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 firstname.lastname@example.org 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. We don’t just help you invest your money, at Nirmal Bang it’s a relationship beyond broking SMS ‘BANG’ to 54646 E-mail: email@example.com 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 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 www.nirmalbang.com 12 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: firstname.lastname@example.org Ahmedabad. SMS: ‘BANG COM’ to 54646 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. penny saved is a penny earned money invested is money earned Your financial growth is our concern. EQUITIES | DERIVATIVES | COMMODITIES | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | DP At Nirmal Bang, it’s a relationship beyond broking... SMS ‘BANG’ to 54646 | e -mail: email@example.com | www.nirmalbang.com 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. an apple a day keeps the doctor away regular investments keep worries away Your financial health is our concern. E Q U I T I E S | D E R I VAT I V E S | CO M M O D I T I E S | C U R R E N C Y | M U T U A L F U N D S | I P O s | I N S U R A N C E | D P At Nirmal Bang, it’s a relationship beyond broking... SMS ‘BANG’ to 54646 | e -mail: firstname.lastname@example.org | www.nirmalbang.com 36 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 target Our team of dedicated and experienced commodity research analysts have been giving calls on prominent business Just plain truth channels, print media and newswire services, which have consistently hit bullseye. Time and again, we have deliv- ered results that are visible and can be measured. Get the Nirmal Bang advantage, if accuracy is what you seek. For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx 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. R E G D. O F F I C E : S o n awa l a B u i l d i n g, 2 5 B a n k St re e t, Fo r t, M u m b a i - 4 0 0 0 0 1 . Te l : 0 2 2 - 3 9 2 6 7 5 0 0 / 7 5 0 1 ; Fa x : 0 2 2 - 3 9 2 6 7 5 1 0 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: email@example.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: firstname.lastname@example.org | 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: email@example.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 SUBSCRIBE TODAY! AL 31, Ramsayi, 3rd Street, 12th Main Road, Anna Nagar, Chennai - 600 040. 044 - 26222620, 26222623, 26222629 Cell: 09952069818, 09962945854, 09380217234 E-mail: firstname.lastname@example.org 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. a stitch in time saves nine plan your finances in time Your financial security is our concern. 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