small deduction at the time of sale. Then, there are making charges.
Lastly, the tax structure is the least friendly of all gold investing avenues. The threshold for capital gains tax is three years — less than three years is short term, more than three years is long term. By comparison, in financial instruments like gold ETFs, it is one year. On top of that, you have to pay wealth tax on gold held in physical form: 1 per cent of the incremental amount above Rs 15 lakh. So, if you have gold worth Rs 20 lakh, you will have to pay a wealth tax of Rs 5,000 (1 per cent of Rs 5 lakh). By comparison, gold funds are exempt from wealth tax.
Coins and bars. Increasingly, not just jewellers, banks have also started selling gold bars and coins. Coins, for instance, are available in varying sizes of 2 gm, 3 gm, 5 gm, 8 gm and 10 gm. While purity is not as much of an issue as it is with jewellers — banks assure purity — other limitations of jewellery remain. Storage is an issue, as is the punishing tax structure. Also, to ensure purity, banks charge a premium of 5-20 per cent, which is a fairly high cost to pay for an investment.
Gold ETFs. Gold ETFs get around all these limitations. They give you an exposure to gold without the headache of holding it. In February, Benchmark Mutual Fund launched a gold exchange-traded fund (ETF); subsequently, UTI and Kotak also launched gold ETFs.
The fund house holds the gold, and hence deals with the risk of storage and purity, and these cannot be passed on to you. What you hold are units in dematerialised form, as you do in a stock or mutual fund. The fund declares an NAV, based on which you buy and sell. Each ETF unit essentially represents one gram of gold, which you can buy and sell from the secondary market as and when required. Since the market price will be linked to the spot price of gold at all times, you have a near-mirror exposure to the asset.
A gold ETF is the most cost-efficient way of investing in gold. When you buy or sell, all you pay is the transaction cost (brokerage plus demat costs), which is usually 0.6-1 per cent. By comparison, a jeweller charges a mark-up of 5-7 per cent over the spot price, banks charge 10-20 per cent more.
DSP Merrill Lynch World Gold fund. The newest offering is also the most popular in the mutual funds space. Launched in August, DSP Merrill Lynch World Gold Fund has a corpus of Rs 600 crore — double that of the three ETFs combined. This is a feeder fund. It simply routes its corpus to a global Merrill Lynch fund called Merrill Lynch International Investment
Funds-World Gold Fund, which has invested in gold mining companies like Barrick Gold, Impala and Newcrest Mining. At all times, at least 90 per cent of the domestic fund’s corpus will be in its sister overseas fund.
Gold’s return to favour has given a big boost to the fund’s first returns. Says Maheshwari: “Gold equity has remain ignored for quite some time now, and companies have been trading at relatively low valuations. Generally when gold prices move up by X, gold equity moves up by 1.5X, though the reverse is equally true.”
That statement of Maheshwari neatly outlines the high risk, high reward proposition of this fund. An investment in this fund is influenced not just by the outlook on gold, but also by the outlook on the mining industry and company-specific factors. Says Vaidya: “The mining industry is a highly geared industry. Such an investment is only for those people who are willing to take the mining industry risk.” Unless you are prepared to that higher risk, stick to gold ETFs.http://www.expressmoney.in/news/SHINING-THROUGH/92277.html

Bank Deposit

2007-10-22T00:36:00.000-07:00

GOOD TO GO

Sandeep Singh
Posted online: Monday , October 08, 2007 at 1506 IST

For the retired and the elderly looking for a regular income, here’s another worthy investment option: ICICI Regular Income Bonds. The bank is offering four investment options: annual and monthly interest payouts for a tenure of five years and three months, and for 10 years. The standout option is monthly payout for 10 years, on which the bank is offering an interest rate of 9.57 per cent. Illustratively, an investment of Rs 10 lakh will give a monthly interest of Rs 9,570.

Several banks, ICICI included, are offering 10 per cent on their fixed deposits, but that’s generally for tenures of up to five years. ICICI’s Regular Income Bonds are offering that rate over 10 years. Given that interest rates might be near their peaks, those are top terms to lock into today for the best part of your fixed-income portfolio (See table: The peer comparison).
These bonds also insulate senior citizens from certain other inconveniences they face in other fixed-income avenues. ICICI will deduct TDS of 11.3 per cent, but it will conform to the government-mandated easier norms for senior citizens (those over 65 years). Interest income up to Rs 10,000 per year won’t invite any TDS. Even if it’s over Rs 10,000, senior citizens can stop the bank from deducting tax by submitting Form 15H.
This issue closes on Friday. ICICI has set the issue size at Rs 500 crore, with the option to retain another Rs 500 crore. In case of oversubscription, the allotment will be on a pro-rata basis. Further, 70 per cent of the issue is earmarked for those applying for 50 bonds or less. The bonds, which don’t have any lock-in, will be listed on the BSE and NSE, giving investors another exit option.

http://www.expressmoney.in/news/GOOD-TO-GO/92276.html

Stock Picks

2007-10-22T00:27:00.000-07:00

STOCK MARKET:
Sandeep Singh
Posted online: Monday , October 01, 2007 at 1405 IST
Reliance Industries: Businesses to rely on
The one stock that has fuelled this rally more than others is Reliance Industries. The company is one of the few large companies offering a heady cocktail of businesses that are stable and profitable (petrochemicals and petroleum) and new businesses that could turn out to be just as big and profitable (retail, and oil and gas exploration).
In the last three years, the Mukesh Ambani-led company's revenues have increased from Rs 69,093 crore to Rs 1,10,405 crore, or a compounded annual growth rate (CAGR) of 16.9 per cent. Higher product prices have led to net profit increasing at a faster CAGR of 32.4 per cent to Rs 11,943 crore. Net margin has increased from 7.4 per cent in 2003-04 to 10.8 per cent in 2006-07. At its current price of Rs 2,296, the stock discounts its earnings for the trailing four quarters by 27.5 times. While there are small upsides for the company to be had by factors like the current rupee appreciation (lower crude import bill), the company is well placed to grow, while maintaining its profitability. When it comes to building something from scratch, few, if at all any, do it better than Reliance Industries. Still a buy for the long term.

STOCK MARKET: NTPC: Could trip on valuations

Posted online: Monday , October 08, 2007 at 1351 IST
On Thursday, 29 BSE ‘A’ Group stocks hit their all-time highs. Among them was the country’s largest power-generation company, NTPC, which has surged 45.7 per cent in just three months to Rs 228. What gives? Agreed, the power sector is coming alive, with the government following up reforms with intent and spending. Obviously, NTPC, being the largest player in thermal power, will get its share of business, if not more. NTPC has a total commissioned capacity of 54,754 mw, of which 26,850 mw is fully owned by it and the rest through joint ventures. Thus, it controls over 20 per cent of the total installed power capacity in India, while generating 28 per cent of power. In the eleventh five-year plan, the government has set a generation target of 68,869 mw, some of which will be commissioned by NTPC.
While its business prospects are strong, spare a thought for what this spike has done to its valuations. On July 4, NTPC was quoting at a PE of 18.6. Now, it’s 31.2. Historically, the market has given good utility companies PEs of 10-15. Even factoring in the growth shot from new projects, current valuations seem high, and NTPC could trip on it.

STOCK MARKET: Unitech: Nifty moves

Posted online: Monday , September 17, 2007 at 1353 IST
Call it the index effect. On September 11, the National Stock Exchange (NSE) announced that Unitech will replace IPCL from October 5, making it the first real estate stock to enter the index. Since then, the share has appreciated from Rs 254 to Rs 282, or 9.9 per cent. Unitech has been doing well, recording a three-year compounded annual growth in revenues and net profit of 91 per cent and 312 per cent, respectively. But this latest spike seems to have less to do with its prospects and more to do with entering a club where more investors want a piece of it.
Many investments are linked to indices like the Sensex and the Nifty. There are many index funds whose portfolio mirrors the Nifty. There are many FIIs who invest, or do futures and options trading, only in index stocks. All these institutional investors will rush to recalibrate their portfolios. Trading in IPCL’s shares will be suspended following its merger into Reliance Industries. And Unitech will enter more investor portfolios. This will create a spike in demand. But this is a short-term effect. In the long run, Unitech the company holds the fate to Unitech the stock.

STOCK MKT: Tata: The ‘Rs 1 lakh’ question

Posted online: Monday , September 10, 2007 at 1409 IST
A few years ago, Tata Motors took a bold turn to diversify into passenger cars. The stakes in its Rs 1 lakh car, scheduled to be launched by mid-2008, might not be as high as they were back then, but they do have the ability to steer the company on to a higher profit trajectory and a higher market share. The call on the small car project is essentially the call to make on Tata Motors today.
If the car is a success, it can do wonders to Tata Motors' numbers. But if it doesn't capture the numbers, the company will feel the weight of the large investment it is sinking into the project. Going by the track record of the Tatas, the aggressive pricing and what the competition has under their bonnets, the odds are in favour of the Tatas.
At its current price of Rs 698, its stock trades at a PE of 13.5. Its commercial vehicles business is growing well, and cars (Indica and Indigo) is managing to weather slowdowns. Over a three-year period, the company has registered a CAGR of 27 per cent in sales and 30 per cent in net profit. That might slow a tad, but even then is a good reason to own the stock. And if the Rs 1 lakh car turns out to be a hit, so will be the stocks.

Reverse Mortgage

2007-10-22T00:12:00.000-07:00

House that!

Sandeep Singh
Posted online: Monday , October 01, 2007

Sometimes, the Kumars (name changed) wish they were younger and fitter. Wistfully, these 60-somethings, living in a middle-class Delhi suburb, recount their tale. He retired from government service seven years ago and got a pension. But it proved to be insufficient when medical problems beset both, and surgeries and medicines started eating into their savings. When their two children refused help, it looked grim. But then, one day, he read about a new product called ‘reverse mortgage’, and it looked like a doorway to a better financial life.

The Kumars had a house. They couldn’t rent it out, but they learnt they could turn it into an income stream in their lifetime, while continuing to live in it. They got in touch with Punjab National Bank (PNB), one of the two players with a reverse mortgage product. PNB assessed the value of their property at
Rs 1.1 crore. It sanctioned a loan on 80 per cent of this (Rs 91 lakh), and structured this loan into monthly payments (like an EMI that you receive).
PNB is paying the Kumars Rs 42,000 per month for 10 years. Says Kumar: “We are able to manage our finances better. The payout takes care of our monthly medical bills and other critical expenses for now.” After 10 years, the payments will stop, but the Kumars can continue living in their house. Only when both of them die will the bank acquire their house. It will offer the Kumars’ legal heirs the option to repay the ‘loan amount’ and take the house. If they don’t, the bank will sell the property and recover its loan amount. Any excess amount over the loan amount generated through the sell-off will be given to the legal heirs of the Kumars.
At present, PNB and Dewan Housing Finance offer reverse mortgage schemes; more banks are expected to join the fray soon, including Allahabad Bank, Bank of Baroda, and Corporation Bank. A reverse mortgage product can be availed by anyone who owns a house, is retired and is above the age of 60 years. While only the monthly payout option is currently available, even a lumpsum is under consideration. The amount of monthly payment is based on the property value, the interest rate charged and the payment tenure (See table: The two options). Like the Kumars, many elderly couples who have a house but not enough income can use that house to ensure a better financial life for themselves in their lifetime.

http://www.expressmoney.in/news/House-that!/92240.html

Reliance Power

2007-10-22T00:08:00.000-07:00

STOCK MARKET:
Reliance Power: Where’s the power?

Sandeep Singh
Posted online: Monday , October 15, 2007

Is this reminiscent of the excesses of the mid-nineties or what? On Friday, a pink paper reported that shares of Reliance Power — a Reliance ADA Group company that is more on paper than on the ground, and has recently filed its papers with Sebi for a huge IPO — were being ‘traded’ at a premium to the expected issue price in the grey market in Rajkot.

What are they paying the premium for? It’s baffling. The company has government approval to set up power projects with an installed capacity of 24,200 mw, which includes the recently-awarded 4,000 mw ultra-mega power project in Sasan and its planned mega project in Dadri, UP. Once those are up and running, they should bring in the profits. But the commissioning date of Sasan is April 2016 and there’s no date for Dadri. In fact, if all goes as per schedule, the company’s first revenues will come only in March 2010, with the commissioning of a 600 mw project. So, why this mad rush to buy into a business that is on paper and whose shares don’t even exist today? Excesses of a bull run?

http://www.expressmoney.in/news/STOCK-MARKET:-Reliance-Power:-Wheres-the-power/92299.html

Open Offers- What to do

2007-09-27T07:06:00.000-07:00

KEEP YOUR OPTIONS OPEN

Sandeep Singh

Posted online: Monday , September 24, 2007

Over the next five days, non-promoter shareholders of Essar Steel, India’s fourth-largest steel company by sales, have a decision to make. The company’s promoters, the Ruias, who hold 87.1 per cent of Essar Steel’s equity, want to buy the balance 12.9 per cent from the public, and delist the company. As per delisting rules, the Ruias have set the floor price at the stock’s six-month average price, Rs 38. Shareholders can accept the offer; or they can quote their price through a formal process on the stock exchanges; or they can wait and watch.

It’s a choice that shareholders of DLF and Bharti Airtel in their previous incarnations had to face. It’s a choice that shareholders of Deccan Aviation are currently facing, in a different context. With India Inc getting bigger and broader, and seeing more large equity investments, mergers and acquisitions, the number of open offers is only bound to increase. How should you respond to such buyout propositions?
What are open offers?There are two reasons why an open offer is made. One, the ‘takeover code’ is triggered. If any investor buys more than 15 per cent of a company’s equity, by law, it has to offer an exit option to other shareholders for at least 20 per cent of the company’s equity. In recent times, for example, UB Group’s acquisition of Deccan, Blackstone’s purchase of Gokaldas Exports.Two, the promoters want to delist their company’s shares. It could be because they don’t want to share the fruits of their business with others or because they don’t want public scrutiny or because they think their shares are undervalued. This delisting intent is most active among multinationals, many of which were forced to list in the seventies under Fera (Foreign Exchange Regulation Act).
What are your options?The rules related to takeovers and delisting have set guidelines for the open offer price. It’s the six-month average share price. Says Kamlesh Gandhi, country head-investment banking, Religare: “Six-month average is fair. One year is too long, as many more factors can influence price. Two weeks is too small and open to manipulation.” If a stock is not traded frequently, besides price paid by the acquirer, other financial parameters like book value and PE ratio also come into play.
As an investor, you don’t have a say in the open offer price. You can take it or leave it. However, in case of delisting, the rules empower you to influence the exit price. Companies wanting to delist have to go through a reverse book-building process on the stock exchanges. As the name suggests, it’s the book-building process used to price IPOs (initial public offers) in reverse. Rather than quote a price you are willing to buy the shares at, you quote the price at which you are willing to sell. Starting from the offer price, the price at which 90 per cent of shares tendered in can be accepted is called the exit price. However, the choice to offer it or not lies with the promoters.
Reverse book-building is intended to give investors a say in setting the price. More often than not, it throws up a higher price than the floor price. For instance, Essar Shipping, another company of the Ruias, went in for a reverse book-building exercise in March. Against the floor price of Rs 31.62, the exit price was set at Rs 50, and even then only 61 per cent of the balance shares were tendered in. Similarly, in January, Eicher offered a floor price of Rs 150, but the reverse book-building process threw up an exit price of Rs 265.
What should you do?If you go by performance records over the last four years, the verdict is split. Roughly, in half the cases, investors have done better than the market by accepting the open offer. In the other half of cases, they would have done better had they availed off the open offer, and simply reinvested that money in the market (See box: Not an open and shut case).
In general, investor participation in open offers is low. For instance, in 2006-07, 90 companies came out with takeover-induced open offers.
Of these, 54 were subscribed less than 10 per cent, and 73 less than 50 per cent. Holcim got barely 0.15 per cent of Gujarat Ambuja in its open offer in April 2006. Says Gandhi: “Subscription levels are low, as investors mostly feel if someone is buying a stake, good things must be happening to the company.” But as the subsequent share performance shows, that may or may not be true.
The decision to tender in your shares should be based on the company’s business prospects. If it’s a takeover, says Gandhi, “I give maximum weightage to the new management and the purpose of the acquisition.” Adds Ashok Jain, chairman and managing director, Arihant Capital: “There is no correlation between the open offer price and future stock performance. It’s a qualitative issue that depends on the company’s future performance.” So, for instance, the call that Deccan shareholders have to make today is whether the company will turn profitable under the stewardship of Vijay Mallya.
Since it draws from the market price, the offer price generally represents the current value of a business. This may or may not be a fair representation. Also, you hold the stock keeping the company’s future in mind, which the offer price may not capture. So, if you think the business is promising and price is less than what your company is worth, stay on.
If you feel the price being offered is more than its worth, tender your shares. Says S.N. Lahiri, senior vice-president (equity), DSP Merrill Lynch Mutual Fund: “Sesa Goa, for example, is in the iron ore business, which has lots of potential. Prices of iron ore have increased by 25-30 per cent in recent times. I don’t see many investors applying to this one.”
The one situation where an additional variable enters the picture is delisting. If the promoters control more than 90 per cent of the company’s equity, they can delist the shares. You can still hold on to your shares, but you will find it difficult to sell. That doesn’t mean when a promoter makes an open offer with the intention of delisting, you should tender in your shares.
Under Sebi regulations, even if a company’s shares get delisted, you can sell your shares to the promoter at the open offer price for six months from the date of delisting. Beyond that, it is up to the promoters to accept — and that’s a risk. Keep that in mind when faced with an open offer or delisting buyout.

Sensex at 17K

2007-09-27T06:58:00.000-07:00

Forget points and look at the percentage

Sandeep Singh

Posted online: Thursday, September 27, 2007

When the BSE Sensex, the bellwether for Indian stocks, briefly crossed another rubicon — 17,000 — today, the usual round of celebrations followed. From the perspective of sentiment and valuations, the rise from 16,000 to 17,000 holds a lot of meaning. But mathematically, the significance of every 1,000-point increase is diminishing because of the higher base effect.

For every successive 1,000-point rise in the Sensex, the percentage increase is less and less. For instance, 16,000 to 17,000 is a gain of just 6.3 per cent. To put it in context, when this bull run began, a 1,000 point increase in the Sensex — from 3,000 to 4,000 — was a percentage gain of 33.3 per cent. In other words, the latest 6.3 per cent rise being fawned over is one-fifth of what we started out with in 2003 (See table).
In the past, the Sensex has risen or fallen more than 6.3 per cent in a single day on several occasions, which says a lot about the quantum of this increase. Since July 25, 1990, when the Sensex closed above 1,000 for the first time, it has surged 6.3 per cent or more in a single day on 18 occasions; conversely, it has shed 6.3 per cent or more in a single day on 15 occasions.
The one impressive thing about this rise from 16,000 to 17,000 is the pace of increase. The latest 1,000-point gain has happened in five trading sessions. In absolute terms, that’s the quickest. However, this is a wrong way to assess speed, because it ignores the percentage variance of each crossing.

To factor in the percentage increase, we devised an indicator: sessions per 1 per cent gain. This shows how many sessions it took for each 1 per cent gain. At 0.8, the latest rise is the third-fastest 1,000-point increase in the history of the Sensex. Ahead of it are the Harshad Mehta-tainted increases from 2,000 to 3,000, and then to 4,000. But then, those were gains of 50 per cent and 33 per cent, respectively, and the latest one is 6.3 per cent. To iterate: forget the points, look at the percentage.

http://www.indianexpress.com/story/221586.html

Overseas Fund- Bouquet

2007-09-24T00:06:00.000-07:00

THE BIG BIZ STORY

MF investors taste globalisation fruits

Sandeep Singh

Posted online: Sunday, September 16, 2007

Mutual funds have widened options for Indians with schemes that invest in world markets; they have also tried hard to differentiate their products
Overseas funds have been available to the Indian investor since 2004. But ever since the Reserve Bank of India (RBI) raised the limit for the Indian mutual fund (MF) industry’s international investments from $3 billion to $4 billion, and individual fund houses’ exposure limit from $150 million to $200 million, there has been a flurry of activity in this domain. A number of fund houses have launched schemes investing in foreign funds or foreign equity, while others are in the process of devising their products. While duplication of products is common in the MF industry, this time fund houses have tried to come out with products that are well differentiated from those of competitors.

The uniqueness of products is no doubt commendable, as it gives the investor more choices, but it also makes his task of investing harder. After all, he must choose from a wide buffet for a mere 10-15 per cent of equity allocation. “If all the products look the same, then the investor has no choice, whereas giving options provides the investor the choice to pick the scheme that is most appealing to him,” said SBI Mutual Fund chief investment officer Sanjay Sinha.
Fidelity’s bouquet of options: Fidelity’s World Range Fund, which is still awaiting Sebi’s nod, offers five options within one scheme. These include the Fidelity America Plan, Emerging Markets Plan, European Growth Plan, International Plan and Pacific Plan. The fund acts like a feeder fund. The investor can choose between the five plans and decide where he wants to put his money, based on his risk profile and investment pattern. For instance, an investor who wants to reduce his risk and is happy with moderate returns might want to invest in the developed economies. Another, looking for higher returns but higher risk, might opt for the Pacific plan.
Birla’s switching option: Birla Sun Life launched its International Equity Fund this week. The fund house has two new ideas to offer. One, it offers investors two options: you may either invest 100 per cent internationally, thus getting the benefit of higher diversification, or you may invest a minimum of 65 per cent in Indian equity and a maximum of 35 per cent overseas, thus getting the tax benefit on capital gains that is allowed on investment in Indian equity. The attractive feature is that you can switch between the two options any time during your investment period without being charged any entry or exit load.
Two, Birla Sun Life’s scheme will not act as a feeder fund for any international fund. Instead, it will invest directly in foreign equity. Investments will be made based on advice from Standard & Poor’s regarding which stocks to pick from the international market.
Tatas’ infrastructure fund: Tata Indo-Global Infrastructure Fund is the first thematic sectoral fund for the international market. We already have a bunch of infrastructure funds trying to capture the growth in the Indian infrastructure sector. This fund, along with capturing the growth in Indian infrastructure with at least 65 per cent investment in Indian equity, will invest up to 35 per cent in international companies benefiting from the growth in their domestic infrastructure.
So, it is suited for investors looking for high growth, and is not for those looking just for risk diversification.
Bullish on Asia: Two fund houses are offering two schemes, one of which is bullish on the Asian market, and the other specifically on China. ICICI Prudential Mutual Fund has come out with its Indo Asia Equity Fund, which will invest in Asian markets. “Asia fits in better with India. Growth in Asia is likely to be higher than in the rest of the world,” said ICICI Prudential Mutual Fund deputy managing director and CIO Nilesh Shah. “Globally, allocation will move to Asia because of its performance potential.”
Capturing the China-India growth story: ABN Amro AMC has launched the China-India Fund, which will invest predominantly in India (65-75 per cent) and China (25-35 per cent). This fund has been launched to capture the growth in the world’s two fastest growing economies — China and India.
While investing in overseas funds, investors need to answer one question: what proportion of their equity investments should be allocated to international equity? According to Delhi-based financial planner Surya Bhatia, international exposure should not exceed 10-15 per cent of your equity portfolio. “By investing this proportion in international equity, you get the benefit of diversification and international growth. You invest overseas with the purpose of diversifying country risk, and for this purpose 10-15 per cent is adequate,” he explained.
Finally, what investors must remember is that while some international exposure will do their portfolio a world of good, they must not go overboard. The bulk of their equity exposure should be to the domestic market.
After all, they have greater knowledge and familiarity with the Indian market and can, hence, monitor their domestic investments better. Most importantly, why venture abroad when your own economy is growing at above 9 per cent.

Delicious Buffet
• Investing in funds with global exposure diversifies country-specific risk
• Such investments mustn’t exceed 10-15% portfolio
• Each product offers a unique proposition
• One allows you to invest in a foreign economy you are bullish about
• Another allows you to gain from infrastructure growth in other countries

http://www.indianexpress.com/story/217290.html

Fed Cut - Its Impact

2007-09-23T23:57:00.000-07:00

THE BIG BIZ STORY

Fed rate cut: Brave act or desperate move?

Sandeep Singh

Posted online: Sunday, September 23, 2007

US Federal Reserve chairman Ben Bernanke said recently that he would cut interests only if there is a genuine problem in the economy. It seems nobody was listening
Ben Bernanke

Last Wednesday brought happy tidings on several fronts. The Sensex zoomed 653 points, up 4.2 per cent in a day, the adrenaline for the surge being provided by the US Federal Reserve Board’s decision to cut interest rates. Union agriculture minister Sharad Pawar’s announcement on the same day, proposing to offer financial incentives to the ailing sugar industry, brought more cheer. And finally, the mood in cricket-obsessed India turned ecstatic when, towards the end of the day, Yuvraj Singh hoisted six consecutive deliveries into the stands.
Ever since the subprime loan fiasco broke out in the US, increasing uncertainty and inducing volatility in stock exchanges around the world, market participants have been looking to Federal Reserve Board chairman Ben Bernanke to provide relief by cutting interest rates. He acted along these lines.
On September 17, he announced the first rate cut of his tenure — a 50 basis points (bps) cut in the Fed Funds Rate (the inter-bank borrowing rate), bringing it down from 5.25 to 4.75 per cent. This cut is expected to boost consumer spending, improve corporate bottomlines (by reducing interest costs), and boost the US — and world — economy. In addition, the Fed also reduced the Discount Rate (the rate at which it extends short-term loans to banks) by 50 bps, a move that will make cheaper funds available to banks.
Markets surge
Markets around the world celebrated Bernanke’s measures: the Nikkei rose 3.7 per cent, Hang Seng 4 per cent, FTSE 2.8 per cent, DAX 2.3 per cent and CAC-40 3.3 per cent. The Indian market, too, responded positively: the Sensex rose 4.2 per cent, in the process breaching the key psychologically mark of 16,000. (It has taken a mere 51 trading sessions for the Sensex to move up from 15,000 to 16,000.)
While the markets have taken the positives from Bernanke’s rate cuts, the negative implications of his decision don’t appear to have sunk in completely. Bernanke had earlier said that he would go for a rate cut only if there was a genuine problem in the US economy, and not just to bail out the banking system. Now, does the 50 basis points cut point to a larger problem in the economy?
Many experts believe that the US economy might be headed for a slowdown, which would lead to greater flight of capital into those high-growth economies that depend less on exports and are propelled more by domestic consumption. Says HDFC Bank chief economist Abheek Barua: “India, Indonesia and China are likely to hold up and are being seen as safe havens by investors.”
...And rupee follows suit
The higher influx of funds that followed the US rate cut led to further appreciation of the rupee, which on Thursday breached the Rs 40 to the dollar mark for the first time in nine years and closed at Rs 39.88.
How will the appreciation of the rupee impact our economy and the stock markets? One, by reducing the oil import bill, the stronger rupee will benefit oil companies. The BSE Oil & Gas index gained 11.4 per cent last week. Reliance Industries Ltd (RIL) gained 11.8 per cent, RPL 18.6 per cent,and ONGC 10.7 per cent. While the Oil & Gas sector has benefited from the rupee appreciation, the IT sector’s earnings are likely to be squeezed even further.
Not surprisingly, the BSE IT index was down 0.5 per cent over the previous week’s close. Satyam and Wipro were down by 2.75 and 2.3 per cent respectively. Infosys and TCS tried to hold their ground but they, too, lost 0.46 and 0.75 per cent respectively over the previous week’s closing.
Selective gains
What is noteworthy is that most of the movement on Wednesday was largely concentrated in the large-cap segment, which foreign institutional investors (FIIs) tend to prefer. The Sensex was up 4.2 per cent, the BSE 100 3.7 per cent, and the BSE 200 3.5 per cent. By contrast, mid-cap and the small-cap indices gained only 1.9 per cent and 1 per cent respectively.
“In future, activity is likely to take place in companies beyond the large cap companies,” says JP Morgan AMC chief executive officer (CEO) Krishnamurthy Vijayan. “The action in the leading stocks has been because of increasing movement of capital from developed economies to emerging markets.
India is likely to see an increase in investment in smaller companies moving beyond the top 50-100 stocks that most foreign investors and mutual funds are today pouring money into.” Over the past year, too, gains in the stock market have been selective. While the Capital Goods and Oil & Gas indices have gained by 78 and 59 per cent respectively, the Auto index has declined by 0.5 per cent.
The BSE IT and BSE Healthcare indices have grown by a mere 0.2 and 1.9 per cent respectively. So, it has not been an all-round gain, and interest rates and currency appreciation have had a major impact on the performance of sectoral indexes.
Gold: The safe haven
With the dollar losing ground, one asset class that has gained significantly is gold. Gold acts as the alternative reserve (to the dollar) for central banks around the world and as a hedge in times of uncertainty. Gold closed at Rs 9,550 per 10 grams on Friday, up 2.9 per cent during the week. With the dollar on the decline, gold appears to be emerging as the favoured asset class and is expected to remain fairly strong in future.
Long-term scenario
Once the stock market euphoria witnessed last week subsides, it remains to be seen whether the Fed’s actions actually stem the subprime crisis, or whether the markets in future have to deal with a recession in the US economy. If that were to happen, markets around the world would get impacted.
Says Barua: “The rate cut could be implying that things are much worse in the US than people expected. If the growth rate in the US economy gets revised downward, it will impact the G7 nations and all the other economies too.”
For India and a few other Asian economies, the positive comes from the fact that these economies, being driven more by domestic consumption, are likely to weather a US recession much better, and it is likely that more investments will flow into their economies and markets.
Bend it like Bernanke
• Fed rate cut expected to provide a fillip to subprime mess-plagued US economy
• Markets around the world responded euphorically to the cut
• Interest rate differential between US and India has widened
• With more funds flowing into India, rupee breached 40 per dollar mark
• Will the present cut protect the US — and world — economy from recession?
• If not, the feel-good induced by it may prove temporary

http://www.indianexpress.com/story/220007-2.html

Realty Fund- IL&FS Milestone

2007-09-23T23:51:00.000-07:00

Invest in realty with Rs 10 lakh

Sandeep Singh
Posted online: Monday , September 17, 2007

Real estate investment trusts (REITs), or real estate funds, are yet to make the transition from policy to product in India. But if you have Rs 10 lakh to invest, you can still invest in diverse pieces of real estate as a financial asset with IL&FS-Milestone Fund-I — a venture capital real estate fund that has slashed the entry limit in such funds from a few crore to Rs 10 lakh.

The productPromoted by IL&FS Investment Managers and Milestone Group, this is a closed-end fund with a tenure of four years, with option to extend by two years. The promoters are looking to collect Rs 1,000 crore for the fund. Investors have to pay only 30 per cent upfront. The remaining can be paid in two instalments between the third and twelfth month. Says Ved Prakash Arya, managing director, Milestone Capital: “We will make a call, with a 21-day notice for the two instalments.”
The fund will work like a pooled investment vehicle. It will collect the monies of investors, and buy properties that are completed and rented out, thus eliminating development risk. It will target offices, IT and ITES buildings, hospitals, warehouses and shopping malls that have long leases and can generate rental income of 12-15 per cent, net of property and service tax. The yield will be paid to investors on a quarterly basis. At the end of the tenure, the fund will sell those properties. Thus, investors get return from rentals through the term and capital gains, if any.
The fund has laid down some rules on investments. It won’t invest more than 25 per cent of its corpus in one project, not more than 40 per cent in a city. Similarly, office property and retail will have a cap of 30 per cent each, IT and ITES 20 per cent, warehouses 10 per cent.
Risks and rewardsThe fund is aiming for rental yields of 12-15 per cent and capital gains, but there are ‘ifs’ related to both. Firstly, the a 12 per cent rental yield drops reduces to 6.9 per cent after paying management fee of 1.5 per cent and tax of 33.99 per cent. Secondly, capital gains are dependent on how property prices move during this period. Thirdly, a 6.9 per cent return on 12 per cent rental is on 100 per cent occupancy. If it is unable to find tenants, or its properties see mild appreciation, worse depreciation, the returns reduce further (See table: The return scenarios). Having said that, the economic outlook is still good. If you have the surplus, invest in the fund.

http://www.expressmoney.in/news/Invest-in-realty-with-Rs-10-lakh-/92111.html

IPO Analysis- Koutons

2007-09-23T23:47:00.000-07:00

PREMIUM valuations for a discount store

Sandeep Singh

Posted online: Monday , September 17, 2007

Organised retailing is here to stay, there’s no question about it. If there’s an investing question related to retailing, it’s this: which retailers will thrive, which ones will die or be swallowed? That’s essentially the call to make while considering buying the shares of Koutons Retail, which manufactures and sells apparels under the brand names Koutons and Charlie Outlaw. Will it thrive or will the arrival of the big retailer kill it?

The numbers show the company, which launched in 1994 but came into its own a decade on, has seen outstanding growth in sales of its shirts, T-shirts, trousers and suits. In the last three years, its sales have increased at a compounded annual rate of 133 per cent, net profit at 239 per cent, margins have improved. Koutons is issuing its shares at a PE of 32.9-36.9, which is stiff. To justify that pricing, it needn’t grow at historic levels, but it still needs to grow 40-50 per cent a year. While the big retailers are settling in, it’s possible. But once hypermarkets have a toehold, companies like Koutons could face the big squeeze.
The modelKoutons is an integrated apparel company. It has 18 manufacturing units, where it makes most of the garments it sells (a small percentage — 15 per cent in 2006-07 — are outsourced. These go to its finishing units, where they are groomed and packaged for sale. Till about five years ago, Koutons relied on distributors for sales. But when it found it had to share shelf space with other brands and it was distributors who called the shots, it shifted to a franchisee model, with the agreement to take back unsold merchandise. As of August 20, Koutons had 999 exclusive outlets — 566 for Koutons and 433 for Charlie Outlaw — in about 300 cities.
“High fashion value for money” is how the IPO prospectus describes the company’s brand positioning. Value for money, we don’t doubt; high fashion, we do. Koutons is a popular middle-end brand. The company sells most of its goods at discount sales — trousers for Rs 500, shirts for Rs 250. That is its strength today, but the same middle-of-the-road positioning could turn out to be its Achilles heel as the retail industry scales up and its dynamics change.
The designsAlthough the branded apparels segment is expanding, competition is heating up, and consolidation is imminent. Experts say the space could get demarcated into two: established brands (for instance, Levi’s and Pepe) and private labels (brands promoted by retailers themselves). Private labels trail established brands today, but that gap is expected to narrow as big retailers expand. Reliance, for instance, is working on its apparel brands, which will be much cheaper than the established brands.
The survivors will be established brands and private labels. Unlike, say, a Levi’s, Koutonsdoesn’t have enduring brand loyalty yet. Unless it manages to build that, it will lose out to big brands from the top and get hammered by the cheaper private labels from the bottom. The challenge before Koutons is to build a brand loyalty. It doesn’t have much time to do so, perhaps two to three years, as big retail is building up.
Koutons has plans, which is partly the reason for this IPO. On the one hand, the company plans to add 140 outlets over the next two years to increase visibility and reach. While men’s wear has been its focus, Koutons recently ventured into women’s wear (brand, Les Femme) and is now planning to get into kids wear (Koutons Jr).
On the other, it is expanding its manufacturing capacity further. The big push for Koutons came in the past two years, when it increased its manufacturing capacity from 600,000 pieces in March 2005 to 12.4 million pieces in March 2007, and its finishing capacity from 3 million to 22.9 million. Although it has unutilised capacity — for 2006-07, capacity utilisation was 22 per cent in manufacturing and 41 per cent in finishing — it’s setting up another manufacturing unit.
The finishIn other words, it has adequate, perhaps excess, manufacturing capabilities. What it needs is more sales, either through its outlets (as it has done so far) or through exports (unexplored). Organised retail has grown at 30 per cent in the last three years, and is expected to match that in the coming three to five years. Koutons should be able to match that rate for the next two to three years. Subsequently, the outlook can get dodgy and margins can come under pressure. That alignment might take longer in the case of Koutons, given its presence in smaller towns, where retailers will take longer to come up.
Koutons sells, but we doubt its ability to sell at a rate that justifies its tall pricing and its ability to keep its long-term competitive advantage. At the upper end of the price band, the stock is priced at a PE of 36.9. By comparison, Zodiac Clothing and Kewal Kiran (owner of brands like Killer, Lawman, easies, Integriti and K-Lounge) trade at 18.9 and 15.8, respectively. Granted, Koutons is bigger and has grown faster than those two, but it’s a stretch to think it can keep doing so to justify these valuations.
Two other things make us uncomfortable. One, the three promoters include chairman D.P.S. Kohli two brothers-in-laws, each of whom hold 22 per cent each. There are no rumblings yet, but family feuds in business make us a sceptic. Two, the promoters don’t seem to share the company’s wealth well with their employees. Koutons has 622 employees, but its three promoters account for 30 per cent of the wage bill, drawing an annual salary of Rs 75 lakh each. By comparison, the 55-year-old executive vice-president who is also in charge of business operations makes just Rs 8.6 lakh a year. That shows it’s a top-driven company, and might not be nimble enough to survive the upcoming big retail onslaught.

http://www.expressmoney.in/news/PREMIUM-valuations-for-a-discount-store-/92119.html

Interview- Ashu Suyash

2007-09-10T12:58:00.000-07:00

BIG TALK: ASHU SUYASH,
MANAGING DIRECTOR AND COUNTRY HEAD, FIDELITY FUND MANAGEMENT-->
‘NFOs should keep investor interests in mind’

Sandeep Singh Posted online: Monday , September 10, 2007

Last month, Fidelity relaunched its flagship equity scheme, Fidelity Equity Fund, with the objective of shifting focus from new fund offers (NFOs) to existing schemes. Now, it is following that up with the launch of Fidelity Growth Fund, an equity fund that targets fast-growing companies. Isn’t there a contradiction? Ashu Suyash, managing director and country head, Fidelity Fund Management, doesn’t think so. In an interview to our correspondent, Suyash defends the new fund launch and charges of product duplication, and outlines the product suite ahead.

One more equity fund. How is this different from your flagship equity fund?
It’s the first fund in our bouquet with a growth bias. Fidelity Equity Fund is a go-anywhere fund, without any preference for sectors or market cap. The Fidelity Special Situations Fund focuses on special situations. The tax-saver fund, which has a lock-in of three years, is closer to the Fidelity Equity Fund.So, given this range, it’s a different product. It takes a 360 degree view on the growth happening in the Indian economy. It considers drivers of growth — demographics, consumption, infrastructure and the corporate culture evolving in India — and captures their benefits. It seeks to pick companies whose return on investment is higher than their cost of capital, and which are in position to continuously compound their earnings.Besides companies listed in India, it will also invest in companies that get a majority of their earnings from India, but are listed outside. So, it takes a 360 degree view on growth and there is an element of differentiation.

You say the investment ideas are different, but the portfolios look so similar, as in the case of Fidelity Equity Fund and Fidelity Special Situations Fund.
There will be common stock ideas. But it’s not just ideas that shape portfolio returns. It’s also when one enters or exits a stock, and the size of the investment. The perspective of the two funds is different. Special situations are more likely to be found in large-cap companies, not in small- and mid-cap companies. Reliance Industries has been through a big restructuring recently. So, one will hold Reliance in a special situations fund, as well as in other schemes.One can have the same stocks, but different weightages, leading to a different outcome. Fidelity Growth Fund is likely to have fewer stocks — it has the option to invest 6-10 per cent of its assets in a stock — and will therefore be more risky.

Barely a month ago, you relaunched Fidelity Equity Fund, and termed the domination of NFOs in new investments as a “worrying development”. Now, you have gone ahead and launched your fourth equity fund.
In the equity investing space, there are basically nine investing styles and at least 14-15 unique products for a mainstream player. We would like to be in each segment, as each investor’s preference and buying behaviour is different.

When you launched in India, you said you won’t indulge in product duplication. Are you faithful to that philosophy?
Absolutely. Like I said, we still have to complete the standard 14-15, and so it’s a long way to go.
That’s a lot of NFOs. Do you see NFOs as penetration tool or a way to offer innovative, new products to investors?
For a nascent market like ours, NFOs are a good tool to get more investors into the fold. There is a certain consumer psychology built around NFOs, and that will remain. What’s important is all steps taken are aligned to investor interests. Our charge structure in an existing fund and a NFO is identical, and will remain so.

What’s with the relaunch of Fidelity Equity Fund? Even other fund houses do it with their schemes from time to time.
When we relaunched, there was PR activity, advertising activity, investing seminars and distributor training sessions. With our track record, we expected investors would come, but that didn’t happen. That told us that there was a need for vigorous communication like in an NFO.

What new, innovative products are you planning?
The feeder fund route is an exciting way of bringing unique products to India. Internationally, Fidelity has about 1,000 funds, which can generate umpteen ideas. We have filed a prospectus for a feeder fund. This is not a fund of funds, but five separate funds targeting major markets — US, Europe, emerging markets, Pacific region and a global option. Investors can pick and choose.
In order to make the industry more investor friendly, you welcomed Sebi’s proposal to waive the entry load for direct and Internet transactions.
It’s not zero load, but flexibility to distributors and fund houses to price load. Within this, one can have a no-load fund, but it’s not a diktat. Even when we get an investor directly, we incur some costs. So, it could be no load or a tiny load. Choice and flexibility leads to better engagement, which is the need of the hour along with better penetration.

But Internet penetration is low, as is branch reach. For instance, you have just 10 offices across the country.
Internet penetration has to increase, and it will over time. We started with five branches, but because of distributors, we are in several hundred cities. As in other industries, the manufacturer is less important than the dealer. That’s why giving distributors and manufacturers the flexibility will help. It is hard to think of a manufacturing company having branches like a bank.

What are the other aspects of the mutual funds business that can improve and benefit investors?
One area under discussion is advice: what is it, who can give it and who should regulate it. Then, development of the bond market. The equity markets have developed; the fixed-income markets haven’t. The bond market still lags in liquidity and transparency in price discovery. Today, we have selective issuance and selective trading. If transparency increases, so will issuance.

Lastly, how do you see the markets moving?
We haven’t seen the last of the sub-prime issue. The good thing is that the US Fed is monitoring the situation and will take action if necessary. That will influence share prices in India. Having said that, the long-term outlook for the economy and corporate India continues to be positive

http://www.expressmoney.in/news/NFOs-should-keep-investor-interests-in-mind/91996.html

IPO Analysis- Power Grid

2007-09-10T12:56:00.000-07:00

Tower POWER

Sandeep Singh

Posted online: Monday , September 10, 2007

Every summer, heat-ravaged Delhi falls short of its power needs. At the peak of the crisis, the chief minister announces arrangements to source additional power from plants in neighbouring states. As you bask in weather-tamed comfort, chew on this: that power is transmitted through a maze of towers, wires and sub-stations, and the company that enables most such inter-state and inter-regional transfers is Power Grid Corporation.

Growing demandWhile state electricity boards (SEBs) control power transmission in the states, Power Grid, a public sector undertaking, does so between states. Technically, Power Grid isn’t a monopoly in inter-state and inter-region transfer of power. This segment of the power business was opened to private players in 1998, but their presence is insignificant.
Meanwhile, the need for inter-region transmission has been increasing — and will only increase further. That’s partly due to the rising demand for power and the nature of the power plants coming up. The present capacity of the National Grid, which is Power Grid’s domain, is 14,100 mw. The government is looking to increase this to 37,150 mw by 2011-12 (2.6 times current capacity) and 65,000 mw by 2006-17 (4.6 times current capacity). Besides this, Power Grid also draws from state projects. Together, in 2006-07, it transmitted 45 per cent of all power generated in India.
In the 11th five-year plan (2007-12), the government has outlined an investment of Rs 1,40,000 crore in the transmission sector, of which, Rs 75,000 crore is for inter-state transmission. The nine ultra mega power projects (UMPP) the Centre is trying to fast-track to bridge the large - and increasing - gap between demand and supply in the country could provide a fillip to Power Grid’s numbers. The company has been asked by the ministry of power to prepare feasibility reports for construction of transmission systems for these UMPPs. The company itself plans to invest Rs 55,000 crore during this period. That’s almost twice the Rs 25,000 crore it has invested in completing 101 transmission projects since 1992.
Stable pricingEven as new capacity drives growth for Power Grid, its existing feeder lines should keep the revenues and profit counters ticking. Power Grid works with power generating companies to set up transmission systems. It transmits that power to SEBs at tariffs that are pre-decided by the Central Electricity Regulatory Commission (CERC).
The tariffs are a cost-plus calculation, which ensures a profit for Power Grid, and are reviewed every five years (the next review is in 2009). The tariff incorporates the project cost, interest on loans, operating and maintenance cost, depreciation and foreign exchange variation, and a 14 per cent return on the equity component of the project (generally, 30 per cent).
This could change, though. The new national tariff policy, notified in January 2006, advocates a shift to competitive bidding, beginning 2011 or when the CERC thinks so. Competitive bidding will reduce the price protection that Power Grid has and the high margins that it earns, so will the expected entry of private players. Those are risks Power Grid faces, but these can be managed, as there’s going to be ample demand for its transmission services.
Beyond powerPower Grid is the proverbial utility, with a captive business that assures a steady stream of sales and profits; with the new projects coming up, growth too. Increasingly, Power Grid is also looking at spin offs from its main transmission business, two in particular. The first is taking on transmission consultancy assignments. The second is leasing the fibre optic cable network it has set up alongside its transmission network, connecting over 60 cities. In 2006-07, the two businesses accounted for 8.4 per cent of Power Grid’s revenues. This could increase further. Till June 30, the company had orders for Rs 250 crore in the telecom business, up from Rs 77 crore for all of 2006-07.
In the last four years, Power Grid’s revenues have grown at a compounded annual growth rate (CAGR) of 12.7 per cent, net profit at 17.6 per cent. In spite of CERC cutting the return on equity in the tariff pricing from 16 per cent to 14 per cent from April 2004, the company has managed to improve margins. Operational expenses in running the towers are minimal. Setting them up is cost-heavy, because of which interest and depreciation become Power Grid’s main expenses.
The IPO is priced at Rs 44-52. based on its 2006-07 earnings and post-issue equity, that’s a PE of 13.7 and 16.2. That’s a fair price to buy this business for the long term. The power sector is finally seeing a lot of activity and Power Grid should be a major beneficiary. A change in rules has improved operating conditions for the good players, and SEBs can’t hold companies like Power Grid to ransom anymore. Indeed, there’s a lot of light.

http://www.expressmoney.in/news/Tower-POWER/92003.html

Infrastructure Fund

2007-09-10T11:55:00.000-07:00

On the FAST TRACK
Sandeep Singh Posted

online: Monday , September 10, 2007

If the Indian economy has to keep growing at 8-9 per cent a year, even try to scale up to 10 per cent, it has to get its infrastructure — roads, power, telecom, ports, airports and rail — in order quickly. If the government and companies are going to invest big money building that infrastructure, the companies that build these superstructures, and the companies that supply goods and services to the builders, are in for a period of heady growth. If the revenues and profits of such companies grow, so should their share prices.

That’s the central premise of infrastructure funds, which are steadily increasing in number — eight schemes are there, two more are in the new fund offer (NFO) stage. It’s a powerful investment idea, one whose time might have come.
The storySceptics, even rationalists, might cite history, and question the figures blown up in the last column that indicate the quantum of investments needed in six key infrastructure sectors. When it has come to making, or enabling, investments in places that matter, investments have fallen woefully short of needs. So, what’s changed?
For one, the economic need and logic is greater than ever before. There is greater realisation and intent among policymakers and entrepreneurs that infrastructure holds the key to the sustaining India’s economic boom. The government has outlined Rs 14,50,000 crore towards infrastructure in the eleventh five-year plan (2007-12) alone. Says Ved Prakash Chaturvedi, managing director, Tata Mutual Fund: “Infrastructure can’t be imported, it has to be built.”
Many more are coming forward to build it and fund it. Proof is the swelling order books of companies involved in this building. Proof is the ever-increasing prices of essential inputs like cement and steel. Proof is the nine ultra-mega power projects the government is trying to push through and the scores of Metro links coming up in major cities. Proof the rash of venture capital funds launched or announced by financial services companies. Says Sanjay Sinha, chief investment officer, SBI Mutual Fund: “Public-private partnership is increasing. There are many more companies participating in this area, which was earlier the preserve of the public sector.”
For businesses that are tied to this infrastructure story, wholly or partly, this is a golden period. Says Chaturvedi: “Overall earnings growth in the next year will be about 17 per cent. By comparison, infrastructure should grow at over 25 per cent.” Further, say analysts, that mark-up in earnings is likely to continue for the next five to 10 years at least. Says Chaturvedi: “Earnings growth for companies operating in the segment should continue for the next decade at least.”
The profiteersAs an investor, you should be looking to ride this surge in economic activity. While most diversified equity funds have a healthy holding of infrastructure-related companies, dedicated infrastructure funds also make for worthy investments. Although these are thematic funds, they are more broad-based than most of their peers. There are builders (for instance, construction, power companies and telecom companies) and there are suppliers (engineering, capital goods, cement, steel, banks). That broad domain brings them in the investment set of more investors.
At present, there are 10 infrastructure funds. Of this, only one scheme, Tata Infrastructure, has completed three years. Six others have completed a year, and their performance over this period is outstanding, beating the benchmark by 14-22 percentage points (See table: Your options in...).
The strategyIt mirrors the Building India story unfolding, and you should get a piece of it through these infrastructure funds. But only a piece. Such investment themes, even if they are broad-based should not be the core holding of your portfolio. Rather, only a portion of your portfolio should go there. Says Sinha: “One can invest 25-30 per cent of your equity allocation to infrastructure funds, given its attractiveness today and growth prospects.”
Pune-based financial planner Veer Sardesai advises a lower allocation and insists on a long-term horizon. “Invest about 20 per cent of your portfolio in infrastructure funds, for a minimum five years. That’s because most of the infrastructure story will play out in the next five to 10 years.”
Targets set by the government might still not be met, especially in sectors where the slow progress on policy changes is holding back investments. If telecom, where private players have the freedom to direct traffic, is a good example of how things should be, power and ports are crying for government attention on a priority basis.
Says financial planner Veer Sardesai: “The story is more of growth, than value. Faster growth will come from government investing in infrastructure and more private participation, with an increasing number of listed companies.”
In the months to come, you might have another
option in the form of dedicated infrastructure funds. These are closed-end funds that will invest in companies in the infrastructure space, both listed and unlisted, and also offer additional tax breaks (See box: Infrastructure funds: Act II). India is building, and you can build on it.

http://www.expressmoney.in/news/On-the-FAST-TRACK/92006.html

Links To 22 OLD Articles

2007-09-01T11:23:00.000-07:00

43% demat accounts suspended but no impact on trading volumes
As on December 31, 4.3 million demat accounts, almost 43 per cent of the total 9.9 million with the two depositories NSDL and CDSL... (Date: 15-Jan-2007)
http://www.indianexpress.com/story/20895.html

New companies, more NFOs to push MF assets in 2007
AUMs increased by 71% to Rs 340,629 cr in 2006 and it wasn’t just the trickle-down effect of a racing stock market (Date: 11-Jan-2007)
http://www.indianexpress.com/story/20607.html

Sundaram to launch two new funds
Sundaram BNP Paribas is launching two new funds in the equity segment - Equity Multiplier... (Date: 9-Jan-2007)
http://www.indianexpress.com/story/20426.html

Key word for the new year: selectivity
Although share prices have exceeded expectations for 2006 — the Sensex gained an impressive 46.8 per cent for the year — market players remain bullish for 2007. (Date: 7-Jan-2007)
http://www.indianexpress.com/story/20310.html

Regional stock exchanges sink as the ‘Big two’ rise
That effectively there are only two stock exchanges in the country — National Stock Exchange and Bombay Stock Exchange — is old news. Here’s how bad the state of regional stock exchanges is. (Date: 18-Dec-2006)
http://www.indianexpress.com/story/18791.html

Traffic on the IPO route increasing, but returns aren’t accelerating
The number of IPOs hitting the market has steadily increased from two a month between June and August to three a week... (Date: 11-Dec-2006)
http://www.indianexpress.com/story/18299.html

Next Bill Gates could be an Indian: Microsoft CEO
There is a special responsibility on India, the world is counting on the talent of this country to lead the next wave of innovation said Ballmer (Date: 9-Nov-2006)
http://www.indianexpress.com/story/16243.html

Multi-brand loyalty has a new catch-phrase: it pays
While plain vanilla cards offer reward points of 0.25 to 1%, multi-brand loyalty cards pay up to 6% for purchases at partner establishments (Date: 6-Nov-2006)
http://www.indianexpress.com/story/16069.html

Search results for sandeep singh

Selective, not broadbased
The big picture says share prices are up and running, but the fine print shows that not all segments, sectors or stocks have hit their highs (Date: 31-Oct-2006)
http://www.indianexpress.com/story/15693.html

India Inc’s growth story continues in first half of FY 07
The wheels are turning in corporate India. And if the financial results for the first-half of 2006-07 are anything to go by, they are turning real fast. (Date: 30-Oct-2006)
http://www.indianexpress.com/story/15635.html

Vijaya Bank plans acquisition in 2007
Vijaya Bank plans to acquire a smaller bank during the next financial year. Speaking at a press meet... (Date: 26-Sep-2006)
http://www.indianexpress.com/story/13418.html

When prices crash, hidden home loan clause may haunt
With property prices likely to follow the downward swing of the stock markets, an innocuous clause of the home loan agreement... (Date: 17-Jun-2006)
http://www.indianexpress.com/story/6614.html

Line and length
(Date: 5-Apr-2006)
http://www.indianexpress.com/story/1830.html

Sensex up; Friday the 13th may decide medium term direction
The market broke last week’s trend today. The Sensex rose 321 points or 2.5 per cent, closing at 13,177. (Date: 10-Apr-2007)
http://www.indianexpress.com/story/27946.html

Is it time to invest in banking stocks?
The Reserve Bank’s move to increase the repo rate by 25 basis points to 7.75 per cent and the Cash Reserve Ratio... (Date: 9-Apr-2007)
http://www.indianexpress.com/story/27829.html

Bearish trend likely to stay as RBI may not cut rates
What a welcome the investors had to financial year 2007-08. The market started on a bad note with the second largest fall in the history of BSE Sensex of 617 points. (Date: 3-Apr-2007)
http://www.indianexpress.com/story/27308.html

Demand for car loans may dip, sales feel the heat
Car loan rates are slated to go up further with Reserve Bank of India announcing an increase in cash reserve ratio by 50 basis points... (Date: 2-Apr-2007)
http://www.indianexpress.com/story/27221.html

With home loan floating rate at 11 per cent, banks have to increase not just your tenure but EMI too
Remember stories in books and films where a villager could never pay off his debts to the village Mahajan (moneylender) because of high interest that kept compounding? (Date: 20-Mar-2007)
http://www.indianexpress.com/story/26162.html

Why policymakers need to rethink: Hiking interest rate to control demand no help
Something’s not adding up. Interest rates of commercial banks are up but are out of sync with the rest of the world. (Date: 12-Mar-2007)
http://www.indianexpress.com/story/25437.html

As MIN deadline approaches MFs see fall in subscriptions
Call it the last minute scramble or regulatory short sightedness or even investor lethargy. (Date: 25-Jan-2007)
http://www.indianexpress.com/story/21677.html

Pension funds allowed 15% exposure to equities
Under the New Pension System 15 per cent of their pension wealth can get an equity exposure... (Date: 24-Jan-2007)
http://www.indianexpress.com/story/21603.html

Policy Change - RBI

2007-09-01T11:18:00.000-07:00

Listed firms can now invest more in foreign portfolio, joint ventures

Sandeep Singh
Posted online: Wednesday, April 25, 2007

Credit policy 2007-08: RBI move will help Indian companies planning overseas acquisitions

NEW DELHI, APRIL 24: The RBI today increased the limit on portfolio investment by listed Indian companies in foreign listed companies from 25 to 35 per cent of their net worth. It also enhanced the limit for overseas investment in joint ventures or wholly owned subsidiaries by Indian companies from 200 per cent to 300 per cent of their net worth. This will help the Indian companies planning big overseas acquisitions.

“With each passing year, the government is moving towards capital account convertibility and this is a step to enhance Indian companies’ overseas investments,” said S C Gupta, chairman and managing director of PNB.
One of the impacts of economic liberalisation is that Indian companies are aspiring to become global players. They are looking for overseas acquisitions. Tata acquiring Corus, Aditya Birla group buying Novelis are some of the recent examples of Indian companies buying global majors. RBI’s move will help Indian companies in fulfilling their global dreams.
The inflows have been growing significantly due to the rising interest rates. This leads to currency appreciation. “The new credit policy will not only check this but also address the demands of Indian companies for their foreign acquisitions,” said Abheek Barua, chief economist, ABN AMRO Bank.
“The RBI has been trying to liberalise the overseas investment in a disciplined manner. The new policy will make Indian players more influential in international markets,” said Rajan Krishnan, business head of Principal PNB AMC.
Welcoming RBI’s monetary policy, said Habil Khorakiwala, president, Ficci: “This is in line with the recommendations of the Tarapore Committee on capital account convertibility and Percy Committee on IFC and clearly shows RBI’s willingness to move towards the CAC in a calibrated manner.”
Some experts have, however, aired their concerns on this issue. “This will reduce inflow and increase outflow in a scenario where we need more capital expansion. Rather than encouraging outflow of capital, the RBI should have encouraged greater capital absorption for capacity expansion,” said Rajiv Kumar, director and chief executive of ICRIER.
The monetary policy that encourages outward flow of foreign currency will check the appreciation of Rupee. “The various measures announced in the policy, which also indicate certain degree of liberal approach to outward flow of foreign currency, are most welcome under the present conditions, since they would have a sobering effect on the rapidly appreciating rupee,” said CII president R Seshasayee.

http://www.indianexpress.com/story/29235.html

Big Biz- Mutual Fund

2007-09-01T11:17:00.000-07:00

THE BIG STORY
To grow big, mutual funds turn to small investors

Sandeep Singh
Posted online: Sunday, April 29, 2007

India’s top three funds lower investment limits to reach out to households in Tier 2,3 and 4 cities

When ICICI Prudential Mutual Fund lowered the minimum limit for its systematic investment plan (SIP) to Rs 50 per month last week, it raised the basic standard for other fund management companies to follow. And with this move, the best vehicle for wealth creation has finally reached the small investor. From now on, a huge chunk of Indians will get to invest regularly in mutual funds while asset management companies (AMCs) will be able to reach out to the “teeming millions”.

Explains ICICI Prudential Mutual Fund managing director Pankaj Razdan, “In the India growth story, only the rich have become richer and there is hardly anything done for the underprivileged retail investors. We want to create an investment avenue for them and, hence, this move.” This will also remove the block in investors’ minds about mutual funds says Razdan, “We want more and more people to taste it so that they feel confident about the market. It’s a slow process but will act as a wildfire in two to three years’ time.” ICICI Prudential is not the first to lower investment limits. In April 2006, UTI Mutual Fund initiated this trend by reducing its SIP to Rs 100 per month for its “pension scheme”; it does not offer this facility for other schemes. UTI Mutual Fund’s idea was to offer MFs to the “underprivileged”, who don’t even have a bank account.
Then last month Reliance Mutual Fund, with its focus on Tier 2, 3 and 4 cities, lowered its SIP limit to Rs 100. Says Reliance Mutual Fund CEO Vikrant Gugnani, “Investors in smaller towns have stayed away from the mutual fund industry because of the higher threshold. So lowering this will remove their apprehensions and act as an entry point to investors in smaller towns.” The impact so far has been what Gugnani describes as a “striking success” for Reliance. “After the launch of this product, we have received applications from 75 new towns.”
Beyond these Big 3, too, the industry is largely lauding the effort. “This product will be able to capture the really micro investors and from that perspective, it’s a really good idea,” says Sundaram BNP Paribas AMC managing director T P Raman. “We are evaluating the feasibility of the product and will accordingly decide.” For the industry as a whole, it is penetration rather than performance that has been the bigger challenge. The customer base has grown by almost 300 per cent over the past three years. But this growth has been on a very small base and penetration is still below 3 per cent. In three years, assets under management (AUM) in the MF industry have grown at a compounded annual growth rate (CAGR) of 37 per cent from Rs 1,39,616 crore in March 2004 to Rs 3,26,388 crore in March 2007.
In the same period, the AUM for equity schemes has grown from Rs 29,362 crore in March 2004 to Rs 132,707 crore in March 2007, a CAGR of 65 per cent. During this period, the Sensex has grown at a CAGR of 35 per cent. This shows that the mutual fund industry has grown faster — which is good for now. But there is still huge scope for growth, given the low penetration levels. Traditionally, most investments in mutual funds have come from the top 20-30 towns while Tier 2, 3 and 4 towns have not gained ground, points out Gugnani, “There is significant wealth lying in bank deposits in almost 600 towns due to lack of other investment avenues. No one has tried to venture out; so no one has gained ground. The industry should try and reach out to new investors and expand the market.” Adds Razdan, “I want to reach every single household as there is no security system in India. I want them to become a part of the economic growth story.”
Though it’s a good move, there are still bottlenecks to the long-term success of this product. Notes CAMS director V Shankar, “This is a good experiment, but it will take about two to three months before we can say that it’s a real success.” The distribution, collection and transaction costs are major hurdles that will have to be addressed. Says Raman, “The accounting and administrative issues need to be taken up properly.” On the small investors’ part, the greatest challenge according to Razdan is financial literacy: “Education is a big bottleneck and we have been teaching the microfinance institutions (our partners) over the past six months who, in turn, will educate the investors. Another bottleneck is costs but we are not creating a parallel infrastructure — we are using our existing microfinance infrastructure which is the most cost-effective way of going about it.”

REACHING OUT
• Prudential ICICI
Will use existing microfinance infrastructure and customer base of ICICI.
Will educate its microfinance partners who, in turn, will teach the investors.
• Reliance
Will create its own infrastructure or recruit people who will operate from Reliance Webworld outlets.
Already has a physical presence in 124 towns and expects to touch 200 by June-end.

http://www.indianexpress.com/story/29575.html

Small Cap needs definition

2007-09-01T11:15:00.000-07:00

MFs want uniform definition of ‘small’ in small cap firms

Sandeep Singh
Posted online: Tuesday, May 22, 2007

Mutual Funds: The word small stretches from Rs 10 crore to Rs 6,000 crore
New Delhi, May 21: If there’s one common theme binding small investors, small companies and funds launching small cap funds for small investors, it is: ambiguity. Coming up for debate is definition of “small cap”, a company whose market capitalisation is, well, small. But that “small” value could range between Rs 10 crore to over Rs 6,000 crore. At stake: investor expectations.

“In the absence of a clear classification accepted uniformly across the industry, there are as many definitions as there are small-cap schemes and indices. Says T P Raman, managing director of Sundaram BNP Paribas Mutual Fund: “We need to organise a meeting or seminar of fund houses, Sebi, NSE and AMFI officials, define a proper classification and monitor it every three to six months, as the size of companies is changing fast.”
At present, there are two dedicated small-cap funds — Sundaram BNP Paribas Select Small Cap and DSP Merrill Lynch Micro Cap Fund — and one portfolio management scheme — Kotak Origin of Kotak Securities. In the Sundaram scheme, small cap is defined as companies other than the top 100 NSE companies ranked by market capitalisation. As on Friday, that meant companies whose market cap was less than Rs 6,138 crore.
DSP Merrill Lynch, however, defines small cap as NSE companies ranked 201-300 by market cap, implying a market capitalisation of Rs 1,441-2,541 crore. So it is targeting companies ranked between 200 and 300.
“There is an overlap because everyone has his own definition. This will exist till market players draw up and accept a common classification,” says S Naganath, president and chief investment officer of DSP Merrill Lynch Mutual Fund.
Ironically, neither scheme is aligned to the definition of the benchmark they track — the BSE Small Cap Index, which as of May 18 had 508 stocks. On that day, the market cap of 507 of these stocks ranged from Rs 10 crore to Rs 3,216 crore; stock number 508 was Cairn India, with a market cap of Rs 25,473 crore.
Meanwhile, funds continue to devise their own definitions and target sets (See table).
For investors, multiple definitions mean they have to check the target stock set of the fund they are considering investing in and difficulty in comparing returns. Says Raman: “Comparison will be tough, as different funds will have companies from different market capitalisation sets.”
Why go small
Investors are attracted to small caps because potentially they can deliver higher than market returns, as smaller companies due to their smaller base can grow faster. The returns come in multiples as companies like Pantaloon (44-fold growth in five years) and Unitech (723 times) have shown. Mid- to large-sized companies like Aban Offshore (134 times), Areva T&D (62 times), Sesa Goa (54 times) and so on were all small caps five years ago. Such companies also carry a much higher risk, as the potential to fail or go bankrupt is equally high. Besides, it is not easy to sell such stocks when the going gets tough.
Finally, since small companies don’t fit into institutional investors’ portfolio and hence are not tracked by analysts, getting information about them is difficult, making the investing exercise that much more difficult — most “vanishing companies” come from this breed.

http://www.indianexpress.com/story/31501.html

Corporate Paycheque

2007-09-01T11:14:00.000-07:00

The big, fat, Indian paycheque

Sandeep Singh
Posted online: Sunday, June 03, 2007

As India Inc. ponders the merit of prime minister’s suggestion on curbing “excessive remuneration”, here is a look at the salary status of the men who power the country’s economy and their place in the global sweepstakes

At Rs 24.51 crore, Mukesh Ambani, chairman and managing director (CMD) of India’s largest private company Reliance Industries, is the highest paid business leader of India. With Rs 15.58 crore, Brij Mohan Munjal, chairman of Hero Honda, comes a distant second, while Sunil Bharti Mittal, who took home Rs 12.68 crore last year as CMD of Bharti Airtel, stands third.
To put these numbers in perspective, on global sweepstakes, Ambani ranks as the world’s 12th highest paid executive, sandwiched between Aviva’s Richard Harvey (Rs 21.3 crore) and IBM’s Samuel J. Palmisano (Rs 32.8 crore), while Munjal gets the 19th rank, between AXA’s Henri De Castries (Rs 14.7 crore) and Ford Motor’s Alan Mulally (Rs 17.6 crore). And this is only converting dollars into rupees not accounting for purchasing power parity, which would take Ambani, Munjal and many of India’s top company’s leaders much higher. These numbers also exclude unlisted companies.
No doubt, riding a trillion-dollar economy, which has taken Indian companies’ valuations to over trillion dollars as well, salaries of CEOs of the country’s biggest private corporations have been sky-rocketing. There are enough reasons for the increase in executive pay. Profits, for instance: over the last three years, the bottom lines of the top 50 companies that comprise National Stock Exchange’s (NSE) Nifty Index have grown by 23 per cent per annum. There is one difference, however: these gains are restricted to “private” corporations, not public sector undertakings (PSUs) whose CMDs take home what management trainees get in many private companies.
Already a raging debate in the US, Prime Minister Manmohan Singh sparked it off in India last month when in context of “extreme poverty” he said, “Resist excessive remuneration to promoters and senior executives.” But the bigger and unexplored issue around executive compensation in India is delivery—just what is it that CEOs are bringing to the table? The numbers speak for themselves.
Compared to their global counterparts, Indian business leaders take home salaries that are a significantly higher percentage of revenues that they help the companies generate. At the aggregate level, Nifty CEOs take home a total compensation that comprises 0.027 per cent of revenues. Against this, the top 20 global company heads take 0.007 per cent of the revenue generated. That is, for every Rs 1 crore of revenues, Indian CEOs take home Rs 2,700 compared to Rs 700 that CEOs of top 20 global companies do.
But if you exclude PSU chiefs, the difference gets starker. Against Rs 2,700 that CEOs of all Nifty companies get, the number rises to Rs 4,000 if you remove PSUs like ONGC, SBI, SAIL and so on. The CEO compensation divide, clearly, is not merely global but national as well.
Within the private sector too, CEOs of family-run companies take home a larger package than professionally run firms. Based on compensation, the top five Indian CEOs are Reliance, Hero Honda, Bharti Airtel (Sunil Mittal draws Rs 12.68 crore), Cipla (Y.K. Hamied, Rs 7.88 crore) and Ranbaxy (Malvinder Singh, Rs 6.57 crore). Among professionally run companies, the stagnating Hindustan Lever’s CEO Douglas Baillie takes home Rs 4.59 crore. At the other end of the spectrum, just above PSU chiefs, is Infosys’ Nandan Nilekani, who took home Rs 41 lakh last year and has since handed over charge.
When expressed as a percentage of profits, Indian company heads are far above their global counterparts. On an average the CEOs of Nifty companies take home 0.168 per cent of the net profit their companies generate. Against this, the average remuneration that the heads of top 20 global companies take is 0.099 per cent. For every Rs 1 crore earned as profit, the Indian CEOs take home Rs 16,800, whereas global CEOs take home Rs 9,900. Exceptions again: Malvinder Singh of Ranbaxy takes home 3.1 per cent of the company’s profits, Munjal of Hero Honda and Sunil Duggal of Dabur take home 1.56 per cent and 1.35 per cent of the profit.
Among PSUs, Bharat Petroleum CMD Ashok Sinha took home the highest remuneration—all of Rs 23.9 lakh—followed by C. Venkataramana of Nalco (Rs 17 lakh). The lowest paid CEO in Nifty was A.K. Purwar, CMD of India’s largest bank State Bank of India, who received Rs 5.7 lakh last year (he has retired since).
Executive compensation is not something that the government or the media can decide. At best they can provide a platform for debate. Finally, it is company boards that have to take the call on how much, how far, how stretched. The board needs to take the realities of talent availability and contrast them against delivery. But a corporate India that benchmarks almost every decision against global levels—finance, markets, technology, scale and so on—perhaps it’s time for it to look at executive compensation as well.

http://www.indianexpress.com/story/32538.html

Corporate Gov- PSU Banks

2007-09-01T11:12:00.000-07:00

Need experts, get political directors off my back: PSU bank chief goes public

Sandeep Singh
Posted online: Tuesday, June 26, 2007

New Delhi, June 25: In perhaps the first such case, the chairman and managing director of a PSU bank has gone public to protest the presence of directors appointed to his board at the behest of the ruling party.

“I have requested the government to reconstitute the board and I welcome people who have integrity and who can contribute...Banking is a highly complicated sector and we are custodians of depositors,” he said. “The bank board should be professionally represented so that it can contribute meaningfully,” said R P Singh, CMD of Punjab and Sind Bank, at a press conference today.
Last month, The Sunday Express had reported how the UPA government had crammed at least 32 of the 37 positions for independent directors (called in bank parlance, “non-official” directors) with men and women known for their allegiance to the Congress party.
Surprisingly, Singh is getting support from the highest quarters. Sources said he got the Finance Ministry’s OK to hold the press conference and moves are on to sack at least two of the five independent directors.
According to Singh, as the bank tried to reduce its non performing assets (NPAs) — from 17% two years ago to 2.4% today — defaulters felt the “pinch” of the recovery initiative and some of them “have been approaching the non-official directors for gaining concessions in settlements.” Since the bank refused relief, these directors “have launched a false propaganda against” the bank’s management, he said.
When the bank would go for auctions to sell distressed assets like properties, “we were put under pressure by these directors along with other political pressures from the sides,” said Singh. “We were told not to go for sale and take the settlement route,” he said. This route yields less money than an auction route.
The bank directors include Krishna Mohini, former Congress MLA from Solan, Himachal Pradesh and vice-president in the All India Mahila Congress; Harcharan Singh Josh, former secretary of the AICC minority cell; Umesh Kumar Sharma, former general secretary of the Haryana Pradesh Youth Congress and K K Sharma, former AICC Secretary.
In their complaint to the PM on May 25, these directors appreciated the Congress “tradition” of appointing party loyalists on PSU bank boards.

http://www.indianexpress.com/story/202685.html

Equity and Debt Funds

2007-09-01T11:11:00.000-07:00

Continue to ride equity, but raise exposure to debt funds

Sandeep Singh
Posted online: Monday, July 02, 2007 at 0000 hrs Print Email

MF STUDY: State Bank of India best-performing fund house in equity; Birla leads in debt, finds Express Money-ICRA Online Best Funds 2007 survey

Over the three-year period up to May 31, 2007, SBI Mutual Fund was the best-performing fund house in the equity segment and Birla Sun Life Mutual Fund the best-performing fund house in the debt segment. As many as 39 of 51 diversified equity funds and 10 of 14 equity-linked savings schemes (ELSS) with a three-year record have beaten the benchmark BSE Sensex, and rather impressively too. Income funds and gilt funds continued to be weighed down by rising interest rates, registering a paltry 3-year CAGR (compounded annual growth rate) of 3.9 per cent and 3.1 per cent respectively.

These are some of the findings of the Express Money-ICRA Online Best Funds 2007 rankings — a performance survey of all mutual fund schemes, across all fund houses, capturing all categories. The survey evaluated fund performance using statistical tools that take into account both returns and risk, and ranked them across 10 homogenous categories (three equity, six debt, and one balanced).
In the equity segment, the rising market lifted all funds, though in varying degrees. Over a three-year time horizon, 75 per cent of diversified equity funds beat the market. However, over a one-year horizon, with the market becoming more discerning and fund managers taking divergent calls, the percentage dipped to 52 per cent.
If the number of four- and five-star funds — a rating tool used by us to capture performance — is an indicator, SBI was the clear leader with five schemes, followed by HDFC with four; Birla, DSP Merrill Lynch and Sundaram had three schemes apiece.
Market players say the long-term outlook for equities remains positive, but advise investors to tone down expectations and to stay patient. Says T P Raman, managing director, Sundaram BNP Paribas Asset Management: “Unlike the past three years, even attractive stock themes may take longer to deliver value. On 2008-09 and beyond earnings, select stocks across the capitalisation curve and sectors that are attractive.”
On the debt side, Birla had the maximum number of four-star and five-star schemes (eight), followed by ICICI Prudential (five) and Kotak and Tata (four apiece). Investors preferred short-term products that are less impacted by interest rates movements, namely liquid funds and fixed maturity plans (FMPs). Although income funds and gilt funds had a better year, their poor showing in the preceding two years reined in their three-year numbers.
However, experts say these two debt fund categories could be back in business. Says Nandkumar R Surti, chief investment officer-fixed income, JP Morgan Asset Management India: “As the slew of monetary and fiscal measures have the desired effect of checking inflation, interest rates will start to moderate; perhaps even drift lower. Investors should look to make allocations to longer-duration debt funds.”
During the period under review, the Indian mutual fund industry crossed the $100 billion mark. On May 31, the total assets under management stood at Rs 4,16,320 crore, compared to Rs 2,31,862 crore in March 2006 — an increase of 80 per cent. While all fund houses have added AUMs, the pecking order has changed. The notable climber is Reliance Mutual Fund. Not even in the top five in May 2005, it has since grown at a compounded annual rate of 141 per cent on the back of new launches, good performance and aggressive marketing, pushing down both ICICI Prudential and UTI by a spot.
Is your scheme a leader or a laggard? Find out in the Express Money-ICRA Online mutual fund rankings in today’s edition of Express Money.

http://www.indianexpress.com/story/203518.html

Big Biz

2007-09-01T11:09:00.000-07:00

THE BIG BIZ STORY
To rise beyond 15,000 mark, Sensex earnings have to increase by 25%

Sandeep Singh
Posted online: Sunday, July 08, 2007

With first quarter results around the corner, market men look at earnings growth to drive it higher

With historic growth in sales and earnings of India Inc, at 31 per cent and 32 per cent respectively for 2006-07, the 17-month long rise of the Sensex from 10,000 to 15,000 seems to be in line. What’s more interesting is that even with a relative slower pace expected in the first quarter of 2007-08, at 25 per cent, earnings growth should continue to power it. According to Ajay Bagga, chief executive officer, Lotus India Mutual Fund, “Market is the leading indicator and makes opinion. Lot of adverse information has already been accounted for. Technology will stabilise and telecom, PSU banks, cement and construction sectors are looking strong to lead the momentum.” Adds R Venkataraman, executive director, India Infoline, “Sensex touching 15,000 is a reflection of the strength and positiveness of India’s growth story.”

But the rally has been selective — only 12 Sensex companies have grown faster than the Sensex. The five companies whose share prices have largely driven this rally from 10,000 to 15,000 are Reliance Industries (up 84 per cent), Bharti Airtel (81 per cent), Larsen & Toubro (73 per cent), Reliance Communications (60 per cent) and ICICI Bank (55 per cent). These five companies have a combined weightage of 38.4 per cent in the Sensex.
According to D D Sharma, senior vice president (retail equity), AnandRathi, “It’s not been a confident all-round rally as very selective stocks have led to the growth and this does not bring the desired comfort level.” As many as 18 companies grew slower than Sensex and six of them registered a decline in the 17 month period — Bajaj Auto, Hero Honda, Tata Motors, Hindalco, Ranbaxy and ITC.
Even so, this is the fastest 5,000 point growth in Sensex. It took 20 years and 8 months for Sensex to reach 5,000 mark from 100, a CAGR (compounded annual growth rate) of 21.1 per cent. The next rally from 5,000 to 10,000 took 5 years and 10 months, a CAGR of 12.2 per cent and the latest one, from 10,000 to 15,000, took just 17 months or a CAGR of 33.1 per cent.
The growth over the past 17 months does not really suggest that the momentum is going to continue, said Sharma: “I don’t see a further sharp rise from here in the near future and neither do I see a sharp correction.” The first quarter results seem to hold some answer to where the market will lead.
According to Anup Maheshwari, head of equities and corporate strategy, DSP Merrill Lynch, “We expect the overall results to be fine, but we are slightly subdued on technology.” IT sector is facing problems of rupee appreciation and market men are nervous about their results. IT bellwether Infosys will declare its results on July 11, which should decide the course of the market.
Compared to other Asian markets, the Indian market has underperformed and has remained underinvested in the last six months. “With high global liquidity and low domestic participation in the past one year, I expect fresh liquidity to come in and increased domestic participation once the momentum picks after results,” said Bagga. “We can see a rally till 17,000 in a few months’ time.” The good subscription of mega IPOs of ICICI Bank and DLF also indicates the strength of the market.
Looking beyond the indices, though, growth has become broader over the past three months with smaller companies getting greater recognition and several fund houses coming up with equity schemes that are looking to invest in small and mid cap companies. “We see enough growth in smaller companies in the near term and market is also recognising them, though the growth will be sector led,” Maheshwari said.
The long-term story though holds strong with market expecting the corporate results to grow at more than 15 per cent per annum, said Sharma: “Though I am skeptical on the short term movement, the long term momentum is strong.” Adds Bagga, “the long term story is supremely positive.”
If Sensex PE of 21.5 seems a concern in comparison to international markets, it should be accounted for in terms of the growth, the markets are seeing. “Only China is growing faster than us and is trading at PE of 35 so in relative terms we are better placed looking at our sustained earnings,” said Bagga.

http://www.indianexpress.com/story/204152.html

Mutual funds

2007-09-01T11:08:00.001-07:00

Mutual funds’ daily collections drop 70-90% in a week

Sandeep Singh

Posted online: Tuesday, July 10, 2007

New Delhi, July 9: The mutual funds industry is facing a crash in daily collections. Between July 2 and today, the falls across various funds have been in the range of 70-90 per cent in their respective retail segments. This is a knee-jerk reaction to an April 27, 2007, circular of the Securities and Exchange Board of India (Sebi).

Under the circular, beginning July 2, all investors in MFs — not just those investing Rs 50,000 and more — need to attach a copy of their permanent account number (PAN) card; till December 31, 2007, an application proof would be accepted.
The funds are now worried. The two largest ones in the public sector and private sector, for instance, while accepting that the idea is good, are apprehensive about its immediate impact. Says UTI Mutual Fund chief marketing officer Joydeep Bhattacharya: “Only 10-12 per cent of retail MF investors hold a PAN, others don’t have it and so it has a direct impact.” Adds Reliance Mutual Fund chief executive officer Vikrant Gugnani: “We are facing a significant impact on daily inflows.”
Though collections are suffering, market players are welcoming the initiative, though with a cauldron of caution. “It will make the securities market transparent and cleanly regulated but this dynamic shift should be done in a phased manner without impacting the industry,” opines Gugnani. “The infrastructure and implementation process needs to be thought through.” “This is a step in the right direction that will benefit everyone in the long-term, though it will have initial hiccups,” said Bhattacharya. “Finally, all financial products should have a single identification number.”
While the MF industry may be protesting, the fact is that the 70-90 per cent fall it says it is facing is in numbers, not value. According to the head of an asset management company (AMC), “The fall is in retail applications, particularly among investors with Rs 100-500 SIPs (systematic investment plans). The high net worth inflows remain more or less the same.” Small investors putting in small sums add up to 15-20 per cent of the total corpus,”
Some funds are working towards the expansion and penetration of PAN among investors. Several fund houses have tied up with PAN issuing agencies like UTI TSL, Karvy and Bajaj Capital to make PAN forms available along with the mutual fund scheme application form and get them collected as well.
According to Bajaj Capital head of operations Harish Sabharwal: “Six AMCs have currently tied up for issuing PAN cards with us and we are being able to convince investors to apply for PAN. While investors were hesitant earlier, the number of applications for PAN has shot up by 10 times now.”
What might come as a loss for mutual funds may benefit other financial institutions, particularly life insurance and banks as they do not fall under this regulation. Aggressive insurance players offering high-cost investment options like ULIPs will benefit, as investors move from MFs to these institutions in the short term.
‘What’s wrong with PAN?’
Making PAN mandatory for all investors while buying mutual funds is only the first step. According to sources in the Ministry of Finance, the PAN condition will be extended to insurance and banking products as well. “This is only the first step,” a source said. “We plan to extend the scheme to other investment products.”
But, “What’s wrong with PAN?” he asked. “The idea is to have a sound audit trail of all transactions. If someone has something to hide, he will not invest but why should others not go for PAN? It takes just 17 days to get a PAN these days and the I-T department is not going to be hounding them.”

http://www.indianexpress.com/story/204356.html

Moeny lenders Vs banks

2007-09-01T11:06:00.000-07:00

Village India relies more on money lenders than banks

Sandeep Singh
Posted online: Tuesday, July 24, 2007

60 yrs after independence: 35% go to age-old lenders, 19% to banks
New Delhi, July 23: Money lenders have caught up with the friends and relatives segment at 35 per cent when it comes to fulfilling the loan requirements of rural India. According to the recently Invest India Savings and Income survey for June 2007, banks with 19 per cent of sourcing, stand at a distant third.

Self help groups and cooperative societies are the fourth and fifth preferred choices for sourcing loans and have a share of 9 per cent and 6 per cent respectively. Says ICRIER director and chief executive officer (CEO) Rajiv Kumar: “It is to ensure ease of transactions that the common man avoids banks. The processes of banks for loans are hide-bound, full of bureaucracy, and require a lot of collateral... these cumbersome processes take the common man away from banks.”
The banking system in our country has not been able to cater to the needs of rural India because of its lack of penetration. According to ICICI Bank head of retail assets Rajeev Sabharwal: “It’s more like being in a development stage as till now the penetration of financing has been more focussed on the urban side. What banks need to do and which they are doing is to spread the distribution network in the rural market and look for low cost solutions by way of technology that will help reduce transactions and cash management costs.”
The Invest India study also provides insights on the requirements of rural India that force them to go for these loans. Financial emergencies come out as the prime reason for taking a loan — accounting for 35 per cent.
The next in importance are medical emergencies and farm/ crop loans, which account for 20 per cent and 18 per cent respectively of loan takens. These three requirements account for 73 per cent of the loan requirements of rural earners.
At the next level come the need for homes/ land, business requirements and social obligation, which account for 12 per cent each. Says Sabharwal: “The requirements for emergencies are there but there is enough demand to finance pre-harvest agricultural implements and the post-harvest needs that come to banks.”
When it comes to taking small loans, banks’ share stands at 26 per cent and trails the loans taken from relatives, which stands at 42 per cent of the total sourced. Money lenders closely follow banks with 21 per cent.
Adds Kumar, “banks will have to come up with some innovative ways to give consumption loans so as to create productive assets.” Banks are organised lending institutions and their retreat raises concern.
According to Sabharwal, “The banks share will increase with the increasing distribution network, which all banks are working towards. Banks’ transparency is high and the interest rates charged by them are lower compared to money lenders.”

http://www.indianexpress.com/story/206480.html

Financial Literacy

2007-09-01T11:04:00.000-07:00

90% high-income urbanites think PSU banks guarantee deposits!

Sandeep Singh
Posted online: Saturday, August 04, 2007

New Delhi, August 3: The state of financial literacy in India is extremely grim. According to data released by the Invest India Incomes and Savings Survey 2007, only 9.6 per cent of the urban population in the income category of Rs 5 lakh plus understand that nationalised banks don’t guarantee deposits.

The survey also discloses that almost 83 per cent of the Indian earning population doesn’t know what a stock market is. In urban areas, in the income group of less than 2.5 lakh a month, almost 50 per cent have not heard of the stock market while in villages, as many as 91 per cent have not heard of the concept. Says Delhi-based financial planner Surya Bhatia: “I am little surprised as I think that almost 95 per cent of retail investors investing in the stock market don’t understand it, they go by what their broker says.”
If this is the case with the stock markets, the situation is even worse for mutual funds (MFs). According to Invest India Dataworks executive director Sandeep Ghosh, “Barely 9.5 per cent of Indian earners have heard of mutual funds and only half of them can actually describe what a mutual fund is.
Also, for mutual funds, the idea of systematic investment plan (SIP) has not actually percolated and people who have not invested in mutual funds think they are too costly.” The situation for insurance is better as it is a retail product and because of the incentives that it offers to distributors for promotion.
With Prime Minister Manmohan Singh and finance minister P Chidambaram both stressing the need for financial inclusion of rural India, the survey shows the enormity of the challenge before the government and industry. It shows that financial literacy has not been able to penetrate the urban population, which has greater access.
“When we talk of financial literacy, we forget that only 5-6 per cent of our country’s population is English-literate,” said Knowledge Networks chairman Rakesh Khurana. “With almost all our sources of financial knowledge in the English language, how will people understand?”
The situation seems a little better when it comes to understanding the importance of regular savings. Still, around 25 per cent of the population in the higher income group (earning more than Rs 5 lakh per annum) do not understand its importance.
What’s heartening is Indians’ understanding of risk. Almost 89 per cent of the people in the income group above Rs 2.5 lakh a year understand that high risk results in higher returns and vice versa.

http://www.indianexpress.com/story/208543.html

Indian Banking Growth

2007-09-01T11:02:00.000-07:00

From docile also rans to go-getters, our banks have come a long way

Sandeep Singh
Posted online: Friday, August 10, 2007

Plush computerised branches, high profile corporate culture and aggressive nature is what the Indian banking sector looks like now, six decades away from when customers lacked access and banks lacked growth. It has been a slow but steady movement over the past 201 years since State Bank of India got established in 1806 (as Bank of Bengal), to now when we have 88 scheduled commercial banks in the public, private and foreign banks category offering a wide variety of services.

The major changes in the banking system started post-Independence. In 1949 came the Banking Regulation Act which empowered RBI to regulate, control and inspect Indian banks. New banks were now required to take licences from RBI to start operations. Between 1949 and 1969 a lot of steps were taken. First the RBI assumed the power to reconstruct and compulsorily amalgamate banks, as a result of which over 200 banks were merged or liquidated between 1962 and 1980. An important move in 1961 was the deposit insurance, which insured depositors’ money.
Under the New Bank Branch Licensing Policy in 1962, which has not been successful in its motive, the stress was on opening branches in unbanked or underdeveloped areas of the country. We still have around 500 million unbanked people in our country and that is the prime area of focus of bankers today, said KV Kamath, managing director and CEO of ICICI Bank: “The biggest challenge today is to bank the unbanked.”
Nationalisation of 14 big commercial banks happened in 1969. Six more private sector banks got nationalised in 1980. This gave the government sizeable control over credit delivery. With nationalisation of banks coming up, growth of banks started to pick up in terms of operations. Demand deposits and savings deposits started picking up fast.
But like all other sectors, 1991 was the turning point for banks as well. The Narsimaham Committee suggested phased reduction of the CRR/ SLR along with reforms in accounting standards, income recognition and capital adequacy norms. Licences were given to private banks, which revolutionised the banking sector in India. Private banks have brought growth. ICICI Bank, carved out of ICICI in 1994, is second only to SBI which has a two century old history.
Backed by technology, private banks raised service standards. Demand deposits expressed as a percentage of GDP, which stood at 0.4 per cent in 1950, rose to 1 per cent in 1972 (the year of nationalisation), to 4.8 per cent in 1991 to 22 per cent in 2006. In short, the growth spurt has come only post-liberalisation.
Going forward, the focus of 28 public sector banks, 29 private banks and 31 foreign banks is going to be consolidation, growth, quality and penetration. Reason: the industry is smaller than the top 50 banks of the world. Clearly, while banks have come a long way in the past 60 years, the way’s longer over the next 60 years.

http://www.indianexpress.com/story/209654.html

Financial Literacy- Raju

2007-09-01T10:49:00.000-07:00

Meet Raju, your new financial literacy teacher

Sandeep Singh
Posted online: Wednesday, August 22, 2007

RBI, NSE launch novel method to increase financial inclusion, devise comic character to explain difficult banking and stock market concepts

If Raj brought India to Archies, Raju is taking banking to consumers. Reserve Bank of India (RBI) and National Stock Exchange (NSE) have launched an innovative mode of propagating financial literacy by adopting comics as a means to educate people in a simplified manner on banks, their services and the understanding of stock markets. This is a step ahead by the banking regulator and the leading stock exchange of the country to make people aware and include them in the growth of the country. The poor level of financial literacy has been a growing cause of concern all across and this step to educate people is an important step forward.

RBI feels that though there are 70,000 bank branches across the country and though India has grown significantly over the past few years, financial inclusion has lagged. This is mainly because of people having wrong notions about a bank or not having the proper knowledge of its functioning. RBI thinks that people are not properly aware of the banking facilities and the services it can offer them like savings, loans and credit cards.
The central bank plans to use comics to carry financial education at various levels to specific categories of people. It has launched its first book on basic banking, Raju and The Money Tree. Four more are in the pipeline — two on basic banking (one each for rural and urban households), one on currency (its use and security), and one on the RBI as a monetary authority. Apart from Hindi and English, these books will be published in the vernacular languages. The first book has been framed in so simple and understandable a manner that even a 10 year-old-child would be able to understand the concepts. It has good caricatures that make the reading more interesting. All facets of the basic financial procedure have been weaved in very neatly in story format, which tries to teach the importance of banks in channelising money through the prism of its main character, Raju. It is explained that banks can be used as a channel to keep money safe and to earn interests. The book makes an effort to enlighten the reader on the basic needs that a bank can serve for an individual.
Other than disseminating financial education through the medium of comics, RBI is also working on the course content for making financial education a part of the school curriculum. RBI expects to complete the course in a year, after which it will approach NCERT to include it as part of the regular course curriculum. The book released by NSE tries to explain what an index is, what it signifies, how it moves and what factors are responsible for its movement. But before RBI’s Raju — who needs a serious upgrade in terms of visual and verbal complexity — NSE’s endeavour falls flat. It barely manages to cut-paste complex concepts from the medium of books to the medium of comics. It doesn’t grip, doesn’t tell a tale. The planning has been done, the books are out and now lies the most critical part — dissemination to people who actually need it and for whom it has been planned. RBI has decided to use channels like state government offices, village panchayats and schools.
What tomes on finance couldn’t and cannot communicate, perhaps Raju will.

http://www.indianexpress.com/story/211865.html

Explained- No Load

2007-09-01T10:43:00.000-07:00

EXPLAINED

Loaded in favour of the intelligent investor

Posted online: Friday, August 24, 2007

On Wednesday, the Securities and Exchange Board of India (Sebi) proposed to allow funds to be sold without load. Sandeep Singh goes behind the proposal to decode just what this is all about

What is a load?
Entry load is an upfront charge which any mutual fund (MF) investor has to pay the distributor selling the fund. It stands at 2.25 per cent for existing equity funds and up to 6 per cent for new fund offers. Sebi has now proposed that all investments in mutual funds — whether a lump sum investment or a systematic investment plan (SIP) — that are routed directly through a mutual fund (through its website or branches) will attract no entry load. However, if the investor decides to go through a distributor, he will have to pay the load.
So, what’s the fuss about?
In one line, it’s about lower costs — and therefore higher returns. It is also about not paying if not availing of a distributor’s service.
But what’s new?
Currently, only one asset management company — Quantum Mutual Fund — offers this facility. One can make investments in Quantum schemes only through its website or branches.
Will it hurt distributor business?
If the distributor is behaving like a courier, that is carting forms to investors, filling them and depositing them with the AMC, yes. But distributors who are providing value by delivering advice will continue as before. In fact, this will help distributors rise up the value chain and behave like financial planners. The former is like a chemist; the latter like a doctor.
Will this affect penetration, given that distributors help bring in new investors?
Not necessarily. The distributor route is still open and investors who want to approach a distributor for investment can do so. This route would suit households that are comfortable investing on their own.
Who should go for no load funds?
Investors who can analyse funds — compare past performances, evaluate portfolios or track fund managers and their performance regularly — should opt for no loads. Others should rely on the advice of a good planner.

http://www.indianexpress.com/story/212291.html

No Load Mutual Fund

2007-09-01T10:40:00.000-07:00

Direct MF applicants may get to avoid entry charge
George Mathew / Sandeep Singh

Posted online: Thursday, August 23, 2007
Mutual Funds: Sebi plan for financially literate investors splits distributors

New Delhi/ Mumbai, Aug 22:

The Securities and Exchange Board of India (Sebi) is considering a proposal to remove the load for direct applications in mutual fund (MF) schemes. Currently all investors, irrespective of the mode of entry, are required to pay an entry load of 2.25 per cent for equity funds. “Keeping in view the interest of investors, Sebi is now considering giving a waiver in the entry load for direct applications received by asset management companies (AMCs), ie applications received through the internet, submitted to AMC or collection centre/ investor service centre that are not routed through any distributor/ agent/ broker,” the Sebi proposal stated while inviting public comments.

According to AMFI chairman A P Kurien, “This is a welcome step but essentially for investors who are confident and fully aware and knowledgeable about mutual fund investing, and understand its risks and returns. Others might need the help of distributors who provide an advisory role.” This is a very positive and “constructive step”, said Financial Planning Standards Board India (FPSBI) CEO Ranjeet Mudholkar. “In fact, we had recommended this along with disclosure of commissions to agents. Since no load is payable on purchase or sale of units, the entire corpus will be put to work.” This would help in other ways too, he added. “From the financial planning perspective, this would encourage more fee-based advice, which in turn would help investors get the right asset allocation.”
Fund houses have welcomed the move. “Fidelity supports the proposal as it is in the investors’ interest,” a Fidelity spokesperson said. This is an investor friendly measure, said JP Morgan AMC CEO Krishnamurthy Vijayan. “But the distributor does add value in terms of giving advice to the investor. Finally, it is the investor who has to decide which way he wants to go.”
Distributors are, however, divided on the issue. Bluechip Corporate Investment Centre managing director J Rajagopalan said, “If an investor knows when and what to buy and sell, he should take this route.” On fears about distributors losing clients and revenues, he said, “Let us see. In my opinion, distributors won’t lose out as they provide advice on which funds to buy.”
Others feel different. “This is a contradiction of existing Sebi rules,” says Bajaj Capital managing director Rajiv Deep Bajaj. “Direct investing with mutual funds without entry loads is tantamount to rebating to investors while Sebi rules debar distributors from rebating to investors. This move will also be detrimental to retail growth of mutual funds as distributors may become unviable.” The measure will help the investor boost returns. If a household invests in a Rs 10,000 per month systematic investment plan (SIP) through a distributor for 10 years, its return would be Rs 26.9 lakh at the end of the period, assuming an average annual return of 15 per cent. If, however, it goes through the no entry load route, the return would be Rs 27.5 lakh.
If at the end of 10 years, the investor decides to pull out this money from the fund house and invest in another fund house, he will have to pay an upfront load of Rs 60,530 on investing Rs 26.9 lakh and still continue with the monthly load through the SIP. Multiply that by four in a 40-year-long investing cycle and the sum is not insubstantial. Sebi has stipulated that the loads collected by the AMCs for each scheme will have to be maintained in a separate account, which may be utilised for meeting the selling and distribution expenses. As per industry practice, the load is normally utilised for meeting the agent/ distributor’s commission.
There are two types of loads. “Sales” load — also called front-end load — is a charge collected by a scheme when it sells the units. “Back-end” load is the charge when the fund repurchases the units.

http://www.indianexpress.com/story/212090.html

IPO Analysis- ICRA

2007-08-29T07:47:00.000-07:00

NEW ISSUES
The Moody's effect
Sandeep Singh
Posted online: Tuesday , March 20, 2007
Its credit rating and information services businesses are poised to do well. The kicker: Moody's, one of the two global biggies, assuming sole charge.

The main, sometimes the only, objective of most companies to go public is to raise money to expand their business. By that count, Icra (Investment Information and Credit Rating Agency) is a rarity. The company is not issuing any new shares. Rather, three of its many promoters are selling their shares, in part (SBI and UTI) or in full (IFCI), in what is called an offer for sale. The entire Rs 80-odd crore IPO proceeds will go to them, Icra will get nothing.
So, what's the point of the issue? Ask company officials that, and they say something about how being listed gives a company visibility. What they dont say is that the exit of IFCI and reduction of SBIs stake to below 10 per cent will put Moodys, co-promoter and the worlds second-largest credit rating agency, in the drivers seat at Icra, opening up more possibilities for the business and by extension, for investors. The prospectus is silent on these possibilities, but those are within the realm of the possible and make for good reasons to invest in the Icra IPO.
Upside in business
The first possibility is that of growth in business. Promoted by a clutch of banks and financial institutions, Icra commenced operations in 1991 as a credit rating agency, assigning ratings (like AAA and A) to debt issues of companies. Over the years, business has grown. The company has also diversified into related businesses, notably consultancy, IT-based services and information outsourcing. As a result, the revenue share of rating services is down from 70 per cent in 2003-04 to 56 per cent in 2005-06.
That share will keep falling, but it will still remain the mainstay for Icra. Demand for rating services is linked to the state of the economy. If the economy is doing well, companies look to expand, for which, they raise money through debt and equity issues. The more debt issues they make, the more business they provide rating agencies like Icra, which earns a one-time fee (for the initial rating) and an annual surveillance fees (for monitoring the rating through the issues tenure). In the last three years, the volume of debt paper being rated has steadily increased.
Over the years, credit rating has been made mandatory for several kinds of debt paper. These include corporate debt with tenures of more than 18 months, commercial paper issued by companies, fixed deposits of non-banking finance companies and debt paper of more than one year issued by listed companies on a private placement basis. Its in the interest of companies to get their debt paper rated, as several institutional investors only look at rated paper.
Rating agencies are venturing into rating new segments like stockbrokers, developers and governance practices of companies. If two pending regulatory proposals are cleared, it will open up two more business lines. The first is IPO grading, the need and utility of which is being contested by many. The second is rating of loans and advances of banks. At present, banks have to maintain a standard capital of 9 per cent on all their advances. But under an RBI proposal, once Indian banks shift to Basel-II norms, the capital they will be required to put aside will be based on a risk assessment of their loan portfolio. So, banks will have to get their loans and advances rated. Elsewhere, Icra is looking to increase its presence in three related businesses.
and promoter
Business for rating agencies is good: companies are issuing debt to expand and regulators are being kind Although the prospectus and company officials are, strangely, silent on the opportunities in these segments or Icras plans, these should benefit from the Moodys taking sole charge. In terms of business and shareholder value, Crisil, Indias largest credit rating agency, came into its own after Standard and Poor (S&P) took charge. Post-issue, Moodys will have a 28.5 per cent stake in Icra. In all probability, the US company will look to increase it beyond 50 per cent, which could be a trigger for the share price.
Even if that doesnt happen or takes long to pan out, theres enough happening in Icra to merit investment. Growth wont be explosive, but it should be steady. In the last three years, Icras revenues have grown at a compounded annual rate of 26 per cent, net profit at 13.9 per cent. Icra is cash-rich and, since it is in a people-driven service business, doesnt need cash infusion to grow.
Salaries have been increasing, but Icra still managed a net margin of 26 per cent in 2005-06, which is better than Crisil. Its issue price of Rs 275-330 discounts its 2005-06 earnings 16.7-20 times, again better than Crisil (See table: Financial performance). If the economy stays on the fast track, if Icra can keep growing its new businesses and not lose much in margins, thats a good price to buy this stock for the long term. As if Moodys increases its hold and influence over the company, it should look even better.

Source : Express Money

Big Talk- Subir Gokarn

2007-08-29T00:42:00.000-07:00

BIG TALK:
SUBIR GOKARN, ED AND CHIEF ECONOMIST, CRISIL

‘Even Rs 39 may be a conservative estimate’ Avinash Singh And Sandeep Singh Posted online: Monday , July 23, 2007 at 1450 IST Updated: Wednesday, June 29, 2005 at 1257 hours IST --

An appreciating rupee is knocking the wind out of the sails of software companies. However, says Subir Gokarn, executive director and chief economist, Crisil, it’s not such knowledge-based industries, but labour-intensive, easily substitutable ones like textiles that will feel pinch of a rising rupee more. In a wide-ranging interview to our correspondents, Gokarn dwelled at length on the prospects and impact of the rupee, why he believes GDP growth will average 8-8.5 per cent a year for the next five years, and much more.

Q1 results are trickling in. What are your first impressions?
They are still too few to spot trends, but my first impression is that there isn’t a slowdown from the previous quarter, but there is no acceleration either. The numbers suggest plateauing, but without any clear indication of a slowdown.
The maximum results are in IT, where an appreciating rupee is taking its toll.An appreciating rupee will hurt any sector where exports account for a majority of revenues. But sectors that are domestically driven or have a balance between domestic revenues and exports won’t be affected. The trend for the IT sector is quite clear.

Some are saying a dollar rate of Rs 39 by mid-2008. What’s your outlook?
It depends on policy. Ever since our balance of payments (BoP) turned positive, four or five years ago, the RBI’s stance has been to resist appreciation. But in a BoP surplus situation, the natural tendency of a currency is to appreciate — it’s a simple demand-supply argument. In that sense, the RBI has kept the rupee undervalued during this entire period.If it decides to go back to that stance, the rupee will settle for some time. If it decides not to resist appreciation, there is no telling where the rupee will go. However, the more it appreciates, the probability of it appreciating further will reduce. What’s that point of equilibrium — Rs 39, 38 or 37 — is difficult to tell. The BoP numbers for the last quarter of 2006-07 show a significant surplus, both in the current and capital accounts. Even capital inflows are very high. So, even Rs 39 may be a conservative estimate, but the question is whether the RBI will let it go.

You feel the RBI will eventually step in.
The pressure from the export lobby will be there. Most of our exports, other than software, are very labour intensive, like jewellery, footwear and garments. They will get hurt, as they are easy to substitute. You can stop buying from India and, without disrupting your supply chain, start buying from Thailand, Vietnam or China. When there is ease of substitution, price competitiveness is important.The commerce and the finance minister tried to work out a package last week, and the signal was that we have to live with this for some time, so let’s try to find other offsets. In other words, the rupee might appreciate further. If I’m forced to take a call, as inflation numbers decline, they might resume a stance of resisting appreciation. But when that will happen is difficult to say.

So, export-driven sectors are in for a period of pain.
Typically, a sector that works entirely on domestic inputs and exports all its output is one that will be hurt the most, the extreme example being software. However, software is not easy to substitute, as clients tend to stick with their partners. However, a JCPenny or Wal-Mart, who are sourcing garments or footwear can easily terminate a contract and replace it with another one from some other country.

Is the manoeuvring room for such Indian exporters very small?
It is, as commodities like garments and footwear is completely replicable. There is no inherent advantage one country has over the other, and price is everything. A change of 2-3 percentage points in a currency can change the attractiveness of a location.It won’t happen in industries like software, or in knowledge-intensive industries like auto components or pharmacy. In auto components, it takes a long time and a lot of investment to set up a supply chain. If the rupee appreciates, GM or Ford, who are buying components from suppliers in India, can’t decide overnight that they are going to abandon them. They will take six months to a year to decide whether they need to source more from, say, Thailand and China, where the currency is to their advantage. But they can’t decide in one go that we are going to buy nothing from India because the capacity in other countries is not there, the quality control is not there and they can’t just abandon investments made in the supply chain. In such sectors, margins will fall, but not so much production.

Going beyond the rupee, is there enough investments and capital expansion happening to sustain 8-9 per cent GDP growth?
A lot of growth momentum came from sectors sensitive to interest rates like auto, construction and housing. If rates rise, some of this momentum will weaken, which will reduce the willingness of companies to set up new capacity. So, we expect to see some decline in investment activity. The numbers of capital goods manufacturers, or those of production and capital expenditure, still look buoyant. Simultaneously, there are signs of higher interest rates hurting housing, auto, especially commercial vehicles and two-wheelers, over the past six to nine months. But even then, it’s not a dramatic change. We still have substantial growth momentum.

The FM is talking of 10 per cent GDP growth rate, provided agriculture grows at 4 per cent.
In the current macroeconomic situation, 10 per cent is more of an aspiration than a forecast.

What is Crisil’s forecast?
An average of 8-8.5 per cent over the next five years.
What gives you the confidence that 8.5 per cent is realistic?Many bits and pieces of the reforms process over the last 15 years contributed to growth, but it never gained a critical mass till about three or four years ago. There were a couple of triggers. One was interest rates, which fell from 16 per cent in 1996 to 7.5 per cent about two years back. Currently, they are at 9.5-10. We can’t expect them to go back to 16 per cent, but now they are moving in a range of 6.5-10 per cent. That means something fundamentally happened in the financial sector to allow lenders to reduce rates from 16 per cent. Competition increased dramatically, efficiency of lending has increased dramatically, risk management has become quite efficient.This was supported by fund inflows, which started in 2002 and accelerated growth, and productivity gains. Our demographics present a big long-term opportunity. All these factors that held back growth have eased considerably.

In the context of growth, you seem to mention interest rates as the critical factor. Is it really that big?
No, I was referring to the structural change between the mid-nineties and today, when rates have fallen by 5 percentage points. Borrowing at 16 per cent versus borrowing at 7 per cent makes a huge difference in the affordability to borrow, and that’s where demographics come in. You have the potential, you convert it into reality.What’s happening with interest rates now is a cyclical change, not a trend change. When rates reach 10 per cent, you shut out few potential borrowers. But that’s not the same as 16 per cent, where you change the trend.

In the current interest cycle, are we close to peaking?
The moderation in growth rate does suggest the cycle is turning, which means there will be a reversion of growth rate towards the trend. Once a trend is identified, the objective of monetary policy is to minimise fluctuation. In a macroeconomic situation, the closer growth patterns are to the trend, the easier it is for investors to take long-term decisions. You are then more confident that your long-term forecast, assumption and expectations will more or less materialize.
Lastly, what’s happening at Crisil with IPO grading?The gradings we did as part of the pilot project painted a wrong picture. Stock exchanges sent us only those companies that they felt needed a grading. I think only one of them got 3 out of 5, the rest were 2 or less. If you are telling investors that all the companies graded are 2 or below, what does a good one look like? Unless investors have something to benchmark them against, the value of this product is limited.

http://www.expressmoney.in/news/Even-Rs-39-may-be-a-conservative-estimate/89884.html

IPO Analysis- Central Bank of India

2007-08-29T00:40:00.000-07:00

Slow off the blocks
Sandeep Singh
Posted online: Monday , July 23, 2007

As investments go, Central Bank of India makes a good first impression. With the economic engines hurtling along, the banking business is poised to go places. The bank itself has the third-largest branch network in the country and is selling its shares at a relatively modest PE of 6.9-8.3. It has received an IPO Grade of 4 (the highest being 5) from credit rating agency CARE, signifying “above-average fundamentals”. But dig deeper, the subsequent impressions are, at best, average. They show a bank that is late off the blocks in reorienting itself to the new economic and business order, in the process under-utilising many of its strengths.

Below parIts biggest strength is reach. With 3,194 branches (1,094 urban, 759 semi-urban and 1,341 rural), Central Bank of India is ranked third, but productivity from these branches is woefully low. In terms of assets and revenues, the bank slips to number eight, and a distant 22 in net profit (one slot behind State Bank of Travancore, which has 694 branches).One of the reasons for this slippage in performance is its tardiness in embracing technology. At a time when full linkages are the norm for private banks, and the leading public sector banks are getting there, only 51 per cent of Central Bank of India branches are computerised. Worse, only 324 of its branches — or less than 10 per cent — offer centralised banking solutions. The bank plans to increase this number to 1,000 by March 2008. It trails most banks in ATM count also. As on March 31, 2007, it had 261 ATMs. That’s an ATM-to-branch ratio of 8 per cent, which compares dismally to the 25 per cent average of public sector banks.The one positive off its widespread branch network is the high percentage of current account and savings account (CASA), 42 per cent, in its total deposit base. A bank wants to have as much of these deposits as possible, as it pays zero interest on a current account and just 3.5 per cent on a savings account. A 42 per cent CASA reduces the cost of funds for Central Bank of India, helping it earn a spread of an impressive 3.2 per cent.However, once it starts accounting for its other expenses and bad debts, it doesn’t end up with as much surplus as it could end up with. The biggest of these outgoes is salaries. In 2006-07, 19 per cent of its income went in paying its employees across its 3,194 branches. Since those branches do not have as many loan assets, and are not generating as much in revenues and profits, as other banks of its size, its profitability is low.
The second biggest outgo for Central Bank of India is provisioning for bad loans. As on 31 March 2007, the bank had gross NPAs (non-performing assets) of Rs 2,571.9 crore, or 4.8 per cent of gross advances. On a net level (gross NPAs minus provisions made that year) stood at Rs 878.4 crore, or 1.7 per cent of its net advances. It was primarily because of provisioning of this level that the bank’s net profit got pared down from Rs 1,269.6 crore to Rs 498.2 crore in 2006-07.
Peer pressureThat’s what’s bogged it down in the past. Question is, what does the bank need to do to change this? And more importantly, is it doing enough to bring about that change? To start with, the bank needs to increase productivity. It can do that by investing more in linking its branches and setting up ATMs. The other front is lending more — and lending profitably.A rough calculation shows that even if every branch increases its revenues by Rs 50 lakh, the bank’s total revenues will increase by about 25 per cent. Since many of its branches are in semi-urban and rural areas, where industrial lending is low, it’s retail that can make an across-the-board difference. However, Central Bank of India has been weak in retail. In 2006-07, retail loans accounted for just 11 per cent of all its loans. By comparison, Bank of India was doing 22 per cent, PNB 24 per cent, even SBI 22 per cent.
The other challenge is to lend profitably. In the last two years, credit has grown at a compounded annualised rate of 35.4 per cent, while deposits have grown at 16.7 per cent. That shows that it is not able to mobilise as much deposits as it needs. If its dependence on CASA reduces and that on FDs increases, its cost of funds will increase — and put pressure on margins. Clearly, a lot of work lies ahead of Central Bank of India, and the management needs to show more intent and speed in transforming the bank into a nimble, modern, profitable business.
The banking sector should grow well, as should Central Bank of India. But why would you want to invest in a bank that is still doing the hard work when you can invest in public sector banks that have done more of that hard work, at the same or marginally higher valuations? Three such banks are Canara Bank, Punjab National Bank and Bank of India, and each one is significantly ahead in efficiency, technology, profitability and business sense (See table: ). Rather than invest in the Central Bank of India IPO, you should buy shares of these three banks from the stock market.

Currency appr and its impact

2007-08-29T00:37:00.000-07:00

UP, UP AND AWRY
Sandeep Singh
Posted online: Tuesday , July 31, 2007

MindTree Consulting, which made an impressionable debut on the bourses earlier this year, increased its revenues by 35 per cent in the first quarter (April to June) of 2007-08. Yet, its net profit for the same period dipped 15 per cent. In another industry, auto ancillaries, Sundaram Brake Linings saw both its revenue and profit growth slip in Q1. As did GTN Textiles in textiles.These three companies are not random examples of corporate performance. They represent three sectors that carry India’s aspirations as a low-cost, high-quality export hub — software, auto ancillaries and textiles — and the hopes of millions of investors who have backed them to make a mark on the global landscape. MindTree got 88 per cent of its revenues from exports in 2006-07, Sundaram Brake 33.3 per cent and GTN Textiles 81.1 per cent in 2005-06 .

Rupee lossesFrom a blessing, this export orientation has become a curse. In the past year, the rupee has appreciated 14.1 per cent against the dollar, from Rs 46.85 to Rs 40.27 now. For Indian exporters selling in dollars, it’s a straight notional loss. If they sold a good for $100 a year ago, they would have repatriated Rs 4,685 into India. Today, if they sell the same good at $100, they will bring back only Rs 4,027.For some like the frontline software companies, it’s a loss in margins. Says Rostow Ravanan, chief financial officer, MindTree Consulting: “Every 1 per cent rise in the rupee lowers our net margin by 0.5 percentage point.” Down the ranks, the threat is of losing business to low-cost export hubs like China.Worrying as the dip in performance is, the forecast for the rupee against the dollar is a greater cause for concern for exporters in general and those from these three sectors in particular. Big dollars are being pumped into India, through the FII and FDI route, by private equity players, in the form of foreign currency loans. Says Abheek Barua, chief economist, HDFC Bank: “The dollar should be Rs 38-39 by next year. Rupee appreciation is here to stay, for four to five years.” Adds Subir Gokarn, executive director and chief economist, Crisil: “In a balance of payments surplus situation, the natural tendency of a currency is to appreciate. If the RBI decides not to intervene, there is no telling where — Rs 39, 38 or 37 — it may go.”A rising rupee impacts your finances in many ways. If you are working abroad and earning in dollars, you will repatriate fewer rupees into India. Conversely, if you are travelling abroad, you will need fewer rupees to buy the dollars. However, those who are affected in such forms are far more than the investors of companies that make a major part of their sales in dollars.Some of them also import raw materials or spend in dollars, which covers the loss on the export side.However, if a company’s exports are high and imports low, as is the case with software, textiles and auto ancillaries, they have some reorientation to do.

Software
In terms of export share, software leads the pack. Several companies are only doing work for foreign companies, that too mostly in the US, and are being paid in dollars. For the top 10 IT companies by revenues, exports comprise an average of 83 per cent of their revenues.During the rupee’s 14 per cent rise against the dollar, the sharp rise has been since March — 9 per cent in five months. So, though the 2006-07 numbers are strong, those for Q1 2007-08 show some after-effects. The big four — TCS, Infosys, Wipro and Satyam — have seen growth, both in revenues and net profit, in Q1 fall compared to 2006-07. For instance, after several successive quarters of above 25 per cent profit growth, Wipro’s year-on-year profit growth dropped to 8.4 per cent.However, experts say, the nature of the software business is such that Indian companies won’t lose out overnight. Says Gokarn: “Software is knowledge-intensive and not easy to substitute, as clients tend to stick with their partners.” Conversely, if business does shift to neighbouring low-cost countries like The Philippines, it might not come back easily.For now, the possibility of a shift is remote. Says Ravanan: “Software is profitable, its demand potential is huge, and it will find ways to recalibrate.”The biggies have room to play with and they are seeing robust demand for their services. Companies down the ranks will feel the pinch more, as they have less room to manoeuvre. Says an IT analyst: “The impact will be more on mid-sized and smaller players. Large companies have the flexibility to absorb the impact. Some of them even have pricing power to pass on the rupee appreciation to their clients.” The three biggies — TCS, Infosys and Wipro — are still good long-term picks.

TextilesUnlike software, the textile business is neither knowledge-intensive nor do companies in it operate at the top end of margins. Admits Rajendra J. Hinduja, executive director, finance and administration, Gokaldas Exports: “Net margin of apparel companies is 5-9 per cent. If the dollar takes away 8 percentage points, we are in trouble.”Eight of the top 10 textile companies that had declared their Q1 results have seen lower revenue growth, compared to the full-year numbers for 2007-08; five of these companies have shown negative growth. The profitability picture is no better (See table). Unlike software companies, Indian textile companies can’t absorb a margin loss. If the rupee keeps rising and realisations keep falling, they will be left with no choice but to hike product prices. The danger here is that the Wal-Marts and JC Penny’s might simply go to another country.Among the three sectors, textiles has the most to lose and the most to change. Says Hinduja: “We can improve productivity, charge higher product prices and move to value-added products, which offer greater pricing power.” The final word belongs to Chirag Khasgiwala, textiles analyst, Emkay Share & Stock Brokers: “A 10-20 per cent drop in profits is likely. I don’t see strong buying potential currently.”

Auto ancillariesAuto ancillaries fall in between IT and textiles. Average exports as a percentage of revenues have risen from 5-8 per cent to about 15 per cent in the past two to three years.Nine of the top 10 auto ancillary companies who have declared their Q1 numbers have reported a drop in net profit growth, compared to 2006-07. India faces competition from neighbouring countries like China, Vietnam, Mongolia and Bangladesh, but there are barriers to a shift. Says Gokarn: “Companies like GM invest a lot to set up a supply chain, which can’t be abandoned like that.”Since the industry imports some of its raw materials, it gets a natural hedge against the rupee. Also, the percentage of exports is still not as significant as textiles or software to press the panic button. Two stocks that are good buys even now are Bharat Forge and Minda Industries.

Stock Picks

2007-08-29T00:30:00.000-07:00

SHOCK-PROOF!
Sandeep Singh
Posted online: Monday , August 20, 2007

Barely a week ago, this market could do no wrong. Now, it seems, it can do no right. The newest word in the Indian investor lexicon, sub-prime, has had a domino effect on all financial markets. It has gobbled up mortgage companies in the US, and hedge funds in the US and Europe. It has caused a credit squeeze and a flight of foreign funds from emerging markets of alarming proportions.Every market is down. Worse, it’s difficult to ascertain how deep and long this damage can run. Says Abheek Barua, chief economist, HDFC Bank: “India is not directly exposed, but we can’t avoid the contagion effect.” Indeed, there are businesses in India, or aspects of it, that are at risk from this complex tangle. Says Sanjay Sinha, chief investing officer, SBI Mutual Fund: “The financial sector is affected. If companies there reduce their IT spend, Indian IT companies with an exposure to the BFSI (banking, financial services and insurance) sector will lose business.” Adds Suman K. Bery, director general, NCAER: “Overseas financing will take a hit, which will hurt companies funding overseas acquisitions.”However, there are several businesses that are insulated or affected only marginally in an indirect way by the sub-prime mess. Says Sandeep Nanda, head of research, Sharekhan: “The long-term story is intact in engineering, capital goods and consumer goods.” With share prices being marked down indiscriminately, you will get juicy opportunities to buy these businesses.Perhaps, the best place to look for them is in the infrastructure space. We have identified five such shock-proof picks. Business for them is good and plotted out for two to three years, order books are flowing and they are shielded from the sub-prime fallout. There are risks like a squeeze in foreign capital and investments, but these companies can manage them. On to our picks…

Areva T&D
One infrastructure area still lagging is power. In the eleventh five-year plan (2007-12), the government is looking to add 68,869 mw of capacity; it also states a fund requirement of Rs 2,37,000 crore in the transmission and distribution (T&D) segment. Those numbers, and the investments unfolding in the power sector, should electrify French multinational Areva T&D, which supplies a range of T&D products and provides a range of T&D services.The sub-prime blowout is unlikely to scuttle these investments. In the T&D space, Areva competes with the likes of ABB and Siemens. Says Ajit Motwani of Emkay Stocks and Share Brokers: “Their parents do a lot of product research, which they are using to grow.” Valuations are high (the stock is quoting at a PE of 47), but justified by the pace of growth. Net profit has increased at a CAGR of 86 per cent in the last three years and, this year, it is looking good for 60 per cent at least.

Bharat Earth Movers Limited (BEML)
You might recognise it by the wagons that move on the Delhi Metro, but BEML is better known as the second-largest manufacturer of earth-moving equipment used in diverse sectors like defence, railways, mining, construction, power, steel and cement, among others. Several of these sectors are a beehive of activity. That’s rubbing off on BEML, which is growing this side of its business at 40 per cent a year.Rail wagons is shaping up to be a strong growth segment for BEML. The Delhi metro is expanding, projects are at various stages of clearance in Ahmedabad, Bangalore, Chennai, Hyderabad, Kochi and Mumbai, which BEML is likely to bid for. The company recently raised about Rs 500 crore through a follow-on public offer (FPO), of which, it has earmarked Rs 215 crore to expand its metro coach facility. With the objective of becoming more cost-efficient, Rs 90 crore each is assigned to upgradation of current facilities and for a VRS.As of February 2007, BEML had pending orders of Rs 824 crore in mining and construction, of Rs 236 crore in defence, and of 300 coaches worth Rs 102 crore and a letter of intent for another 875 coaches. The BEML stock has appreciated about 31 times in the past three years,but its PE has only doubled to 23.4, which reflects strong earnings growth. Its user industries are diverse. Even if some of them start to flag, BEML should still manage to sustain strong growth in the coming years.

Noida Toll Bridge
Even if sub-prime woes intensify, the 100,000 vehicles — and growing — that do a Noida-Delhi or Delhi-Noida via the Noida Toll Bridge every day will continue their to and fro. The toll road is a 30-year BOOT (built, own, operate, transfer) project, which means IL&FS should manage the project till 2031 and then hand it over to the New Okhla Industrial Development Authority (Noida).However, the transfer is unlikely to happen in 2031 or even the years after that. The concession agreement between the stakeholders assures the company a 20 per cent return on investment over the life of the project. The company retains control of the toll road till it earns that return, which is a long way away, as the shortfall every year gets added to the project cost.Meanwhile, traffic on the road is increasing at 15 per cent a year. At present, it’s about 90,000 vehicles per day, which is about half its designated capacity. Meanwhile, toll charges are increasing — the toll for a car has increased from Rs 15 to Rs 20 in six years, and yet the number of vehicles has increased. The new link road to Mayur Vihar will add more vehicles, as will the increasing occupancy in Greater Noida.The company also has 235 acres of land, which presents additional revenue possibilities. All in all, it’s a steady road.

Patel Engineering
Another company riding the infrastructure boom. Patel has an order book of Rs 5,000 crore, or about five times its 2006-07 revenues. About half of this is from hydro-power projects, a high-margin segment because of the complexities involved and where it is the second-largest player after Jai Prakash Associates. Patel does projects mainly for state irrigation departments, NHPC and NEEPCO. The government has fixed a hydro-power generation target of 15,285 mw for the eleventh five-year plan.Besides hydro-power, Patel also builds roads, tunnels, dams and bridges, among other things. More recently, the company has ventured into the real estate business, with a land bank of 500 acres. At its current PE of 22, Patel trades cheaper compared to competitors Jai Prakash (PE of 40) and Gammon (34.6) — and offers good scope for growth.

UltraTech Cement
Formerly part of L&T and now a Grasim subsidiary, Ultratech has a capacity of 17 million tonnes. Together, UltraTech and Grasim are the leading combine in India, controlling about 20 per cent of the installed capacity. Cement makers have posted triple-digit increases in net profit in the last three years, helped by strong demand and inadequate supply. Cement prices have soared, even withstood government moves to bring them down (from Rs 130 per 50 kg in March 2004 to 200 in March 2007).Projects that will lead to an overall increase of about 50 per cent in capacity are currently underway, must of which are likely to come up in mid-2009. That will bridge the deficit, even check prices. But if construction demand stays robust, as is expected, the cement cycle should stay up — as should UltraTech.

http://www.expressmoney.in/news/SHOCK-PROOF!/91083.html

Big Talk- Nilesh Shah

2007-08-29T00:22:00.000-07:00

BIG TALK:
NILESH SHAH,
DEPUTY MANAGING DIRECTOR,
ICICI PRUDENTIAL MUTUAL FUND-->
‘We are buying on every fall’
Sandeep Singh
Monday , August 27, 2007

The US sub-prime crisis and political turmoil might push the stock market down, but it’s because of foreign money moving out, not because anything significant has changed in the economy or the way companies are doing business. So believes Nilesh Shah, Chief Investment Officer of ICICI Prudential Mutual Fund who has recently also been made Deputy Managing Director. In a conversation with our correspondent, Shah explains why he thinks India is in better shape to handle such surprises and gives his reading of the market.

How bad is the sub-prime problem and how much will it affect India?
The sub-prime issue will keep resurfacing over the next few months. Sub-prime is the result of falling housing prices, rising interest rates and higher EMIs in the US, after two soft years. So, unless the entire cycle reverses, it is unlikely the sub-prime issue will be settled quickly.One positive is that the US Federal Reserve has shown inclination to contain it by cutting some key interest rates in the next few months. That should take care of rising interest rates. What’s left is falling housing prices and accelerating EMIs. But once interest rates start falling, housing prices will start stabilising, and then accelerated payments won’t create much of a problem. Although the sub-prime problem persists, the market has more or less discounted the risk from it. Unless something dramatic and new happens, the market won’t be bothered much.

It won’t fall much from here…
At a Sensex level of 14,000, the market has substantially discounted political and global uncertainty. The monsoon has been very good, inflation is low and falling, interest rates are stabilising, industrial growth is continuing, the rupee overvaluation is correcting — there’s a lot going for India.For September 2008, a year on, we expect earnings per share (EPS) of Rs 900 for the BSE Sensex. Then, in the Sensex, there’s about 2,000 points of non-monetised businesses like Reliance Gas, which is not commercially operational, or the life insurance business of ICICI, SBI and Bajaj Auto, all of which have value. Remove 2,000 points from 14,000, and the market is trading at a PE of 13.5-14, which is a reasonable valuation to buy into.
Are you buying?
Certainly. We have been buying with every fall. It makes sense to buy when stocks are cheaper, rather than when they are expensive.

Where’s the value?
FMCG has been the most defensive, and hasn’t fallen much. Capital goods and IT too didn’t fall much, but some auto, banking and telecom stocks got butchered. In the current volatility, invest more in large- and mid-caps.

What about political uncertainty?
Won’t it hurt?Political uncertainty has greater ability to cause a short-term blip, rather than leave a long-term impact. Sentiment will be affected, as people across the world have invested in India, thinking of it as an economic powerhouse. Those perceptions may, rightfully or wrongfully, change, leading to money being pulled out. But I don’t think it will have a material, long-term impact on our economy. Today, we are in far better shape to handle this problem.
The sub-prime crisis and politics do affect Indian companies. For instance, overseas borrowing could get more expensive, even more difficult.The cost of foreign borrowing has gone up because of a widening in spread on Indian credit. However, our external commercial borrowings (ECBs) are $25 billion. If rates increase by 1 percentage point, that’s an extra interest outgo of $250 million. That’s manageable. Indian treasurers are smart: they will trade in currencies and interest rates to take care of this movement. And even if the US Fed cuts interest rates, spreads may widen, but the base rate will fall. So, net-net, the borrowing cost won’t be significantly higher for Indian companies.

How do you see the rupee moving in the next three years?
Currencies are difficult to predict on a longer tenure. There are several factors to it. If FII and FDI inflows, and remittances, keep pouring in, the rupee can only appreciate. If commercialised gas production increases in India, our dependence on oil reduces, which means outflows reduce. Again, long-term appreciation.In the short term, we see the rupee depreciating to 42 against the dollar because the credit risk has widened overseas, reducing demand for ECBs. In the long term, it might climb to Rs 40, even Rs 39 levels.

Coming to ICICI Prudential Mutual Fund, there have been some changes at the top. Will that change anything?
No. Our business is simple: we have to service our customers to the best of our abilities. We have always managed our products in a manner that gives investors the best, not just in terms of returns, but also in terms of suitability and expectations.For instance, take our new Indo Asia Equity Fund, which will invest 65 per cent in Indian stocks and 35 per cent in Asian stocks. This fund is unique and fulfils many needs. As it is, retail investors’ allocation to Indian equity is lower than what’s necessary or deserved. This fund ensures 65 per cent allocation to Indian equities and the tax advantage of an equity fund. Since the balance is in Asian equity, it gives them an exposure to business cycles different from that of India. It also gives them an exposure to industries not available in India like natural resources and semi-conductors.

Why not 100 per cent allocation to foreign equities, as most overseas funds are doing?
Retail investors have low exposure to Indian equities, and there’s no point in pushing a 100 per cent foreign fund to them. At the same time, country diversification makes sense, as business cycles in Asia are different from India, as are industries. Combining the two gives a less risky product and also a tax advantage.

Why restrict it to Asia?
Asia fits better with India. Growth in Asia is likely to be higher than the rest of the world. Globally, allocation will move to Asia because of its performance potential — $3.3 trillion reserves and two billion people.

No Load

2007-08-29T00:19:00.000-07:00

No distributor, no load
Sandeep Singh
Monday , August 27, 2007

Even as life insurers and the insurance regulator defend high agent commissions, capital market regulator Sebi is proposing to scrap entry loads on investments not made through an agent (that is, made directly or through the Internet).

Sebi regulations allow fund houses to charge you a total load (entry plus exit) of 7 per cent, which they use to pay their distributors. Typically, fund houses charge an entry load of 2.25 per cent in equity funds. So, if you invest Rs 10,000 in an equity fund, you are allotted units for Rs 9,775 — the rest the fund house gives to distributors.
Knowledgeable Investors like Gaurav Garg, a CA in Delhi, have been lamenting they get nothing in return for this outgo. “My distributor gives no advice. When I can use the Internet to identify schemes, and invest directly, why should I pay an entry load?” In the long run, the savings from the waiver of an entry load of 2.25 per cent add up (See table).
At present, only Quantum Mutual Fund, which doesn’t sell through distributors, works on a no-load model. All other funds levy a load, regardless of how you invest. This might change. Says A.P. Kurien, chairman, Association of Mutual Funds in India (Amfi): “It’s an investor-friendly step. Knowledgeable investors can invest by themselves, but others might still need help from distributors.”
Predictably, distributors, who face a potential loss of income, are opposed to this move. As an investor, if you want to present your views to Sebi, email to ruchic@sebi.gov.in or send a snail mail to Sebi, Investment Management Department, SEBI Bhavan, Plot number C-4A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai-400051 before September 12.
Load unloadMost equity funds charge an entry load of 2.25 per cent of investment. If you were investing 5,000 a month through an SIP (systematic investment plan), you would end up paying Rs 20,250 as load. Sebi has proposed to do away with this charge if you invest directly or through the Internet. Since more money goes to invest for you, you end up with a lot more over long periods of time.

http://www.expressmoney.in/news/No-distributor-no-load/91430.html

Emerging market funds

2007-08-21T10:36:00.000-07:00

To gain from capitalism, this time just turn to nationalism - BIZ THE STORY

The US subprime crisis, faster economic and corporate growth, consistent markets, and the rising rupee have made India a lower-risk, higher- return haven for investors

SANDEEP SINGH

SIXTY years of political independence and 16 years of relative economic freedom have catapulted India to the top of the in vestment charts - only China's gross domestic product (GDP) is growing faster than India's and only Brazil's stock market has generated a higher five-year return. At such a time, when product sophistication and innovation mean creating opportunities for diversification of "country risk", it seems rather naive for an Indian household to invest its money outside India.
In April 2007, the RBI increased the limit on overseas investment for the mutual fund (MF) industry from $3 billion to $4 billion, and for individual fund houses (FHs) from $150 million to $200 million. Following this decision, FHs have started offering funds that plan to invest in emerging markets. But in a situation when the Indian economy is on a strong foothold and is shaping itself in a way that makes the developed nations depend on it for higher returns, should Indian investors venture abroad? More so in the context of the subprime mess, which has taken risk to a more dangerous level of uncertainty.
It makes sense for American, European and Japanese investors to invest in emerging markets considering the slow growth rate of their own economies - US (3.3 per cent), UK (2.7 per cent), Japan (2.8 per cent), and the low returns in their domestic markets (8.8 per cent, 8 per cent and 11.8 per cent respectively). It is justifiable for them to get out of their own markets and look for faster growing, greener pastures. For them, opportunity lies in emerging markets like India, Brazil and Mexico, which have generated five-year returns of more than 35 per cent per annum. Investors in developed markets are not entering these "risky" markets to diversify their country risk (minus the subprime fiasco, country risk in developed nations is less), but to fetch higher returns. But does this logic apply to Indian investors? Better Returns: Not quite . The Sensex has grown at a three-year compounded annual growth rate (CAGR) of 42.8 per cent and a five-year CAGR of 36.4 per cent. At this rate of return and a high GDP growth rate, both of which are strongly expected to sustain with slight moderation, the Indian market is expected to remain strong on the back of robust domestic consumption and infrastructure growth.
In comparison, the other emerging markets seem riskier. Mexico has a GDP growth rate of 4.5 per cent and its BOLSA index trades at a PE of 19.9; Egypt has a GDP growth rate of 6.9 per cent and its Hermes index has a PE of 21.5; Brazil has a GDP growth rate of 3.7 and its Bovespa index is trading at a PE of 13.5. Only China, with a GDP growth rate of 10.7 per cent, fares better than India but with its Shanghai Composite Index trading at a very high PE of 41.8, its market becomes high risk. Economic growth in India is also steadier - over the past 16 years many governments have changed but the growth momentum has been sustained. There are, however, factors other than the GDP growth rate. The stability and rate of returns of the Indian market make investing abroad less attractive. Tax Considerations: There are tax related considerations as well to take into account. Funds that are planning to invest most of their assets abroad will be treated as debt funds. Thus, any long-term capital gain on them will be taxed at the rate of 10 per cent without indexation benefits. Exchange Rate: This is another factor that those planning to invest abroad must factor in. Over the past few years, there has been a significant flow of funds into the Indian market, which has caused the rupee to appreciate. This is emerging as a big concern for dollar earners. At present, the rupee is trading at around 40.5 against the dollar. If it were to appreciate to 3637 to the dollar, investors would see a huge fall in returns. The rupee has already appreciated by 14 per cent in the past 12 months and a large section of economists feels that "the rupee appreciation is here to stay".
Thus, with a robust and sustained domestic growth rate, strengthening rupee and unfavourable tax rules which make rupee returns higher than dollar ones- this may not be the right time to invest abroad. The damage from the US subprime debacle is still being calculated. And Indian investors still need to be able to grapple with exotic products like securitised debt and its derivatives like collateralised debt obligations.
In fact, once the global subprime crisis gets over, international money will flow back to India.
Home sweet home ? The US subprime debacle's impact on global markets makes this an inopportune time to invest abroad ? On criteria like GDP growth and recent stock exchange returns, India is now more attractive than other emerging markets ? Funds investing abroad don't get indexation benefits ? An appreciating rupee will further diminish returns earned abroad

2007-07-22T20:22:00.000-07:00

MONEY MANAGEMENT

Srinivas needs financial planning but who’s going to give it to him?

Sandeep Singh

Posted online: Monday, July 23, 2007 at 0000 hrs Print Email

When finance minister P Chidambaram on July 20 said that financial literacy should be a compulsory subject in class XI, and observed, “Everyone who earns an income is a potential saver, every saver is a potential investor, every investor ought to be financially literate,” and stressed on inclusive growth, I travelled back 30 days on a journey to my hometown.

I had to make a sudden trip to Gorakhpur and after trying in vain to get a berth on a train, I spent the night awake in a general compartment. I sat on the entrance footstep of the wagon, sharing it with a rough looking man, rough clothes, rough hands, but warm, soft eyes.
We got talking and he introduced himself as Srinivas, a 29-year-old knowledge worker — a mason, an “expert” in fixing marble slabs. As he smoked his beedi, he told me he had no savings, even though he made between Rs 12,000 and Rs 15,000 a month and had been working for the past seven years. He does not have an insurance policy and has three children and a spouse to be looked after.
We write about microfinance, micro SIPs and so on but we also know that our banking system has failed to reach half of our country’s population. I wonder how going micro will help.
Does Srinivas need financial planning? He not merely needs it; financial planning for him will be a life-changing tool. When asked why had he not opened a bank account or a post office saving, he very meekly said, “No one ever advised me where to keep the money and so I just save in cash which then gets used later on.” I realised that this man will keep earning till the end of his life and will have no savings that can take care of his children’s education, their marriage and his retirement.
I scared him with all these thoughts and also with the idea of what would happen to his family if he died. He got little wary and with great concern asked for advice. With the little knowledge I have, I told him to initially start with a recurring deposit (RD) of Rs 500 a month in a post office which is a safe investment and take a term life insurance policy, that will secure the future of his wife and kids in case he dies.
A few dark stations later, he told me that there are many who are in the same situation as his. I thought there must be crores of people like Srinivas who are earning fairly well but not being able to manage and grow their money. All they need is a 2 hour directional session and they can have a life that’s financially stress free.
Srinivas is very keen to give his children a good higher education and put them on a higher berth on the inter-generational journey. We said our good byes and he promised that he would open a recurring deposit with a post office and buy a life insurance policy.
As I took the cycle rickshaw to my home, I felt that for people like Srinivas financial planning will change the way they see life and will be a beginning for a better future. With Chidambaram’s intent behind people like him, we will not only be able to see a more “inclusive” wealthier India, but the economy will also be able to deploy the money more efficiently.
But till such time that such intentions remain intentions, it is people like us who need to take the initiative. I know households who have opened post office accounts and SIPs for their drivers and maids. May their tribe increase.

http://www.indianexpress.com/story/206329.html

Credit card- Reward Points

2007-07-21T10:06:00.000-07:00

Rewards of loyalty

Friday October 27 2006 15:36 IST

Sandeep Singh

Sachin Deshwal, a construction contractor in Noida, runs up a bill of Rs 10,000 a month on his credit card. Although this young bachelor has several cards, he uses his ICICI Bank card more frequently than the others, as a result of which he had accumulated a good number of reward points. Last week, Deshwal pored through the ICICI Bank gifts catalogue, and picked out a Yukai-Mustek Handycam, for 2,000 points and Rs 4,500. Says Deshwal: “I like the concept of reward points. I think I got a great deal.” We think, maybe not. It’s easy to feel like Deshwal does because the handycam is a freebie, an unexpected bonus. The tendency is to not even impute a cost to such reward point-related freebies from card-issuing banks. But if you did, you’d find that you are not really getting a steal. Further, in the way the market is evolving, the best value-for-money credit cards are not those offered by banks, but the new breed of loyalty cards being launched by big business houses, which straddle many products and services. Intense competition has turned a credit card into a commodity. Every bank has a card, and increasingly the joining fee and annual fee are being waived off for entry-level cards. The rate of interest charged on rollovers is similar (usually, exorbitant) and reach is not a problem. In other words, what you can do with, say, an ICICI Bank card, you can do so with an SBI or Canara Bank card too. So, issuers are trying to differentiate themselves through value-adds, the chief one being reward points. For every Rs 100 you spend on the card, banks give you a small amount Rs 0.50-2 on entry-level cards, Rs 3-6 on value-add cards as a bonus. Banks express this bonus in reward points, but it’s not necessary that one point equals Re 1. Sometimes, it is equal to 50 paise, some banks don’t even state the monetary value of a reward point. Typically, the points you accumulate can be reimbursed to buy gifts from your bank or get shopping vouchers. Here is where banks show their ingenuity and sometimes, be a source of irritation to you. Some banks give gifts, but it’s usually a combination of reward points and some cash, which is charged to your card. It can be annoying to know that the only chance you have to encash your reward points is if you pay more. Says Vijay Bobba, chief executive officer, Loyalty Solutions and Research: “About 70-80 per cent of reward points earned are never redeemed, as most cardholders don’t manage to hit the minimum typically, 500 points or lose interest in the structure.” Some banks like ABN AMRO give you gift vouchers, which is definitely better if you don’t want to spend additional money to redeem. However, invariably, these vouchers are all spending-oriented things like shopping, travel and restaurants. No bank lets you use the points to pay essential bills. This is where the new breed of loyalty cards score. Loyalty cards are essentially co-branded cards done on a larger scale. Typically, co-branded cards entailed tie-ups between a bank and a seller for instance, ICICI Bank and HPCL, ABN AMRO and Barista or a handful of sellers. Loyalty cards increase the number of partner products and services manifold, giving you higher reward points and more useful reimbursement options, and do away with the need to carry a wallet full of cards. Earlier this year, Tata and Maruti launched their loyalty cards. Last week saw the launch of Reliance Credit Card, from the Reliance ADA (Anil Ambani) Group, in partnership with Citibank. The Tata Card (with SBI Cards), for instance, gives more reward points Rs 4 per Rs 100 as an introductory offer, and Rs 1-6 subsequently at any of its 17 partner brands, which cover utility providers, financial service sellers, shopping outlets, petrol pump and airlines, and probably more in the near future. The same is the case with the Reliance Card. On all other spends, you continue to earn the reward points a normal credit card would earn. Moreover, you are not constrained to use the reward points accumulated to buy gifts you don’t need or which require you to pay more. Chances are, you can use it to pay utility bills. For instance, if you reside in South Delhi or use a Reliance phone, you can use the reward points accumulated on the Reliance card to pay those bills. The shift from co-branded towards multi-brand loyalty cards is only expected to gain pace, even see innovation. Earlier this year, Loyalty Solutions and Research launched a loyalty programme called the I-mint card. This is only a rewards card, it doesn’t double up as a payment card. When you shop at any of the partner brands (at present, six) or outlets (3,500-4,000) across the country, getting your I-mint card swiped will fetch you 1-30 reward points (monetary value not stated), which can be used to buy gifts or for vouchers. Says Bobba: “The trend is towards helping customers earn significant number of points in quick time.” And that’s only good for you. Loyalty pick Tata Card Charges: Annual fee of Rs 500 for Privilege Card, Rs 1,000 for Premier Card, though vouchers for an equivalent amount can be redeemed at partner brands Partner brands: Tata Group (Tata Motors, Voltas, Tata AIG, Westside, Star India Bazaar, Landmark bookstores, Taj Hotels, Titan, Tanishq, NDPL, VSNL, Tata Indicom) and others (Indian Airlines, Jet Airways, Air India, BPCL and India Today) Reward points: Rs 1-6 on partner brands, 1 per cent on other spends Reliance Credit Card Charges: Free for life Partner brands: Reliance ADA Group (Adlabs, BSES, Reliance Communications, Reliance Insurance) and others (IOC) Reward points: Not available Maruti Autocard Charges: Free for life Partner brands: Maruti, IOC Reward points: Rs 1.5-6 on partner brands, 1 per cent on others.

http://www.newindpress.com/sunday/sundayitems.asp?id=SEK20061027061006&eTitle=Money&rLink=0

Big Talk- Madan Sabnavis, NCDEX

2007-07-21T09:59:00.000-07:00

Sunday June 18, 05:40 PM

'Invest in gold only for the long term'

The past year saw nearly all asset classes stocks, real estate, precious metals, base metals move northwards. Gold was a frontrunner in the race its price nearly doubled during this period, crossing the psychological barrier of Rs 10,000 per 10 grams before falling down to around Rs 8,700. Madan Sabnavis, chief economist, National Commodity and Derivatives Exchange spoke to Sandeep Singh about the factors that led to the soaring prices of gold, and the subsequent crash of the yellow metal.
Though they've come down now, gold prices had moved to astronomical levels. Where was the demand coming from? Two factors were at play here. The first, demand-supply fundamentals like the disruption in South Africa impacted global supply. But, it hasn't disturbed the balance significantly.
The second is the behaviour of financial markets. Gold prices have an inverse relation with the value of the dollar the coefficient of correlation is over 0.98. When the dollar weakens against the euro, the price of gold tends to move up, as funds move away from the dollar and towards gold.
So how do you explain the reversal? The stock market correction seems to have impacted gold prices too. The strength of the dollar vis-à-vis the euro has driven gold prices downwards of late. This relationship between the two should continue. The acceptance of Bernanke's conservative monetary policy stance will strengthen this feeling. In any case, a continuous decline in the dollar could impact European exports, and the Euro zone would try and arrest a freefall in that currency. This would result in phases of weaker gold prices.That said, while the supply of gold is limited, demand is ever increasing. So the price can only move up in the long run.
So where do you see gold prices a year from now? It is hard to say. While the basic relationship depends on the euro-dollar strength, we have seen deviations. In the first half of 2005, everything was moving up gold, dollar, crude oil, metals, stocks and interest rates. But the strength of the euro would depend on the current account deficit of the US, which is around 6 per cent of GDP today. This can't come down in the near future and as long as it remains high, the dollar is bound to come under pressure, which in turn, would push gold prices up.
So you're saying this is a good time to invest in gold. I'm saying investment decisions should be based on fundamentals, for which ideally one should look at a longer time horizon. Given that the US deficit wouldn't stabilise in a hurry, there would be a proclivity towards a weaker dollar. However, short-term disturbances would always be there driven by other economic and socio-political factors.
Even at Rs 8,700-plus gold does seem expensive. Will this impact the traditional market in India? The domestic price of gold is fully correlated with the international price. Although India is the largest consumer of gold, it is just a price taker. Therefore, the price would tend to mimic the global trends. Further, we import all the gold that we use, so there is no real supply issue as far as India is concerned.
Retail buying is unlikely to come down with higher prices, as gold is treated as a sign of wealth. So when prices rise, one would be tempted to buy more gold to maintain one's status, and also because one knows that the price will not come down in future. That makes the precious metal a safe investment harbour.
How will the demand of gold move when gold ETF is launched in India? The demand for gold would be on the rise with the launch of gold ETFs. But since we are price takers and gold is freely importable, the supply constraint may not be there. We need to wait and watch on the response of these funds.
What factors would affect the price of gold in the near future. Would rising interest rates impact its demand? The gold price in India is driven by the international price of gold and the exchange rate. If the international price rises and the rupee weakens, we will see higher prices and vice versa. Interest rates may not impact the demand for gold. This is because the investor in gold is different from the one who deals with fixed income instruments. To the extent he does borrow money to invest in gold, there would be some caution. However, given that the gains from gold are much higher than the incremental interest cost of borrowing, it may not be limiting factor.
How does one hold gold in demat form. What are the advantages of doing so? In a simplistic manner, you can take your gold to an authorised warehouse of NCDEX and get it certified by an authorised assayer. Your commodity balance account with the DP (depository participant) is then credited with, say, 1 kg of gold. You can then hold it or sell it by simply transferring it to the depository balance of the buyer. This way, there is no physical movement and the transfer of monetary balances is instantaneous. The advantage of dealing on NCDEX is that as a buyer you are sure of the quality and as a seller your demat account is adjusted according to your need.
How can one check the quality and standard of gold? There are assaying agencies that check the purity of the gold based on the contract specifications of NCDEX. When gold is brought to the warehouse, it has to meet these specifications and any tolerable deviation goes at a discount. As a buyer of this gold on the exchange, you are guaranteed for this level of purity.

http://in.biz.yahoo.com/060618/203/655ai.html

Gold as Investment

2007-07-21T09:56:00.000-07:00

Monday November 6, 03:47 PM
Golden rules

By Sandeep Singh

It's that time of the year when demand for gold hits new highs. On Diwali, people buy gold for auspicious reasons and to gift. After that, and through the winter months, it's all about conspicuous consumption, as the wedding season takes flight. Gold-buying patterns of Indians might not have changed much 80 per cent of gold is still bought in jewellery form, mostly around this time but the buying options have increased.
24-carat gold
This year, for the first time, banks are advertising heavily to sell gold coins and bars of 24-carat, or 99.99 per cent purity the highest available. ICICI Bank, for example, is selling gold in round-shaped coins (2.5 gm, 5 gm and 8 gm), heart-shaped coins (2.5 gm) and rectangular bars (20 gm and 50 gm).
Banks are perceived as institutions of trust. That they are assuring purity and consistency in a precious metal where quality has always been an issue could be the clincher for many buyers. But such assurances come at a cost.
Banks charge a mark-up of up to 25 per cent over the prevailing market price of gold. For instance, on November 2, when 24-carat gold closed at Rs 9,148 per 10 gm on the NCDEX, ICICI was retailing a 5 gm, 24-carat coin for Rs 5,604. Extrapolating, a 10 gm coin will cost Rs 11,208. That's a premium of 22.5 per cent over the spot bullion price. Other banks also charge a similar premium, ranging from 13-23 per cent. Banks say the mark-up is meant to cover the various costs they incur on logistics, storage and insurance. By comparison, jewellers charge a mark-up of 5-7 per cent.
Bhargava VaidyaGold Analyst
Invest in gold only through exchange-traded funds. Their costs are the lowest and their launch is not far awayThe quantum of mark-up reflects the risk of being sold something less than 24-carat gold. Jewellers command less credibility than banks. Says an official of Union Bank of India: "All the gold that banks sell has got an assay certification and comes in tamper-proof packing. Most assurances from jewellers are not based on such certification, but on word-of-mouth."
You don't want a situation where you buy 24-carat gold today, but when you go to sell, you are told it is of lower purity. If a jeweller is trustworthy and you have a relationship going with him, it's safe to buy 24-carat gold from him, as you will get the ruling market price when you go to sell. However, if you are venturing into the unknown, you are better off buying from a bank and paying 13-23 per cent more than the market price.
Gold as an investment
Put another way, if you are buying gold for investment purposes and buy from a bank, you are down 23 per cent at the very outset. How good or bad is an investment if you incur a cost of 23 per cent to buy it? By comparison, the cost of buying shares is about 1.5 per cent of the transaction value, equity funds 2-25 per cent.
For you to recoup your investment, and profit from it, gold prices have to travel a longer distance. They have done so in the past, but not with any degree of consistency. On a 10-year holding period basis, beginning 1970, the maximum compounded annual return from gold was 24.4 per cent (1970-80). Investments made in gold in the 1970s have given shining returns, but investments completing 10 years in the past decade, even with the surge in prices in the past three years, have performed woefully, with the CAGR ranging from minus 0.2 per cent to 4 per cent (See chart: Dull and shine). It would get worse if you added 23 per cent transaction costs to it. Says Bhargava Vaidya, a gold analyst: "I wouldn't advise buying a gold coin for investment at such a high premium."
The numbers indicate that gold makes for an ordinary investment, especially if it is purchased in the physical form, where transaction costs eat into returns. Some relief is in store on the charges front, with the launch of gold ETFs (exchange-traded funds) any day now. Says Vaidya: "For small investors, gold ETFs are the way to invest, as their loading on the market price is only 0.5 per cent. And you don't have to worry about purity or safety issues."
Less than 24-carat gold
Purity issues linger with gold purchased through jewellers. Increasingly, though, the government, through the Bureau of Indian Standards (BIS), is institutionalising checks and balances that let you gauge the purity of the gold being sold to you.
Purity of gold symbolises the actual gold content. So, 24-carat is 99.99 per cent pure, 22-carat is only 91.66 per cent pure (22/24 x 100), and 18-carat is 75 per cent pure (18/24 x 100), and so on. Pure gold, or 24-carat gold, is only sold in the form of bars and coins, and is too malleable to be made into jewellery.
There is a standard way to check the purity of the gold sold to you the BIS's five-point hallmarking check. Every piece of jewellery that has been hallmarked by the BIS will have a small imprint. Says Aman Gupta of Delhi-based PP Jewellers: "While purchasing jewellery, one should buy only hallmarked jewellery, as it provides an assurance of purity." The BIS certification will have five things, namely:
BIS logo Fineness, as indicated by a number that corresponds to carat. For example, 22-carat is 91.66 per cent gold, and the imprint should show '916'. Similarly, 18-carat gold, which is 75 per cent pure, should show '750'. Logo of the assaying and hallmarking centre Year of hallmarking. It starts from 2000, which is denoted by 'A', 2001 by 'B', and so on Jeweller's mark
Says A.K. Talwar, deputy director general (hallmarking), BIS: "You should buy only hallmarked jewellery. And when you buy, check the hallmark yourself through a magnifying glass." The BIS issues licences to jewellers, as well as hallmarks jewellery items on a select basis. At present, the BIS has issued licences to about 2,500 gold jewellers.
A jeweller can have a BIS licence, but the piece of jewellery he is selling might not have been hallmarked. So, always, look for the hallmark on the piece of jewellery. Says Talwar: "It is proposed to make hallmarking of gold jewellery mandatory from 1 January 2008. Once this happens, all gold sold will have to be hallmarked." If and when that happens, it will mark a big step. But till then, you have to be on your guard, and do your own checks and balances.

http://in.biz.yahoo.com/061106/203/69440.html

Interest rate impact on home loan

2007-07-21T09:49:00.000-07:00

Staying afloat

Sandeep Singh

Posted online: Tuesday, April 17, 2007 at 1720 hours IST
Updated: Tuesday, April 17, 2007 at 1759 hours IST

You can no longer ignore the rising interest rates. The impact of this is clearly visible in the increased EMIs that you pay now on your previous loans, and the extended tenure for which you will be required to pay on a floating rate loan. This is a fallout of the Reserve Bank of India’s response to the rise in inflation and risk in lending to the real estate, car loan and personal loan sectors. The RBI as a policy measure has increased the Repo rate, CRR (cash reserve ratio) and provisioning against real estate lending. This has left banks with little option but to increase their interest rates.
The impactThe interest rates are on a steep rise with floating interest rates surging up from a level of 7- 7.5 per cent a year-and-half back to 11- 12 per cent now. People who have been hit the most are the existing floating rate home loan holders. For them it’s like being in a trap. Surya Bhatia, a Delhi-based financial planner says: “If you can’t prepay or switch your loan to a cheaper rate from another bank, you are stuck with it and can only wait.”
It also means that whatever you thought you have saved, by way of purchasing a house two years back when the prices were low, is all lost.
Property prices have gone up significantly over the past two years. Anshuman Magazine, managing director, CB Richard Ellis, says: “The prices of residential property across the country have gone up by 50- 100 per cent over the past two years.” But the excess amount that you would be required to pay on your outstanding loan amount now, due to the increase in interest rates, wipes off the notional gain by way of increase in property prices.
Figure it outLet us assume that you opted for a 20-year floating rate home loan at 7.5 per cent in September 2005 for purchase of a residential property worth Rs 25 lakh. The EMI for your loan would have been Rs 16,111. Now that the rates have climbed up, your EMI on the amount outstanding on the same loan at the rate of 12 per cent, with tenure revised from 20 years to 30 years, will now stand at Rs 19,978. This takes your total outgo on the loan up from Rs 38.6 lakh earlier to Rs 71.2 lakh.
If we assume that the price of your property went up by 60 per cent during the same period, the value of your house stands at Rs 40 lakh. But the interest cost on your house has gone up by Rs 32.6 lakh taking the total cost of your house to Rs 71.2 lakh.
For a new buyer the impact is even harder. “A new buyer will have to face the impact of both the rising prices of the property as well as the rise in cost on account of interest rates going up on the home loan,” says Bhatia.
What you can doIf you are in a situation where you have a floating rate loan that has gone substantially up, then there are some options for you to explore to bring your costs down. Bhatia says: “In case you have money with you and you took the loan for tax benefits, you need to revisit your calculations and should prepay your loan.”
The part prepayment option is also not feasible for many individuals and hence they need to look for a bank that is offering a cheaper loan and switch the loan amount. Here you need to pay a prepayment penalty of up to 2 per cent on your loan outstanding. If you find the penalty to be lower than the amount you would save by switching, then it’s worth considering.
Going by the above example of a 20-year Rs 20 lakh loan, after paying your regular EMIs for a period of 18 months you are still left with a principal outstanding of Rs 19.31 lakh. If your bank has revised your interest rate from 7.5 per cent to 12 per cent and your tenure from 20 years to 30 years, your new EMI will stand at Rs 19,978. The prepayment penalty in this case will be Rs 38,620. Now if there is a bank that offers you a loan on the amount outstanding at 10.5 per cent, then your EMI comes down from Rs 19,978 (12%) to Rs 17,804 (10.5%). This brings your total outgo less by Rs 7.4 lakh over the total tenure of the loan.
After paying your EMI at Rs 17,704 for 18 months you will recover the prepayment penalty you have paid and the rest goes on to save for you at your existing loan rate. This is a sample case and you need to calculate for your specific case and take a call. Although in most of the cases it fits well.
Should you defer your purchase?If you were planning to buy a house, you must have wondered whether to buy now or later, considering the possibility of interest rates going down. But that is no reason for you to defer your purchase by a year or so. Magazine says: “Property prices won’t come down crashing and they can only go up, though the rate of price rise might slow down.”
According to Bhatia it’s better to buy now than to wait. “If the interest rates stay put there is no reason to defer, if it goes up it is only better to take it now, and if it goes down then with your floating rate loan you will get the benefits of the same,” he says.
Floating or fixed?With housing loan rates rising with every passing month, it is no wonder home loan customers are concerned whether they should take fixed rate or floating rate loans. If we see the impact of the rising rates, it has been only on the floating rate loan holders.
There are couple of factors that come into play when one has to decide between floating and fixed rates. The first and foremost factor is the direction the interest rate market will move. Rajiv Kumar, director and chief executive, Icrier, says: “Inflation has been driving the interest rates.” “The interest rates are peaking so maybe we will stay at these levels for some time and then see the decline,” adds Abheek Barua, chief economist, ABN AMRO Bank,
In such a scenario where interest rates are expected to come down, it would not be wise to get into a fixed rate home loan — the rates are high and you won’t get the benefits of the declining interest rate, which exist in floating rate home loans. So opt for a floating rate loan. Bhatia says: “The difference between the fixed and floating rate is big — 150-200 basis points. The downside risk gets higher than the upside risk, which is why you should go for a floating rate.”
So work out the strategies for your previous loans and do not wait for things to settle down to buy a house. Go ahead with your plans.
‘New loan takers will be hit’Anshuman MagazineMD, CB Richard EllisWhat is your take on the rising interest rates in relation to the housing sector?There definitely has been value erosion because of the rise. The value of transactions in the residential markets has gone down and the growth rate in loan disbursement has come down from 30 per cent to 25 per cent now.
How do you see the individual getting impacted by it?The new loan takers will get significantly hit, as they will find it far too expensive to go for a loan at a higher rate and that too on a costly property.
To be specific, how will the interest rate rise impact them?If the EMI payment increases more than what has been budgeted, then it will strain those individuals unless the salary increase has been significant.
‘Make your purchase now’Surya BhatiaFinancial PlannerWhat do you think an investor should do to reduce the impact of interest rate rise on his ongoing loan?He can explore options like prepaying the loan if he has the money, or switch over the loan to another bank if he gets the loan at a cheaper rate.
Should new homebuyers defer their house purchase decision because of interest rate rise and expectations that they will fall?It’s very tough to say which way the interest rates will move. But either way they go — up or down, it only makes sense to purchase it now. If the rates are to go up, it is only better that you only advance your decision. If they were to go down then you anyway will get the benefit of the low rate on your floating rate loan.
Finally at these rates, should one go the fixed way or floating?You should go for the floating rate loan as the upside risk is lower than the downside risk.

http://www.expressestates.in/full_story.php?content_id=85005

Big talk- TP Raman - Sundaram

2007-07-21T08:58:00.000-07:00

BIG TALK T.P. RAMAN, SUNDARAM BNP Paribas Mutual Fund

‘Fund managers matter more in themes’

Sandeep Singh

Posted online: Tuesday , April 17, 2007 at 1447 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

One of the issues facing fund houses is people. Fund managers, the all-important set of people who are a big reason for your investment to lead or lag, are few in number. With the number of fund houses and schemes growing by the day, fund managers moves are becoming more frequent. Recently, for instance, Sundaram BNP Paribas Mutual Fund lost the services of Anoop Bhaskar, who was an important reason for the fund house’s strong equities showing. Sundaram managing director T.P. Raman promises continuity, but also admits that individuality plays a greater role in specialised funds. In an interview to our correspondent, Raman touches on the touchy issue of fund manager churn and more.

Fund managers come and go. Recently, you lost Anoop Bhaskar, your driver on the equities side. Will it affect performance of your equity funds?
We are a process-driven and institutionalised fund house, and we don’t promote a star culture. Having said that, a fund manager’s perspective is important. His views are important, as they are unique to him. He takes a view on the amount of risk to take from situation to situation. Still, I would say, more than individuals, systems and processes are important, as they work in the long term.

How much weightage you would give to a fund manager?
It is difficult to assign weights, as there are many cheques and balances we follow while managing people’s money. What I can say is that a fund manager is more crucial in some kinds of funds than others. His perspective and views are more important in specialised funds like small-cap funds, where there is a smaller universe, compared to a large-cap fund. Even in sector funds, if the fund manager has knowledge of the sector, it works to the fund’s advantage, as he can then take better calls.

Coming to the performance of your schemes, they have done well over three-year and five-year periods, but they have lagged over the past year.
It depends on the style of the scheme and the state of the market. For instance, large caps have been doing well. But our mid-cap fund can’t take an exposure to large caps, as it would mean changing the style of the fund. But don’t look at one-year performance — it’s a short-term perspective. We do work to protect our downside. We aim to be consistent, and we have been so. On a year-on-year basis, the average return has been 9-10 per cent, and a couple of our funds are there.

But there are also some funds like India Leadership and S.M.I.L.E. that have given negative returns.
We need to give these funds some time, as they are theme-based. Themes might not show results in the short term, but they should work in the long term. I can say that themes like infrastructure will work, though how much is difficult to quantify.

But didn’t you anticipate that volatility and act on it?
We were focussed on the downside, but we don’t want to move away from our designated themes. We can’t always keep changing the fund’s long-term objectives with short-term volatility or market movements. It’s tough to predict factors like oil, politics and interest rates. Hence, we try to stick to the theme of the fund, and manage risk by increasing our cash holding.

Sundaram has been quite active in promoting themes. How do you narrow in on a particular theme?
A certain amount of thought and planning goes into it. The government’s policy announcements and strategic intent are critical inputs. For example, we know that the power story will happen, but will it happen one year or three years from now is difficult to say.

It’s results season again. What are your expectations?
I think it will be a mixed bag, as the impact of higher interest rates and inflation will be felt. Perhaps, net profit growth will slow down. There has also been an increase in employee costs and input prices, especially in industries that rely heavily on metals. Prices of metals like steel, zinc, aluminium and cement have risen, which will tell on bottom lines.

And how do you expect the market to respond?
The volatility will continue. And it’s not just because of domestic factors. Even global liquidity and interest rates will leave their impact on the stock market — we are not insulated from global factors anymore.

High interest rates are unsettling companies and individuals alike. Do you see interest rates falling?
Stability in interest rates is still a few months away. I don’t see rates coming down over the next two to three months at least. If anything, I feel, we are due for another upward revision. So, for now, it’s wait and watch.

So, is it a good time to invest in debt funds?
People should start entering debt funds now. Fixed-maturity plans (FMPs) are giving returns of about 10 per cent, that too with a high degree of assurance, and it’s time to get into them. At a later stage, when interest rates stabilise, you may get into medium- and long-term bond funds. Investors should also look at balanced funds, as the debt portion should generate returns comparable to what the equity portion will generate.

And what about equity funds?
India is a strong growth story and is happening. Stay invested for the long term. Get in the market to take benefits of the cycle, but don’t do so with a short-term perspective.

http://www.expressmoney.in/news/Fund-managers-matter-more-in-themes-/84976.html

Stock Pick- Airline

2007-07-21T08:55:00.000-07:00

Stay grounded

Sandeep Singh

Posted online: Tuesday , April 24, 2007 at 1156 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

Last week, after much give and take, Jet Airways finally bought Air Sahara. Elsewhere, decks continue to be cleared for the impending — some would say, never-ending — merger of the two state-owned airlines, Air India and Indian. And unconfirmed news reports say the Anil Ambani Group is looking to buy a 26 per cent stake in the country’s leading low-cost airline, Deccan Aviation.

By the deal-making going on and being talked about, and the growing number of Indians taking to the skies, it would appear the airline sector is poised to fly into a higher trajectory. It might well unravel that way. Still, to an investor today, investing in an airline stock is entering an unknown. There’s so much flux and there are so many issues that it’s even difficult to tell which company will be around three years on. And even if it is around, whether it will be making profits; and, if so, how much.
Battle of attritionToday, the battle is for market share, and it is being fought at the expense of profits. All airlines are bleeding, and bleeding badly. Leading the price wars are low-cost carriers, which are weaning away market share from full-service airlines by the month — led by Deccan, their share of the domestic pie has increased from 21 per cent in January 2006 to 37 per cent in March 2007. This will increase to 70 per cent by 2010, predicts the Centre for Asia Pacific Aviation, an aviation industry consultancy.
That’s an ominous sign for full-service airlines. If passengers grow at the projected rate of 25 per cent a year, all airlines will grow. But how many will turn — and stay — profitable is the question. Airlines is a volumes and cost-management business, and it doesn’t have room for many. That explains the rush for market share and the fare wars. The fear is that not only will the fare wars lead to some airlines going belly up, it will also leave the survivors in bad shape. Says Sachin Neema, research head, India Infoline: “The situation will improve only if airlines decide not to undercut competition.”
Policy pushReforms — rather, the absence of it — is the other factor preventing airlines from travelling at the pace they would like to. Fuel is the biggest cost head for Indian airlines. More than high prices of crude, it’s high taxes that are killing. Says Warwick Brady, chief operating officer, Deccan: “Fuel taxes are 70 per cent higher in India than in other countries.” As a result, while 42 per cent of Deccan’s expenses go towards fuel, and Jet spends 37 per cent, the corresponding figure for European airlines is in the mid-20s.
Airlines want state taxes on aviation turbine fuel (ATF) to be reduced from the current 20-40 per cent to a standard 4 per cent. This move calls for tricky negotiations between the Centre and states, most of which look at ATF as a luxury item. If duties are reduced, it will provide a fillip to profitability. Airline chiefs believe it’s not a question of ‘if’ it will happen, but ‘when’ it will happen. But as a shareholder, are you prepared to stake your investment on government intent?
The same argument also holds true for other policy measures that the industry has been crying for. Airport infrastructure is a mess. The smaller airports are not in ideal shape to service additional capacity, which holds back low-cost carriers from expanding as they would like to. Then, the older airlines are losing market share, but they still have a monopoly over parking bays and corner key time slots. For all this, airlines are paying extra or are not utilising their asset as efficiently as they could be. Says Neema: “They are inefficient users of capital, as is indicated by the low return on capital employed.”
Even as they wait for the new civil aviation policy, which might address some of these issues, airlines are increasing fleet size and adding destinations. Says Warwick: “We are working towards becoming the most-efficient low-cost carrier, and expect to be in profits within a year.” Getting there is one thing, staying there is another, which is what you should be interested in. At this point, it’s difficult to predict who will rule the skies and when. Stay grounded till the sky is clear to fly.

http://www.expressmoney.in/news/Stay-grounded-/85365.html

Big Talk- Sanjay Sonthalia, AIGMF

2007-07-21T08:49:00.000-07:00

‘We will invest our money in the fund’

Sandeep Singh

Posted online: Monday , May 07, 2007 at 1401 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

The global financial powerhouses are flocking to the growing Indian mutual fund industry. Last month saw two big names, JP Morgan and AIG (American International group), unravel their plans for the Indian market and launch their maiden schemes. Globally, AIG provides insurance, retirement services, financial services and asset management, managing $670 billion of assets as on December 31. In India, AIG is already present in the insurance space, through its twin tie-ups with the Tata Group. And now, it’s entering mutual funds. Saurabh Sonthalia, chief executive officer, AIG Global Asset Management Company (India), feels India is a promising market, with good returns potential. In an interview to Sandeep Singh, Sonthalia explains what is different about AIG, the group’s plans for India and why they believe in the India story.

There are so many fund houses and equity funds in the market. And their number is only increasing. Why should investors consider AIG?
Three reasons. One, AIG will also be an investor in the scheme, and invest its own money. We will have to work to generate returns for our own money, which should build trust among investors, as our money is invested with theirs. Two, easy sharing of information globally. We have a proprietary tool called EPIC (equity platform for investment communication), which disseminates all global market-related information to all our investment experts simultaneously. Three, our equity fund is a scheme for all seasons. We won’t be limited by any investment style, and our fund manager will have flexibility to work as the market behaves.
After this equity fund, what next?We want to be a full-service fund house offering services like mutual funds, hedge funds, private equity and portfolio management schemes (PMS), among others. We have capabilities across a diverse variety of product categories — debt, equity, real estate, commodities, structured products and more. We will keep bringing relevant products into the market.
But is there enough space for so many fund houses?
There is. The industry is growing and so is the number of new investors. Banks and other financial service players are expanding their distribution networks. They are helping people understand the product, and are bringing in more investors.

What is about India that gives you such confidence to grow your business?
We are very bullish on India. The Indian economy has moved to a higher growth curve, and is capable of growing at 8 per cent a year for several years to come. If the seventies belonged to Japan, the eighties to the US, the nineties to China, this decade is India’s.
Our manufacturing has become world-class. Time was when Indian companies were protected from outside competition, but now they are going out and competing against foreign companies. The government too is spurring infrastructure development.
About 90 per cent of the Indian economy is driven by domestic demand. The Rupee is getting stronger, which will reduce the country’s import bill, especially in oil, and lower inflation. An appreciation in the Rupee will also boost FII investments, as global investors want to invest in a stronger currency — they gain with an appreciating currency.
There is a risk of high inflation and high interest rates dragging down growth rates.Inflation is a part and parcel of high growth. I feel what the RBI has been doing to moderate growth and inflation is fine. The economy was getting overheated and asset bubbles were building up. The RBI is trying to ensure that the situation doesn’t go out of control.
As far as the effect on growth goes, the return on equity (RoE) for Indian companies is about 20 per cent. Companies are cash-rich, which reduces their dependence on borrowings. Even if they borrow at higher interest rates, their RoE remains high and, hence, they still add value. Also, the large companies have access to foreign markets, and may not be that affected by higher interest rates here.

But won’t demand for goods and services get impacted because of higher interest rates?
We remain bullish because of the cycle of growth. There is a demographic dividend in the form of a large population in the working group. As more jobs are created, their earning and spending capacity will increase, which will create its own momentum. By raising interest rates, the RBI is trying to rein in speculative demand.

What about current equity valuations? Is the market fairly valued?
We are not overvalued. In the last year, earnings have grown well, while the PE of 27 of the 30 Sensex stocks has either fallen or is the same. That tells we are fairly valued.

http://www.expressmoney.in/news/We-will-invest-our-money-in-the-fund/86080.html

ICICI Bank Stock Pick

2007-07-21T08:47:00.000-07:00

Should you SELL ICICI Bank?

Sandeep Singh

Posted online: Monday , May 07, 2007 at 1441 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

On April 28, Saturday, the board of directors of ICICI Bank, the country’s second-largest bank, approved raising Rs 20,000 crore of additional capital to bankroll growth over the next three years or so. Two days later, when the market opened, the ICICI stock slumped 8 per cent almost immediately, pulling down not just banking stocks, but the entire market.

Short-term pain, but…Here was one of India’s fastest-growing big businesses putting the first of the pieces in place that would give it a chance to double its size in two to three years, and yet the market, which has a healthy growth fixation, seemed to be disapproving. Here was one of India’s most-respected companies and a poster child of liberalised India nudging closer to unseat State Bank of India from the top spot in the banking sector, and the market was giving a thumbs down. What gives?
Maybe, the market was concerned about the tame profit growth the bank had logged in the last quarter of 2006-07, the results for which it had declared on the same day as the announcement of the capital-raising plans. Maybe, the market felt the 20-30 per cent dilution in equity and the corresponding drop in return on equity — a measure of how well a bank is using its capital — was more than it needed to do. Maybe, the market was doubting whether this big bank could grow bigger in a short period of time and whether the economic environment would facilitate that jump.
…long-term gainOf course, profit growth in the fourth quarter was tame, hit by rising interest rates and a conscious decision to slow down retail lending, particularly housing loans. But focussing on the micro details of a quarter of results would be to miss the big picture. The grand design can be summed up in one word: growth. Says Kamlesh Gandhi, country head - investment banking, Religare: “India doesn’t need many banks. It needs big banks, and ICICI aims to be one.” With this capital-raising exercise, ICICI is embarking on another phase of heady growth.
For every Rs 100 a bank gives out as loans or invests, it has to maintain Rs 9 as capital (equity, reserves and some categories of bonds); from 2008-09, this will increase to about 12 per cent. This is called the capital adequacy ratio (CAR). Conversely, it can give loans only to the extent of the capital it has. Because of the frenetic pace at which it has been growing - a compounded annual growth in assets of 40 per cent over the last three years — ICICI is operating close to that limit, with a CAR of 11.7 per cent as of 31 March 2007.
The capital infusion of Rs 20,000 crore will boost its tier-I CAR (comprising equity and reserves), which is currently set at 6.5 per cent of the overall 9 per cent CAR. According to an analyst, ICICI’s tier-I CAR will rise from 7.4 per cent to 13 per cent, easily funding its growth plans for the next two to three years. Says Ashutosh Narkar, banking analyst, India Infoline: “Most banks leverage their capital 14-15 times.” At 15 times, ICICI Bank will be able to lend Rs 300,000 crore. To put this figure in perspective, as on March 31, it had assets of Rs 344,658 crore. In other words, it is aiming to nearly double its balance sheet size.
On Friday, the ICICI stock closed at Rs 855. If its sells its stock at Rs 850 a share, its equity base will get diluted by 26.4 per cent; at Rs 800, by 28.1 per cent; at Rs 750, by 30 per cent. The market is fretting over this dilution. In the process, it is perhaps short-selling the medium-term expansion this dilution will facilitate. In the past three years, ICICI has diluted equity twice. On both occasions, the impressive earnings growth has compensated for the equity dilution (See graphic: Trading equity dilution for growth).
Risks and rewardsThe difference between then and now is that ICICI was about half its current size, which makes it more difficult to grow at that same pace. Although it is planning its domestic-cum-American Depository Share (ADS) issues in June, leveraging on that and growing its asset base will happen over two to three years.
Continuing demand for funds is critical for that scenario to pan out. Says Rakesh Jha, senior general manager, ICICI Bank: “Credit growth has fallen, but we expect it be 25 per cent for the sector.”
Analysts expect ICICI Bank to grow faster than that — at least 30 per cent a year for two to three years. Says Gandhi: “If we look at infrastructure investments in airports, ports, power and roads, the demand for funds is huge. In that context, ICICI’s move is strategically correct.”
If demand holds, the dip in RoE should be temporary. Post-dilution, the RoE will fall from 13.7 per cent to 11 per cent. Says Narkar: “If the bank manages to grow as in the past, it should attain a decent RoE level in a year’s time.” Adds Jha: “If we exclude our investment in the two insurance subsidiaries and include profits from our banking subsidiaries, the RoE increases to 15.5 per cent.”
ICICI is planning to spin off its subsidiaries to reduce the burden on the bank’s balance sheet, especially in the long-gestation insurance business. Says Jha: “Once the insurance business is spun off, it will free up the bank’s capital.” Branch expansion will also lead to more efficiency gains and reduce its cost of funds, something it has been trailing on. As on March 31, the bank had 755 branches. Recently, it acquired Sangli Bank, which will take that number up to 950. Says Jha: “More branches will increase our access to low-cost savings and zero-cost current account deposits.”
Several banks will tap the market in the coming years to keep up with CAR norms. ICICI has played its hand early, which might be a good thing, as it can avoid the bunching up and get valuations that might be as good as it gets — on its Friday close of Rs 855, it was trading at 29 times its trailing four quarter earnings. Says Narkar: “They are tapping the market early and will now not need capital for another three years.” If it manages to keep the juggernaut going, as most think it will, the payoff will be smart.

http://www.expressmoney.in/news/Should-you-SELL-ICICI-Bank/86091.html

IPO Analysis- Time Technoplast

2007-07-21T08:42:00.000-07:00

Nicely packaged for the long term

Sandeep Singh

Posted online: Monday , May 21, 2007 at 1243 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

Time Technoplast lacks visibility, it doesn’t have the stature that comes from size and scale, it doesn’t own big or successful brands, its business is boringly industrial in nature, its business will probably never see a dramatic jump in size, but don’t write it off on any of those counts. Behind this non-descript profile is an industrious company, which is growing steadily, has a promising and experienced management steering it and whose IPO prospectus is one of the most transparent ones we have come across in recent times.

A good packageThe company lurks silently in your daily life, manufacturing a diverse range of polymer-based packaging products like lubricant oil drums, paint drums, jerry cans, pails, containers, radiator tanks. Even as it steadily diversifies in the packaging space, it is also expanding into other polymer-based products like garden furniture under the brand Regal, turfs and matting, and, most recently, syringes that have to be disposed off after use because they are fitted with a mechanism that locks up instantly after use.
Formed in 1989, Time grew steadily, with sales reaching Rs 150 crore in 2004-05. In July 2006, it acquired Tainwala Polycontainers, a competitor, and added about Rs 100 crore in sales. Now, Time is looking to raise Rs 113-123 crore from its IPO, partly to pay off the short-term loan it had taken to fund the Tainwala buyout and partly to expand its production capacity by about 33 per cent. On both counts, it should emerge stronger. Consumption of virtually everything that is packaged in products made by it is on the rise. Naturally, that will boost demand for its products.
About 70 per cent of Time’s revenues come from packaging. This includes 20-250 litre drums made of high density polyethelene (HDPE), and used in industries like chemicals, FMCG, pharmaceuticals, food and lube oil. The company also makes 5-25 litre coni pails that are used to store paints, lube oil and additives.
Time also manufactures polymer-based products for the auto industry (radiator tanks, fuel tanks, air ducts and vents, anti-spray mats), construction (safety and warning nets), healthcare (syringes, blood sampler and face mask) and lifestyle products like garden furniture, turf and mats.
The company is now scaling up its non-packaging segments, where it’s getting help from a regulatory ruling. Taking the lead from developed nations, the Automobile Research Association of India (ARAI), in April 2005, said that all heavy vehicles with a capacity of over 7.5 tonnes should have an anti-spray mat fitted adjacent to their tyres to prevent rainwater from being sprayed. The cost for each truck is about Rs 3,000. Time, which supplies this mat to truck manufacturers, recorded sales of Rs 40 crore in 2005-06 from this product alone. Internationally, this requirement is also mandatory for cars and two-wheelers, and might happen in India too.
Solid and steadyTime is setting up new manufacturing facilities in Baddi-Thane, Silvassa, Sharjah and Poland. The company basically faces two risks. One, rising polymer prices, which will reduce Time’s margins.
Two, the company is unable to sell more due to competition from imports and domestic peers like Essel Propack, Supreme Plastics and Balmer Lawrie Van Leer. That seems unlikely, as its products, which are made in a technical tie-up with Mauser of Germany, are being sold to about 500 industrial clients and its distribution network covers 345 cities across the country. Imports are a no-go in some segments like drums, which are large and so entail huge transportation costs.
The company’s financial performance over the years is not strictly comparable. Till 2004-05, the numbers are for Time only. For subsequent periods, it also includes those of Tainwala, which it acquired in July 2006. Already, for the nine-month period to December 2006, the first operating year for the combined entity, revenues have equalled those for 2005-06, while net profit has topped the previous year’s number.
Net margin has increased steadily, from 3.9 per cent in 2002-03 to 10.5 per cent for 2006-07. The outlook remains good, as the revenue share of the lower-margin packaging business will come down and that of the higher-margin auto components, healthcare and lifestyle will increase.
Time has set a price band of Rs 290-315 for its IPO. On 2005-06 earnings, that’s a PE of 24.8-26.9. Annualising the net profit for the nine-month period to 2006-07, the PE works out to 17.0-18.4. For a company that is unlikely to show breakout years, that’s not striking. But for a well-managed company that is well-placed to consolidate and grow 15-20 per cent a year, that’s a decent price to buy the business for the long term.

http://www.expressmoney.in/news/Nicely-packaged-for-the-long-term/86843.html