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					                                  For Pr ivate Circulation   Volume 1 Issue 48   08th Apr ’11




A single factor alone is not
responsible for the movement
of the stock markets and the
economy on the whole. In fact,




MOVERS
there are a host of factors at play




  & SHAKERS
I turn two!
              2 Years




              1 Years
                                                    DB Corner – Page 5


                                                    RBI At It Again
                                                    The RBI has yet again hiked key rates as it is an effective tool to balance growth while
                                                    containing inflationary pressures and addressing liquidity concerns – Page 6

                                                    Fixing The Leak
                                                    India’s decision to adopt a five-fold strategy to deal with the menace of black money and
                                                    money laundering was long overdue. Nonetheless, it is a step aimed in the right direction –
                                                    Page 10

                                                    Movers And Shakers
                                                    A single factor alone is not responsible for the movement of stock markets and the
                                                    economy on the whole. In fact, there are a host of factors at play – Page 14

                                                    Back In Business
                                                    From the lows of 2008, the office space market has rebounded and the outlook looks good
                                                    with a number of businesses going ahead with their expansion plans – Page 31

                                                    Sky Is The Limit
                                                    Limitless opportunities lie before the IT industry and newer technologies like cloud
                                                    computing are likely to drive the sector, going forward – Page 34

                                                    Entrapment?
Volume 1         Issue: 48, 08th Apr ’11            Pharma companies that were lured by the opportunities offered by tax-free states are now
                                                    vulnerable, following the withdrawal of the sops offered to them – Page 38
  Editor-in-Chief & Publisher: Rakesh Bhandari
  Editor: Tushita Nigam
                                                    Havells India: Fanning Out
  Senior Sub-Editor: Kiran V Uchil                  Sustainable growth drivers, aggressive expansion plans, new product launches and the
                                                    turnaround of Sylvania will all help the company to spread its wings far and wide and beat
  Art Director: Sachin Kamble                       competition– Page 41
  Junior Designer: Sagar Padwal

  Marketing & Operations:                           Fortnightly Outlook For Commodities – Page 48
  Dwiti Bhuta, Savio Pashana
                                                    Fortnightly Outlook For Currencies – Page 49
  Research Team:
  Sunil Jain, Kunal Shah, Michael Pillai,
  Hussain Nagarwala, Vikash Bairoliya,              Mutual Funds: A Fresh Lease Of Life
  Ruchita Maheshwari, Sunit Mehta.                  The recent announcements by the Finance Minister and the directive by SEBI on mutual
                                                    funds have revived an otherwise lacklustre sector – Page 50
  HEAD OFFICE
  38-B/39, Khatau Bldg, 2nd Floor,                  One For All
  Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001   A Fund of Funds offers investors the best of both worlds by investing in schemes of other
  Tel: 022 - 39268600                               funds – Page 52

  CORPORATE OFFICE
  B-2, 301/302, Marathon Innova,                    Important Statistics For The Fortnight Gone By – Page 54
  Off Ganpatrao Kadam Marg,
  Lower Parel (W), Mumbai - 400 013
  Tel: 022 - 3926 8000                              Pranab Mukherjee: A Master Strategist
  Web: www.nirmalbang.com                           The 75-year-old finance minister of the country is a man of many hats. From being a
                                                    teacher to a journalist to an author, he has done it all and continues to be a force to reckon
  We, at Beyond Market welcome your views,          with in the political circles – Page 60
  comments, inputs and feedback.
  Do help us to grow better as per your liking.
  This is our attempt to reach you better while     Words From The Wise
  crossing horizons...                              Benjamin Graham is considered as one of the pioneers in the field of fundamental analysis
                                                    of companies and his theory on value investing is regarded as one of the most important
  beyondmarket@nirmalbang.com                       ones till date – Page 62
  Tel No: 022 - 3926 8047

                                                                                                                                                3
  Beyond Market 8th Apr ’11                                                                                          It’s simplified...
The Big Picture
A host of factors are responsible for the movement of the markets, and their subsequent impact on companies and econo-
mies, on the whole. These factors could be micro and macro, like political uncertainties, geopolitical tensions, policy changes
and new regulations, FII movements, commodities, currencies and interest rate movements, among others.

These factors work in isolation or in tandem with each other, impacting the markets, companies and economies either
negatively or positively, depending on the scale of change. Whichever way the wind blows, the impact of these factors is
inevitable even if the magnitude is controlled. In fact, the factors could have a trickle-down effect from a country’s economy
to its markets; it may even spread to other nations.

Although individuals may not be able to predict whether the factors would have a positive or a negative impact on the
economy and the financial markets, the understanding of the same could lessen the damage and ready them for surprises
that could spring up in the absence of a foolproof system to predict the outcome of these factors. To simplify the issue, we
have broadly picked 10 factors, that in our view, should be looked out for as they could affect an economy, its markets and
the companies therein.

Apart from this, there are articles on the recent interest rate hike announced by the Reserve Bank of India in the Monetary
Policy Review, the five-fold strategy adopted by India to eliminate black money and money laundering, the rebound in office
space as companies are going ahead with their expansion plans and the crisis besieging pharma companies following the
withdrawal of sops offered to them in tax-free states.

The Beyond Basics section carries two interesting pieces on mutual funds. While one article talks about how new directives
are likely to help the lacklustre industry, the other explains the concept of Fund of Funds, which is quite lucrative for
investors thanks to the multiple advantages it offers. Do not miss the Beyond Learning section as we have introduced the
investment style of one of the greatest investors, Benjamin Graham. The article dwells on Graham, considered to be the
father of financial analysis and value investing, and his style that helped him make millions and even billions on the bourses.

Beyond Market completes two years with this issue. It has been a memorable journey for the entire team and I would like to
thank each of our readers for the constant support and feedback they have offered us. We truly believe in learning and
improving continuously. We hope you have enjoyed reading the issues as much as we have had putting them together.
Keep reading!

Tushita Nigam
   Editor
                                                                                                                                    2 Years




                                                                                                                                    1 Years




4
         Beyond Market 8th Apr ’11                                                                                   It’s simplified...
The markets look good
   at current levels..




    I
          n the previous fortnight, the Indian bourses             The fourth quarter company results, which are also the
          witnessed strong FII inflows mainly on the back of       year-end financial results for 2010-11, are likely to be the
          profit-booking in base metals like copper, zinc and      highlight of the coming month. The streets are expecting
          nickel. These funds found their way into India and       a mixed bag of results for the quarter. However, banking
    the Philippines, among other emerging nations, giving a        could be a positive surprise.
    fillip to the stock markets, and are likely to continue,
    going forward.                                                 On the global level, rising crude oil prices could be a
                                                                   cause of concern in the next fortnighT.
    Also, after the recent hike in interest rates by the Reserve
    Bank of India in its monetary policy review, the upside
    now seems to be capped at the current rate.

    The Nifty benchmark index has support at the 5,800 level
    and at the 5,750 level, thereafter. The markets look good
    at current levels for investors and traders alike.

    Market participants can consider stocks like Axis Bank
    Ltd (LTP: `1,409.05), Bank of India (LTP: `479.90),
    Orchid Chemicals & Pharmaceuticals Ltd (LTP:
    `317.30), Bharat Forge Ltd (LTP: `355.35), Federal-
    Mogul Goetze (India) Ltd (LTP: `212.05) and Mcleod
    Russel India Ltd (LTP: `262.35) as they look attractive at
                                                                   Sensex: 1,9420.39
    the current levels.                                            Nifty: 5,826.05
                                                                   (As on 1 Apr’11)
    Sectorally speaking, cement looks good and market              Disclaimer
    participants can look at Prism Cement Ltd (LTP:                It is safe to assume that my clients and I may have an investment interest in
                                                                   the stocks/sectors discussed. Investors are required to take an independent
    `54.10), Grasim Industries Ltd (LTP: `2,529.90) and            decision before investing. Investment in equity is subject to market risk. Our
    ACC Ltd (LTP: `1,091.95) from investment as well as            research should not be considered as an advertisement or advice, professional
                                                                   or otherwise. The investor is requested to take into consideration all the risk
    trading perspectives.                                          factors including their financial condition, suitability to risk return profile and
                                                                   the like and take professional advice before investing.

                                                                                                                                                         5
    Beyond Market 8th Apr ’11                                                                                                 It’s simplified...
T
         he job of a regulator is best done when it has a      are already higher than neutral rates, further tightening
         strong element of surprise in it. On the contrary,    will hurt investment growth.
         the hikes in key rates by the Reserve Bank of
         India (RBI) in its mid-quarter monetary policy        While inflation was a matter of major concern in the
review on 17th March this year was as expected. The RBI        earlier monetary policy reviews, it continues to be a
increased key rates by 25 basis points (hundred basis          cause of worry for the RBI this time too. This is because
points make one percent).                                      after a slight moderation in January, headline WPI
                                                               inflation was reversed in February this year and was
The current hike, eighth in a row, saw the repo rate (rate     accompanied by a sharp increase in non-food manufac-
at which banks borrow from the regulator) inching up 25        tured products inflation.
basis points from 6.50% to 6.75%. Similarly, the reverse
repo rate (rate at which banks park their surplus liquidity    While the prices of food items have declined substan-
with the regulator) rose to 5.75% from 5.50%.                  tially since January ’11, the prices of milk and eggs, meat
                                                               and fish – the main sources of protein – continue to
While the hikes were in sync with the general expectation      remain high, reflecting structural demand-supply imbal-
of the markets, there certainly were surprises bundled in      ances. “A number of measures contained in the Budget
the policy review. One, thanks to high commodity prices        for 2011-12 to improve the agricultural supply response
and rising core inflation, the RBI saw a clear upside risk     in the medium-term will aid in redressing these imbal-
to inflation and accordingly, revised its March ’11 whole-     ances,” said the RBI. But fuel prices remain high, reflect-
sale price index (WPI) inflation projection upwards to         ing the global trend, with the potential to rise further.
8% from 7% earlier. And two, never before has the RBI
acknowledged downside risks to growth owing to high            The other worry for the RBI is the sharp rise in non-food
commodity prices, in particular the risk of this impairing     manufactured products inflation, an indicator of
the investment climate.                                        demand-side pressure, from 4.80% in January to 6.10%
                                                               in February, which continues to stay well above its
Compared to its last policy, there are three areas where       medium-term trend. In its January policy review for the
the RBI seems less concerned. Firstly, although the lower      third quarter of 2010-11, the RBI had projected a year-
level of the budgeted fiscal deficit in 2011-12 seems to be    on-year (y-o-y) WPI inflation for March ’11 at 7%.
comforting, the RBI highlighted that commitment to
contain subsidies has to be adhered to. Secondly, the          “However, further upside risks have stemmed from high
current account deficit is likely to be contained at around    international crude prices, their impact on freely priced
2.5% of the GDP in financial year ending March ’11 due         petroleum products, the increase in administered coal
to robust exports. And thirdly, on liquidity, the RBI          prices and pick-up in non-food manufactured product
expects the deficit to move close to its comfort zone of       prices,” said RBI in its defence against revising its
plus/minus 1% of the net demand and time liabilities after     estimate upwards for the same period to around 8%.
the advance tax-induced squeeze in end-March.
                                                               And it does not end there. With higher global commodity
Economists, however, contradict this. Sonal Varma, Vice        prices, risks of a fuel price hike in May, an incomplete
President and India Economist at financial services firm       pass-through of past input cost increases and food prices
Nomura India, in a report said, “While liquidity may           having already reversed their past increases, Nomura
improve in early April due to month-end government             does not expect any room for underlying price pressures
spending, we are not as sanguine on the outlook towards        to ease. “These pressures may, in fact, to a large extent,
end-April and May when high currency leakage is likely         offset any benefits arising out of base effects in the
to again increase liquidity deficit much above the RBI’s       coming months,” said Varma in her report.
stated comfort zone.”
                                                               Further, Nomura expects real GDP growth to moderate to
While inflation management is the priority over manag-         8% y-o-y in FY12 from the advance estimate of 8.6% in
ing growth, balancing the two is becoming even more            FY11, owing to high cost pressures, elevated interest
challenging for the RBI. Although the RBI has not been         rates, tighter fiscal policy and slower agriculture growth.
vocal about the same, the latest policy meeting is the first
meet ever where the RBI has acknowledged the downside          On balance, the statement points to further tightening.
risk to growth owing to high commodity prices.                 “However, this will only translate into a gradual rather
                                                               than an aggressive tightening cycle,” said Leif Lybecker
According to the RBI, there is still some uncertainty as       Eskesen, Chief Economist for India and ASEAN, HSBC
energy and commodity prices may pose a threat to the           Global Research in Singapore. It is also important to
current growth trajectory. Given the fact that policy rates    keep in mind that the monetary policy still remains
                                                                                                                              7
Beyond Market 8th Apr ’11                                                                                It’s simplified...
    highly accommodative, with current policy rates well          continue to rein in demand-side inflationary pressures
    below neutral levels, said Eskesen in a note. “We conse-      while minimizing risks to growth; and manage inflation-
    quently continue to see the repo rate going to 7.5% by the    ary expectations while containing the spillover of food
    end of 2011, translating into another 75 bps in rate hikes    and commodity prices into a more generalized inflation.
    this year,” he added.
                                                                  Unlike otherwise, this time around the RBI gave
    Here on, further rate hikes might as well continue.           direction to the market by saying that based on the evolv-
    Because, while the RBI had the option set of high growth      ing growth and inflation scenario, it is likely to persist
    and low inflation last year, it chose the unsustainable       with the current anti-inflationary stance.
    path of high growth at the cost of high inflation. The only
    available choice before it now is opting for lower growth     Needless to say, the central bank would have preferred to
    and higher inflation. Clearly, the downside risk to growth    throw up surprises. But that seems quite unlikely in the
    has increased. The RBI expects its latest policy actions to   coming monthS.




8
    Beyond Market 8th Apr ’11                                                                               It’s simplified...
S M S ‘ BA N G N R I ’ t o 5 4 6 4 6           |      n r i @ n i r m a l b a n g. c o m                  |       w w w. n i r m a l b a n g. c o m

                        38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610,
                                                       T
                                                                 he 2G spectrum scam, the Commonwealth Games fiasco and
                                                                 the ongoing case of Pune-based stud farm owner Hasan Ali
                                                                 Khan, who is facing charges of money laundering and tax
                                                                 evasion have brought to the fore the issue of black money.

                                 India’s decision to   According to a 2010 report by the non-profit research and advocacy
                                                       body, Global Financial Integrity (GFI), from 1948 through 2008, India
                                  adopt a ve-fold      lost a total of $213 billion (`9.7 lakh crore or 16.8 % of the GDP as on
                                                       2008) in illicit financial flows (or illegal capital flight).
                          strategy to deal with
                           the menace of black         Of this amount, around $125 billion (`5.7 lakh crore) was lost between
                                                       2000 and 2008 and `4.3 lakh crore between 2004 and 2008. However,
                                 money and money       it falls short of the estimated $1.4 trillion by the BJP government before
                                                       the general election in 2009. If we adjust the amount for accumulated
                           laundering was long         interest, then the sum would increase to $462 billion.
                         overdue. Nonetheless,
                                                       The report attributes the illicit financial flows to corruption, bribery and
                       it is a step aimed in the       kickbacks, criminal activities and efforts to shelter wealth from India’s
                                                       tax authorities. It further elaborates on the two vital points for the
                                    right direction    increase in the flow of illicit money – trade liberalization of 1991 and
                                                       mushrooming of high net worth individuals (HNIs) and private compa-
                                                       nies keen on amassing wealth without attracting government attention.
10
     Beyond Market 8th Apr ’11                                                                              It’s simplified...
BLACK MONEY & MONEY LAUNDERING                                 countries the capacity to successfully take action against
                                                               money launderers and terrorist financiers.
Also called illegal money, unaccounted money or
parallel economy, black money is that money which              The FATF has issued 40 general and 9 special recom-
remains out of the taxation net of the government and is       mendations that provide a comprehensive plan to fight
usually parked with banks in tax havens (a territory           money laundering. FATF member countries have to
where certain taxes are levied at a low rate or not at all     mandatorily comply with these recommendations.
and/or conceals the identity of the account holder).
                                                               INDIA & FATF
Illicit funds are those funds that are not recorded in the
country of origin for they typically violate that country’s    India became a full-fledged member of the Financial
law and banking regulations.                                   Action Task Force (FATF) in June ’10 after the delega-
                                                               tion reviewed India’s preparedness and compliance with
Money laundering in short is cleaning of the dirty money.      the required criteria.
It is generally regarded as the practice of engaging into
financial transactions to conceal the source, target and       Black money causes a loss to an economy, increases the
identity of black money and is given the appearance of         threat of the illicit funds being routed for criminal
having originated from a legitimate source.                    purposes, while pushing demand-side inflation and
                                                               making things difficult for the policy-makers.
The illegal money is obtained from drug trafficking,
white collar crimes, terrorist activity or other serious       The membership of FATF will allow India easy access to
crimes. But in simple terms, it is the conversion of black     real-time information on money laundering and terror
money into white money by buying legal assets.                 financing. India, a victim of terrorism, can raise the
                                                               diplomatic pitch against perpetrators. It will also make
The usual way of money laundering is by putting money          India more attractive in the eyes of the global investors.
into the financial system by breaking it down into smaller
deposits. Then a complex structure is followed with            INDIA’s MONEY-LAUNDERING REGULATIONS
funds that are moved to different accounts with multiple
banks. In the later stage, the money is used to acquire real   The Prevention of Money Laundering Act (PMLA),
assets, which subsequently creates legitimate gains.           2002, forms the core of the legal framework in India.
                                                               PMLA and the rules notified therein are in effect from 1st
The structure of taxation, price control policies, quota       Jul ’05.
and license systems, scarcity of commodities, general
elections, stock markets, real estate and international        Financial Intelligence Unit - India (FIU-IND) and
trade (under or over invoicing) are some of the reasons        Enforcement Directorate are the two agencies respon-
for the rise in black money, which eventually finds its        sible for the implementation of the PMLA.
way into tax havens like Switzerland, Luxembourg,
Channel Islands, etc.                                          The FIU is a central agency that receives information,
                                                               analyzes and processes the data and disseminates it to
FATF: BENEFITS & KEY RECOMMENDATIONS                           national and international authorities. It works in close
                                                               co-operation with the regulatory authorities, including
The Financial Action Task Force (FATF) is an inter-            the Reserve Bank of India (RBI), Securities and
governmental policy-making body comprising of 36               Exchange Board of India (SEBI) and Insurance Regula-
members, 34 nations and 2 regional organizations (Gulf         tory and Development Authority (IRDA).
Co-operation Council and the European Commission). It
sets global standards to combat money laundering and           Though the authority to combat money laundering is
terrorist financing.                                           FIU-IND, the RBI and SEBI have also taken adequate
                                                               steps to prevent money laundering.
The FATF was set up by the G-7 countries in 1989 in
response to mounting concerns over money laundering.           The RBI has laid down anti-money laundering guidelines
                                                               for banks and other financial institutions.
The organization develops, sets standards and promotes
national and international policies to combat money            Similarly, SEBI has also prescribed certain requirements
laundering and terrorist financing. They advocate              relating to Know Your Customer (KYC) norms for finan-
increasing the transparency of the financial system            cial intermediaries in the securities market to combat
(making it easier to detect criminal activity) and giving      money laundering.
                                                                                                                             11
Beyond Market 8th Apr ’11                                                                               It’s simplified...
                   The objective of the KYC procedure is to prevent banks                                                                                                                        and Exchange of Information for Tax Purposes. Finance
                   from being misused by criminal elements and also to                                                                                                                           Minister Pranab Mukherjee, in his Budget speech,
                   enable banks to understand the customers and manage                                                                                                                           emphasized on the fact that the government had adopted
                   their risks efficiently.                                                                                                                                                      a five-fold strategy to deal with the menace of generation
                                                                                                                                                                                                 and circulation of black money.
                   Besides obtaining the membership of FATF, India is also
                   a part of Financial Integrity and Economic Development,                                                                                                                       A move in that direction was expected, not only because
                   a global coalition of civil society organizations and over                                                                                                                    of the continuous bashing from the opposition parties,
                   50 governments working to address inequalities in the                                                                                                                         but also because money laundering means a huge loss to
                   financial system, and the Global Forum on Transparency                                                                                                                        the governmenT.




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                    Beyond Market 8th Apr ’11                                                                                                                                                                                                                                                                           It’s simplified...
       Date: 21st April, 2011   To register, contact:
              Time: 6:30 pm     Devarshi Bhatt: +91 7600014125
Venue: The Grand Bhagwati,      Mail: beyondmandi@nirmalbang.com
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T
          he recent bull run on the bourses has been formidable to say the least. But the upward movement has
          not been without its share of hiccups. While inflation and rate hikes are the dominant factors that steer
          the course of the markets, the share of other factors like crude oil, commodities, currencies, FII move-
          ments, geopolitical tensions, political uncertainties, policy and regulations as well as frauds and scams
are no less intimidating as they too play a dominant role in the highs and lows of the markets. Although they
propel the markets, they are yet independent of each other. Nonetheless, all these factors have at some point or
the other affected the stocks, the markets and the economy, directly or indirectly.

These factors have been shortlisted on the basis of the impact they have had on the bourses and the economy, in




INFLATION
general. In hindsight, these factors have time and again played a key role in determining the movement of the
markets.




                                                           I nflation is good. It offers incentives for growth.
                                                           Consumers spend more leading to higher sales growth
                                                           for companies, which on a broader level, transmits into
                                                           higher growth for an economy. This is what is desired by
                                                           every economy.

                                                           But that growth, coupled with other factors, can some-
                                                           times back fire and cause havoc in the economy and give
                                                           sleepless nights to policymakers. Inflation can some-
                                                           times get out of control and have widespread effects,
                                                           ranging from decrease in the purchasing power, a
                                                           rich-poor divide and unemployment to worsening of the
                                                           balance of payment of an economy.

                                                           Inflation is the rise in the general level of prices of goods
                                                           and services in an economy over a period of time. In
                                                           simple terms, one can buy fewer things for `100 now
                                                           than what he could have bought some time back.
                                                           However, if the prices of goods and services fall, it is
                                                           called deflation and it is the opposite of inflation.

                                                           When the rate of inflation decreases, it does not imply
                                                           that things are becoming cheaper, it only means that they
                                                           are getting more expensive at a lesser rate. Conversely,
                                                           when the inflation rate increases, it simply means that
                                                           things are becoming expensive but at a much faster rate.

                                                           The prime cause of inflation is the demand-supply
                                                           mismatch. When the demand for a product grows at a
                                                           faster rate than supply (buyers are willing to pay more).
                                                           This is called demand-pull inflation. And when compa-
                                                           nies increase the price of their products due to the
                                                           increase in production cost or any other reason, it is
                                                           called as cost-push inflation.

                                                           Rapid economic growth leads to higher money with the
                                                           people, which prompts them to spend more, leading to

                                                                                                                           15
Beyond Market 8th Apr ’11                                                                             It’s simplified...
     inflation, while increase in prices of raw material forces    growth. Also, inflation eats away the real value of a
     companies to hike their product price to keep their           currency. So the actual value of debt decreases due to
     margins intact, both giving rise to inflation. Printing too   inflation, benefiting indebted businesses and individuals.
     much money, changes in the tax structure, depreciation in     So, in a way, inflation mitigates economic recession and
     the exchange rates, or war or other events causing            boosts spending.
     instability, can give rise to inflation.
                                                                   With inflation still not within the comfort zone of policy-
     An appropriate level of inflation rate in an economy is       makers and crude prices showing no signs of cooling off
     always desired by policymakers. Controlled growth of          currently, interest rates are still some time away from
     inflation can become a part of business growth, simply        peaking out. The biggest casualty will be banking stocks,
     because savings are often invested, as there is a net loss    which have a direct implication in form of a slowdown in
     if they are kept in banks.                                    borrowings and amount of deposits that a bank must have
                                                                   stacked in its vaults. Rate-sensitive sectors like automo-




                                                                   INTEREST
     Individuals tend to spend more as they believe that things    bile and realty also feel the pinch as loans come with
     will be costlier in the future, hence, contributing to        higher interest rates, directly hitting top lines.




                                                                   RATES
                                                                   E  very day when you open the morning newspapers,
                                                                   you are bombarded with information on how market
                                                                   experts are worried about rising interest rates or that the
                                                                   RBI has hiked rates to tame inflation.

                                                                   The benchmark indices always seem jittery over the
                                                                   possibility of interest rate hikes and the currency markets
                                                                   can go into a tizzy when an unexpected hike comes
                                                                   around. So what are these interest rates after all and why
                                                                   must everyone give this factor so much importance?

                                                                   To put it simply, interest rates are the markup that the
                                                                   borrower (may be an individual or a company) pays over
                                                                   the principal amount to his lender for the use of this
                                                                   money over a stipulated period of time.

                                                                   Interest rates are expressed as a percentage over a one
                                                                   year period. Interest rates can be a vital tool in the hands
                                                                   of the monetary authorities like the RBI in case of India,
                                                                   when dealing with variables like inflation or investments.

                                                                   When interest rates are low, cheaper credit is available,
                                                                   so there are many borrowers who are willing to take
                                                                   loans. This means that more money is being generated in
                                                                   the system and can lead to high inflation.

                                                                   In order to tame inflation, the RBI is thus left with no
                                                                   choice but to hike rates and make it costlier for banks to
                                                                   lend money. This, in turn, pumps out money from the
                                                                   system and keeps inflation in check. Or in a reverse
                                                                   situation, when an economy is exhibiting a low rate of
16
     Beyond Market 8th Apr ’11                                                                               It’s simplified...
growth, central banks may choose to lower interest rates         the long term, constantly rising interest rates may also
in order to increase the supply of money in the system           impact the fundamentals of the company, thus impacting
and generate more purchasing power to improve growth,            the growth of the economy on a macro perspective.
as was witnessed during the recent global slowdown.              Central banks, thus, have to walk on a tightrope to keep
                                                                 the balance between growth and inflation.
But ever since the economy in India has recovered from
the perils of the slowdown, it is being plagued by rising        From the market investors’ point of view, while rising
inflation and the RBI has long exited its accommodative          interest rates hurt the economy on the whole and thus
stance and is pumping out liquidity from the system. This        make stock markets jittery, there are certain interest
is how rising interest rates impact the common man.              rate-sensitive sectors such as banking, automobile, auto
Rising interest rates have a direct impact on him/her. The       ancillaries and real estate, which are directly impacted by
grocery bills will be the first indicator, that will show the    rising rates. Therefore, any hike in rates sees the stocks in
strain of rising interest rates, as articles of daily use will   these sectors taking a beating.
become dearer. One will also feel the pinch if he is a
home loan borrower at a floating rate of interest.               Therefore, it is a common practice among market inves-
                                                                 tors to move from an interest rate-sensitive sector into
In case of a 1% hike in interest rate by the RBI, in all         safe haven sectors such as pharma or FMCG, which are
probability, the bank giving a loan will respond with a          relatively insulated from interest rate risks. One might
1% hike in the floating rate of interest, as well. This          postpone buying a house in a high interest rate regime,
means that the monthly repayments will increase and the          but he cannot obviously postpone the purchase of daily
individual will be left with lesser purchasing power.            items such as soaps, detergents or medicines.
Consumption, in general, will see a contraction, and thus,
will help in taming inflation to a certain extent.               Currently, the Indian economy is witnessing a rising
                                                                 interest rate scenario. The RBI has hiked its short-term
Not only individuals but also corporates have to suffer          lending (repo) and borrowing (reverse repo) rates eight
the imminent impact of rising rates. Companies need              times since March ’10, with the view to tighten liquidity
capital to run their day-to-day operations. Capital comes        supply for curbing inflation. Its latest hike of 25 basis
in the form of debt and equity.                                  points each in repo and reverse repo rates was recently
                                                                 announced in RBI’s monetary policy review.
Bank borrowings form a large part of debt raised by
companies. Therefore, if interest rates go up, borrowings        The central bank has little choice but to use interest rates
become costlier, and hence, they have to pay a higher            to curb inflation. Food inflation, during the first week of
amount to service this debt.                                     March, was 9.42%. Even headline inflation has been
                                                                 hovering around 8%, since February ’10 and is refusing
Of course they have the option of passing on the impact          to come down.
of rising costs onto its end users, but an intensely
competitive market does not allow that very often. So the        Despite the Finance Minister’s announcement in the
company is left with little choice but to absorb the burden      Union Budget 2011-12 to tackle rising inflation without
of rising costs itself.                                          compromising on economic growth, industry bodies are
                                                                 crying foul that repeated rate hikes have increased the
As a result, company profits decline, making the stock           cost of production of companies and are also eating into




CRUDE OIL
unattractive for potential stock market investors. Over          their profits.




C   rude oil is an essential commodity for any economy,
whether it is a developed economy or a developing one.
Not surprisingly, many wars have been fought over crude
oil and global politics too, to a large extent, revolves
around this commodity. Crude oil therefore, merits a
                                                                                                                                  17
Beyond Market 8th Apr ’11                                                                                    It’s simplified...
      special mention among all the other commodities.               fiscal deficit. In India, the prices of key energy sources
                                                                     like petrol, diesel, kerosene, cooking gas etc are
      Crude oil is an important ingredient for the manufacture       regulated by the government.
      of petroleum products like petrol, diesel, kerosene and
      gas. There are two types of companies that deal in crude       As a result, the government has to bear a large proportion
      oil. The first ones are those that mine crude oil directly     of the losses incurred by the government-owned oil
      from the earth’s surface and have direct access to oil         refining and marketing companies. And these losses
      blocks. ONGC, Reliance Industries, British Petroleum           usually run into thousands of crores. It means that the
      and Shell are some of the major players in this category.      government has to pay a huge crude oil bill from its own
                                                                     pocket, thus widening the fiscal deficit.
      The second category of companies comprise of refiners
      who buy crude oil and refine it to produce different           The situation could worsen if the government already has
      downstream products like petrol, diesel, etc. These            a high fiscal deficit and crude prices increase further. If
      companies directly take their products to the end              the government plans to borrow from the market by
      consumer and, hence, are also known as oil marketing           issuing bonds, it would add to the inflationary pressure.
      companies. Some of the examples are IOC, BPCL and              Otherwise, the government would have to continue with
      HPCL, among others. However, the same company                  higher fiscal deficit.
      might also mine the crude oil, refine it and market it
      through its own distribution network.                          The impact of higher crude prices are manifold. As
                                                                     inflation rises, analysts say that the economy is likely to
      Globally crude oil prices are benchmarked against Brent        grow at a slower pace. In another scenario, if companies
      and Nymex. While Brent is widely used as a benchmark           wish to retain a significant chunk of the rise in operating
      in Europe and Asia, Nymex is utilized in North America.        expenses, then their net profits will decline. This may not
      While tracking crude oil prices, the most important thing      augur well for market participants and, hence, analysts
      one should look for is the percentage change in these          will start downgrading the earnings forecast and conse-
      benchmark prices.                                              quently, stock target prices.

      Crude oil can impact an economy in many ways. With             Higher crude oil prices affect currencies too as a higher
      the rise in crude prices, the input cost for power and         crude bill will force the government to sell more domes-
      energy too increases. Most companies try to pass on this       tic currency (rupee in case of India) in exchange for the
      price burden to their customers.                               US dollar. This may weaken the domestic currency.

      As a consequence, the output price of different products       For example, if the Indian government or companies sell
      and services in an economy rises, although with a time         more domestic currency in exchange for the US dollar,
      lag. And as we know, high rate of inflation reduces the        then the exchange rate may widen, let us say from `45
      consumer demand for goods and services in an economy,          per dollar to `50 per dollar. It means a currency
      thereby bringing down the real rate of growth in the GDP.      trader/investor in the Indian rupee may also incur losses
                                                                     since the value of the rupee will come down.
      When we take into account the rise in crude oil prices on
      the markets, we see that it directly leads to the rise in      However, to have any material impact in the currency
      freight rates, increase in transportation costs, hike in the   market, the fiscal deficit really needs to be very high.
      price of crude derivatives like naptha, HDP, PUC, etc.         The only asset class which can be considered a safe bet
      When the price of petrol and diesel increases, the             during a higher crude price scenario is precious metals.
      transportation cost of companies also rises as transport-      Gold, the safest among precious metals, usually moves
      ers begin charging more and to maintain their operating        upwards. It is also a good hedge against inflation caused
      profit margins, transport companies will pass on most of       by higher crude oil prices.
      this increase in operating expenses to the end consumer.
      Household consumption bills especially kerosene and            When crude prices surged from $90 per barrel to $140
      LPG are also seen increasing.                                  per barrel during January ’08 to July ’08, the inflation in
                                                                     India reached a double digit number. What happened
      In effect, the consumer will have to pay more for the          afterwards was history. We witnessed one of the worst
      same kind of products. When this phenomenon takes              recessions in recent times. Though crude prices
      place across different industries, we say that inflation has   themselves were not responsible for the economic
      reached a very high level. Similarly, the rise in crude oil    slowdown, they compounded the problem. Even in the
      prices indirectly affects the balance of payments,             absence of the slowdown, the equity markets in India
      currency rates and further leads to a rise in a country’s      would have reacted negatively during such a period.
18
     Beyond Market 8th Apr ’11                                                                                It’s simplified...
COMMODITIES
                            C    ommodities are important raw materials for finished
                            goods. The commonly used commodities can be catego-
                            rized into different complexes like base metals, agri
                            commodities, energies and precious metals. Every
                            commodity from the commodity complex has a key role
                            to play in a nation’s economy.

                            To begin with, commodities affecting inflation directly
                            are considered very important by policymakers in any
                            country. If the inflation is driven by demand-side
                            problems, then it can be controlled to a certain extent by
                            the consuming country. Otherwise, the policymakers can
                            do very little to influence international commodity
                            prices.

                            For instance, the prices of most metals are denominated
                            in the US dollar and India can hardly influence their
                            prices. The London Metal Exchange (LME) is the main
                            exchange where metal prices are traded. The trading
                            price at the LME is considered as the benchmark for
                            companies dealing in base metals.

                            Sometimes, governments bring in regulations like
                            curbing import/export and tweaking tax rules in order to
                            influence the domestic commodity prices.

                            Commodity prices are influenced mainly by two factors:
                            liquidity in the market and a supply-demand scenario.
                            The first factor is a function of the overall money in
                            circulation, economic growth expectation, etc. For
                            instance, when big-sized hedge funds have sufficient
                            money, they try to speculate in the commodities market.

                            In such a scenario, even if the physical demand for these
                            commodities has not increased, their prices may rise
                            significantly higher in the metal exchanges. And since
                            these benchmark prices are followed by manufacturers
                            and producers alike, the actual cash outflow for
                            commodity consumers increases proportionately.

                            The second factor, that is, demand and supply, is actually
                            driven by the geopolitical situation and economic
                            growth. Factors like war, natural disasters, change in
                            guard, etc negatively impact the supply of a commodity
                            and, hence, push prices upwards. For instance, the supply
                            of coal in the world markets will be affected if there is
                            any major flood in Australia, one of the largest producers
                            of coal worldwide.

                            Similarly, crude prices usually go up whenever there is a
                            war-like scenario, as is visible now in West Asia. Like
                                                                                         19
Beyond Market 8th Apr ’11                                           It’s simplified...
     supply-side constraints, higher demand resulting from            Similarly, steel itself is a major input for auto and
     the real growth in the economy could push prices                 consumer durables companies. Agri products are major
     upwards. The last time when China was hosting the                inputs for sugar and retail companies. Therefore, any
     Olympics in 2008, the steel prices skyrocketed due to the        increase in the prices of such commodities will influence
     high demand from China.                                          the demand and profitability of these companies.

     If there is a steep increase in the prices of most commodi-      Agri commodities like vegetables and rice have a direct
     ties, it could potentially push inflation numbers north-         impact on the basic livelihood of the people. This is more
     wards. This could, consequently, force the central bank to       so in a developing country like India. And since this is a
     tighten the monetary policy by making funds costlier.            very crucial political issue, any demand-driven rise in
     The final result is a slowdown in economic growth.               food prices would force the monetary authority to raise
                                                                      the interest rates. This could have a cascading effect on
     Commodities account for a large portion of the cost of           other interest-rate sensitive sectors like auto, banking and
     raw materials for many companies, one of the most                real estate.
     important operating expenses for any industry.
                                                                      Whatever the case may be, any disproportionate rise in
     If there is a rise in a particular commodity that impacts a      commodity prices could slowdown the growth in an
     particular industry, then the companies in that sector will      economy. The rise in commodity prices leads to higher
     take a hit in terms of profitability. If they pass on the rise   inflation, resulting in a higher interest-rate regime and
     in input costs to their consumers, then the sales demand         finally, impairing economic growth.
     will take a hit.
                                                                      However, a modest increase in commodity prices in
     On the other hand, if they bear the burden of the surge in       times of economic growth is considered a positive. If
     commodity prices, then their operating profits will be           there is an excessive rise in commodity prices across
     shaved off. Usually, the companies choose a middle path          sectors, then there could be a potential downgrading of




                                                               CURRENCY
     to deal with such scenarios. For instance, iron ore and          earnings in most industries. The few sectors that may be
     coking coal account for more than two-thirds of the raw          left unaffected are software services and to a certain
     material cost for a steel company.                               extent, telecom.




                                                                      W    ith the wave of globalization engulfing Indian
                                                                      corporations, a meaningful portion of revenues for these
                                                                      corporations comes from the overseas markets.

                                                                      Of the total 4,500 companies listed on the Indian bourses,
                                                                      more than 31% of them derive 51% or more of their
                                                                      revenues in non-rupee denominations, suggesting that
                                                                      most of them are exposed to currency fluctuations.

                                                                      Of these, most companies are into the computer software
                                                                      business and are followed by textiles, drug formulations,
                                                                      diamond, IT BPO and pharma companies.

                                                                      Information Technology Industry

                                                                      In the late 1990s and early 2000s, the information
                                                                      technology wave took the country by surprise and every
                                                                      company intended to get into the software business. It is
                                                                      said that in terms of trading, when a company had
                                                                      dotcom in its name, it was recommended as a buy. More
                                                                      than 10 years now, Indian IT companies continue to
                                                                      remain the brains behind software-related project execu
20
     Beyond Market 8th Apr ’11                                                                                   It’s simplified...
tions. Indian IT companies today, are known for two          overseas when the patent of the drug of a similar compo-
basic services in computer-related businesses - IT BPO       sition expires.
and software.
                                                             Companies such as Aurobindo Pharma Ltd, Cadila
Indian IT companies continue to be preferred as one of       Healthcare Ltd, Caplin Point Laboratories Ltd, Cipla Ltd,
the economical destinations for outsourcing. Companies       Dishman Pharmaceuticals & Chemicals Ltd and Dr
such as Allsec Technologies Ltd, Eclerx Services Ltd,        Reddy’s Laboratories Ltd derive more than 50% of their
Firstsource Solutions Ltd, Hinduja Global Solutions Ltd      revenues from the US market.
and Tricom India Ltd derive more than 50% of their
revenues from foreign exchange.                              Diamond Industry

In the computer software space, companies such as HCL        Gems and jewellery companies also benefit a great deal
Technologies, Infosys Technologies, Mindtree Ltd, Tata       from the foreign markets. India is said to be a global
Consultancy Services and Mphasis Ltd get more than           trading hub for diamonds. Many diamond companies are
90% of their revenues from foreign exchange.                 engaged in polishing, designing and branding of
                                                             diamonds.
Textile Industry
                                                             Companies such as Anshuni Commercials Ltd, Gitanjali
The textile industry continues to be one of the prominent    Gems Ltd, Suashish Diamonds Ltd and Zodiac-JRD-
sectors dependent on overseas markets for substantial        MKJ Ltd earn a substantial portion (more than 70%) of
revenues. Many a textile company exports garments,           their revenues from the overseas market. These compa-
cotton, yarn, fabric-making and designing work to            nies’ association overseas has its flip side too. When
companies based in the US, Europe and other countries.       times are good, that is, when the rupee appreciates in
In the yarn space, companies such as Nitin Spinners Ltd,     relation to the dollar, these companies make good profits.
Prime Urban Development India Ltd, Spentex Industries
Ltd and Winsome Yarns Ltd earn more than 50% of their        However, recently, the rupee depreciated in relation to
revenues from the US and the European markets.               the dollar. As a result of this, the financial performance of
                                                             companies in these sectors suffered a lot. Recently, it was
In the fabrics space, companies such as Bombay Rayon         reported that the foreign exchange derivatives contracts
Fashions Ltd, Orbit Exports Ltd and Ventura Textiles Ltd     entered into by Indian companies in the last two to three
obtain more than 90% of their revenues from the US and       years had started taking its toll on companies’ perfor-
the European markets. And in the garment space, compa-       mance owing to continued depreciation of the rupee
nies such as Gokaldas Exports Ltd, House of Pearl            against the dollar.
Fashions Ltd, Poddar Developers Ltd and Zodiac Cloth-
ing Co Ltd are the ones, which derive a major chunk of       It was found that the performance of the BSE 100 compa-
their revenues from the overseas markets.                    nies has been weak with aggregate Forex losses of
                                                             around `43,000 crore, comprising mark-to-market
Drugs Formulations And Medicine Industry                     (MTM) loss on Forex loans and outstanding Forex
                                                             derivative contracts, which accounted for 21.4% of the
In the drugs formulation space, Indian pharmaceutical        reported profit before taxes. Due to the crucial changes in
companies are engaged in two segments. While one             accounting norms, the impact was not felt.
segment caters to the research requirements of pharma-
ceutical companies in the US, the other is involved in       In 2007, companies got into derivatives structures to
making drugs. Indian pharmaceutical companies do the         reduce their interest costs and most of them opted for
research on drugs and its composition and companies          dollar loans. The appreciation of the rupee eroded the
like Pfizer and the likes give them contracts for conduct-   revenues and profits of exporters as they made fewer
ing research.                                                rupees for every dollar earned abroad.

Companies such as Divi’s Laboratories Ltd, Kopran Ltd,       On the other hand, they had to service the dollar loans, on
Shilpa Medicare Ltd, Sun Pharma Advanced Research            which they incurred a higher interest outflow. Similarly,
Co Ltd and Suven Life Sciences Ltd derive more than          currencies too play a dominant role in the earnings of
50% of their revenues from the US market.                    companies involved in the business of imports. The
                                                             major companies associated with this business import
Many Indian pharmaceutical companies launch their            petroleum products such as mineral fuels, mineral oils
own drugs overseas. These companies, however, exercise       and products of their distillation, bituminous substances
caution while patenting a drug. A drug is only launched      and mineral waxes, natural gas, imitation jewellery and
                                                                                                                              21
Beyond Market 8th Apr ’11                                                                                It’s simplified...
     other stones and other machineries.                       Manugraph India, Praj Industries and BEML import
                                                               machineries. In the imitation jewellery space, the
     According to the Directorate General of Foreign Trade,    earnings of companies such as Gitanjali Gems, Rajesh
     more than 35% of India’s import comprises of petroleum    Exports, Su-raj Diamonds and 20 Microns are suscepti-
     products, followed by metal stones (15%) and machiner-    ble to currency fluctuations.
     ies (nuclear reactors and other electrical machineries,
     combined 15%).                                            Experts say that full integration of the Indian financial
                                                               markets with international markets is a key aspect to




                   FII MOVEMENTS
     The companies that fall into these segments are HPCL,     reduce the excessive dependence of one currency’s
     BPCL, and IOCL. In the engineering sector, Texmaco,       domination on the other.




                                                               A    n important factor influencing market sentiments in
                                                               India today is the movement of foreign institutional
                                                               investors, commonly known as FIIs. These are financial
                                                               institutions from a country outside India, registered with
                                                               our capital market regulator, the Securities and Exchange
                                                               Board of India (SEBI).

                                                               FIIs can be from any country and are usually hedge
                                                               funds, mutual funds, pension funds, investment trusts or
                                                               insurance companies looking for opportunities to invest
                                                               outside their own country to obtain better returns on their
                                                               investment portfolio.

                                                               There are also sub-accounts registered with the SEBI that
                                                               make investments on behalf of trusts or even high net
                                                               worth individuals (HNIs). As of now, there are about
                                                               1,800 FII accounts and 5,500 sub-accounts registered
                                                               with SEBI. FIIs and sub-accounts can invest in all securi-
                                                               ties traded on the primary as well as secondary markets.

                                                               SEBI mandates that at least 70% of the total FII invest-
                                                               ments must be in equity or equity-related investments.
                                                               There are several factors that influence the investment
                                                               decision-making of FIIs. These are high national and
                                                               economic growth rates, exchange rate stability, interest
                                                               rates, taxes on capital gains, the speed and reliability with
                                                               which dispute settlements may be settled and the degree
                                                               of protection of investor rights, to mention a few.

                                                               FII investments have been allowed in India from the year
                                                               1992, but FII inflows became really meaningful from the
                                                               turn of the decade in the early 2000s, after the ceiling for
                                                               overall FII investments was increased and registration
                                                               norms were made simpler.

                                                               Net investments by FIIs have jumped to great highs in
                                                               recent times. FIIs, thus brought in the much-needed
                                                               volumes in the equities space. Also, FIIs with their larger
                                                               appetites for equity (as compared to debt) have been, to a
                                                               large extent, responsible for promoting the equity cult in
22
     Beyond Market 8th Apr ’11                                                                             It’s simplified...
India, as domestic investors, followed their example.         a country’s economy and banking system. Besides, FII
Also with screen-based trading and transparency in the        flows can lead to the appreciation of currency (the rupee
system, the FII investments into India increased substan-     in our case) and result in the exports industry becoming
tially and aligned itself with the international order,       uncompetitive. Also large amount of FII inflows will, in
thanks to the globalization of capital markets. In fact,      turn, generate larger demand for the rupee, thus adding to
over the last 15 years, FII flows have become the basis of    inflationary pressures, which again is a problem for the
many opinion makers’ analysis.                                central bank. But the largest risk that an emerging
                                                              economy like ours runs from portfolio investments is the
Being a professional body of fund managers or financial       impact on small investors. Having a stronghold on the
analysts, FIIs have, over the years, contributed to better    markets (FIIs comprise nearly 17% of the investing
disclosures and improving corporate governance among          population in the Indian markets today), FII movements
Indian companies. In the Indian financial markets, FIIs       can have a great influence on the markets.
played a pivotal role in the early years. It was on the
insistence of FIIs that the rolling settlement system was     Aggressive FII buying pushes the markets up, while
introduced in the first place, as they were uncomfortable     selling in hordes, sends the benchmark indices spiralling
with the then prevalent Badla system. Therefore, it may       downwards. It is in this phenomenon that a retail investor
be said without exaggeration that FIIs have played an         might get stuck and lose money due to erratic FII move-
important role in improving the stock market infrastruc-      ments. The recent memory of FIIs pulling out funds from
ture in India.                                                India does not date back too far. It was from the begin-
                                                              ning of September ’08 that FIIs started pulling out funds.
Also, FIIs were the first ones to identify the potential in   During the course of the year (FY09), FIIs had pulled out
the Indian technology stocks. However, before the             a whooping `47,706 crore, almost close to `53,000 crore
dotcom bubble burst resulting in the fall of US-based         (FY08) that they had invested in the previous year, into
Nasdaq and the subsequent Ketan Parekh scam that hit          Indian equities.
the country, FIIs had already exited those scrips and
made tidy profits.                                            However, FII flows began to resume from January ’10
                                                              when the Indian economy started reviving and the
However, rising portfolio investments has not always          Sensex was hovering close to the 20,000 mark. By
been a boon. FII investments are also classified as hot       October ’10, the FII investments had touched the 1 lakh
money, which means that these are funds invested by           crore-mark.
those who are actively seeking short-term returns. These
investors are thus always scanning the market for short-      But this excessive dependence on FIIs for market
term, high interest rate investment opportunities, thus       enhancement has not ceased to be a worry for market
causing erratic movements, when they pull out as a            regulators and small investors alike. The only solution to




       GEOPOLITICAL
reaction to any negative event.                               this is in increasing the potential of our domestic institu-
                                                              tions (mutual funds and insurance) who have to match up
‘Hot money’ can, therefore, have severe implications on       to the FII inflows.




            ISSUES
                                                              S   tock markets react to news. And it goes without
                                                              saying that a geopolitical event has the potential to upset
                                                              many calculations. It can cause havoc to companies,
                                                              markets and the economy as a whole. In isolation, a
                                                              geopolitical event may be thought to have little impact.
                                                              But with globalization spreading its wings, it is impera-
                                                              tive for investors to keep a tab on various macro-events,
                                                                                                                              23
Beyond Market 8th Apr ’11                                                                                It’s simplified...
     which would prevent their wealth from getting eroded, or       A geopolitical event may have a direct or an indirect
     at least, help them pull up their socks during such            impact on companies, financial markets and the nation.
     undesired events.                                              Some implications are common for all the three.

     There are two types of linkages between any two                Implication On Companies
     countries: trade (imports and exports) and financial (FDI
     and FII investments). In today’s age, the political            -- Risk of assets and labour
     environment is the most important factor in international      -- Disruptions of raw material supply
     business and it holds more significance for India as more      -- Impact on revenues and profits
     and more corporates hunt for business overseas, naturally
     exposing them to country risk.                                 Implication On A Country

     The Indian stock markets, which heavily depend on              -- Spoils relations between countries or regions
     foreign institutional investors, may face redemption           -- Drift in country’s focus, leading to more spend to
     pressures on the outburst of an event (not necessarily in      resolve the issues and its implications
     the country concerned but in the region or an event back       -- Depressing economic growth
     home) causing wealth erosion.                                  -- Unemployment, inflation
                                                                    -- Certain events can distort trade and fiscal balance
     While there is no precise meaning of a geopolitical event,     (challenges to policy makers)
     it is widely understood as a risk to returns on investments    -- Impact on foreign portfolio and direct investment
     due to unwanted consequences arising from a geographi-         -- Credit risk by the country embroiled in such an event
     cal or political activity. A geopolitical event, planned or    -- Resource supply shocks
     unplanned, implies political risk in terms of government       -- Distorts exchange rates
     interference with business operations.
                                                                    Implication On Financial Markets
     Both the 20th and the 21st centuries have witnessed a
     slew of geopolitical events that have altered the course of    -- Changes in the fundamental investment outlook
     world history and have caused varied consequences on           -- Based on the event, it may show reactions, which could
     economies. Uninvited events were due to the change in          be temporary or sustained, localized or global.
     government, legislative bodies, other foreign policymak-       (volatility)
     ers, terrorist attacks or military control. The two World         Influences investment portfolio and asset returns
     Wars, Cold War, OPEC Oil embargo, 9/11 terrorist attack
     on twin towers are few such events.                            Diversification and ongoing risk assessment are impor-
                                                                    tant precautionary measures to limit losses during such
     Talking of the recent events, the unrest in the Middle East    an event. History has it that whenever there are geopoliti-
     and North Africa (Jasmine Revolution), tension between         cal events, financial markets show some kneejerk
     North Korea and South Korea, Euro zone debt crisis and         reaction but eventually normalize over a period of time.
     China’s persistent attempt to keep their currencies under-     The key thing to watch out for is the quantum of the
     valued, are some of the geopolitical events that have          geopolitical shock and its ability to transmit to the
     given a tough time to asset classes, from commodities          broader economy.
     and currencies to stocks.
                                                                    One option, though risky, to consider when investing
     Economists widely believe that there are many signals          during a geopolitical event is to target assets that would
     indicating that geopolitical risks would be on a rise in the   be expected to react during the event. For example,
     world today and have consequences on the economy and           betting on crude would make sense during a geopolitical
     the financial markets.                                         event as it would stand to gain from the conflict like in
                                                                    the Middle East.
     Following are few of the reasons cited by economists:
                                                                    With retail investors now having the option of investing
     -- Shift in the global balance of power                        in Indian Depository Receipts (IDRs) or country-focused
     -- High unemployment and increase in economic                  funds or in overseas assets, they do run a risk of being
     inequality                                                     affected by geopolitical uncertainties. It is worth keeping
     -- Scarcity of resources                                       oneself abreast of various international affairs that might
     -- National ambitions                                          give a heads-up for any unwarranted event. It would also
     -- Religion and faith or fundamental clash over ideology       help the investor to keep a tab on the exposure of compa-
     -- Fragile state of world economy                              nies in his/her portfolio towards various nations. Over
24
     Beyond Market 8th Apr ’11                                                                                It’s simplified...
exposure to a nation or region would certainly mean            22.4% in total exports. More importantly, the Middle
higher risk.                                                   East region is the main source of India’s remittances.
                                                               Remittances from the Middle East comprises of around
For instance, the Arab world, which has a major control        50% of India’s total remittances of US $52 billion.
over the production of crude oil has always been an
overhang on the global financial markets. Let’s take the       Indian stock markets have reacted negatively to the
example of the recent unrest in the Middle East and            developments in the MENA, in line with other world
North Africa (MENA) and its implications on India.             markets and still the endgame of the crisis remains uncer-
                                                               tain. Rising oil prices on fears that the production will be
The event which started with self-immolation of a man in       impacted due to the unrest have clear implications on the
Tunisia spread like wild fire in Middle East and North         rising oil import bill for India. This, coupled with the fear
African nations. The widespread dissatisfaction against        of a fallout on the remittance from the region, is a big
high levels of inflation, unemployment, corruption,            negative for the country.
poverty and autocratic political systems are the prime
reasons for the unrest.                                        Institutions have sold Indian stocks on worries that
                                                               macro parameters will get distorted due to the rising oil
There is a threat to the global oil supply due to the unrest   prices. But there is a silver lining to the unrest in MENA.
and for India, in particular, as gulf countries meet around    Entry of democracy to the region is the need of the hour




                                                   POLITICS
60% of India’s total crude oil requirement. The Middle         and it might act as a saviour in the longer term, which is
East is also India’s largest export market with a share of     not only good for India, but also for other economies.




                                                               I t was mid-May 2004, when the results of the general
                                                               elections were supposed to be announced and almost
                                                               everybody was sure that the BJP along with its alliance
                                                               parties would form the government at the Centre, which
                                                               was also more or less evident in the pre-election polls,
                                                               where a majority of pollsters had agreed on the same.

                                                               And why not, since most believed that the BJP-led
                                                               alliance, which was riding high on the feel-good factor
                                                               and its promotional campaign ‘India Shining’, could
                                                               easily defeat the opposition and win with a clear major-
                                                               ity. The economy too had shown a steady growth during
                                                               the BJP rule and along with its market-friendly policies
                                                               such as disinvestment of some of the PSUs helped it to
                                                               gain popularity in the market.

                                                               But the election results did not turn out as expected.
                                                               Instead, the Congress won with a larger number of seats
                                                               and announced to form the government with the support
                                                               of its alliance parties. On Monday 17th May ’04, the
                                                               markets had a free fall as the BJP was out of power and
                                                               the Congress was readying to form the government with
                                                               the support of the Left parties.

                                                               The Sensex hit the lower circuit and trading was
                                                               suspended twice. The Sensex made an intra-day low of
                                                               4,227, which was over 16%, lower than its previous close
                                                               of 5,070.
                                                                                                                               25
Beyond Market 8th Apr ’11                                                                                 It’s simplified...
     There are many instances that show how politics and            clear majority and apart from the stability and continuity
     markets are interlinked. But why do market fall or rise        of the same government, the investors were happy that
     with a change in the political environment.                    now since the government does not have to ask for
                                                                    support to prove the majority, there seems to be no speed
     Although, political environments do not change very            breaker and the government could take bold reforms.
     frequently, they are critical for the stock markets and
     could have a greater implication on other events. The          The reaction of the market was very positive. The day
     example of the ongoing crisis in the Middle East region        after the results were announced, the Sensex made
     and African countries, where the people have come on           history with a strong gain of 17% to close at 14,284 and
     the streets to protest against the national leadership, have   many stocks hit the roof and continued to do so for
     significantly damaged the share markets.                       several days.

     Generally, investors do not like uncertainties. They want      Political environments and policies do not impact the
     a stable government and stable policies. Whenever there        markets directly but since they influence the consumers,
     is uncertainty they tend to sell, which, in turn, results in   investments and the corporate sector, they are bound to
     collective selling, triggering squaring off of positions.      have implications on the markets.
     Importantly, those who have borrowed and invested tend
     to sell aggressively at any given price.                       Like during the BJP regime, privatization and decontrol
                                                                    of oil prices helped many PSUs to discover their true
     Similarly, during the general elections in May ’09 most        value. Also, the opening up of certain sectors for FDI and
     political analysts were divided on who would form the          foreign investments, changes in the Electricity Act to
     government at the Centre. Though there was high                open up for private players, insurance sector, telecom
     probability of the Congress and its allies forming the         sector helped a lot in terms of attracting and improving
     government, the BJP and other parties too were looking         the environment for investments to which the markets
     strong. There were even possibilities of a hung parlia-        respond positively.
     ment or no one party winning with a clear majority.
                                                                    Congress too has its share of good policies in terms of
     In this pre-election scenario, the markets went nowhere.       spending on infrastructure, promotion of low cost
     In fact, investors remained light in terms of their            housing, raising income tax limits to increase spending,
     exposure to equities. But the undertone was clear that if      higher focus on agriculture and rural economy, which
     the Congress formed the government, the markets would          also partly helped to avert the global financial crisis in
     give a thumbs up to the stability and continuation of          the year 2008-09 due to higher domestic consumption.
     policies. In the second case, if the BJP formed the
     government, then the markets might go up given their           The individual policies too impact different sectors and
     perceived image of aggressive reforms and market-              companies. For instance, when Transport Minister
     friendly policies.                                             Kamal Nath announced new policies in the road sector
                                                                    and promised to build 20 km a day, the whole sector got
     Equally, there was a strong case for the Third Front,          re-rated as the prospects for the companies in the sector
     which is nothing but the alliance of other smaller parties,    seemed to be improving.
     mainly the Left parties with the social agenda. Every
     party is perceived differently by the markets, given their     But the bad news is that in the investors’ mind, issues
     own set of policies and style of politics.                     pertaining to governance persist. The recent mess in the
                                                                    telecom sector and bribery cases against politicians is the
     Left parties were considered to be very conservative in        perfect example of how political uncertainty could be
     their policies, in the sense their policies were not consid-   devastating to a particular industry or for the markets on
     ered to be market-friendly for disinvestment, FDI, FIIs,       the whole.
     labour laws, etc.
                                                                    To elaborate further, regional politics is another interest-
     At the same time, there was fear about their spending on       ing area worth watching. Political changes in Uttar
     social schemes, including subsidies on oil, fertilizers and    Pradesh could have implications on companies in the
     food, which could burn a big hole in the government’s          state, especially sugar companies.
     finances. This is also the reason why policies of different
     parties may have negative or positive impacts on the           For instance, many listed South-based infrastructure
     financial markets.                                             companies’ balance sheets and profits were hit after
                                                                    Andhra Pradesh’s former chief minister YSR Reddy died
     Anyways in 2009, the Congress won the election with a          in an accident leading to a lot of uncertainties, cancella
26
     Beyond Market 8th Apr ’11                                                                                 It’s simplified...
                            Frauds And
tion and delays in projects and payments for the existing   group companies due to their strong connections or links
projects. Politics also influences individual stocks and    with the political parties or leaders.




                                Scams
                                                            T   oday scams and frauds are the buzz words in India. In
                                                            the last one year we saw many of them, including the
                                                            CWG scam, Adarsh housing scam, telecom scam (2G
                                                            scam), bribery scam and even share price rigging by
                                                            certain promoters.

                                                            However, it is also real-time learning for those investors
                                                            who did not know how markets, sectors and companies
                                                            could react to scams and frauds and how the outlook for
                                                            the sectors and companies change overnight and share
                                                            prices tumble with no hope of recovery. Even one of the
                                                            biggest global financial crises of 2008, was partly due to
                                                            scams and frauds. The nexus of rating agencies, compa-
                                                            nies, brokers, politicians and investment bankers resulted
                                                            in heavy losses not only to the investors but also to the
                                                            global economies.

                                                            Scams and frauds are not unique, in the sense, that they
                                                            can occur in any section of the economy with one or
                                                            more involved persons benefiting at the cost of others.
                                                            One classic example is the Harshad Mehta securities
                                                            scam, which took place between 1991 and 1992.

                                                            In the early days, Harshad Mehta, who was also known
                                                            as the big bull on the Dalal Street, used the banking
                                                            system and its funds to rig the share prices. The scheme
                                                            was well thought out and planned, involving several
                                                            people. Share prices of many companies in which he held
                                                            positions were inflated to significant levels, which in
                                                            turn, also led to the rise in the Sensex.

                                                            The Sensex went up by a whopping 4.5 times from nearly
                                                            1,000 points in February ’91 to 4,500 points in March
                                                            ’92. However in early April 1992, the newspapers
                                                            reported a shortfall in the government securities held by
                                                            the State Bank of India. Within a few months into the
                                                            investigations, a bigger scam running into `5,000 crore
                                                            to `6,000 crore came to the fore.

                                                            The scam was widespread and names of top executives
                                                            of large PSU banks, foreign banks and financial institu-
                                                            tions, regulators and politicians figured among the list of
                                                                                                                           27
Beyond Market 8th Apr ’11                                                                             It’s simplified...
     beneficiaries of the scam.                                    ment or due to their promoters’ risk.

     However, days after the news of the scam broke, the           Every time a scam occurs, people try to trace the link
     tainted stocks become worthless as investors failed to        between the people behind the scam and the sectors they
     find any takers, causing panic among investors and            hail from. This is why many a times, scams result in
     brokers, leading to heavy losses. Within few days, the        broader sell offs. Also, due to the uncertainty caused by
     markets plummeted by 40% and lost more than 1,00,000          scams, investors usually square off their long positions
     crore in capitalization. Many investors who lost money        and wait for the dust to settle.
     suffered heart attacks, while others committed suicide.
                                                                   Further, it is also possible that the impact of scams or
     One can imagine the magnitude of scams. But this is not       frauds may be limited to a certain sector or companies. In
     the only scam that has hit the markets. Even the Ketan        such a scenario, the fall in the markets could only be a
     Parikh scam and the IPO scam where the investors were         temporary correction.
     cheated with the promise of offering quick money, had a
     negative bearing on investors as well as the bourses.         Recently, the telecom scam hit the markets with the
                                                                   investigations going on about the allocation of 2G
     Frauds and scams have a rippling impact on the stock          licences and flow of money among the regulators,
     markets due to the fear of loss, sudden selling pressure      companies, politicians and others.
     and winding up of leveraged positions. In these
     situations, illiquid stocks suffer the most. The higher the   Post the scam, the sector suffered significant setbacks,
     number of people’s money and companies involved, the          most of the telecom companies were trading close to
     bigger is the size of the scam and its subsequent impact      their life time lows, especially companies whose names
     on the markets.                                               have been speculated or mentioned and have destroyed
                                                                   the share holders wealth significantly.
     One of the biggest corporate scams of recent times – the
     Satyam Computers scam - shows how greed can bring a           But it is also possible that the scam could have a little
     company down. A large amount of money was siphoned            impact on some companies in the same sector. Therefore,
     off from the company by its promoters to fund their own       it is always better to be associated with a company
     businesses and interests. More importantly, the share-        having a clean management with high regard to transpar-
     holders were under the impression that they owned the         ency and corporate governance.
     funds, which appeared in the books rather than the ones
     that were in the physical form in the bank accounts.          However, investors should assess the situation
                                                                   thoroughly in terms of the actual impact of the scam on
     As the truth came out, it had a huge impact on the            companies in terms of penalty, amount involved, the
     markets and on the company’s share prices. The fraud          company’s take on the situation and the involvement of
     caused a mayhem on the major indices, though they             the management, etc before deciding the fate of the
     recovered soon after. However, in such circumstances it       stock. To sum up, investors should keep their ears to the
     is also observed that group companies (like Maytas in the     ground. Also, a good institutional presence could help in
     Satyam case), too get punished for their direct involve-      protecting the interests of small investors.




     POLICIES AND
     REGULATIONS
     T   he post-liberalization period from 1991 onwards has
     seen the Indian economy grow by leaps and bounds,
     despite having to battle various crises. Policies and
     regulations have through the last two decades, changed
     the landscape of the economy, by stepping in with
     prudential measures from time to time. Ironically, it has
     taken several crises to give the authorities a jolt, who
28
     Beyond Market 8th Apr ’11                                                                              It’s simplified...
have then responded with adequate measures.                 trolled. While fertilizer subsidy exists because fertilizer
                                                            is sold to the farmers at a price lower than its economic
The first crisis that came to fore in mid 1991 was          cost, the benefits of fertilizer subsidy also accrue to the
triggered by a balance of payment difficulty. Large and     consumers of farm products.
growing fiscal imbalances over the 1980s were precipi-
tated by the Gulf War. This was the time where our          The consumers are able to get food products at affordable
exports slumped, credit channels dried up and investors     prices and the industries which use raw material from the
pulled out money.                                           agricultural sector, are able to keep the cost of production
                                                            of such manufactured goods low.
All this had a cumulative impact on the trade deficit and
in time, ballooned into an economic crisis. The govern-     The other industry that witnessed a sea change was the
ment was close to defaulting and foreign exchange           Indian textile industry. The textile industry, which is the
reserves had dwindled to such a point that India could      second largest industry in India after agriculture, was
barely finance three weeks’ worth of imports.               plagued by labour issues and trade restrictions.

While this problem was taken care of by the government      But all that changed from 1st Jan ’05. The abolition of
by securing a $2.2 billion loan from the International      import restrictions of the multi-fibre arrangement (MFA)
Monetary Fund (IMF) by pledging the country’s gold          since 1st Jan ’05 under the World Trade Organization
reserves, it was a wake-up call for the authorities.        (WTO) Agreement on Textiles and Clothing has made
                                                            the market highly competitive.
The then Prime Minister Narasimha Rao, called upon the
wisdom of Dr Manmohan Singh who was then responsi-          With more emphasis on growth in GDP, textile exports
ble for steering breakthrough reforms that included         and employment opportunities, the Indian government
opening up of international trade and investment, deregu-   has invested huge amounts in aiding the industry’s
lation, initiation of privatization, tax reforms and        growth by developing better infrastructure and network-
inflation-controlling measures.                             ing. Apparel parks have been set up and the government
                                                            has introduced a technology upgradation funds scheme
While the balance of payments crisis brought about a        that keeps constant tabs and aids the modernization of the
host of macroeconomic reforms, Indian industries too,       accessories required by the industry.
were on the brink of change. Before the liberalization
era, India practised a system whereby a license was         Even the telecommunication industry was facing severe
required to set up any big industrial unit.                 challenges during the 1990s, with the entry of several
                                                            private tailor-made manufacturers. The New Economic
But the prevalent system led to delay, harassment, lower    Policy (NEP) was introduced in the year 1991 that
production and inefficiency. This led to a change in the    revolutionized the industry. The manufacturing of equip-
mindset and it was realized that in order to have a         ment pertaining to the telecom sector was decentralized
sustained growth in productivity, enhance gainful           and several value-added services were introduced into
employment, attain optimum utilization of human             the market.
resources, the policy needed to be liberalized.
                                                            The telecom services were divided into basic telephony,
Accordingly, the list of items requiring compulsory         radio paging and cellular mobile. The TRAI was estab-
licensing was brought down gradually over the next two      lished as an independent regulatory body pertaining to
decades, opening up huge opportunities for the corporate    the telecom sector and the concept of revenue sharing
sector. Today, all industrial undertakings are exempt       was introduced to replace the fixed license fee. This
from obtaining industrial licenses to manufacture.          brought about the growth of the private sector as we
                                                            know it today.
Special attention was paid to certain industries that
required sweeping reforms. One of the first to receive      This was also the time when the government laid a lot of
attention was the fertilizer industry, as it had a direct   emphasis on deepening various components of the finan-
impact on the agriculture sector.                           cial market such as the money market, government
                                                            securities market and the Forex market, which were
Since 1991, when economic liberalization began, consid-     important and implied a shift from direct to indirect
erable changes were made in the fertilizer pricing policy   instruments of monetary control.
and various subsidies were introduced.
                                                            In order to widen the money markets in terms of improv-
From 1994, all fertilizers, except urea, have been decon-   ing short-term liquidity and its efficient management,
                                                                                                                            29
Beyond Market 8th Apr ’11                                                                              It’s simplified...
      new short-term instruments such as certificates of depos-        monetary tightening was further increased. This credit
      its and commercial paper were introduced.                        tightening from FY04–05 onward, ensured a soft landing
                                                                       of the Indian economy, which began overheating over the
      While economic liberalization was underway, there came           past three years with the actual growth rate exceeding its
      another rude shock in the 1990s again, when the stock            potential growth rate. As a result, the growth rate began
      market crashed because of Harshad Mehta’s rampant use            to slow down from the middle of FY07–08.
      of the loopholes in the banking sector.
                                                                       Though the RBI was criticized time and again for its
      Comprehensive financial sector reforms have been put in          hawkish stance, this is what saved the day for the Indian
      place since then, as SEBI came into being and the forma-         economy, when the recession hit us. Because of the rapid
      tion of the National Stock Exchange changed the rules of         decline in inflation, the RBI wasted no time in shifting
      broking and made trading transparent and leverage was            gears from inflation to growth.
      made accessible to the last mile investor.
                                                                       Several actions were taken such as injecting a consider-
      The latest and perhaps the most significant impact of the        able amount of liquidity into the economy through a
      monetary policy was the period before the economic               series of policy rate cuts. Besides refinancing schemes
      crisis hit the Indian shores. After a comfortable period of      were introduced to save sectors such as real estate from
      low inflation, the Indian economy started feeling the            the brink of insolvency.
      pressure of rising global commodity prices in the first
      quarter of FY04–05.                                              The RBI has also liberalized external commercial
                                                                       borrowings and FII-related norms. To attract the foreign
      In response to this rise in inflation, the RBI started           portfolio investors, the FII limit on corporate bonds was
      tightening the monetary policy in September ’04, raising         increased from US $6 billion to US $15 billion.
      the cash reserve ratios from 4.5% to 5%. As the inflation-
      ary situation worsened in the subsequent period, the             In hindsight, policies and regulations at various points of
      tightening of the monetary policy became more aggres-            time have prevented our growth from plummeting into
      sive. Consequently, inflation declined from around 8% in         the negative territory. This is not to say that no further
      the middle of 2004 to less than 4% in September ’07.             regulatory reforms are required. But we definitely have
                                                                       come a long way in the past two decades.
      However, in keeping with global inflationary trends,
      domestic inflation once again started increasing towards         We still have corporate frauds brewing (which came to
      the end of 2007 and became a major headline in the first         the fore in the case of Satyam in the year 2007) and our
      week of June ’08, when it entered the double-digit range         regulators must find a plausible solution to increase
      for the first time since the 1991 BOP crisis.                    corporate accountability. There are challenges ahead, but
                                                                       we can safely say that crucial steps are being taken in the
      It drew a sharp reaction from the RBI and the speed of           right direction.



      All said and done, these factors can have a major bearing on an economy, its markets and even the companies. Hence,
      it will do investors a lot of good if they stay informed and look out for the factors that could possibly play spoilsport
      and halt their merry-making on the bourses. Whoever said, it is better to be safe than sorry, couldn’t have put it in a
      better way.




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           money invested is money earned

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30
      Beyond Market 8th Apr ’11                                                                                           It’s simplified...
                                                                   BACK
                                                                   IN
                                                                   BUSINESS
                                              T
                                                        he office space market in India, which had come to a standstill
                                                        during the real estate slowdown of 2008 is showing signs of
                                                        recovery, backed by an improved economic environment and
                                                        an increase in confidence among the corporate sector.

                From the lows of 2008, the    In 2008, the global office market saw a huge slump because of a credit
                                              crunch and a slowdown in demand from companies, as the global
                     o ce space market has    economic crisis hit companies hard. Vacancy levels in the office space
                                              shot up and office rents went down. New leasing of space too plum-
                rebounded and the outlook     meted substantially as corporates became wary of committing to new
                                              space since this was the time when many companies cut back on
                 looks good with a number     expenses through employee retrenchment or other measures.
                 of businesses going ahead
                                              In the Asia Pacific region, confidence among companies was down
                 with their expansion plans   though the slowdown in the region was less severe than what was seen
                                              in the United States and Europe. India also saw a slowdown in office
                                              space leasing, which in turn, led to a correction in prime office space
                                              rentals in New Delhi and Mumbai.

                                              There was, however, a flip side to this. High vacancy levels and falling
                                              lease rates increased the leverage of tenants to negotiate with the
                                              landlords, who were more than willing to reduce rents to fill up the
                                              vacant space. It was a good time for cash-rich companies to rent new
                                              office space at a lower rate. In fact, many existing tenants also negoti-
                                              ated with their landlords to renew fresh leases at lower rates.

                                              The years 2008 and 2009 were a tenant market, both globally and in
                                              India. Things have, however, changed now as the global economy has
                                              improved and India, in particular, is poised to grow at a Gross Domestic
                                              Product (GDP) rate of above 8%, over the next few years.
                                                                                                                          31
Beyond Market 8th Apr ’11                                                                       It’s simplified...
     It is, therefore, not surprising that the Indian office         America and Europe were stable.
     market is seeing a recovery. A report by real estate
     consultancy firm CB Richard Ellis says that India’s             North America, which was the worst affected office
     rental market for office space is firming up because of an      space market during the global economic slowdown saw
     increase in demand and conversion of enquiries into             rents moving up by a mere 1%, as demand remained
     closures. Consider this: in 2010, around 55 million             sluggish across most locations. Canada saw a 1% rise in
     square feet (sq ft) of office space was added. Of this,         rent, while the US actually saw a decline of 2% in 2010.
     around 32 million sq ft was absorbed.                           In the US, most cities saw a fall in rents as demand was
                                                                     muted. There is, however, some good news as rents in the
     India’s top seven cities (NCR or National Capital               prime Midtown New York submarket rose by 10%, as
     Region, Mumbai, Bengaluru, Chennai, Hyderabad, Pune             the city emerged from the recession.
     and Kolkata) at present have a total office space of 280
     million sq ft, to which another 50 million sq ft is expected    Rents across Europe moved up by 1% as the continent
     to be added in 2011-12.                                         saw slow economic recovery, with a number of locations
                                                                     seeing an increase in rents. The recovery in rental values
     The supply in 2011-12 will be led by Mumbai, the sixth-         was mostly led by London, with rents growing by 25%
     most expensive office market in the world, with more            over the year in Central London and by 27% in the West
     than 25% share in the year 2011-12, while Bengaluruand          End of the city. Rents in other European countries such
     NCR have a 19% and 17% market share, respectively.              as Ireland, Spain, Greece, Bulgaria and Romania fell by
                                                                     19%, 7%, 3%, 9% and 5%, respectively over the year.
     The upswing in the Indian office market is mostly
     because of increased optimism among corporates,                 Asia Pacific, which recorded the steepest rental decline
     increase in the budget of corporates and demand from the        in 2009, bounced back with rents increasing on an
     IT industry, with almost 70% of the supply in 2011-12           average by 9%. In 2010, the aggregate net absorption of
     expected to come from IT-dominated segments such as             prime office space across 16 major Asian cities reached
     IT parks and Special Economic Zones. In fact, the               levels that were seen before the global financial crisis in
     IT/IT-Enabled Services sector leads office space growth         2007 and more than double the level recorded in 2009, as
     in India, accounting for 75% to 80% of Grade A                  per CB Richard Ellis’ Q4 2010 Asia MarketView report.
     commercial space demand followed by banking, finan-
     cial services, insurance, pharmaceuticals and telecom.          “The period saw a steady flow of pre-commitments to
                                                                     new development schemes and cities including Tokyo,
     A 2010 global office market report by a global real estate      Singapore, Beijing, Mumbai and New Delhi reported a
     consultancy firm Cushman and Wakefield says that                number of large leasing deals involving premises of over
     many of India’s corporate expansion plans that were put         1,00,000 sq ft” said John Falkiner, CB Richard Ellis’
     on hold as a result of the financial crisis were executed in    Managing Director of Transactions for Asia.
     the first half of 2010, resulting in a healthy revival of the
     office market nationwide.                                       Asia’s recovery has mostly been led by expansion of
                                                                     multinational companies in the region and by Asian
     “While rental values held firm in Mumbai, Bengaluru             companies too. In 2011, the Asian office market will
     witnessed a growth of 13% over the year due to strong           continue to see growth in demand for office space and an
     demand ahead of supply,” the report said adding that            increase in supply in most first-tier cities, the report said.
     India saw a 23% increase in absorption across the
     country and an increase in rents by 5%, over the last year.     The only region to see a decline in rental values in 2010
                                                                     was Africa and the Middle East, with an average
     The recovery in the Indian office market is not isolated as     decrease of 10%. This was primarily due to significant
     substantiated by the report, which says that the global         falls in rents in Oman, Bahrain and the UAE, the report
     office market has started to recover from the severe            said. Manama and Muscat saw the greatest decline in
     downturn of 2008. The year 2010 saw a pick up in                rents at 33% and 27%, respectively, while rents in both
     demand across most markets which, along with a dearth           Dubai and Abu Dhabi also fell markedly, recording
     of new construction activity, pushed down supply.               rental declines of more than 20% over the year.

     The report said global office market rents increased            The outlook for office market space in India looks good
     marginally by 1%, with rents in all regions barring the         with several companies reviving their expansion plans.
     Middle East and Africa moving back into positive                Consultants say this, however, does not mean that office
     territory. South America saw the highest increase in rent,      rents will increase substantially, thanks to the fact that a
     with a rental growth of 12%, while rents in North               steady flow of supply will keep the rents in checK.
32
     Beyond Market 8th Apr ’11                                                                                   It’s simplified...
I
    n the last few years, the Indian Information Technol-      overall growth in demand from different geographies.
    ogy (IT) companies have secured a coveted standing         The demand from the US in the last few years has
    globally. Today, if one goes by the estimates, it is       increased consistently and today it contributes to more
    believed that Indian IT companies handle 21% of the        than 60% of the export market revenues.
global outsourcing services.
                                                               There is growing demand from the Asia Pacific region
Indeed, being the hub of skilled software creators and         too. Traditional segments such as banking, insurance,
providers of such services at lesser rates, the demand for     financial services, retail, healthcare, media and utilities
the services of the Indian IT companies is increasing by       have driven the growth in demand.
leaps and bounds.
                                                               The Indian IT companies have evolved from application
In its latest report, global accounting and consulting firm    development and maintenance to full service players that
Deloitte has said that the Indian IT sector will employ        provide testing and infrastructure services, consulting
more than 2.25 lakh new professionals in 2011.                 and system integration.

The consultancy firm also pointed out that revenues from       Within exports, the IT services segment was one of the
the IT and BPO industry in India will be around $71.7          fastest growing segments. It grew by 22% and constitutes
billion for the year 2011 and will contribute 5.8% to          around 57% of the total exports. In the export market, a
India’s Gross Domestic Product. This shows the increas-        trend that is emerging is the one-stop-solution business
ing reach and acceptance of Indian IT companies since          model promoted by the Indian IT companies.
the last few years.
                                                               A core strategy that is promoting this business model is
Even though such growth bodes well in terms of employ-         the wide acceptance of cloud-based solutions that offer
ment and foreign exchange generation, one undeniable           the best service at minimum capital expenditure.
fact that is emerging of late is the intense competition
among Indian IT companies to secure global deals.              The BPO segment has grown by 14% to reach $14.1
                                                               billion in FY11. This year also saw one of the new phases
This has resulted in some companies - having long-             of BPOs called BPO 3.0, which has greater depth and
established brands, securing better and bigger contracts       breadth of services, increased delivery of analytics and
than companies which are emerging but are ready to be          knowledge-based platforms as well as strong domestic
economical in the global outsourcing market.                   market focus.

Let us look at the situation in detail and see how the stiff   THE ‘IT’ OF COMPETITION
competition among the Indian IT companies is affecting
the industry as a whole. This is likely to have a bigger       In the past few years, IT companies such as Cognizant
significance since the next wave of outsourcing, specifi-      and HCL Technologies have given tough competition to
cally concerning India, is set to begin soon.                  big IT firms as these companies have secured a signifi-
                                                               cant market share of outsourcing deals.
INDUSTRY
                                                               On the one hand, Cognizant has been securing a market
The Indian IT industry accounts for around 6.1% of the         share in the traditional services market where Infosys and
country’s GDP in FY11, according to data published by          Tata Consultancy Services also operate, while HCL
Nasscom. In FY11, the annual revenues from the                 Technologies has gained a market share in enterprise
IT-BPO sector is estimated to have grown over $88.1            applications and infrastructure services.
billion compared to China with $35.76 billion and Philip-
pines with $8.85 billion.                                      As a result of this, Cognizant and HCL Technologies
                                                               have operating margins between 15% to 20%, while
India’s outsourcing industry is expected to increase to        Infosys and TCS have operating margins in the range of
$225 billion by 2020. India enjoys a cost advantage of         25% to 30%.
around 60% to 70% as compared to other markets. One
advantage that the Indian IT companies had due to the          Given their lower margins, these IT companies have been
economic downturn was the opportunity to enhance their         able to invest more in terms of sales and marketing and
overall efficiency.                                            secure a critical portion of outsourcing deals. This, in
                                                               turn, will ultimately result in investments made by bigger
Indian IT companies’ revenues from the export markets          IT companies to outdo these relatively smaller IT compa-
is likely to gross $59 billion in FY11. There has been an      nies in terms of sales and marketing.
                                                                                                                              35
Beyond Market 8th Apr ’11                                                                                It’s simplified...
     It is estimated that this investment on operations would                 Going forward, five parameters would bring about a shift
     add pressure on the operating parameters of companies.                   in the global IT-BPO industry, determining how well
     According to experts, it is estimated that the EBITDA of                 Indian IT companies would do their business.
     large Indian IT companies would come down by 100-300
     basis points.                                                            a Markets: A large part of the growth would be driven
                                                                              by Asia, public sector and government entities, which
     It is also estimated that since the sector has come out of               would form a priority customer base for IT companies.
     the grips of recession, Indian IT companies would go for
     a hike of 15% in wages, which in turn would put pressure                 b Customers: Customers would enjoy seamless IT
     on margins.                                                              experience across zones and geographies. The low-cost
                                                                              offering from IT companies would not be sufficient.
     Another upshot of the intense competition would be                       Customers would demand a transformational experience.
     newer methods of marketing and growth strategies to                      One such case in point is cloud computing.
     secure clients. Apart from this, the list of the top five
     Indian IT companies that would secure outsourcing deals                  c Talent: Pressures from the government to create local
     would also change.                                                       jobs with local knowledge would alter the employee mix.
                                                                              It is estimated that the proportion of non-Indians would
     In this situation, only IT companies that can withstand                  be higher.
     competition through innovative growth strategy would
     grow faster and achieve a huge market share.                             d Service Offerings: New form of offerings such as
                                                                              design services in manufacturing and remote infrastruc-
     Given these realities, it is expected that only big compa-               ture management would emerge. Also, the services that
     nies such as Infosys and Tata Consultancy Services                       have a strong domestic focus would come to the fore.
     would like to gather market share faster and gain critical
     deals, considering they are long-established brands, have                e) Business model: IT companies would shift the focus
     a strong delivery model, a big scale of operations and an                of their current business model from technology-centric
     encouraging track record.                                                offerings to a whole range of integrated solutions as well
                                                                              as high-end services.
     Smaller IT companies such as Mahindra Satyam and
     Mphasis are among the few mid-sized IT companies that                    While developed markets usually have a large share of
     would have to struggle to secure a market share.                         the IT spend, many IT companies in the emerging
                                                                              markets have increased their IT spending to increase
     OUTLOOK                                                                  their global competitiveness.

     Despite the unprecedented economic downturn, the                         Considering this, Indian IT companies are looking
     industry is likely to witness a sustainable growth. The                  beyond the UK and the US. It is estimated that in the
     global technology-related spending is expected to grow                   coming years, Indian IT companies would be able to tap
     from the year 2010 onwards, led by growth in outsourc-                   into newer segments such as defense, printing, health-
     ing adoption.                                                            care, publishing, utilities and the public sector.

     Greater focus on cost and operational efficiencies in the                Indian companies would also tap into newer geographies
     recession period is expected to enhance global sourcing.                 such as BRIC countries. To tap into these geographies
     Services and software segments are estimated to cross                    and segments, the Indian IT companies would have to go
     $1.2 trillion by 2012. This is more than the 5.2% growth                 beyond metros and develop talent pools. This would save
     expected in total IT spending.                                           costs for these companies toO.


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     Beyond Market 8th Apr ’11                                                                                                                                                It’s simplified...
             1st Nov ’10 Soya Oil Rs 632/10 kg

                                                                              4th Dec ’10 Crude Oil $105/barrel

       14th Dec ’10 Nickel $29,000/tonne

                      27th Dec ’10 Guar Seed Rs 2,825/quintal

                                                           28th Jan ’11 Jeera Rs 16,000/quintal


  on                                                                                                                          15th Feb ’11 Gold $1,425/ounce


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                                          Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing.
Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
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CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981




                                                                                                       w w w. n i r m a l b a n g. co m
                                 ENTRAPMENT?
                                   Pharma companies that
                                   were lured by the
                                   opportunities o ered
                                   by tax-free states are
                                   now vulnerable,
                                   following the
                                   withdrawal of the sops
                                   o ered to them




38
     Beyond Market 8th Apr ’11                              It’s simplified...
T
         he government at the Centre had granted a tax        Dr Reddy’s Laboratories Ltd
         holiday to Himachal Pradesh in the year 2003,
         allowing pharmaceutical companies to set up          Like other pharma companies, Dr Reddy’s too has a
         units in the state and offered an exemption in       finished dosage facility in Baddi.
excise duty and income tax as well as subsidies on plant
and machinery.                                                Mankind Pharmaceuticals Ltd

Following this announcement, not only big but also small      Mankind Pharma has a US Food & Drug Administration
pharmaceutical firms flocked to Baddi and Paonta Sahib,       (US FDA) approved manufacturing unit at Paonta Sahib,
the two tax-free zones in Himachal Pradesh. Also, those       which has a production capacity of 60 million ampoules
investors and entrepreneurs without any prior knowledge       and 30 million vials in a single shift.
of the trade lapped up the opportunity and set up manu-
facturing units in this region as they did not want to miss   Dabur India Ltd
this chance. Most organized companies started utilizing
the capacities created by a large number of small and         The company manufactures several of its products in
medium-scale factories due to the cost advantage.             Himachal Pradesh, including its throat lozenges brand
                                                              Honitus, glucose and digestive brand, Hajmola.
Around 300 pharmaceutical companies such as Cipla
Ltd, Dr Reddy’s Laboratories Ltd, Morepen Laboratories        Zydus Cadila Healthcare Ltd
Ltd, Torrent Pharmaceuticals Ltd, Zydus Cadila Health-
care Ltd, Mankind Pharma Ltd and Indoco Remedies Ltd          Zydus Cadila has a formulations manufacturing facility
among others currently run their businesses in the state of   at Baddi.
Himachal Pradesh.
                                                              All these pharmaceutical companies enjoyed a great deal
KEY PLAYERS                                                   of privileges. The concessions included a 100% central
                                                              excise exemption for 10 years, 100% income tax exemp-
Ranbaxy Laboratories Ltd                                      tion for the first five years and 30% for the next five
                                                              years, CST at the rate of one per cent for five years,
Ranbaxy has a manufacturing facility at Paonta Sahib in       capital investment subsidy and central transport subsidy
Sirmaur district where it manufactures fermentation-          at the rate of 15%.
based products such as Lovastatin and Pravastatin.
                                                              Besides, the state also reimbursed 75% of the cost of
Cipla Ltd                                                     transportation of the companies’ raw materials/finished
                                                              goods to and from the location of industrial units, if they
Cipla established its manufacturing facility at Baddi with    were situated in the state or from anywhere in the state to
an investment of about $11 million in the year 2005. The      the nearest specified broad gauge rail head under the
company manufactures bulk drugs, tablets and capsules,        central transport subsidy scheme for a period of five
creams, aerosols/inhalation devices as well as                years from the date of commencement of production.
injections/sterile solutions.
                                                              Apart from offering employment avenues to the local
Torrent Pharmaceuticals Ltd                                   populace, the notification gave a fillip to the pharma
                                                              industry on the whole as it helped in developing northern
The company commissioned a new formulation manu-              India as a big pharma zone as against Gujarat, Maharash-
facturing facility at Baddi in November ’05 with an           tra and certain states in southern India that enjoyed the
investment of $30.6 million. The facility has a capacity      status in the past. It also boosted contract manufacturing
to manufacture 3,600 million tablets, 400 million             and small scale industries in this region.
capsules and 18 million oral liquid bottles per annum.
                                                              Moreover, the creation of tax holiday states like
Panacea Biotec Ltd                                            Himachal Pradesh has come as a blessing in disguise for
                                                              the pharma industry as a whole.
Panacea Biotec’s pharmaceutical and vaccine formula-
tions facility is located at Baddi in Himachal Pradesh.       Earlier, due to the introduction of the new Schedule M,
This plant has a production capacity of 900 million           Schedule L-I etc, most Small Scale Industries (SSIs) in
tablets, 120 million hard-gelatin capsules, 150 million       the country were under pressure to set up new plants and
soft-gelatin capsules, 60 million herbal capsules and 600     upgrade the existing ones. So most of the new plants set
million doses of vaccines per annum.                          up in the tax-holiday state were in clusters.
                                                                                                                             39
Beyond Market 8th Apr ’11                                                                               It’s simplified...
        These developments have totally changed the concept of                                                                                                                                       reduction in profit margins, stiff competition and incon-
        SSIs in the pharma industry. Initially, there were teething                                                                                                                                  sistent government policies have hit the SSIs in the
        problems as setting up a pharma company takes lot of                                                                                                                                         tax-free zones whose long-term plans have taken a
        time since new units need to focus on everything from                                                                                                                                        beating.
        choosing the location to scouring for manpower, to
        developing new systems in the organization and working                                                                                                                                       Even the recent budget speech by Finance Minister
        within the law of the land. Now, SSIs involved in the                                                                                                                                        Pranab Mukherjee failed to cheer them. The government
        pharma business are operating on a completely different                                                                                                                                      will levy a minimum alternate tax of 18.5% on profits of
        scale from 10 years ago.                                                                                                                                                                     all units operating at the special economic zones (SEZs)
                                                                                                                                                                                                     from the next fiscal year, beginning April.
        However, the good times for pharma companies are as
        good as over. The excise-free regime in Himachal                                                                                                                                             However, despite the anomalies in the sector, the pharma
        Pradesh ended in March ’10. To add to their woes, the                                                                                                                                        industry is expecting the government to offer adequate
        central government has reduced the excise duty on bulk                                                                                                                                       support in the form of price control, transparency in
        drugs and finishing products in non-tax-free zones.                                                                                                                                          fixing prices, limitation criteria on SSIs, lower tax
                                                                                                                                                                                                     regime to encourage domestic pharma manufacturers,
        This has taken a toll on many pharma units, including                                                                                                                                        educating bankers on special requirements of the pharma
        SSIs in tax-free zones as they are unable to generate good                                                                                                                                   industry such as softer loans capex, site upgradation
        business due to the reduction of excise duty to 4% in                                                                                                                                        funds, IPR and R&D creation, ambiguities in defining
        non-tax free zones in a short span of eight months; thus                                                                                                                                     R&D for tax deduction, etc and also discourage MNCs
        highlighting the disparity in terms of scale and type of                                                                                                                                     from taking over Indian pharma companies.
        small scale units in these zones.
                                                                                                                                                                                                     This will bring the pharma companies on a level-playing
        Surplus production capacities and production costs,                                                                                                                                          field and boost healthy competition among theM.




                                                                                                                                                                                                                                                                         SMS ‘BANG’ to 54646
                                                                                                                                                                                                Contact at: 022-3926 9404, E-mail: contact@nirmalbang.com
                                                                                                                                                                                                      Registered O ce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006
                                                                                                                                                                                                  Corporate O ce: B-2, 301/302, 3rd Floor, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
                                                                                                                                                                                                 BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981




     EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS # | IPOs # | INSURANCE # | DP
     Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors




40
         Beyond Market 8th Apr ’11                                                                                                                                                                                                                                                                                                                                                                                                                     It’s simplified...
FANNING OUT
 Sustainable growth drivers, aggressive expansion plans, new product launches and the turnaround
    of Sylvania will all help the company to spread its wings far and wide and beat competition




H
            avells India Ltd is one of the largest and       The Shift To Energy-efficient Consumer Electrical
            fastest growing electrical and power distribu-   Lighting
            tion equipment manufacturer in India. It
            manufactures products ranging from indus-        Havells is a leading manufacturer of consumer electrical
trial and domestic circuit protection switchgear, cables     goods. The consumer electrical goods industry is
and wires, motors, fans, power capacitors, CFL lamps as      leveraged to the growth in housing in India. We expect
well as luminaires for domestic, commercial and indus-       spending on housing to remain strong due to the bounce
trial applications.                                          back in the economy, continuing urbanization, job
                                                             creation in industries, changing social structure - increas-
This billion-dollar-plus organization owns some of the       ing number of nuclear families, rising electrification and
prestigious global brands like Crabtree, Sylvania,           shift to energy–efficient lighting.
Concord, Luminance, Linolite and SLI Lighting.
                                                             Over the last five years, Havells’ revenues have grown at
With 91 branches/representative offices and over 8,000       a CAGR of 23.5% and we expect similar growth to
professionals in over 50 countries across the globe, the     continue, going forward. Havells ranks number one in
group has achieved rapid success in the past few years.      most product categories. Further, aggressive branding
Its 11 state-of-the-art manufacturing plants in India        strategy makes it well-positioned to benefit from the
located at Haridwar, Baddi, Noida, Sahibabad, Farid-         rising demand.
abad, Alwar, Neemrana and 8 state-of-the-art manufac-
turing plants located across Europe, Latin America and       Reasons For The Robust Growth Outlook
Africa churn out globally-acclaimed products.
                                                                  According to the report released by the Technical
INVESTMENT RATIONALE                                         Group on Estimation of Housing Shortage, an estimated
                                                             shortage of 26.53 million houses during the Eleventh
I. Sustainable Growth Drivers Infused By The                 Five Year Plan (2007-12) provides a big investment
Growth In Rising Electrification, Urbanization And           opportunity to the sector and subsequently, the company.
                                                                                                                            41
Beyond Market 8th Apr ’11                                                                              It’s simplified...
         The Indian economy is likely to produce approximately 120 million jobs till 2030E in urban areas, whereas the
     service sector will produce nearly 90 million jobs till 2030E, constituting approximately 75% of the overall job
     creation in urban cities.
                                                             Urban Non - agricultural Employment (Projected)
                                                               250

                                                               200

                                                               150                                   3.6% .a.
                                                                                                                              158

                                                               100
                                                                                            69
                                                                   50
                                                                                                                              62
                                                                                            33
                                                                    0
                                                                                           2008                              2030
                                                                                                  In us ry      Services



         Rising electrification and a shift to energy-efficient lighting will increase the demand for cables and wires as well
     as switchgears.
     Per Capita Consumption Of Electricity                                                                      Demand Summary Of All India Forecast
      16000
              13647                                                                                              2500                                           (As Per 17th EPS Report)   350
      14000
                                                                                                                                                                                    298    300
      12000                                                                                                      2000
      10000                                                                                                                                                      218                       250
                       8486     8186
       8000
                                                                                                                 1500                                                            1915      200
                                                                                                                                                153
       6000                                                                                                                                                    1392                        150
                                                                                                                 1000         100
       4000                                   2782     2471             2232    1956                                                           969                                         100
       2000                                                                             719       566             500
                                                                                                                             690                                                           50
          0
                                                                                                                    0                                                                      0
               US




                                                                                                  In ia
                                               Worl
                                Sin a ore




                                                                                La n
                                                           C ina
                        O CD




                                                                        razil




                                                                                           sia




                                                                                                                           2006-07           2011-12          2016-17

                                                                                                                           ( c ual)             n
                                                                                erica




                                                                                                                                      ner y equire en ( U)              eak Loa (GW)




     GROWTH OUTLOOK FOR HAVELLS’ KEY PRODUCT SEGMENTS

     Havells has a wide array of products - switchgear, electrical durables, cables and wires and lighting and fixtures.
     Havells is a market leader in the domestic switchgear market. While cable and wire dominated the revenue mix of
     around 41% in FY10, switchgear dominated the contribution profit (gross profit) mix of 49% in FY10.

     Contribution Profit in FY10                                                                                Segmental Revenue in FY10
                                                      1%                                                                                                1%
                                  13%
                                                                                                                                            15%
                                                                                                                                                                       28%


                      19%                                                       49%                                                15%




                                17%
                                                                                                                                                       41%
                                                                                                                              Swi c ear          lec rical Consu er Durables    O ers
                      Swi c ear              lec rical Consu er Durables           O ers
                      Cable & Wire          Li    n & Fix ures                                                                Cable & Wire      Li    n & Fix ures




42
     Beyond Market 8th Apr ’11                                                                                                                                               It’s simplified...
Switchgear

Havells is the leader in the `12 billion domestic switchgear market, catering to the low voltage switchgear market for
domestic and industrial consumption. Its share increased to 20% in September ’10 from 15% in 2006 in the domestic
switchgear market.

Havells is the number four player in the industrial switchgear market with a modest share of 8% in the `20 billion
market. Larsen & Toubro, Siemens and Schneider are the other strong players in this segment. Industrial switchgear
requires direct sales pitch, but Havells relies on its distribution network for selling, resulting in low market share. We
expect robust demand for domestic switchgear on the back of increase in construction activity, increase in urbaniza-
tion, demand shift from local to branded products and the rise in electrification.

We expect the revenue from switchgear to grow at a CAGR of 7.8% between FY10 and FY13E.

                               Havells Switchgear Sales Trend (` in cr)
                                 1000
                                                                                          908
                                  900       CAGR 9.8%                             825
                                  800                             724      750
                                  700                   623
                                  600      568

                                  500
                                  400
                                  300
                                  200
                                  100
                                    0
                                           2008         2009     2010     2011E   2012E   2013E

                               Source: Company and Nirmal Bang Research


Cables And Wires

The wire and cable business in India is highly fragmented, with unorganized players accounting for almost 40% of the
market. The size of the wire and cable market is `120 billion and Havells share has grown from 6% in 2006 to 9% in
2010. It is the number two player in this segment. Apart from Havells, Finolex, Polycab and KEI are other strong
players. The major customers for the wire and cable industry are automotive, telecommunication and construction
industries. In the past few years, these industries have witnessed rapid expansion leading to an annual growth of
approximately 25% in India.

Wires and cables account for 40% of Havells domestic revenues. We expect the revenue from cables and wires to grow
at a CAGR of 11.3% over a period of FY10 – FY13E.
                               Havells Cables & Wires Sales trend (` in cr)
                                1600                                                      1508

                                1400        CAGR 7.2%                             1347
                                                                          1202
                                1200      1064          1107     1095

                                1000

                                 800

                                 600

                                 400

                                 200

                                   0
                                          2008          2009     2010     2011E   2012E   2013E

                               Source: Company and Nirmal Bang Research

Lighting And Fixtures

Havells is the number two brand in compact fluorescent lamps (CFL) and number four brand in luminaires. The
                                                                                                                              43
Beyond Market 8th Apr ’11                                                                                It’s simplified...
     current market size of CFL is `12 billion and Havells’ market share is 10%.

     The market for CFL is growing due to the increasing acceptance and preference towards power - saving lighting
     products. Havells is likely to maintain a strong growth in CFL, going forward.

     Historically, Havells has not been a strong player in the luminaires segment. Now, Havells is planning to sell Sylvania
     products in India, giving it a competitive advantage amongst its peers as Sylvania is the number four brand globally.
     Following the introduction of Sylvania products, the company will be able to bridge the product gap, going forward.
     We expect the revenue from lighting and fixtures to grow at a CAGR of 25.2% over a period of FY10 – FY13E.

     Trend For CFL Growth In India                                                                                                                       Havells Lighting & Fixtures Sales Trend (` in cr)
                          1200                                                                                                                              800                                                                          734
                                                                                                                                                            700
                          1000
                                                                                                                                                                          CAGR 20.5%                                            587
                                                                                                                                                            600
      Quan ty mn pieces




                           800
                                                                                                                                                            500                                                   462
                           600
                                                                                                                                                            400                                     374
                           400                                                                                                                                          289           280
                                                                                                                                                            300
                           200
                                                                                                                                                            200
                             0                                                                                                                              100
                                                                                                  2011E

                                                                                                          2012E

                                                                                                                  2013E

                                                                                                                          2014E

                                                                                                                                  2015E

                                                                                                                                          2016E
                                 2002

                                        2003

                                                2004

                                                       2005

                                                              2006

                                                                     2007

                                                                            2008

                                                                                    2009

                                                                                           2010




                                                                                                                                                              0
                                                                                                                                                                       2008          2009          2010          2011E         2012E    2013E
     Source: Company and Nirmal Bang Research                                                                                                            Source: Company and Nirmal Bang Research

     Electrical Consumer Durables

     Havells entered the electrical durables market with electric fans in mid-2003. Havells is the number three player in the
     fan segment and has 13% market share in the `30 billion market. Havells is the first to launch energy - efficient fans,
     consuming only 50W of electricity and is the largest seller of energy-saving fans in the country.

     The company is planning to expand its product portfolio by launching water heaters, irons, kitchen appliances, etc.
     Havells recently launched a water heater and was able to do a sale of `20 crore in the first four months.

     Bajaj is the number one player in electrical consumer durables segment, with `250 crore of revenue and Racold is the
     second player with `100 crore of revenue in the water heater segment. The company plans to overtake Racold in terms
     of revenue by FY12E. We expect the revenue from electrical consumer durables to grow at a CAGR of 23% over a
     period of FY10 – FY13E.
     Fan Sales Trend (MM units)                                                                                                                          Havells Consumer Durables Sales Trend (` in cr)
                                                                                                                                                            800
               70
                                                                                                                                                            700                                                                          674
                                                                                                                            57.4                                          CAGR 22.9%
               60
                                                                                                                                                            600                                                                 562
               50
                                                                                   40.2                                                                                                                           468
                                                                                                                                                            500
               40
                                               28.6                                                                                                         400                                     362
               30                                                                                                                                                                     277
                                                                                                                                                            300         240
               20
                                                                                                                                                            200
               10
                                                                                                                                                            100
                      0
                                                                                                                                                               0
                                        2006                                  2011E                                       2016E
                                                                                                                                                                       2008          2009          2010          2011E         2012E    2013E
     Source: Background paper on India: Strategies For Low Carbon Growth and                                                                             Source: Company and Nirmal Bang Research
             Nirmal Bang Research


                                                        a stitch in time saves nine


                                                        plan your finances in time

                                                     Your financial security is our concern.                                                  EQUITIES | DERIVATIVES | COMMODITIES | CURRENC Y | MUTUAL FUNDS | IPOs | INSURANCE | DP
                                               At Nirmal Bang, it’s a relationship beyond broking...                                          SMS ‘BANG’ to 54646 | e -mail: contact@nirmalbang.com | www.nirmalbang.com
44
     Beyond Market 8th Apr ’11                                                                                                                                                                                                 It’s simplified...
Havells Market Position In Different Product Segments
               Segment                         Sub - segment           Competitor         Havells Market Share Market Share
                                                                                         Position   in 2006      in 2010
    Switchgear                             Domestic Switchgear MCB Legrand – MDS              1       15%      ~20%
                                                                     Schneider
                                           Modular Switches Crabtree Matsushita/Anchor       2        5%       ~15%
                                                                     Roma
                                           Industrial Switchgears    L&T                     4        7%        ~8%
                                                                     Siemens
                                                                     Schneider
    Cable & Wire                           Cable                     Polycab
                                                                     KEI                     2        6%        ~9%
                                           Wire                      Finolex
                                                                     Polycab                 2        6%        ~9%
    Lighting & Fixtures                    CFL                       Philips
                                                                     Osram                   2       10%       ~10%
                                           Luminaires                Philips
                                                                     Crompton                4        3%       ~10%
                                                                     Bajaj
                                                                     Wipro
    Electrical Consumer Durables           Fans                      Crompton                3        6%       ~13%
                                                                     Orient
                                                                     Bajaj
                                           Electrical Water Heater   Bajaj                New        New        New
                                                                     Racold
Source: Company and Nirmal Bang Research

II. Enhancing Product Portfolio And Extensive Distribution Network

We believe that the electrical market is highly fragmented with stiff competition from regional and national players.
Havells has created a huge distribution network. The company is working on enhancing its network by adding 500
dealers every year. As a result of this aggressive strategy, the company has been able to garner a good market share
across most of its product segments.

In India, the dealer plays a vital role in the sales pitch of consumer products that are highly fragmented in nature. To
cash in on the strong dealer and customer relationship (most of the buys are influenced by dealers’ advice and sugges-
tions), Havells has adopted trader-friendly practices and has further strengthened its relationship with its distributors.
It partially compensated distributors in H2 FY09 for inventory losses due to the fall in copper prices, demonstrating
how it is developing its relationship with its distributors.

Havells has also rolled out exclusive brand outlets under the name ‘Havells Galaxy’. The outlet will improve visibility
of Havells brand and widen the distribution of its products too. Currently, the company has 76 outlets and plans to
increase it to 100 by March ’11. These outlets are owned by the dealers and the cost of setting-up one outlet is `4 lakh
to `5 lakh, excluding real estate prices. Havells provides a brand building exercise to these stores. These outlets are for
display purpose and mostly attract institutional buyers.

Over the last five years, Havells has spent aggressively on advertisement and sales promotion and was able to build a
strong equity and brand recall in the minds of its consumers. Havells is planning to roll out new products like rice
cooker, irons, toaster, kitchen and bathroom electrical appliances, etc. We expect a strong brand equity and extensive
distribution network to help roll out its new consumer durables products going forward.

III. Sylvania Turnaround To Boost The Consolidated Profit

Havells acquired Sylvania worldwide, except North America, Australia and New Zealand, in April ’07 for the
enterprise value of Euro 227 million plus transaction costs of Euro 7.5 million.

Sylvania is a 100-year-old company and a number four player in the artificial light sources segment (lighting and
                                                                                                                                  45
Beyond Market 8th Apr ’11                                                                                    It’s simplified...
     fixtures segment) with a strong presence in Europe and Latin America, while expanding rapidly in fast growth markets
     in Asia. The rationale behind the acquisition of Sylvania was to get a foothold in the international markets with a
     strong brand, wide distribution channel and to enter other emerging markets. The implied valuation paid for Sylvania
     was about 7.5x EV/EBITDA.

     Post-acquisition, Sylvania’s financial performance was badly hurt due to the economic slowdown. In response to the
     global slowdown, Havells initiated a restructuring programme to turn Sylvania around.

               The Restructuring Took Place In Two Phases
                        Restructuring Plan                                 Phoenix                                   Prakram
                    Start Date                                  Jan ’09                                        Sep ’09
                    End Date                                    Sep ’09                                        Jun ’09
                    Focus Geography                             Europe and Latin America                       Europe
                    Total Cost                                  Euro 12-13mn                                   Euro 22mn
                    Major Area of Restructuring                 Reduced around 1,300                           Around 400 workforce was
                                                                workforce in Latin                             laid off in Europe
                                                                America and Europe
                                                                Shifting of UK plant in India                  To rationalize high fixed cost by
                                                                                                               increasing outsourcing from low
                                                                                                               cost countries like China and India
                                                                Manufacturing units were
                                                                closed in Brazil and Costa Rica
                    Annual Savings                              Euro 16 – 17mn                                 Euro 18 – 19mn
               Source: Company and Nirmal Bang Research


     Havells has completed its restructuring efforts at Sylvania. Additionally, Havells has been aggressively expanding its
     presence in Latin America, Asia and other emerging markets, to reduce the dependence on European markets. Europe
     accounts for around 70% of Sylvania’s total revenue.

     As a result of restructuring, Sylvania broke even at PAT level in Q2FY11. We expect EBITDA margins to improve
     from -0.2% in FY10 to 7.5% in FY13E. Further, we expect Europe to post a negative CAGR growth of -0.1%, Latin
     America to grow at CAGR growth of 25.9% and Asia to grow at a CAGR of 33.9% for the period from FY10 to
     FY13E. We estimate Europe’s share to the total revenue to decline from 70.8% in FY09 to 53.3% in FY13E, whereas
     the share of Latin America to increase from 26.6% in FY09 to 40.8% in FY13E.

     Sylvania Financials
                                    EBITDA And Margins
                                      45                                                                      7.5%      8.0%

                                      40                                                          6.5%                  7.0%
                                      35                                                                      41        6.0%
                                               5.4%
                                      30
                                                                                                  32                    5.0%
                                                                                    4.3%
                                      25
                                                                                                                        4.0%
                                      20      28
                                                                2.7%                                                    3.0%
                                      15                                             19
                                                                                                                        2.0%
                                      10
                                                           13
                                       5                                                                                1.0%
                                                                       -0.2%

                                       0                                                                                0.0%
                                                                           -1
                                             FY08         FY09          FY10       FY11E*       FY12E*      FY13E*
                                       -5                                                                               -1.0%
                                                                       EBIDTA       EBIDTA Margin%

                                    Source: Company and Nirmal Bang Research




                     Your financial security is our concern.                    EQUITIES | DERIVATIVES | COMMODITIES | CURRENC Y | MUTUAL FUNDS | IPOs | INSURANCE | DP
               At Nirmal Bang, it’s a relationship beyond broking...            SMS ‘BANG’ to 54646 | e-mail: contact@nirmalbang.com | www.nirmalbang.com

46
     Beyond Market 8th Apr ’11                                                                                                                               It’s simplified...
                     FINANCIAL ANALYSIS
                     Growth in Consolidated Revenues (` in cr)                                                                                                                                EBITDA, PAT And Margins
                         8000                                                                                                                                          14.0%                                                                                                                                                                     12.0%
                                                                                                                                                       13.2%                                      1000.0
                                                                                                                                                                                                                                                                                                                                10.7%
                         7000                                                                                                    12.7%                                 12.0%                                                                                                                            10.1%                                    10.0%
                                                                                                                                                                                                   800.0
                         6000                                                                                                                                          10.0%                                                                                                     8.2%
                                                                                                                                                                                                                                                                                                                                                  8.0%
                                                    9.5%
                                                                                                                                                                                                   600.0
                         5000                                                                                                                                          8.0%                                                                                                                                                       6.0%            6.0%
                                                                                                                                                                                                                        5.3%                           5.9%                                               5.4%
                                                                                                                                                                                                   400.0                                                                        3.9%
                         4000                                                                                                                                          6.0%                                                                                                                                                                       4.0%
                                                                                                          4.3%
                         3000                                                                                                                                          4.0%                        200.0                                              1.3%                                                                                        2.0%

                         2000                                                                                                                                          2.0%                            0.0                                                                                                                                        0.0%
                                                                                                                                                                                                                        FY09                     FY10                     FY11E                     FY12E                     FY13E
                         1000                                                                                                                                          0.0%                       -200.0                                                                                                                                          -2.0%
                                                                              - 0.8%
                                                                                                                                                                                                                              -2.9%
                              0                                                                                                                                        -2.0%                                                                                                                                                                      -4.0%
                                                                                                                                                                                                  -400.0                             EBIDTA               PAT              EBIDTA Margin%                    PAT Margin%
                                             FY09                      FY10                    FY11E                     FY12E                    FY13E
                                                                                 Net Revenues                       Growth%

                     Source: Company and Nirmal Bang Research                                                                                                                                 Source: Company and Nirmal Bang Research


                     VALUATION AND RECOMMENDATION

                                Year                          Net Growth                                                    EBITDA                             EBITDA                               PAT                       PAT                               EPS                      P/E                 P/ABV P/BV
                                                             Sales  (%)                                                      (` cr)                            Margin                              (` cr)                    Margin                              (`)                     (x)                   (x)
                                                             (` cr)                                                                                              %                                                             %
                             FY10                          5431.5                            -1%                                344.3                             5.90%                             69.5                        1.30%                           5.6                     63.5                    2.99                        11
                             FY11E                         5665.8                             4%                                503.5                             8.20%                            223.3                        3.90%                          17.9                     19.8                    2.47                          7
                             FY12E                         6385.4                            13%                                684.7                            10.10%                            346.4                        5.40%                          27.8                     12.7                    2.01                        4.7
                             FY13E                          7230                             13%                                810.1                            10.70%                            432.7                        6.00%                          34.7                     10.2                     1.6                        3.4
                     Source: Nirmal Bang Research


                     At a CMP of `347, the stock is trading at a PE of 19.8x in FY11E and 12.7x in FY12E, whereas on EV/EBITDA, it is
                     trading at 10.5x and 7.5x in FY11E and FY12E, respectively. We believe that Havells is well–placed amongst its peers
                     on the given improvement in Sylvania, increased domestic consumption and rising contribution from the emerging
                     markets.

                     This stock can be looked at from an investment perspective as an upside of 27% is likelY.




   EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS # | IPOs # | INSURANCE # | DP
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors




                                                                                                                                                                                                                                                                                                                                                                                 47
                     Beyond Market 8th Apr ’11                                                                                                                                                                                                                                                                    It’s simplified...
     Fortnightly Outlook For Commodities

     M
                  ost international commodities continue to       fell back to $9,300/tonne after reaching almost
                  be affected by the ongoing unrest in the        $9,800/tonne on the LME, while nickel fell by more than
                  Middle East and the massive earthquake,         10% after crossing $29,000/tonne in the previous month
                  accompanied by the tsunami in Japan.            on the LME. Industrial metals dropped on concerns that
                                                                  the conflict in Libya and the unrest in the Middle East
     The uprising in Libya, Yemen and other neighbouring          region may sustain an oil rally, curbing economic recov-
     regions affected the prices of commodities as crude oil      ery and hurting the demand for metals.
     prices reached multi-week highs during this period.
                                                                  Inflation has been a major cause of worry for the emerg-
     Precious metals traded firm, with silver once again          ing nations. And with crude oil rallying further, we
     outperforming others in this complex. However, the           expect more stringent measures by these nations to
     non-ferrous complex was badly hit, with its worst            control inflation. This could be attributed to the recent
     quarterly performance ending March ’11.                      slump in the prices of industrial metals.

     PRECIOUS METALS                                              The recent earthquake accompanied by the tsunami
                                                                  proved to be very destructive for the Japanese economy.
     The prices of precious metals continued to rise higher,      We expect short-term brakes to the demand for industrial
     extending the gains seen in February. Silver was an          metals from Japan as their major plants, which use
     outperformer, trading above $37.30/ounce on the Comex        refined industrial metals as raw materials, have been
     to reach a 31-year high and above `56,000/kg on the          shut. But, the long-term economic reconstruction
     MCX, reaching an all-time high on the Indian exchanges.      demand from Japan remains intact.

     Although the yellow metal was relatively subdued, it still   Going forward, we expect the weakness in the industrial
     managed to reach around the $1,440/ounce-mark on the         metals complex to continue as tightening fears and
     Comex as clashes in Libya and turbulence across the          slowing demand in China will weigh heavily on the
     Arab region encouraged investors to seek a safe haven.       prices. Also, rising stock levels at major warehouses
                                                                  indicate sluggish physical demand across the globe.
     However, ETF holdings for gold have not been encour-         Aluminium, in particular, looks relatively strong as the
     aging since the start of the quarter. The SPDR Gold Trust    unrest in the Middle East may fuel expectations of rising
     said its holdings fell to 1,211.229 tonnes by 31st March,    costs for producers of the power-intensive metal. We
     down from 1,280.722 tonnes in the quarter ending             expect copper prices to test `400/kg to `405/kg on MCX
     December ’10, its biggest quarterly drop since inception.    and below $9,000/tonne on the LME.
     Hence, gold prices failed to sustain at the upper levels.
                                                                  CRUDE OIL
     On the other hand, holdings in the world’s largest silver-
     backed exchange-traded fund, iShares Silver Trust, rose      The good run-up in crude oil prices in recent times can be
     to 11,139.52 tonnes by 31st March, a two percent rise in     attributed to the unrest in Middle East countries,
     March ’11 and their strongest since early January. Hence,    especially Libya, Yemen, Syria and Bahrain. Moreover,
     being a precious metal and also an industrial metal, the     fears that the unrest in the Middle East region may spread
     investment interest in silver continues to be very strong.   to other countries such as Saudi Arabia and Iran persist.

     Going forward, we expect a further rise in the prices of     In addition to this, the demand for crude oil by China is
     precious metals as the ongoing unrest in the Middle East     supporting crude oil prices. China’s crude oil imports in
     region is likely to support bullion prices as a safe haven   February rose 7.2% on a year-on-year (y-o-y) basis, its
     investment and high crude oil prices will result in high     third highest on record.
     inflation globally. We expect gold prices to test
     $1,460/ounce to $1,475/ounce in the near term.             Robust manufacturing activity across the globe, coupled
                                                                with supply concerns from oil-rich Middle East and north
     BASE METALS                                                African nations are likely to support oil prices in the near
                                                                term. In the near term, we do not expect crude oil prices
     Industrial metals were hit once again in the previous to go below $100/barrel while, we expect it to reach
     fortnight as prices did not bounce. Copper and zinc prices $112/barrel - $115/barrel on the NYMEX.
48
     Beyond Market 14th Mar ’11                                                                             It’s simplified...
     Fortnightly Outlook For Currencies

T
          he fortnight gone by unfolded a series of          would be on the ECB meet scheduled on 7th April and
          events having profound consequences for the        Portugal’s refinancing needs. We expect the euro to test
          Forex market. The G7 launched its first coordi-    $1.4350 against the US dollar on the upside. However,
          nated yen-weakening intervention in a decade       any request for aid by Portugal could trigger a strong
last week and euro zone officials postponed the setting      liquidation in euro long positions.
up of the European Stability Mechanism or a permanent
euro zone bailout fund to June.                              The sterling showed good strength in the first half of the
                                                             previous fortnight on expectations of an interest rate hike
Rising crude oil prices took a breather and see-sawed in     as early as June and hit a high of $1.64 against the US
a tight range as markets juggled the impact of the data      dollar. However, a flurry of weak economic numbers
showing rising crude oil inventories in the United States,   later in the fortnight dashed the hopes of an early interest
while uncertainty over the ongoing crisis in Libya and       rate hike. The sterling nosedived to the low of $1.5935
the Middle East limited losses.                              against the US dollar following this development and
                                                             settled at just over $1.60.
The US dollar continued to struggle against major
currencies through most of the fortnight on build up in      The sterling also fell to a five-month low versus the euro
expectations that the Fed would lag behind other             on expectations that UK’s interest rate hikes would lag
advanced economies in normalizing their policy rates.        those in the euro zone. Even the data showing the UK
                                                             economy shrank less than previously thought in the final
However, the dollar witnessed some respite towards the       quarter of 2010, lent little support to the currency.
end of the fortnight after an ADP Private Employment
Report for March buoyed expectations over the pace of        Investors have now shifted their focus to the preliminary
the economic recovery in the United States, the world’s      GDP estimate for the first quarter of this year, due at the
largest economy.                                             end of April. In the coming fortnight, we expect sterling
                                                             to slide further to $1.58 against the US dollar. Investors
Going forward, US non-farm payrolls data for March           can look forward to the levels of $1.6150-1.6100 as a
will be closely watched than usual for a clue as to when     good selling opportunity.
US interest rates may rise. We believe the dollar index, a
broad measure of the dollar’s performance against six        The Japanese yen witnessed extreme volatility, hovering
major currencies, may slide a little further to 75.          in a very wide range of 76.25 - 83.50 against the US
However, the level of 75 should act as a good psycho-        dollar. Expectations of heavy fund repatriation by the
logical support and the dollar index is likely to witness    Japanese insurance companies, post the earthquake in
some bounce back from this level.                            Japan pushed the yen to a record high of 76.25 against the
                                                             US dollar.
The euro continued to turn higher against the dollar,
hitting a high of $1.4250. Investors were seen caught        However, a co-ordinated yen-weakening intervention by
between two events. On one hand, the debt scenario           G7 countries last week reversed all the gains in the yen.
deteriorated after the Portuguese debt yields hit new        Later in the fortnight, the dollar gained further on the yen
highs following Standard & Poor’s downgradation of the       as the gap between US and Japanese yields widened in
country’s credit ratings and warned it could cut them        the greenback’s favour. The USDJPY settled at around
again. Investors were also disappointed after EU leaders     83.50 in the last fortnight. We expect USDJPY pair to
delayed finalizing a package set up to bail out failing      cruise to the 84.50 level before taking a breather.
peripheral economies.
                                                             The rupee strengthened to 44.50 against the US dollar on
On the other hand, European Central Bank officials’          the back of robust inflows and the broad weakness in the
noise over raising the interest rate in the ECB meeting      US dollar abroad. Going forward, the rupee may
scheduled on 7th April reached its crescendo. It seemed      continue to strengthen to 44.10-20 as the Reserve Bank
that investors shrugged off negative developments in the     of India is widely expected to continue its rate tightening
debt markets and stayed largely bullish in the euro.         cycle and raise policy rates further, which would trigger
                                                             more debt-related inflows. However, RBI intervention
The 16-member currency settled at around $1.4150             may chip in at these levels, triggering a trend reversal in
against the US dollar. The focus in the coming fortnight     the USDINR paiR.
                                                                                                                             49
Beyond Market 8th Apr ’11                                                                               It’s simplified...   39
MUTUAL FUNDS
A FRESH LEASE OF LIFE
                                              The recent announcement
                                               by the Finance Minister
                                              and the directive by SEBI
                                                on mutual funds have
                                                revived an otherwise
                                                   lacklustre sector



     I
         n the last one month, the mutual fund industry in India       Pranab Mukherjee said mutual funds can accept
         received two surprises: one from the Finance Minister in      subscriptions from foreign investors who meet the Know
         this year’s Union Budget and the other from the newly         Your Customer (KYC) requirements for equity schemes.
         appointed chairman, UK Sinha of the Securities and            Currently, only FIIs and sub-accounts registered with the
     Exchange Board of India (SEBI).                                   Securities and Exchange Board of India (SEBI) and NRIs
                                                                       are allowed to invest in mutual fund schemes.
     The Union Finance Minister Pranab Mukherjee in his budget
     speech said foreign investors can directly invest in equity       The Finance Ministry has planned to liberalize the
     mutual funds. Few days later, SEBI in its circular asked fund     portfolio investment route to permit SEBI-registered
     houses to maintain two separate load accounts for paying their    mutual funds to accept subscriptions from foreign inves-
     marketing and distribution expenses, thus boosting sales in the   tors. This would enable domestic mutual funds to have
     mutual fund industry.                                             direct access to foreign investors.

     These two decisions brought cheer to the `8-lakh crore mutual     The mutual fund industry was quick to hail the move as it
     fund industry, which was under the limelight since the last       would bring more money into the sector, which had
     one-and-a-half years following a series of regulations.           witnessed redemptions following the ban on entry load.
                                                                       Many participants said there could be other implications
     PACKING A SURPRISE                                                of the proposal as well.

     The Indian mutual fund industry was witnessing continuous         An industry player requesting anonymity said there will
     outflows from equity schemes after distributors stopped           be a good response to the move and that the rupee might
     selling mutual funds owing to lack of compensation. However,      firm up on the back of increase in inflows into the
     the announcement by the Finance Minister was quite surpris-       country in the coming months. The new move could also
     ing, to say the least.                                            indirectly benefit the equity markets as investments from
50
          Beyond Market 8th Apr ’11                                                                             It’s simplified...
mutual funds could increase.                                   The circular by SEBI states: “Load balance shall be
                                                               segregated into two accounts of the schemes; one to
Mutual fund players, however, are unclear on the               reflect balance as on July ’09 and the other to reflect
taxation front. Currently, local equity funds pay no           accretions since August ’09.”
capital gains tax for investments made for more than one
year or they pay a short-term capital gain tax of over         Market players feel that this move will bring more clarity
15%, if redeemed within one year of investing.                 on using load balances. Loads refer to fund charges
                                                               which are either in the form of entry or exit loads. SEBI
Senior officials from the mutual fund industry feel that to    also said fund houses cannot use more than one third of
further enhance the flow of foreign money into Indian          the load balance as on 31st Jul ’09 in any financial year
equities, this route must offer open access to attract a new   while accretions from August ’09 can be fully used for
class of investors who would otherwise have not invested       paying marketing and distributors’ commission in a
in India, which is one of the fastest growing economies in     single financial year.
the world.
                                                               Since 31st Jul ’09, the entry load on mutual fund schemes
However, some other participants offer a different view        has been banned by the regulator and exit loads have
on the same. They feel that foreign investors, who are         been allowed to continue. Both these charges are levied
attracted to invest in India, already have access to a large   on the investor either at the time of investing (entry) or
number of offshore funds offered by fund houses. These         during redemption (exit).
offshore funds are available in major financial markets
globally and are aggressively marketed by distributors in      SEBI further clarified that fund houses can utilize only
those markets and by financial advisors too.                   one-third of the amount collected prior to the entry load
                                                               ban in any financial year.
However, the question that remains to be seen is whether
the volume and shape of mutual funds grow significantly        However, some market participants say that ever since
bigger than they are at present since the government of        the entry load was banned, fund houses have been using
India has opened up a new route for investments in India.      historical balances to pay hefty commissions to distribu-
It is believed that, it will take a few more months to         tors. This, according to market participants, benefitted
incorporate the changes.                                       funds with larger assets under management as they were
                                                               able to use its larger reserves to pay hefty commissions.
Nothing much changes for the foreign investors in the          But through the latest directive, SEBI has brought in a
global markets. However, everything will depend on how         level-playing field among mutual fund players.
financial intermediaries operating in those markets and
the team of local fund houses get to offer Indian funds to     SEBI had banned entry load from 1st Aug ’09, before
their overseas customers.                                      which the distributors were getting 2.5% commission on
                                                               investments from fund houses in the first year. While
But, for that to happen, Indian fund houses will have to       initially after the ban, commission structures dropped for
comply with the regulatory framework of the countries          the fund industry, they picked up later to the pre-ban
where the investors hail from. This will take time and         levels with a significant portion of commissions coming
effort and each fund house will make its own cost-benefit      in from historical load balances.
calculations for the same.
                                                               On the other hand, some players believe that this move
For now, all eyes are set on the Securities and Exchange       will not ensure a level-playing field in the industry as it
Board of India (SEBI), which will soon come out with           will be more advantageous to bigger players than smaller
the guidelines allowing foreign investors to come and          ones, since bigger fund houses will have a larger corpus
invest in India.                                               resulting in higher load amounts.

NEW RULE ON LOAD ACCOUNT MEANS MORE                            As small fund houses with miniscule corpus have a
COMMISSION TO DISTRIBUTORS                                     negligible balance in these two accounts, they feel that if
                                                               bigger fund houses increase the commission they give to
The directive from market regulator, SEBI, mandating           distributors, it would further dent their pockets as the
maintenance of two separate load accounts for paying its       distributors would expect similar commissions.
marketing and distribution expenses has revived hopes of
mutual fund houses, which have been severely hit by the        But for now, the mutual fund industry which was
flight of investors due to severe restrictions on the          witnessing continuous redemptions may have a positive
distributors’ commission.                                      impact on their corpus due to the latest announcementS.
                                                                                                                              51
Beyond Market 8th Apr ’11                                                                                It’s simplified...
     ONE
     FOR
     ALL
     investors the best of both
     worlds by investing in
     schemes of other funds



     T
               hanks to the availability of hundreds of mutual fund
               schemes offered by over 40 fund houses in the
               country, investors regularly find themselves in a
               tight spot over choosing the right schemes that suit
     their needs. Such investors can look at fund of funds (FoF) to
     overcome their dilemma.

     Fund of funds predominantly invest in a basket of other mutual
     fund schemes. It is basically a fund that invests in schemes of
     other mutual funds. So, an FoF will hold units of other mutual
     fund schemes in the same way that an ordinary scheme holds
     shares of different companies.

     Investing in an FoF is a good hedging tool as it means greater
     diversification in numerous schemes. Investing in an FoF also
     saves the investor the bother of keeping track of all the
     schemes in the market as the fund manager does that task for
     him. All that the investor has to do is to select his general risk
     profile as FoFs also need to be categorized according to the
     type of schemes the fund houses are investing in.

     Investing in FoF offers two distinct advantages to investors
52
          Beyond Market 8th Apr ’11                                       It’s simplified...
over investing directly in the underlying mutual funds.       If an investor wants an exposure to the equity markets,
Firstly, an FoF offers tax benefits and convenience. An       but does not want to invest in two-three schemes, he can
FoF is a mutual fund scheme wherein there is no tax on        choose say, Kotak Equity FoF, which has invested its
the income generated from buying and selling securities.      corpus in top schemes such as HDFC Top 200, Birla Sun
                                                              Life Frontline Equity and Kotak Opportunities.
In case of FoF, there are no tax implications when the
fund is rebalanced to maintain its asset allocation. If an    If an investor wants to invest in commodity funds, then
investor rebalances his portfolio, he is liable to pay the    he should look at ING OptiMix Global Commodities as
capital gains tax. According to the tax implications on       it will be attractive to any investor who is seeking an
mutual fund investments, rebalancing within a period of       exposure to commodities. This fund will invest primarily
one year from investing, invites short-term capital gains     in the units of global mutual funds which invest in
tax, which is 15% for equity funds and gets added to the      commodity-related securities. FoF is also suitable for
income from debt funds.                                       someone who has the money, yet does not have the time
                                                              to select many funds, build a portfolio and subsequently
Long-term capital gain tax is nil, which is a major           monitor it.
positive for the equity funds. Therefore, if investors sell
their units after at least one year of holding them, which    If we look at returns, then Kotak Equity FoF, for
should be the case in equity, there is no tax on the same.    example, has given a return of over 11% in the last five
But if an investor invests in a debt fund, then the tax       years and 14% since it was launched in 2004. Returns are
treatment is different. The short-term capital gain on debt   little lower than core equity or large-cap funds, but a FoF
funds is added to the taxable income of an individual and     has many advantages over other schemes.
is taxed as per the applicable tax slab. Long-term capital
gain is taxed at 11.33% without indexation or 22.66%          According to the data by the Association of Mutual
with indexation.                                              Funds in India (AMFI), currently, there are over 3,000
                                                              crore assets under management (AUM) for FoF, which is
All FoF are treated as debt funds where the tax aspect is     likely to grow further in the coming months.
concerned. So one might as well invest in good, perform-
ing equity funds; an investor pays no entry load and the      But the downside to FoF is that expense fees for such
tax treatment works to his benefit. An FoF will also          schemes are higher than ordinary schemes since manage-
charge an investor an expense ratio over the expense          ment fees have to be paid twice; that is, their cost
ratio already charged by each fund in the portfolio.          structure will include the fees already charged by the
However, expense ratio in FoF is now in the range of          funds in which the investments are made. Not only that,
50-75 bps, much lower than equity or multi-cap schemes.       there are several funds which invest in international
                                                              funds that are present in the market, which can diversify
FoF also allow investors to diversify their risk by the       their portfolio.
stage and the size of investment and industry sectors by
investing across a wide range of leading funds. However,      However, Indian equity markets have fared better than
fund selection is critical and we assume that most funds      most other equity markets in the long run. So investors
would invest only in top performing schemes.                  might indeed get higher returns from the Indian markets.
                                                              But, there is no guarantee of the same. Diversification is
A new investor would not always be able to differentiate      thus a response to this uncertainty.
between a good scheme and a poor scheme. It stands to
reason that an experienced fund manager is in a better        Another disadvantage of FoF is that since it invests in a
position to make superior fund selection decisions. FoFs      host of schemes that are themselves invested in a wide
also provide access to few best performing funds that are     range of stocks, it is possible that the said fund house will
often inaccessible to small or new investors.                 be investing in the same stock through different schemes.
                                                              Further, keeping track of holdings, limits, etc can be
Not only that, FoF removes the requirement for a              difficult. Of course, there will be regulations in place to
dedicated in-house team which would be expensive to           check these fundamentals but it is still manageable.
recruit and retain. It leaves the outsourcing tasks such as
investment screening, due diligence, negotiation and          However in India, market regulator, Securities and
monitoring to the specialists.                                Exchange Board of India (SEBI) has decreed that invest-
                                                              ments in the schemes which are under the same fund
Currently, investors can opt for Kotak Equity FoF, Quan-      management should be restricted to 5% of the asset of the
tum Equity FoF, Franklin Templeton Indian Life Stage          fund and in such a case no management fee should be
FoF and schemes by ING Mutual Fund in this segment.           charged on such investmentS.
                                                                                                                               53
Beyond Market 8th Apr ’11                                                                                 It’s simplified...
 CHANGE IN PRICE AND OPEN INTEREST
                              CHANGE IN PRICE AND OPEN INTEREST OF THE NIFTY 50 COMPANIES
                                         14th Mar'11      31st Mar'11
             Company Name                    Price     Open       Price      Open      Change Change Change               Change
                                              (`)     Interest     (`)      Interest   in Price in Open in Price          in Open
                                                                                          (`)   Interest  (%)             Interest
                                                                                                                             (%)
     Nifty Futures                          5555.30   28269200    5858.70   26076500    303.40   -2192700      5.46          -7.76
     Bank Nifty                            10948.25     959525   11763.35     828225    815.10    -131300      7.45         -13.68
     ACC Ltd                                 989.70    2299000    1080.05     921500     90.35   -1377500      9.13         -59.92
     Ambuja Cements Ltd                      127.70   10452000     146.15    9928000     18.45    -524000     14.45          -5.01
     Axis Bank Ltd                          1299.80    2176750    1413.15    1694750    113.35    -482000      8.72         -22.14
     Bajaj Auto Ltd                         1391.50    1378000    1468.85    1328000     77.35     -50000      5.56          -3.63
     Bharti Airtel Ltd                       324.15   12739000     359.70   10215000     35.55   -2524000     10.97         -19.81
     Bharat Heavy Electricals Ltd           1974.45    2427375    2075.40    2112750    100.95    -314625      5.11         -12.96
     Bharat Petroleum Corporation Ltd        572.40    1558500     616.45    1044000     44.05    -514500      7.70         -33.01
     Cairn India Ltd                         347.85   11391000     353.75   11416000      5.90      25000      1.70           0.22
     Cipla Ltd                               301.45    3863000     324.35    3092000     22.90    -771000      7.60         -19.96
     DLF Ltd                                 229.40   19441000     268.05   15244000     38.65   -4197000     16.85         -21.59
     Dr Reddy's Laboratories Ltd            1585.85    1464750    1650.75     968750     64.90    -496000      4.09         -33.86
     GAIL (India) Ltd                        464.10    2421500     467.50    2613500      3.40     192000      0.73           7.93
     Grasim Industries Ltd                  2399.40     277125    2478.70     424125     79.30     147000      3.30          53.04
     HCL Technologies Ltd                    466.25    1406000     477.60    1829500     11.35     423500      2.43          30.12
     HDFC Ltd                                675.10    6296500     704.20    5214500     29.10   -1082000      4.31         -17.18
     HDFC Bank Ltd                          2224.80    2698125    2356.70    2311125    131.90    -387000      5.93         -14.34
     Hero Honda Motors Ltd                  1527.75    2214750    1588.80    1702375     61.05    -512375      4.00         -23.13
     Hindalco Industries Ltd                 210.30   14340000     209.80   13674000     -0.50    -666000     -0.24          -4.64
     Hindustan Unilever Ltd                  277.60   18844000     283.30   16610000      5.70   -2234000      2.05         -11.86
     ICICI Bank Ltd                         1023.95    8901750    1120.90    8251500     96.95    -650250      9.47          -7.30
     IDFC Ltd                                146.80   14886000     155.80   12138000      9.00   -2748000      6.13         -18.46
     Infosys Technologies Ltd               3105.00    2766500    3255.40    2851125    150.40      84625      4.84           3.06
     ITC Ltd                                 174.40   17174000     183.05   14120000      8.65   -3054000      4.96         -17.78
     Jindal Steel & Power Ltd                668.60    2833000     700.00    2590000     31.40    -243000      4.70          -8.58
     Jaiprakash Associates Ltd                84.85   36130000      93.15   35304000      8.30    -826000      9.78          -2.29
     Kotak Mahindra Bank Ltd                 429.70    3683000     460.90    3083000     31.20    -600000      7.26         -16.29
     Larsen & Toubro Ltd                    1571.50    3955875    1666.65    2835625     95.15   -1120250      6.05         -28.32
     Mahindra & Mahindra Ltd                 666.40    3029500     705.30    2007000     38.90   -1022500      5.84         -33.75
     Maruti Suzuki India Ltd                1259.25    2473500    1267.55    2024250      8.30    -449250      0.66         -18.16
     NTPC Ltd                                179.20   16628000     194.10   11761000     14.90   -4867000      8.31         -29.27
     Oil & Natural Gas Corporation Ltd       282.45   13910000     292.40    7522000      9.95   -6388000      3.52         -45.92
     Punjab National Bank                   1083.75    1982500    1213.95    1442750    130.20    -539750     12.01         -27.23
     Power Grid Corporation of India Ltd      99.50   17288000     102.65   12398000      3.15   -4890000      3.17         -28.29
     Ranbaxy Laboratories Ltd                471.35    1689000     445.80    2647500    -25.55     958500     -5.42          56.75
     Reliance Communications Ltd             101.40   30368000     108.60   24700000      7.20   -5668000      7.10         -18.66
     Reliance Capital Ltd                    564.85    7045000     586.80    4445000     21.95   -2600000      3.89         -36.91
     Reliance Industries Ltd                1024.20   12619500    1056.80    9462000     32.60   -3157500      3.18         -25.02
     Reliance Infrastructure Ltd             630.70    5861500     694.25    4279500     63.55   -1582000     10.08         -26.99
     Reliance Power Ltd                      128.30   19140000     130.75   18296000      2.45    -844000      1.91          -4.41
     Steel Authority of India Ltd            160.50    6076000     171.00    4248000     10.50   -1828000      6.54         -30.09
     State Bank of India                    2613.15    3672625    2790.90    2838875    177.75    -833750      6.80         -22.70
     Sesa Goa Ltd                            273.70   12221000     292.75    8818000     19.05   -3403000      6.96         -27.85
     Siemens Ltd                             862.35    2102500     836.15    2562500    -26.20     460000     -3.04          21.88
     Sterlite Industries (India) Ltd         164.30   17880000     174.75   15864000     10.45   -2016000      6.36         -11.28
     Sun Pharmaceutical Industries Ltd       428.85    2824375     445.00    2162500     16.15    -661875      3.77         -23.43
     Tata Motors Ltd                        1159.50    9238250    1230.35    6361750     70.85   -2876500      6.11         -31.14
     Tata Power Co Ltd                      1249.30    1134250    1337.00     884000     87.70    -250250      7.02         -22.06
     Tata Steel Ltd                          603.20   19725000     623.65   16033500     20.45   -3691500      3.39         -18.71
     Tata Consultancy Services Ltd          1103.90    4169000    1190.60    3300000     86.70    -869000      7.85         -20.84
     Wipro Ltd                               458.35    3355500     481.65    2678000     23.30    -677500      5.08         -20.19
                                                                                                                      Source: NB Research
54
          Beyond Market 8th Apr ’11                                                                         It’s simplified...
BULK DEALS
Bulk deals take place from normal trading windows that brokers provide and can be done
any time during trading hours. In a bulk deal, the total traded quantity exceeds 0.5%
of the number of equity shares of a company.
                      MAJOR BULK DEALS WHERE OVER 1% OF EQUITY WAS TRADED FROM 14th MAR ’11 TO 31st MAR ’11                           Price (`)
  Ex      Date                     Company                                 Client                  Trade   Quantity   % of Eq   Traded       Close
 BSE   14 Mar'11       Fineotex Chemical Ltd              North Eastern Publishing & Advt Co Ltd   Sell      553316    4.93      161.53       0.00
 BSE   14 Mar'11       IT People (India) Ltd              IT People Pvt Ltd                        Buy      5160000    3.33       18.00       0.00
 BSE   14 Mar'11       Matra Realty Ltd                   Omkara Steel And Wires Pvt Ltd           Buy       400000    3.26        3.24       0.00
 BSE   14 Mar'11       Matra Realty Ltd                   Tripurari Properties Pvt Ltd             Sell      390058    3.18        3.24       0.00
 BSE   14 Mar'11       Fineotex Chemical Ltd              North Eastern Publishing & Advt Co Ltd   Buy       355322    3.16      150.25       0.00
 BSE   14 Mar'11       Tide Water Oil (India) Ltd         Tide Water Oil Co India Ltd              Buy        22425    2.57     6399.33       0.00
 BSE   14 Mar'11       Fineotex Chemical Ltd              Welspun Realty Pvt Ltd                   Buy       150000    1.34      151.39       0.00
 BSE   14 Mar'11       B&A Ltd                            National Insurance Co Ltd                Sell       40309    1.30      108.65       0.00
 BSE   14 Mar'11       Nandan Exim Ltd                    Sparow Exports Pvt Ltd                   Sell     5000000    1.10        2.00       0.00
 BSE   14 Mar'11       Nandan Exim Ltd                    Chiripal Industries Ltd                  Buy      5000000    1.10        2.00       0.00
 BSE   15 Mar'11       Fortis Malar Hospitals Ltd         International Hospital Ltd               Buy      2451333   13.18       30.90       0.00
 BSE   15 Mar'11       United Breweries Holdings Ltd      Morgan Stanley Mauritius Co Ltd          Sell     2037402    3.05      176.00       0.00
 BSE   15 Mar'11       Nova Iron & Steel Ltd              Bank Of India                            Sell     3258100    2.16       11.00       0.00
 BSE   15 Mar'11       SV Electricals Ltd                 Snehtracon Trexim Pvt Ltd                Buy       250000    1.20       79.80       0.00
 BSE   16 Mar'11       Chandni Textiles Ltd               Aarya Agro Bio And Herbals Pvt Ltd       Buy      1000000    6.20       68.74       0.00
 BSE   16 Mar'11       Dhruva Capital Services Ltd        Karnawat Hire Purchase Pvt Ltd           Sell       49000    1.50       20.67       0.00
 BSE   16 Mar'11       Nandan Exim Ltd                    Chiripal Industries Ltd                  Buy      5000000    1.10        1.92       0.00
 BSE   17 Mar'11       Emporis Projects Ltd               Akshar Entertainment Pvt Ltd             Sell      258000    3.15       45.65       0.00
 BSE   17 Mar'11       Acropetal Technologies Ltd         Newgen International Pvt Ltd             Sell      500000    1.29      123.00       0.00
 BSE   17 Mar'11       Emporis Projects Ltd               Avichal Reality Pvt Ltd                  Sell       82100    1.00       47.09       0.00
 BSE   18 Mar'11       Mahindra Composites Ltd            Mahindra Holdings Ltd                    Buy       220000    5.00       50.00       0.00
 BSE   21 Mar'11       Pipavav Shipyard Ltd               ILFS Ltd                                 Sell    35640000    5.35       80.00      79.05
 BSE   21 Mar'11       Gennex Laboratories Ltd            Arion Commercial Pvt Ltd                 Buy      3000000    2.37        1.16       1.18
 BSE   21 Mar'11       Gennex Laboratories Ltd            Mandpam Commercial Ltd                   Buy      2800000    2.21        1.16       1.18
 BSE   21 Mar'11       Nandan Exim Ltd                    Chiripal Industries Ltd                  Buy      6000000    1.32        1.98       1.97
 BSE   21 Mar'11       S R S Real Infrastructure Ltd      SRS Housing Finance Ltd                  Buy      2600000    1.29       43.40      44.10
 BSE   21 Mar'11       S R S Real Infrastructure Ltd      SRS Portfolio Ltd                        Sell     2600000    1.29       43.40      44.10
 BSE   21 Mar'11       Gujarat Heavy Chemicals Limited    Acira Consultancy Pvt Ltd                Buy      1260000    1.26       37.87      39.85
 BSE   22 Mar'11       Hydro S And S Industries Ltd       Machino Transport Pvt Ltd                Buy       171769    2.68       22.00      23.15
 BSE   23 Mar'11       Chisel & Hammer (Mobel) Ltd        JMD Telefilms Industries Ltd             Sell       20000    1.65      178.99     166.50
 BSE   23 Mar'11       Kavveri Telecom Products Ltd       Dhanlaxmi Lease Finance Ltd              Buy       140000    1.39      110.68     110.60
 BSE   23 Mar'11       MJP Leasing Ltd                    India Max Investment Fund Ltd            Buy        61235    1.02       47.05      47.05
 BSE   24 Mar'11       Accel Transmatic Ltd               Accel Ltd                                Buy       507918    4.60       19.70      19.80
 BSE   24 Mar'11       Shetron Ltd                        India Max Investment Fund Ltd            Buy       248256    2.76       19.36      19.35
 BSE   24 Mar'11       MJP Leasing Ltd                    India Max Investment Fund Ltd            Buy       150000    2.50       45.45      45.45
 BSE   24 Mar'11       MJP Leasing Ltd                    IGFT Pvt Ltd                             Sell      150000    2.50       45.45      45.45
 BSE   24 Mar'11       Acropetal Technologies Ltd         India Focus Cardinal Fund                Sell      722938    1.86       82.00      76.55
 BSE   24 Mar'11       Pankaj Polymers Ltd                Garnet International Ltd                 Buy       102532    1.85       15.00      14.45
 BSE   24 Mar'11       Nandan Exim Ltd                    Chiripal Industries Ltd                  Buy      6000000    1.32        1.93       1.93
 BSE   24 Mar'11       Vital Communications Ltd           Parag Gases & Chem Pvt Ltd               Buy       450000    1.19        0.75       0.75
 BSE   24 Mar'11       Twilight Litaka Pharma Ltd         IFCI Factors Ltd                         Sell      250000    1.17       50.44      50.10
 BSE   25 Mar'11       Elegant Marbles & Grani IndstLtd   Aashka Construction Pvt Ltd              Buy        86200    1.92       39.40      39.30
 BSE   25 Mar'11       Volant Textile Ltd                 Everready Marketing Pvt Ltd              Buy       100000    1.33       97.45      97.45
 BSE   28 Mar'11       NCL Research & Financial Ser Ltd   Sprint Vanijya Pvt Ltd                   Sell       84500    2.49       86.75      86.75
 BSE   28 Mar'11       Joindre Capital Services Ltd       Thrush Vypar & Vitt Pvt Ltd              Sell      275000    1.99       16.48      14.95
 BSE   28 Mar'11       NCL Research & Financial Ser Ltd   Shreehari Vinimay Pvt Ltd                Sell       50000    1.47       86.75      86.75
 BSE   29 Mar'11       Gini Silk Mills Ltd                Garnet International Ltd                 Sell      150000    2.68       52.80      52.50
 BSE   29 Mar'11       Krishnadeep Trade & Invst Ltd      Lincoln Pharmaceuticals Ltd              Sell       55350    1.73       89.70      89.00
 BSE   29 Mar'11       Sanjivani Parenteral Ltd           Ratnamani Marketing Pvt Ltd              Sell      100000    1.70       39.01      38.85
 BSE   29 Mar'11       Chandni Textiles Ltd               Aarya Agro-Bio & Herbals Pvt Ltd         Sell      250000    1.55       47.35      47.35
 BSE   30 Mar'11       Eduexel Infotainment Ltd           Regent Finance Corporation Pvt Ltd       Sell      214100    2.53       16.78      16.78
 BSE   30 Mar'11       Chandni Textiles Ltd               Avance Technologies Ltd                  Buy       400000    2.48       49.70      45.00
Source: NSE and BSE
                                                                                                                                                  55
              Beyond Market 8th Apr ’11                                                                                It’s simplified...
      TECHNICAL OUTLOOK FOR THE FORTNIGHT
     KEY HIGHLIGHTS                                               We are currently at the 5,834 level. But Brent crude is
                                                                  currently at $111/barrel. A little bit of consolidation
     Although the crisis in Japan weighed heavily on the          and profit-booking is likely after a sharp 9.4% rally.
     global markets, India demonstrated great resilience by
     being one the best performing markets in the previous        On the Options front, we saw huge additions at the
     fortnight. The Nifty rallied almost 9% in the month of       5,900 Call and net additions of `34.30 lakh on the Put
     March. Moreover, since it is the end of the financial        side. The additions at the 5,700 and 5,800 Put were
     year, we may not see a lot of selling at these levels.       `18.26 lakh and `11.43 lakh, respectively.

     Market watchers who were expecting the market to             The Put Call Ratio for the Nifty increased from 1.58 to
     remain in the range of 5,200 and 5,600, were surprised       1.70. However, it is very important for the spot Nifty
     to see it trade in the upper band. At present, the market    to maintain above its 61.8% retracement of the fall
     momentum looks good thanks to fresh FII inflows and          from the November ’10 high of 6,335 level till the
     a huge Nifty premium, clearly indicating that the            February ’11 low of 5,177 level, to further continue its
     market is favouring the bulls.                               major bull run.

     The Nifty rallied almost 500 points month-on-month           Technically, it is all looking positive as the Nifty,
     (m-o-m) giving a break out in the very short term. The       which is trading well above its 200-day moving
     short-term indicators are giving a sense that the            average (DMA) of 5,699 and 89 day exponential
     markets are nearing their overbought zone and the Put        moving average (eDMA) of 5,632, which validates
     Call ratio (PCR) for the Nifty is also at 1.58, indicating   that the markets are well-shaped.
     that the markets could pause for some time.
                                                                  A lot of supply points are likely to come in between.
     Large-cap banking and IT stocks are leading the              However, breaking out of a big consolidation suggests
     markets, showing signs of a bigger rally, going              that the overall trend continues to remain up.
     forward. While FIIs have been huge buyers of `8,395          Currently, we are at a stage where one has to be more
     crore for the month of March, domestic institutions          stock-specific rather than being bullish on the Index,
     continued to book profits at higher levels.                  and more importantly focus on quality mid-cap stocks.

     STRATEGY                                                     On the commodities front, oil continues to remain a
                                                                  concern. Meanwhile, we expect the prices of precious
     We believe the markets could see profit-taking in the        metals to soften. Copper at the NCDX is in a correc-
     coming fortnight, as the spot Nifty is likely to face        tion mode and could correct further. A strong support
     resistance around the 5,893 level (that is, 61.80%           is seen at the 418-411 levels and could trade below the
     retracement of the fall from November ’10 till Febru-        395 level. A stiff resistance is seen at the 441 level and
     ary ’11). The markets appear to be close to the upper        if it stays above the 441 level, then a strong rally is
     end of the trading range.                                    likely to resume.

     A fresh review of the markets would depend on                The spot Nifty at the 5,833 level is expected to find
     triggers like the upcoming quarterly earnings and the        resistance near the 5,900 level and stability above this
     monsoon. If the markets sustain above the 5,900 level        level, could take it further up to 5,980 – 6,050 – 6,150
     on the Nifty and the 19,700 level on the Sensex in the       levels in the near term. A strong support is placed at
     near term, then a big rally is likely to take place in the   the 5,670-5,620 levels and only a break below the
     near term.                                                   5,585 level could damage the current uptrend.

     We saw huge FII inflows for the first time in four-          The Bank Nifty at the 11,763 level looks quite strong
     and-a-half months. It remains to be seen whether this        and going forward, if the index holds above the 12,050
     can be sustained. In general, things seem to be in a         level, then a big spurt is likely in the banking sector.
     good shape globally, at least for equities. But, the         On the lower side, we see a strong support around the
     markets seem to be discounting a lot of negative news.       11,300 – 11,000 levels.
56
     Beyond Market 8th Apr ’11                                                                              It’s simplified...
         STOCK IDEAS                                                        Ltd, Maruti Suzuki India Ltd, Oil & Natural Gas
                                                                            Corporation Ltd, Ranbaxy Laboratories Ltd and Tata
         Technically, stocks like Indian Hotels Co Ltd, Shree               Consultancy Services Ltd can be bought on a correc-
         Renuka Sugars Ltd, Bharat Petroleum Corporation                    tion from a trading perspectivE.
         Ltd, Federal Bank Ltd, ITC Ltd, Infosys Technologies

         NIFTY FUTURE DAILY CHART

         The Nifty Futures is trading near its important resistance level of 61.8% retracement of the 5,895 level. Going
         forward, if it maintains above this level, then we might see a fresh rally. On the downside, if the Nifty maintains
         the 5,640 level, we could see this positive trend continuing.




MUTUAL FUND, FII ACTIVITY AND NIFTY                                                   Date           MF Net*       FII Net *      Nifty
This graph and data represent the Mutual Fund and FII activity
that took place in the last fortnight, whether the Fund Houses                     14 Mar'11               32.10   -216.30        5531.50
were buyers or sellers.                                                            15 Mar'11              -84.90    507.00        5449.65
                                                                                   16 Mar'11              286.70    219.40        5511.15
                                                                                   17 Mar'11               65.00   -124.60        5446.65
 2000                       MF Net , FII Net & Nifty                       5900
                                                                                   18 Mar'11              -19.80   -404.80        5373.70
                                                                           5800
 1500                                                                              21 Mar'11             -257.60   -454.70        5364.75
                                                                           5700
 1000                                                                              22 Mar'11               -2.40    -67.90        5413.85
                                                                           5600
                                                                                   23 Mar'11              232.30    313.30        5480.25
  500                                                                      5500
                                                                                   24 Mar'11              158.00    393.20        5522.40
                                                                           5400
     0                                                                             25 Mar'11               79.20    345.50        5654.25
                                                                           5300
  -500
                                                                           5200
                                                                                   28 Mar'11              176.50   1517.90        5687.25
 -1000                                                                      5100
                                                                                   29 Mar'11             -290.00    481.70        5736.35
      14 Mar'11      17 Mar'11       22 Mar'11         25 Mar'11   30 Mar'11       30 Mar'11             -249.30   1500.40        5787.65
                             MF     FII    NIFTY (RHS)
                                                                                   Source: NB Research                   *Net activity in Equity

                                                                                                                                                   57
         Beyond Market 8th Apr ’11                                                                                     It’s simplified...
       MOVERS AND LAGGARDS IN MUTUAL FUND SCHEMES
                                                                                                Absolute %
                                                                                     NAV
                                     Scheme Name                                              (Point to Point)
                                                                                (08th Mar'11)
                                                                                                 2 Weeks
         Equity Schemes
         Movers
         Sundaram Financial Services Opportunities Fund - Ret - Gr                   21.195             8.341
         ICICI Prudential Banking and Financial Services Fund - Retail - Gr          19.300             7.882
         JM Emerging Leaders Fund - Gr                                                7.237             7.296
         UTI Banking Sector Fund - Gr                                                45.590             7.145
         Reliance Equity Opportunities Fund - Gr                                     35.497             7.060
         Laggards
         Religare Arbitrage Fund - Gr                                                12.865             0.144
         ICICI Prudential Blended Plan - Option A - Gr                               15.026             0.189
         UTI Spread Fund - Gr                                                        14.134             0.210
         ICICI Prudential Equity & Derivatives Fund - I O - Retail - Gr              13.510             0.223
         Birla Sun Life Enhanced Arbitrage Fund - Gr                                 10.821             0.246

         Debt Schemes
         Movers
         Birla Sun Life Equity Linked FMP - Series A - Ret - Gr                      13.580             6.501
         ICICI Prudential SMART Fund - Series G - 36 Months - Ret - Gr               19.520             6.068
         DWS Hybrid FTF - Series 2 - Gr                                              11.006             2.479
         Axis Triple Advantage Fund - Gr                                             10.301             1.934
         FT FTF - Series X (5 Years) - Plan D - Gr                                   12.963             1.927
         Laggard
         DWS FTF - Series 66 - Reg - Gr                                              10.777            -0.488
         DWS FTF - Series 69 - Gr                                                    10.645            -0.196
         DWS FTF - Series 68 - Gr                                                    10.721            -0.078
         Religare Active Income Fund - Reg - Gr                                      11.545             0.007
         Kotak FMP - Series 31 (77 Days) - Gr                                     10.1934 *             0.062

         Balance Schemes
         Movers
         JM Balanced - Gr                                                            22.781             4.451
         ICICI Prudential Balanced - Gr                                              46.330             4.253
         HDFC Prudence Fund - Gr                                                    213.337             4.219
         Birla Sun Life 95 - Gr                                                     313.160             4.171
         Principal Conservative Gr Fund                                              87.150             4.159
         Laggards
         Escorts Opportunities Fund - Gr                                             27.599             1.434
         Kotak Balance                                                               22.352             1.480
         LIC Balanced - Plan C (Gr)                                                  55.164             2.873
         Canara Robeco Balance - Gr                                                  60.130             2.910
         Sundaram Balanced Fund - Gr                                                 49.071             3.196
       *(20-Mar-11) Source: NB Research

                                                               Disclaimer
                                                               The information provided here has been obtained from
                                                               various sources and is considered to be authentic and
                                                               reliable. However, Nirmal Bang Securities Private
                                                               Limited is not responsible for any error or inaccuracy
                                                               in the same.
58
     Beyond Market 8th Apr ’11                                                                       It’s simplified...
                                                                                   Editor:

                                                                         K Nitya Kalyani
                                                                         First Editor of IRDA Journal
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Read by top Life and General insurance agents in India since July 2006
                                                                                    The 75-year-old finance
                                                                                    minster of the country is a
                                                                                    man of many hats. From
                                                                                    being a teacher to a journalist
                                                                                    to an author, he has done it
                                                                                    all and continues to be a
                                                                                    force to reckon with in the
                                                                                    political circles

                        Pranab Mukherjee:
                        A Master Strategist


     P
                ranab Mukherjee, the 75-year old finance           co-ordination among all sections of the House for a
                minister of India is considered to be one of the   peaceful and meaningful debate in the Parliament.
                sharpest minds in the political realm in present
                times. He has an all-encompassing career           Mukherjee has also been on the committee of business
     ranging from being a teacher to a journalist, to author and   advisory, privileges, rules and has been the chairman of
     a political personality.                                      the department-related parliamentary standing commit-
                                                                   tee on science and technology as well as home affairs.
     Mukherjee’s parliamentary career began as a Rajya
     Sabha member in 1969 and his ministerial career began         More than just the finance minister, he is literally the
     in 1973 as the Deputy Minister of Industrial Develop-         Congress party’s leading counsellor, often rising to the
     ment. Mukherjee has held office in numerous portfolios        occasion for speaking on behalf of the government’s
     varying from shipping and transport, revenue and              stance on issues like foreign policy, inflation and so on.
     banking, planning commission, defence to external
     affairs, trade, commerce, steel and mines to name a few.      He is a member of the Congress Working Committee,
                                                                   which is the highest policy-making body of the Congress
     POLITICAL JOURNEY                                             party since 1997 and the president of the West Bengal
                                                                   Pradesh Congress Committee from the year 2000.
     He was elected to the Rajya Sabha from the Congress
     party several times and has been the Leader of the House      In the past, he has been on the board of Governors for
     from 1980 to 1984 where his prime task was to maintain        several global financial organizations like the Interna
60
     Beyond Market 8th Apr ’11                                                                              It’s simplified...
tional Monetary Fund (IMF), the World Bank, Asian            Mukherjee widened the foreign institutional investor
Development Bank and African Development Bank,               (FII) limits for investment in corporate bonds and gave a
among others. Mukherjee was the chairman of the Group        tax-free status to infrastructure bonds. A disinvestment
of 24, which is a Ministerial group attached to IMF and      target of `40,000 crore was also announced.
World Bank, which is officially called the Intergovern-
mental Group of Twenty-Four on International Monetary        LIFE OUTSIDE POLITICS
Affairs and Development.
                                                             Mukherjee was born in Mirati village in West Bengal in
His leadership in the finance ministry and other minis-      the year 1935. He possesses a double masters degree in
tries is well acclaimed, both nationally and internation-    History and Political Science and an LLB degree too. He
ally. He was touted as the foremost figure in devising       has also been honoured with a DLtt. (Honoris Causa),
long-term economic policies of the country. Under his        which is an honorary degree that is conferred upon a
direction, India earned the merit of not withdrawing the     distinguished visitor for his contribution to a specific
last installment of the IMF loan which amounted to           field or even to society in general.
almost US $1.1 billion.
                                                             He began his career as a college teacher and later as a
This is Mukherjee’s second stint as India’s finance          journalist. He was associated with publications such as
minister. During his tenure in 1984, he was rated as one     Deser Dak (Call of the Motherland) and ran the
of the best five finance ministers of the world, according   renowned Palli O Panchayat Sambad (News from Rural
to a survey by Euro Money magazine, a journal                Areas and Panchayats) for a number of years.
published in New York.
                                                             Mukherjee has authored a number of books, including
He was also presented the ‘Best Parliamentarian Award’       ‘Midterm Poll’ in 1969, ‘Beyond Survival: Emerging
in 1997. In 2010, Mukherjee was named the ‘Finance           Dimensions of Indian Economy’ in 1984, ‘Off the Track’
Minister Of The Year In Asia’ by a London-based maga-        in 1987, ‘Saga of Struggle and Sacrifice and Challenges
zine, ‘Emerging Markets’, recognizing his initiatives to     before the Nation’ in the year 1992. His last two publica-
usher in fiscal transparency, fuel price reforms and         tions have been applauded as a ready reckoner on the
inclusive growth strategies.                                 Indian National Congress - their history, ideology as well
                                                             as their philosophy.
TRI-BUDGET REFORMS
                                                             The Padma Vibhushan is the second highest civilian
Mukherjee has presented the 2009, 2010 as well as the        award in the Republic of India. Mukherjee is the first
2011 Union Budget of India. In the 2009-10 annual            ever serving Cabinet Minister to get a Padma Vibhushan
budget, he announced many tax reforms, such as the           award for exceptional and distinguished service to the
termination of the Fringe Benefit Tax and the Commodi-       nation in the field of social affairs.
ties Transaction Tax.
                                                             Mukherjee grew up in a nationalist and political environ-
He gave more priority to rural development projects          ment and this has influenced and guided his political
while announcing a 144% jump in the allocation of the        ideas and activities. His father, Late Kamada Kinkar
flagship job guarantee scheme, NREGA and a 45% hike          Mukherjee was active in the Congress party from the
for the Bharat Nirman programme that focuses on              1920s and was a member of the All India Congress
infrastructure development in villages.                      Committee (AICC) and the West Bengal Legislative
                                                             Council. Mukherjee’s father was also a respected
In the 2010-11 Union Budget, Mukherjee came up with a        freedom fighter who was sent to prison for more than 10
string of reforms for the corporate, banking and agricul-    years for his opposition to the British rule.
ture sectors and also introduced the much-hyped GST
(Goods and Services Tax). His move of widening the           Mukherjee’s wife, Suvra Mukherjee is an accomplished
income tax slabs came as a much-needed relief to the         Rabindra Sangeet singer. Their daughter Sharmishtha is
individual tax payers.                                       a very talented performer of the north Indian dance form
                                                             of Kathak. They also have two sons, Surojit and Abhijit.
The recent budget of 2011-12 saw Mukherjee focusing
majorly on building infrastructure for the agriculture       The younger son, Abhijit quit his job at Steel Authority
sector by approving 15 Mega Food Parks and increasing        of India (SAIL) and is now contesting elections from the
the storage capacity by 4 million tonnes. He also allotted   Congress party from the Nalhati constituency in West
around 49% of the total plan allocation to the infrastruc-   Bengal. Mukherjee prefers to spend his leisure time by
ture sector.                                                 reading books, gardening and listening to musiC.
                                                                                                                           61
Beyond Market 8th Apr ’11                                                                             It’s simplified...
                                                                               Benjamin Graham is considered
                                                                            as one of the pioneers in the eld
                                                                                   of fundamental analysis of
                                                                                 companies and his theor y on
                                                                                value investing is regarded as
                                                                              one of the most important ones
                                                                                                      till date




     WORDS FROM
        THE WISE
                                 D
                                             uring difficult times like these, investors usually pray and hope for some
                                             good luck to come their way. But we all know that successful people
                                             make their own luck. We have, therefore, decided to feature investment
                                             theories of some of the most successful and famous investors of all times,
                                 who have not only made their own luck, but also that of countless others around
                                 them. The idea is not to copy their style. Instead, it is to gain an insight into their
                                 successful investing regimen and learn a thing or two from these great men.

                                 Most of us would think Warren Buffet, the greatest investor of all times, should be
62
     Beyond Market 8th Apr ’11                                                                         It’s simplified...
the first on this list. But the one we have chosen to write     imaginary business partner called Mr Market, who is a
about is someone who Warren Buffet himself considers            very emotional guy. Mr Market comes to the office
his mentor and guru. That person is none other than the         everyday and offers to either sell you his share of the
legendary Benjamin Graham, better known as the Father           business or buy a share of your business. Most of the
of Value Investing.                                             times, the price quoted by Mr Market is quite reasonable.
                                                                But sometimes, the price that Mr Market quotes can
Benjamin Graham is considered as one of the pioneers in         either be extremely high or absurdly low depending on
the field of fundamental analysis of companies with a           whether he is upbeat about his business or depressed
strong belief in investing as opposed to speculating. His       about his business. But the best part is that the onus lies
two best-selling books, ‘The Intelligent Investor’ and          completely with you, as an investor, on whether to trade
‘Security Analysis’ adorn the bookshelves of almost all         with Mr Market or to completely ignore him.
financial managers and investors and are thought to be
compulsory reading for anyone desirous of a long and            The investor should not be influenced or intimidated by
fulfilling career in the stock markets. Although these          what Mr Market thinks. Rather, he should look at capital-
books were first published almost 60 years back, its core       izing on the different moods of Mr Market. Since you, as
principles are as effective today as they were then.            an investor, have a better understanding of your business
                                                                and have arrived at a fair value of the shares based on
Out of the many investing principles put forth by Benja-        your own research parameters, you are in a much better
min Graham, value investing is perhaps the most impor-          position to decide whether the price quoted by Mr
tant and widely accepted concept.                               Market is overvalued or undervalued.

Value Investing: Value investing means identifying              In other words, you can look at taking advantage of Mr
stocks that are undervalued. In other words, it looks for       Market by either buying his shares if they seem underval-
stocks that are trading for less than their intrinsic value.    ued or by selling or shorting his shares if you feel that the
Simply put, value investing means buying a thing that           prices are overvalued. And unlike your real-life business
you know has an intrinsic value of `10 but is available in      partners, Mr Market does not break off his partnership
the market at `7. The main question here is how do you          with you even when you repeatedly take undue advan-
know that the intrinsic value of that thing is `10?             tage of him.

This requires a thorough understanding of the business,         In fact, he will again show up at your office the next day,
an in-depth fundamental analysis of the company, future         all set to do business with you. A good investor should
prospects, industry outlook, profitability, etc. And if after   look at buying shares of a strong business on the days
such an extensive research the investor feels that the          when the mood of Mr Market is negative and he is ready
stock is trading at a discount to his perceived intrinsic       to sell his shares at a throw-away price. Then one should
value, then he should initiate a value buy. Remember,           wait for his mood to reverse and also for the price of the
intrinsic value is a very subjective value, in the sense that   shares to rise.
it can differ from person to person and the parameters
used to calculate this intrinsic value.                         II Active And Passive Investor: Benjamin Graham has
                                                                divided the investor community into two distinct classes
A value investor believes that there is a general tendency      - Active Investor and Passive Investor. Every investor in
for the markets to overreact to news and this overreaction      the stock market should know what type of an investor he
leads to a price aberration, which over a period of time,       or she is so as to set a realistic target for himself.
when sanity returns to the markets, will find its fair value
and your undervalued buy will reap you rich profits.            Basically, a passive investor is a defensive investor. He
Buying fundamentally strong companies with good                 does not spend much time and effort in researching and
future prospects but which have escaped the eye of the          scouting for great investment opportunities; nor does he
markets, is the principal aim of a value investor.              indulge in regular monitoring and rebalancing of his
                                                                investment portfolios.
The three most famous concepts of Benjamin Graham
are discussed below:                                            He has no real understanding of the business or the
                                                                fundamentals of the company and is an impulsive buyer,
I Mr Market: Graham came up with an analogy that                who normally buys on tips and recommendations. A
captures the essence of the stock markets everywhere.           passive investor can expect to earn returns that are at par
Even today, there is no better way to explain the work-         or marginally higher than the average market returns
ings of a stock market to a layman. He called this ‘Mr          over a period of time and, hence, Graham advises such an
Market’. Let’s say, you own a business and you have an          investor to invest either in good index funds or safe
                                                                                                                                 63
Beyond Market 8th Apr ’11                                                                                   It’s simplified...
         blue-chip stocks, because the emphasis is more on             As in the earlier example, if you have calculated the
         minimizing ones losses rather than earning huge returns.      intrinsic value of a stock as `10, then you wait to buy the
         Passive investors are in for the long haul and expect         stock until it is available at `7 in the markets. This differ-
         profits over a longer period of time.                         ence of `3 is your safety net. The difference between the
                                                                       market price and the intrinsic value of a stock is known
         An active investor on the other hand, invests a great deal    as the margin of safety. This concept would be clearer
         of time and effort in researching quality bargains in the     when explained with the help of an example.
         market. An aggressive investor looks for hidden gems
         because they have a much higher upside potential and the      Suppose you know that you require 10 apples for your
         odds are highly in favour of the stock beating the markets    perfect recipe of an apple pie, do you buy exactly 10
         over a period of time.                                        apples? No. You buy 11 or, maybe, 12 apples. Why do
                                                                       you do that? This is because, you are creating a buffer in
         An aggressive investor looks to invest in a few select        case one or two apples are rotten, then your entire recipe
         companies, so as to be in a much better position to           should not suffer on account of those 1 or 2 less apples.
         regularly monitor his portfolio and take appropriate          So what you are doing is creating a margin of safety.
         action if the market conditions change dramatically.
         Graham firmly believed that more the effort and work          A margin of safety is achieved when securities are
         that an investor puts into his investments, the better        purchased at prices sufficiently below their intrinsic
         returns he is likely to get. Active investors are generally   values to allow for human error, bad luck or extreme
         short-term investors, who indulge in regular buying and       volatility in a complex, unpredictable and rapidly chang-
         selling of shares.                                            ing world. Value investors invest with a margin of safety
                                                                       that protects them from large losses in declining markets.
         III Margin Of Safety: Benjamin Graham put forth the
         concept of margin of safety, which he believed is the         How Large Should The Margin Of Safety Be?
         central theme of any investment operation. This term was
         first coined by Benjamin Graham, the father of value          There is no universal standard to determine how large the
         investing and David Dodd, way back in 1934 and later          margin of safety should be. Each investor has his own set
         followed and applied by several other investors. Margin       of values, which he ascribes to the valuation of a particu-
         of safety means buying a stock only when it is trading at     lar company depending on their comfort and assessment
         a price much below its intrinsic value.                       of the risk and returns.

                                                                       So the margin of safety could be enough at 30% lower
                                                                       than the intrinsic value of such securities for one person,
                                                                       while it could be as high as 60% for another person.
                                                                       However, this does not mean that share prices may not
 What Is Intrinsic Value?                                              fall from the level the value investors buy or from 60%
                                                                       margin of safety.
 Investopedia defines intrinsic value as the actual value of a
 company or an asset based on an underlying perception of its          It is difficult to time the markets or stock prices because
 true value, including all aspects of the business, in terms of        many a times they deviate significantly higher or lower
 both tangible and intangible factors. This value may or may           from their intrinsic value for different reasons, including
 not be the same as the current market value.                          liquidity, sentiments and perception of a particular event.
                                                                       This is also the reason why despite having enough
 Value investors use a variety of analytical techniques in order       margin of safety, an investor could see prices falling.
 to estimate the intrinsic value of securities in the hope of
 finding investments where the true value of the investment            This means that the margin of safety does not at all, by
 exceeds its current market value.                                     any means, insure or protect the downside. However,
                                                                       what it does is provide an investor with enough safety in
 Value investors calculate the intrinsic value, which is also          case of errors in estimating or understanding the true
 called the fundamental value of any security, by discounting          value of the company. Also, stocks having enough
 the expected future cash flow that a security will generate           margin of safety tend to fall less compared to those with
 over a period of time. Different people use different matrix,         high expectations built in or the stocks that trade higher
 which could be price to book value, price to earnings ratio,          than their intrinsic value.
 dividend yield, enterprise value to operating profits, etc, to
 arrive at the intrinsic value, which is also the reason why it        Though the margin of safety does not guarantee a
 differs from person to person.                                        successful investment, it does provide room for error in
64
         Beyond Market 8th Apr ’11                                                                                 It’s simplified...
an analyst’s judgment. Additionally, stocks bought at         Tools To Use
relatively lower valuations, have in the long run, given
superior returns than those with higher valuations or         There is a misconception that if the share price trades
those which have been bought near or at a higher price        below its fifty-two week or a life time low, it becomes
compared to the intrinsic value of such stocks.               attractive or has more margin of safety. To clarify,
                                                              margin of safety is not calculated on past share prices.
Determining a company’s ‘true’ worth (its intrinsic
value) is highly subjective. In addition to human error, it   For Benjamin Graham, the benchmark for calculating the
is very difficult to predict a company’s earnings, which is   margin of safety was the interest rate payable for good
influenced by so many internal and external factors that      quality bonds or AAA bonds.
are mostly beyond imagination. Margin of safety
provides a cushion against errors in calculation.             If, for instance, a good quality bond or risk-free bond
                                                              earns 10%, it is only profitable or sensible when a
Current Context                                               company’s share price returns more than the risk-free
                                                              rate of return, which in this case is 10%. Higher the
The Indian markets have already corrected a lot and are       returns earned on a company’s share price, the better is
now trading near their historically average valuations.       the margin of safety.
Mid-caps and the small-caps especially have been
hammered by a significant margin, irrespective of the         Hence, if a company’s share price is trading at `100 and
quality of such companies. This is neither the first time     the company is expected to do an EPS of `20, this gives
nor the last time such an instance has occurred. However,     a 20% return. But that is not enough. Investors need to
times like these offer huge scope for those who are           see if these earnings are sustainable and predictable,
willing to make a portfolio of good companies that are        apart from the fact that the company in which they are
trading at good valuations.                                   investing has both, a sound business and management.

Besides, those who practice margin of safety are              Remember that the greater the margin of safety, the safer
probably able to stay away from the crowd and tend to         is your investment and greater is your chance of making
make fewer mistakes.                                          a profit.




 Benjamin Graham’s Philosophy

 1. The price to earnings ratio of the stock has to be less than the inverse of the yield on AAA corporate bonds
 2. The price to earnings ratio of the stock has to be less than 40% of the average price to earnings ratio over the last 5
 years
 3. The dividend yield should be greater than two-thirds of the AAA Corporate Bond Yield
 4. The stock price should be less than two-thirds of book value per share
 5. The stock price has to be less than two-thirds of the Net Current Assets of the company
 6. The Debt-Equity ratio has to be less than 1 time.
 7. Current Assets should be twice its current liabilities
 8. The company’s debt should be twice its net current assets
 9. Historical growth in earnings per share for about over the last 10 years should be higher than 7%
 10. There should not be more than two years of negative earnings over the last 10 years.


 And finally we sum it all up with one quote by Benjamin Graham himself which is the gist of all his investment
 theories: “An investment operation is one which upon thorough analysis, promises safety of principal and an adequate
 return. Operations not meeting this requirement are speculativE.”



                                                                                                                              65
Beyond Market 8th Apr ’11                                                                                It’s simplified...
38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610,
                                                 &




                     Beyond
                                    Present




  LEARN THE ART OF
COMMODITY INVESTING                                     Exchange Partner




                            Date: 18th March, 2011
                            Venue: Hotel Presidency,
                                    Kochi.                                  67
Beyond Market 8th Apr ’11                              It’s simplified...
GOD’S OWN COUNTRY                                                        Expert guidance and right advice
                                                                         alone can help market participants to
  BECKONS MARKET                                                         use the rally in the commodity
      PARTICIPANTS                                                       markets to their advantage



B  eyond Mandi, the one-of-its-kind investor education camp was organized by Nirmal Bang
Commodities Pvt Ltd in association with Zee Business at Hotel Presidency in Kochi, Kerala on
18th March this year.

The main aim of the camp is to educate both, traders and investors alike on the art of investing
in commodities by inviting experts from the industry to give sharp insights into the commodity
markets, thus helping them take the right investment decisions.

The sixth camp saw Anjani Sinha, MD & CEO of the National Spot Exchange; Kunal Shah,
Head – Commodity Research at Nirmal Bang Commodities Pvt Ltd; James Jose, MD, Chemma-
nur Gold Refinery and ME Meeran, Chairman, Eastern Group of Companies discussing the
opportunities in the commodity markets with Amish Devgan, Commodity Editor and Anchor at
Zee Business.                                                                                                Amish Devgan,
                                                                                                             Commodity Editor and
Amish Devgan kick-started the event by introducing the speakers and briefed the audience on the              Anchor at Zee Business
topics that would be covered at the Kochi camp, ranging from the opportunities in the spot and
the futures market to the commodity outlook and the course the markets are likely to take in the
near future.




                                                                   The first speaker of the evening, Anjani Sinha, MD & CEO, National
                                                                   Spot Exchange deliberated on the correlation between the futures and the
                                                                   spot markets. He said, “The futures market has provided a very good
                                                                   platform for risk management and hedging. The commodities market has
                                                                   performed exceptionally well in the past one year and market partici-
                                                                   pants should treat it as an asset class.”

                                                                   Further, he said that since the small and retail participants too, form a
                                                                   huge chunk of the investor community, NSEL, therefore, came up with
                                                                   e-series products like e-gold, e-silver, e-copper, e-lead and e-zinc, which
 Anjani Sinha,                                                     they intend to take up to 20 products in the series, by the end of this
 MD & CEO of NSEL                                                  calendar year.
 Anjani Sinha is the MD & CEO of the National Spot
 Exchange Ltd (NSEL). He has over two decades of                   He later elaborated on the benefits of investing in e-gold, while clearly
 experience and deep knowledge of commodity derivatives            explaining the difference between investing in e-gold and ETFs. “NSEL
 and spot markets. His previous stint was with the Ahmed-          plans to empanel jewellers to make gold easily fungible,” said Sinha.
 abad Stock Exchange. Prior to that, he was associated with
 the Bombay Commodity Exchange Ltd, Interconnected
 Stock Exchange of India Ltd (ISEI) and Magadh Stock
 Exchange.


 68
              Beyond Market 8th Apr ’11                                                                           It’s simplified...
                                                  Kunal Shah, on his part, spoke about the benefits of investing in commodities, its value
                                                  and how it is being used by countries as a means of economic warfare. He illustrated how
                                                  commodities had beaten other asset classes, including equities and currencies, in the year
                                                  2010. “Although there was a correction in the equity markets this year, the commodity
                                                  market continues to outperform it,” he said.

                                                  Even as the BRIC economies are growing, the demand-supply gap continues to grow with
                                                  the rise in population and the decline in the capacity to produce commodities, which
                                                  would ultimately lead to a hike in commodity prices, said Shah.

                                                  He dwelt on the fact that countries today are printing excess money to overcome reces-
                                                  sion, which again will have a positive impact on commodity prices.

                                                  These days, nations are utilizing commodities as a means of economic warfare. China, the
Kunal Shah,                                       world’s largest holder of Forex reserves and US bonds, is refusing to comply with United
Head of Commodity
Research at Nirmal Bang                           States’ demand to appreciate its undervalued currency, which is pushing commodity
                                                  prices higher. The US too has been pumping money into the economy, further fuelling a
Kunal Shah serves as the Head of Commodity
Research at Nirmal Bang. He closely tracks
                                                  hike in commodity prices.
precious metals, base metals, energy and
agricultural commodities. He addresses            This has left India in a critical position as it does not have any commodity reserves except
seminars on the outlook of commodities across     for essential ones. And the economy will have to undergo a radical change to become a
the country. He appears regularly on business
channels. He is also sought by the print media    serious player in the commodity market. India, therefore, needs to work on building a
and wire services, on a regular basis. Prior to   healthy commodity reserve if it wants to stay in the race.
Nirmal Bang, he was associated with Motilal
Oswal Commodities Pvt Ltd, where he
                                                  Talking about the opportunities in the commodities space, Shah said that though not
managed the research desk.
                                                  many commodity instruments are available to investors, this asset class has grown
                                                  tremendously. With the weakening of currencies, commodities become cheaper, which
                                                  leads to general inflation.

                                                  In order to attract investments, most developing countries have a near-zero interest
                                                  policy. The current spurt in liquidity will increase inflationary expectations, thus making
                                                  commodities an attractive investment option.

                                                  Referring to agri commodities in India, he said that the production has not been in line
                                                  with the growth in population. He also said that the futures market is not to be blamed for
                                                  the rise in prices.

                                                  Sharing his investment philosophy, he urged investors to be careful while investing their
                                                  hard earned money. He also mentioned that apart from understanding the support and
                                                  resistance levels, they must also understand the fundamentals of demand and supply. He
                                                  asked them to use stop losses every time they traded and also warned them against trading
                                                  in less liquid commodities.

                                                  Shah said that China has decided to downgrade its GDP from 10% to 7%. Also, the hike
                                                  in interest rates in China and the hike in commodity prices has caused a trade deficit of
                                                  $7.3 billion for the first time in four years.

                                                  Giving a general outlook on commodities, he said pepper, coriander, guar seed, crude oil,
                                                  copper and lead are looking attractive at present.




                                                                                                                                         69
              Beyond Market 8th Apr ’11                                                                           It’s simplified...
                                                     The next speaker, James Jose, MD, Chemmanur Gold Refinery discussed the price
                                                     trend of gold in the last decade and stated the consumption and investment pattern of
                                                     the yellow metal in India. He spoke about the reasons behind the rise and fall of gold
                                                     prices, while explaining the correlation between the price of gold and geopolitical
                                                     situations around the world. He said heavy production and consumption of gold in
                                                     China and the buying of the yellow metal by the central banks had affected the prices
                                                     of this precious metal.

                                                     Coming to India, Jose explained the consumption pattern of gold in the country and
                                                     gave reasons behind the same. He also discussed the consumption pattern of gold in the
                                                     southern states vis-à-vis northern states. “While the people in Kerala attach a higher
                                                     value to gold, those from the north do not do so,” he said.
James Jose,
MD, Chemmanur Gold Refinery
James Jose is the MD of Chemmanur Gold
Refinery. He is also the Secretary of the All
India Council of Indian Association of
Hallmarking Centre and the District
President of the All Kerala Gold and Silver
Merchant’s Association.

                                                     The final speaker for the evening, ME Meeran, Chairman, Eastern Group of Companies
                                                     demonstrated how trading helps in bringing about an inclusive growth. He spoke of
                                                     how the hike in prices would result in inflation and how the decline in prices would
                                                     result in farmer suicides.

                                                     “Commodity exchanges play a key role in price discovery and transparency,” said
                                                     Meeran adding that manufacturers and users should have faith in the system, which can
                                                     be brought in by perfecting the delivery system.




                                                     The investor education camp ended with a panel discussion and a round of
ME Meeran,
Chairman, Eastern Group                              questions and answers. It was followed by a sumptuous dinner. The next camp
of Companies                                         will be held on 21st April at AhmedabaD.
ME Meeran is the Founder and the
Chairman of the Eastern Group of Compa-
nies. He serves as the Chairman of the
Eastern Treads Ltd and has been its Director
since 1993.




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70
            Beyond Market 8th Apr ’11                                                                                                              It’s simplified...
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