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					For Pr ivate Circulation   Volume 1 Issue 51   14th J un ’11




    The listing of LinkedIn has
    thrown open the debate as
    to whether the Internet
    companies are here to stay or
    that the hype is just a bubble
    waiting to burst, much like
        the tech bust of 2000
                                                    DB Corner – Page 5


                                                    Double Trouble
                                                    Already reeling under the impact of rising raw material costs, the recent hike in interest rates is hurting the
                                                    profits of most Indian companies – Page 6

                                                    In Revival Mode
                                                    Companies are reconsidering the private equity route to raise money in volatile times like these – Page 9

                                                    A Catalyst For Change
                                                    By coming up with an interest subsidy scheme, the government is planning to introduce reforms in the
                                                    power sector, whose stocks have been declining despite strong earnings growth – Page 11

                                                    An Uphill Task
                                                    Although auto companies have reported a rise in sales, their profits have seriously taken a beating, making
                                                    their climb difficult – Page 14

                                                    Breathing Life Into The Asthma Market
                                                    The domestic pharmaceutical companies manufacturing drugs to treat asthma are likely to emerge as more
                                                    competitive and aggressive players in the coming times – Page 16

                                                    All Smoke, No Fire?
                                                    The listing of LinkedIn has thrown open the debate as to whether the Internet companies are here to stay or
                                                    that the hype is just a bubble waiting to burst, much like the tech bust of 2000 – Page 20

                                                    Plunging In
                                                    Indian companies are leaving no stone unturned to make the most of the opportunities in the online and
                                                    mobile ad space – Page 23
Volume 1         Issue: 51, 14th Jun ’11
                                                    True Lies
                                                    Complaints of mis-selling of insurance products, especially ULIPs, prompted IRDA to put in place preventive
  Editor-in-Chief & Publisher: Rakesh Bhandari      guidelines – Page 25
  Editor: Tushita Nigam                             Spend To Save
  Senior Sub-Editor: Kiran V Uchil                  If selected appropriately and used smartly, cash-back credit cards could be an instrument to enhance
                                                    savings for customers – Page 28

  Art Director: Sachin Kamble                       Now, Loans Against Gold
  Junior Designer: Sagar Padwal                     People can now take loans by pawning their gold, thus making the most of the skyrocketing prices of the
                                                    yellow metal – Page 30

  Marketing & Operations:                           Leap Of Blind Faith
  Dwiti Bhuta, Savio Pashana                        Analyze the situation, draw your conclusions and stand by your view even if it’s contrary to others, as
                                                    following the crowd may not be the right thing to do – Page 32

  Research Team:
  Sunil Jain, Kunal Shah, Michael Pillai,           KEC International Ltd: Power Play
                                                    The merger, acquisition and diversification into new high-growth sectors will boost KEC International’s
  Vikash Bairoliya, Sunit Mehta,                    growth and profitability, going forward– Page 34
  Subhash Lalwani, Anand Vyas

  HEAD OFFICE                                       Fortnightly Outlook For Commodities – Page 38
  38-B/39, Khatau Bldg, 2nd Floor,
  Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001   Fortnightly Outlook For Currencies – Page 39
  Tel: 022 - 3926 8600/01

  CORPORATE OFFICE                                  A Safer Alternative
                                                    FMPs are suitable for investors seeking low-risk avenues with a short-term investment horizon – Page 40
  B-2, 301/302, Marathon Innova,
  Off Ganpatrao Kadam Marg,
  Lower Parel (W), Mumbai - 400 013                 Important Statistics For The Fortnight Gone By – Page 42
  Tel: 022 - 3926 8000
  Web: www.nirmalbang.com
                                                    Usha Narayanan: Woman At The Helm
  We, at Beyond Market welcome your views,          The 59-year-old Executive Director of the Securities and Exchange Board of India is a key force in the
                                                    workings of the stock market regulator – Page 48
  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...                              Noted for following the philosophy of value investing and for his personal frugality despite his immense
                                                    wealth, American investor, philosopher and philanthropist, Warren Buffett’s principles can surely change the
                                                    fortunes of people – Page 50
  beyondmarket@nirmalbang.com
  Tel No: 022 - 3926 8047


  Beyond Market 14th Jun ’11                                                                                                    It’s simplified...
                                                                                                                                                               3
The year 2000 had witnessed a one-of-its–kind technology bust, also referred to as the ‘dot-com bubble’, which was the result of the rapidly
increasing values of the Internet sector and related fields in the US markets. Prior to that, from 1995 to 2000, a huge number of firms had
formed a cluster of Internet companies, whose prices soared simply with the addition of ‘e-‘ or a ‘.com’ to their names. Such companies
attracted not only venture capitalists, but also market participants as they believed these companies would give healthy profits. Therefore,
they began investing heavily in such stocks.

The uniqueness of these stocks, along with the difficulty to decipher the exact value of the companies supported the soaring prices, with a
lot of money chasing these stocks. Ultimately, the bubble that was forming burst, causing many companies to shut shop and this dented
investors’ portfolios heavily.

Coming to the current year, once again a heavy rush of similar Internet companies is being witnessed in the US markets after almost a
decade. A number of initial public offerings are being floated in the equity markets, with high valuations. But now the point of contention
among people is whether this spurt in Internet companies is likely to replicate the tech bust of 2000 or things have changed for the better.
We need to wait and watch to see if this development would impact the Indian markets or it is only smoke without fire. The cover story
sheds light on all this and more.

The other stories in this issue include the impact of rising interest rates, coupled with high raw material prices, on different sectors in the
Indian economy and the number of companies relooking at the private equity/venture capital route to fund their businesses, among other
stories. Sectorally, we have dwelt on the likely reforms in the power sector, the current state of the auto industry, the opportunities for
domestic pharmaceutical companies involved in the manufacture of drugs treating asthma and the growth in the online and mobile
advertising space.

Further, there is an article on mis-selling of insurance products and the introduction of preventive guidelines by insurance regulator IRDA.
In our Beyond Basics section, there is a piece on fixed maturity plans (FMPs), a mutual fund product that can prove beneficial as an invest-
ment option in the current times where high interest rates, high inflation and global uncertainties, among other issues have made short-
term rates attractive. This time, we have penned down the investment mantras of the great investor, philosopher and philanthropist Warren
Buffett in the series of investment gurus in the Beyond Learning section.

Finally, Nirmal Bang is back with its equity investor camp ‘Beyond Market’ in association with ET Now. The camp travels to cities across the
country to educate investors on the art of investing. You can also read about the wisdom shared by the experts at the event that was held
at New Delhi last month, in this issuE.


                                                                                                                            Tushita Nigam
                                                                                                                               Editor


4
         Beyond Market 14th Jun ’11                                                                                  It’s simplified...
  Investors and traders
   are advised to avoid
   overnight positions
due to international issues.




     I
          n the fortnight gone by, Federal Reserve Chairman        Yes Bank Ltd (LTP: `300.55) on declines around the
          Ben Bernanke accepted that the recovery in the US        given Nifty support levels.
          economy had slowed down a bit, but he did not hint
          at providing any additional stimulus package to          The markets are likely to take direction from the ongoing
     prop it up.                                                   monsoon season and other global factors. They can also
                                                                   take cues from the upcoming RBI policy review, in the
     Also, continued support from the IMF and ECB to               next fortnighT.
     Greece brought relief to the markets, while raising
     question as to whether the aid is only a temporary
     solution or it can sustain in the long run.

     On the domestic front, the previous fortnight saw the end
     of last quarter’s earnings results of all listed companies.
     The outcome of the results was factored into the stock
     prices along with rising inflation and interest rates. The
     stock markets now need an altogether new reason to
     show any major movement.

     In the coming fortnight, the markets are likely to remain
     range-bound. The Nifty has support around the 5,450 and
     5,370 levels and resistance at the 5,560 and 5,625 levels.
     However, investors and traders are advised to avoid
                                                                   Nifty: 5526.85
     overnight positions due to international issues that could    Sensex: 18,394.29
     weigh on the markets.                                         (As on 8th Jun ’11)
                                                                   Disclaimer
     Traders can consider stocks like LIC Housing Finance          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
     Ltd (LTP: `226.65), Praj Industries Ltd (LTP: `74.15),        decision before investing. Investment in equity is subject to market risk. Our
     Orchid Chemicals & Pharma Ltd (LTP: `285.45),                 research should not be considered as an advertisement or advice, professional
                                                                   or otherwise. The investor is requested to take into consideration all the risk
     Hindustan Zinc Ltd (LTP: `134.40), Adani Power Ltd            factors including their financial condition, suitability to risk return profile and
     (LTP: `113.30), Federal Bank Ltd (LTP: `452.90) and           the like and take professional advice before investing.


     Beyond Market 14th Jun ’11                                                                                               It’s simplified...         5
                                 R
                                           aising interest rates nine times in a year has
                                           taken its toll on the Indian corporate sector,
                                           which is crumbling under rising input and
                                           borrowing costs.

                                 The double whammy has dented the profitability of
                                 companies, especially in interest rate-sensitive sectors
                                 such as banking, automobile and real estate.

                                 Earlier, in May this year, India’s central bank, the
                                 Reserve Bank of India (RBI) increased key short-term
                                 lending (repo) and borrowing rates (reverse repo) by 50
                                 basis points (0.5%) with immediate effect to bring down
                                 inflation. This is the ninth interest rate hike by the RBI
                                 since March ’10.

                                 While sales of corporates are still healthy, the increase in
                                 raw material costs and interest rates is dragging down the
                                 operating profit of companies. The automobile industry
                                 is among the worst hit industries.

6
    Beyond Market 14th Jun ’11                                              It’s simplified...
AUTOMOBILE SECTOR                                              such as DLF Ltd and Unitech Ltd are likely to miss their
                                                               sales targets.
For the first time in two years, auto sales are showing
signs of a slowdown due to rising fuel prices and hike in      High property prices and high interest rates, which are
interest rates.                                                keeping potential buyers away from the market, are
                                                               likely to put pressure on realty developers’ bottom line.
Banks have hiked their lending rates and the current           There have also been very few project launches this year,
interest rates on car loans are between 10.75% and             which is likely to reflect in the yearly results of most real
13.25%. Industry insiders say that the rising interest rates   estate companies.
have led to reduced enquiries and the conversion rate
from enquiry to purchase has slowed down. This is              Realty companies that have so far declared results are
expected to continue in the coming months, till there is       IndiaBulls Real Estate Ltd, Oberoi Realty Ltd and
respite from interest rate hikes.                              Godrej Properties Ltd, all of which have zero or
                                                               negligible debt, which gives them the flexibility to
In April ’11, car sales in the domestic market slowed          reduce prices to attract more buyers.
down with major auto makers reporting subdued growth
during the month compared to the same period last year.        IndiaBulls, Oberoi and Godrej have all posted a rise in
In stark contrast to the 29.73% growth in FY10, growth         sales and net profit but this is not going to be the case for
in car sales in FY11 is mostly in single digits.               the highly leveraged developers. Analysts say DLF will
                                                               miss its sales guidance of 12 million sq ft for fiscal year
India’s automobile sector is wrestling with rising             2011 and Unitech is expected to report a decline in
commodity prices and it is only going to get worse as          revenue and net profit.
even automobile suppliers have increased prices from the
month of April.                                                INFRASTRUCTURE, ENGINEERING AND CON-
                                                               STRUCTION SECTOR
Automobile companies may not be able to pass on the
input cost increase to buyers. This means that they will       In the infrastructure sector, it is bad news all over.
have to take a hit on their bottom line. In fact, this is      Infrastructure major, Larsen and Toubro’s net profit was
exactly what has happened with most automobile compa-          down by 18.2%, due to the increase in interest rates and
nies, including India’s largest two-wheeler maker Hero         soaring commodity prices. Patel Engineering Ltd,
Honda, which posted a 16.2% decline in net profit,             another leading infrastructure company saw a 50%
though its sales was the highest in FY11.                      decline in its net profit for FY11, though its revenue
                                                               increased by 33%.
Maruti’s net profit also plunged by 9.23% for FY11,
though it posted its highest ever sales in FY11. The fall in   The fall in profit was because of the lower share of
profit is worrisome because Maruti posted its best ever        revenue from its hydropower segment and higher
sales in a year, registering a 24.81% increase in sales in     construction cost. Construction and other costs increased
FY11 compared to FY10. The company said the decline            by 48.2% on a year-on-year (y-o-y) basis.
in profit was because of the increase in commodity prices
and forex fluctuations.                                        Consolidated Construction Consortium also posted a
                                                               disappointing set of numbers. The top line was flat at
It is pretty much the same story for all other auto compa-     1.1% rise in sales mainly on account of a delay in obtain-
nies, who are reeling under rising input costs and a           ing infrastructure orders. The shocker was, however, the
slowdown in auto sales.                                        company’s net profit, which plunged by 95.5% on a
                                                               y-o-y basis.
REAL ESTATE SECTOR
                                                               The company said the reason for the decline was increase
In the real estate sector, home sales have already slowed      in material and subcontracting cost. IRB Infrastructure
down as buyers do not want to take on home loans at            Developers Ltd also reported a decline of 27.49% in its
higher interest rates. A large number of public and            net profit.
private sector banks have raised lending rates, and this
combined with spiraling property prices has made homes         Engineering and construction company, Hindustan
unaffordable to a lot of prospective buyers.                   Construction Company Ltd, even went to the extent of
                                                               blaming its poor performance in the fourth quarter of
A majority of builders are yet to announce their FY11          FY11, on the slowdown in government spending on
results. However, analysts predict that market leaders         infrastructure in the last fiscal and high interest costs.

Beyond Market 14th Jun ’11                                                                                 It’s simplified...   7
                         HCC reported a decline of 47.4% in net profit even as its                                                                                                                                  for the current financial year.
                         turnover increased 10.8%.
                                                                                                                                                                                                                    The plunging profits of companies has been acknowl-
                         BANKING SECTOR                                                                                                                                                                             edged in one of RBI’s study, which says that increasing
                                                                                                                                                                                                                    raw material cost and rising salary bill has eroded the
                         Banks are also seeing a dip in their total profits due to the                                                                                                                              profitability of India Inc.
                         increase in deposit rates and lower yield on loans. The
                         best example of this is India’s largest bank, State Bank of                                                                                                                                The study, which analyzes the performance of the Indian
                         India (SBI), which saw a 9.8% fall in its FY11 net profit,                                                                                                                                 private corporate sector during the first half of FY11,
                         though its total income increased by 13%.                                                                                                                                                  noted that while sales growth was robust on the back of
                                                                                                                                                                                                                    pick up in demand, companies could not generate higher
                         SBI was hurt by a rise in provisions to `4,157 crore from                                                                                                                                  profit margins primarily on account of higher input
                         `2,349 crore, including `3,264 crore set aside against                                                                                                                                     prices and rise in interest outflows.
                         possible bad loans. SBI’s provisions jumped after it
                         recently ended a home loan scheme called ‘teaser loans’,                                                                                                                                   The Confederation of Indian Industry (CII) has also
                         which charged borrowers below market interest rates in                                                                                                                                     expressed its concern about the impact of interest rate
                         the initial years of a home loan tenure.                                                                                                                                                   hikes on industrial growth. The statement said the indus-
                                                                                                                                                                                                                    try is already reeling under the impact of rising raw
                         The net profits of UCO Bank, Union Bank of India, Bank                                                                                                                                     material costs and an increase in interest costs will be an
                         of Maharashtra, Dhanlakshmi Bank declined in FY11.                                                                                                                                         added burden.

                         The only exceptions to these are ICICI Bank Ltd and                                                                                                                                        The industry lobbying body, CII has suggested that the
                         HDFC Bank Ltd, which had fairly good quarters because                                                                                                                                      government should focus on supply-side measures to
                         they did not set aside large amounts against possible bad                                                                                                                                  boost growth and investments, instead of rasing interest
                         loans. ICICI, India’s second largest bank, saw its net                                                                                                                                     rates. Until, the government changes its monetary policy,
                         profit rise by 28% year-on-year, while HDFC, India’s                                                                                                                                       the corporate sector is likely to see more pain in the
                         third largest bank, registered a 33% growth in net profit                                                                                                                                  coming quarterS.




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8
                          Beyond Market 14th Jun ’11                                                                                                                                                                                                                                                                                                It’s simplified...
                                                                                       Companies are reconsidering the
                                                                                       private equity route to raise




IN REV VAL MODE
                                                                                       money in volatile times like these




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 T
          he private equity (PE) and venture capital (VC)        The more pertinent question for them is while PE players
          industry has travelled from crest through trough       provide funds to the companies, where does the money
          and back to the peak in the last few years. The        for the PE firm come from? A private equity firm is
          period that was marked by low liquidity and risk       usually set up as a limited partnership company.
 aversion post the 2008 credit meltdown was followed by
 the collapse of the US housing market.                          The fund is formed as a legal agreement in which the
                                                                 investors in the funds, such as wealthy individuals or
 Bouts of revival and euphoria are being seen off late,          institutional investors are called as Limited Partners
 throwing challenges both at investors and companies.            (LPs) - each investor in the fund has a liability that is
 Though the activities in the form of number of deals and        limited up to the amount invested by them in the fund,
 size of the deals have varied amid macro-economic               and, hence, they are called LPs - and the fund managers
 headwinds, the PE and VC industry has only evolved and          in the PE firm are called General Partners (GPs).
 matured over time.
                                                                 The GP leverages its expertise and buys stakes, though
 The Indian market has always been considered different          not only equity but also sometimes debt, on behalf of the
 and the promoters here are perceived as tough nuts to           LPs into companies known as portfolio companies. The
 crack. But over time, Indian promoters have gradually           time horizon of investment typically ranges from 3 to 7
 come to recognize PE as a source of active capital that         years, for which they charge fees varying from 1% to 3%
 can help build their businesses. Let us understand the          of the asset managed along with some target-based
 changing landscape of the PE industry in India and what         bonuses. The GPs raise funds as per their domain (say,
 lies before companies and investors.                            realty, infrastructure, etc) and invest in companies.

 The terms venture capital or private equity are under-          A typical investment process includes the following
 stood in many ways and over the years the difference            steps.
 between them has only become murkier with them                                                                    -
 trespassing into each other’s area of investments.

 Traditionally, a VC is thought of as an investor who
 invests in the initial stage of an enterprise that has poten-
 tial to grow, while a private equity investor comes in at a
 later stage. In a narrow sense, it is only the stage of         The PE as per the agreement keeps on pumping money as
 investment that differentiates one from the other.              and when required and provides their expertise to the

 The different stages when a company requires funds are          company grows, the PE locks in profit by exiting the
 early stage, growth stage, late stage, buyout, pre-IPO and      company through any of the following exit routes, public
 PIPE (Private Investment in Public Enterprise).                 offering of shares, M&A, secondary sale to another

 Beyond Market 14th Jun ’11                                                                               It’s simplified...   9
            private equity firms or promoters buying back the stake.                                                                            However, ever since the US Federal Government started
                                                                                                                                                easing credit, the activity has once again started shoring
            PE and VC investors are still predominantly based                                                                                   up and deal values have been restored to the pre-crisis
            outside India. Citi Venture Capital, Temasek Holding,                                                                               levels. The lull lasted five quarters before the deal values
            Goldman Sachs, Sequoia Capital, Warburg Pincus are                                                                                  were restored to pre-crisis levels in the first quarter of
            some of the major foreign players that are active in the                                                                            2010. However, the deal size still remains well below the
            Indian markets. Back home, Chrys Capital, 2i Capital,                                                                               US $35 million average value of deals concluded in 2007
            ICICI Ventures, IL&FS Venture Capital, IDFC are some                                                                                at the peak of the PE cycle.
            players with a good track record and dominate the PE and
            VC scene in India.                                                                                                                  Unlike the West, where PE has been known to acquire
                                                                                                                                                higher stakes and in many instances run the company, it
            CHANGING SCENARIO                                                                                                                   is an altogether different ball game in India. Off late the
                                                                                                                                                scenario may have been changing as Indian promoters
            The past decade saw an enormous growth in PE invest-                                                                                have started seeing PE from a strategic point of view, but
            ments, which increased from $1.2 billion in 2000 to                                                                                 a major drift is unlikely as Indian promoters still like to
            $12.45 billion in 2010. The PE activity was bolstering                                                                              have major control over their businesses. Thus, a major-
            during the year 2004-2005 and was at its peak in 2007.                                                                              ity of PE deals would continue to be minority invest-
            However, the credit crisis of 2008 threatened to stall the                                                                          ments rather than buyouts and this is not likely to change
            growth in deal activity. In a way, the plunging stock                                                                               any time soon.
            market and weak macro-economic cues led investors and
            companies to fight over valuations.                                                                                                 FUTURE OUTLOOK
     Deal Summary
                                                                                                                                                The fundamentals look promising for PE in India. Short-
                            Year 2008 2009 2010 2008 2009 2010                                                                                  term nervousness in the capital markets is likely to keep
                                                           Volume                             Value (US$ bn)                                    valuations low, which will slightly work for PE players
                             PE              312            206            253 10.59 3.45 6.23                                                  as they negotiate overvaluations with promoters. Also,
                             QIP              --             54             56   --  8.61 6.22                                                  considering the ever-staying need for funds in an emerg-
                            Total            312            266            309 10.59 12.06 12.45                                                ing economy like ours and value addition that PE brings
           Source: Grant Thornton                                                                                                               along with the funds, India Inc will keep raising funds
     Deal Summary                                                                                                                               through the PE and VC route.
                                                             2011
                            MTH JAN                 FEB MAR APR JAN                                FEB MAR APR                                  The year 2011 may see some volatility in the equity
                                                   Volume                                  Value (US$ bn)                                       markets as we are yet not completely out of the woods.
                             PE            18         29           29       38        0.19         0.41      1.54 0.73                          There will be more exits in 2011 as compared to previous
                             QIP           --         1             1       --         --          0.09      0.43 --
                            Total          18         30           30       38        0.19         0.50      1.97 0.73                          years as portfolio companies are maturing. A good
             Source: Grant Thornton                                                                                                             number of secondary sale investments are likely to
         PE Deals                                                                                                                               happen according to experts as the IPO markets are likely
                                                                                                                                                to remain subdued.
                            3500                                                                                           45

                                                           Deal Value (US $ mn)               Avg Deal Size
                                                                                                                                                There were only lessons to be learnt from the economic
                                                                                                                           40
                            3000



                            2500
                                                                                                                           35
                                                                                                                                                downturn. Not only has the number of investors
     Deal Value (US $ mn)




                                                                                                                           30
                                                                                                                                                increased over the years, experts also believe that these
                                                                                                                                Avg Deal Size




                            2000                                                                                           25                   funds are safer than the volatile flows of the foreign
                            1500                                                                                           20                   portfolio investors.
                                                                                                                           15

                                                                                                                                                PE and VC players have adapted well to the changing
                            1000
                                                                                                                           10

                            500
                                                                                                                           5
                                                                                                                                                landscape of the industry. Take for instance, the trend of
                                                                                                                                                more than one PE coming together to fund a corporate or
                             0                                                                                             0
                                   Q3-08   Q4-08   Q1-09   Q2-09   Q3-09   Q4-09   Q1-10   Q2-10   Q3-10   Q4-10   Q1-11
                                                                                                                                                the changes in regulations in the form of qualified institu-
             Source: E&Y, Celent
                                                                                                                                                tional placements (QIP), which PEs have used to the
       Few legal cases over default on commitment by the                                                                                        optimal level. India will remain the preferred destination
       investor and tussle over exit in an otherwise weak IPO                                                                                   for this investment avenue. Creating a regulatory
       market dampened sentiments in the industry. It was only                                                                                  environment more conducive to the industry, that is the
       post the economic crisis that GPs became cautious and                                                                                    long-standing demand of the industry of raising the open
       tried to concentrate on their existing portfolio and shied                                                                               offer level to 25% from the existing 15% for PE firms,
       away from fresh commitments.                                                                                                             will help the industry to go a long waY.

10
             Beyond Market 14th Jun ’11                                                                                                                                                    It’s simplified...
A CATALYST FOR CHANGE
                By coming up with an interest subsidy scheme, the government is
              planning to introduce reforms in the power sector, whose stocks have
                         been declining despite strong earnings growth



 I
      ndian power utility stocks have been declining since     may act as a catalyst for power stock prices.
      the past six months despite showing strong earnings
      growth and achieving record levels of capacity           POWER SECTOR IN INDIA
      addition in the country in the first three quarters of
 the current financial year.                                   There are three kinds of power companies that are
                                                               involved in the business of power generation, transmis-
 For instance, the BSE Power Index has lost almost 17%         sion and distribution. Power generation companies are
 since the beginning of this year. This kind of underper-      those that produce power from fuels like coal, nuclear
 formance is due to a combination of demand-side               energy, hydro energy, etc. Some examples of power
 pressure on earnings and heightened concerns about the        generation companies are NTPC (National Thermal
 financial health of state electricity boards (SEBs).          Power Corporation) and NPCIL (Nuclear Power Corpo-
                                                               ration of India Ltd).
 Hence, any good news related to the improvement in the
 financial health of SEBs or other power distribution          The second type of power companies are those that are
 companies should help boost sentiments of investors in        involved in the business of transmitting electricity build
 the power sector. The recent news of the government           equipment that aid power transmission. They are also
 offering interest rate subsidy scheme to power companies      involved in the set-up of grid stations, including electric

 Beyond Market 14th Jun ’11                                                                              It’s simplified...   11
     towers. ABB, Areva T&D are transmission companies.             RECENT UPDATES

     Finally, there are companies that take electric power to       If recent developments are any indication, then they may
     the final consumers. Also known as distributors, they buy      help distribution companies to improve their financials.
     electricity from suppliers and sell them to end consum-        There have been power tariff hikes in the range of 5% to
     ers. There are many state and central government compa-        40% across states in the past one year. Even politically-
     nies that belong to this category. Even private players        sensitive states like Tamil Nadu, Haryana and West
     like Tata Power, Reliance Infra and Adani Power are            Bengal have increased their prices. Though this step
     from this category.                                            alone many not be sufficient to cover up prior losses, it
                                                                    will certainly help to some extent.
     However, in their bid to maximize operational efficien-
     cies, some of the companies have either undergone              However, major boosts are likely to come from power
     forward or backward integration. As a result, most listed      distribution reforms from the central government. With
     power companies do not belong to any one of the catego-        mounting SEB losses, government bodies have realized
     ries mentioned above, and are hybrid in nature.                that initiating further reforms in last-mile connectivity
                                                                    alone will help them come out of the debt trap.
     Out of these three areas (generation, transmission and
     distribution) of business, the distribution business faces     The government of India has long been planning VGF
     huge challenges. Since pricing of electricity is a very        (viability gap funding)-based schemes for incentivizing
     sensitive political issue, distribution companies can’t        privatization in distribution and providing loans for
     really increase prices only on the basis of market and         reducing T&D (transmission and distribution) losses via
     economic factors.                                              R-APDRP (Restructured Accelerated Power Develop-
                                                                    ment and Reforms Programme). The Prime Minister’s
     MAJOR CHALLENGES AND ISSUES                                    Office has set up a committee to look into these issues.

     SEBs have huge amounts of losses, which increases the          Going by recent media reports, the government is likely
     risk of defaulting on payments. Most SEBs supply power         to come out with an interest subsidy scheme to push
     at cheaper rates, mainly due to political compulsions.         distribution reforms in the power sector. This is great
     However, they buy expensive merchant power from the            news for investors. As per this news, the performance-
     open market.                                                   linked subsidy would be given to distribution companies
                                                                    to create infrastructure.
     As a result, the financials of a large number of SEBs
     appear to be very weak. The only solace is that these          With the aim of bringing more areas under the reform
     payments are usually backed by state governments. As           process, the subsidy would only be available to distribu-
     per industry research reports, distribution utility compa-     tion companies not being covered under the existing
     nies are making losses to the tune of `2,290 crore after       distribution reform programme.
     subsidy and `5,260 crore without subsidy. For many
     states, the losses are in excess of 7% of the state’s          The scheme would be enforced through the creation of a
     revenue expenditure.                                           national electricity fund (NEF). The idea of an NEF was
                                                                    first proposed in the 2008-09 Budget to help the perenni-
     A significant gap exists between the average cost and          ally bankrupt state electricity boards to improve finances
     revenue realization by the companies, resulting in huge        and reduce distribution losses.
     losses. For instance, the average revenue realization is
     `2.5 per unit, whereas the average cost of selling is in the   According to a senior power ministry official, the minis-
     range of `3 per unit to `3.5 per unit.                         try of finance has given its nod and the power ministry is
                                                                    likely to move a Cabinet note for approval. The govern-
     Even state subsidy support for distribution companies          ment would also decide on the executing agency for the
     fail to make up for the gap in realizations and costs. The     new scheme. “It could either be Power Finance Corpora-
     current level of state subsidy is not sustainable in the       tion (PFC) or Rural Electrification Corporation (REC),
     long-term and some definite action is required from            or both,” the official said.
     central government bodies to solve this issue.
                                                                    The existing R-APDRP scheme is also meant to improve
     For instance, most states in India have a subsidy burden       distribution systems and minimize transmission and
     of around 4% to 5% as part of their revenue expenditure.       distribution losses in the sector through loans that are
     However, for states like Rajas than and Haryana, the           converted into grants on the completion of the reform
     amount of subsidy offered is as high as 10% to 18%.            process. The Commission suggested an interest subsidy

12
     Beyond Market 14th Jun ’11                                                                              It’s simplified...
mechanism, wherein the Centre would bear a part of the          (AT&C) losses to 15%.
interest cost of funds raised by a state transmission utility
for power distribution projects.                                The distribution of electricity was identified as the
                                                                ‘weakest part’ in the country’s power sector by the
Though the corpus for the fund is yet to be decided, the        Planning Commission in its mid-term appraisal last year,
power ministry official said the requirement would be           owing to heavy AT&C losses. The losses, which touched
met through budgetary support. Under the R-APDRP                a record high of `40,000 crore in 2009-10, ensured the
scheme, the government provided a budgetary support of          disability of most SEBs to raise money or to do so only at
`1,831 crore for 2011-12. Of this amount, as much as            very high rates of interest.
`1,756 crore is being given as loan to PFC, which
finances distribution companies.                                The impact of this interest rate subsidy scheme can be
                                                                multi-pronged. One, the financial health of SEBs would
Projects under the scheme are taken up in two parts in          improve and this would have cascading effects on all
urban areas and cities with a population of more than           other power companies. The cash flow projections of
10,000 in special category states and 30,000 in other           various companies will improve. Overall, the investor
states. The objective of the programme is to facilitate         sentiments will be better off and power stocks may earn
reduction in Aggregate Technical and Commercial                 better returns in the coming dayS.




Beyond Market 14th Jun ’11                                                                                It’s simplified...   13
                                     Although auto
                                     companies
                                     have reported
                                     a rise in sales,
                                     their profits
                                     have seriously
                                     taken a
                                     beating,
                                     making their
                                     climb difficult
                                  AN UPHILL TASK
14
     Beyond Market 14th Jun ’11                         It’s simplified...
I
      ndia’s auto industry is facing turbulent times. A       It is reported that the newly launched Toyota Etios has
      host of factors are responsible for the slump in the    shown phenomenal acceptance. The car has shown a
      automobile sector. Prominent among them is the          growth of 43% on a m-o-m basis. Among major players,
      rising cost of raw materials. Now, the increase in      Hyundai’s market share has risen by 2% in a tussle with
interest rates has compounded its woes. April, considered     Maruti Suzuki, while the rest of them have been able to
to be a lean month in terms of sales due to seasonality of    hold on to their market share.
business, saw a sharp decline on a month-on-month
(m-o-m) and year-on-year (y-oy) basis, clearly indicating     B) Commercial Vehicle Segment
a precarious situation the auto industry finds itself in.     The commercial vehicle segment has been the worst
                                                              performing segment with decline in sales by 33.83% on a
Segment-wise performance analysis will give a clear           m-o-m basis. It has shown a meagre growth of 7% on a
picture of the automobile sector and also list companies      y-o-y basis. This time in April, which is traditionally
that are likely to withstand the current scenario.            sluggish due to seasonality of business, the sales of
                                                              commercial vehicles fell by 33%. This has resulted in a
SEGMENT-WISE PERFORMANCE                                      tough business situation for commercial vehicle manu-
Of all the segments - three-wheeler, two-wheeler,             facturers. Ashok Leyland reported a decline in dispatches
passenger cars and commercial vehicles - in the auto          on a y-o-y basis, considering elections in Tamil Nadu,
industry, the three-wheeler segment has been the best         one of its major markets for the company. For April, the
performer. The segment reported a m-o-m growth of 7%          company’s sales were down by 15% to 5,500 units as
and a y-o-y rise of 17.76%. Exports of three-wheelers         against an estimate of 7,000 units.
were also stupendous with sales up by 83% on a m-o-m
basis at 37,394 units. This rise in volumes was pushed by     C) Two-wheeler Segment
four-seater carriers, which reported a 17.5% growth.          Sales in the two-wheeler segment on a month-on-month
                                                              basis, however, increased marginally by 1%. Of the three
Domestic sales were also down by 26.78% with the              major two-wheeler players, Hero Honda performed
passenger carrier segment reporting sales of 25,209 units.    better than Bajaj Auto and TVS Motors. On a year-on-
The total passenger carrier sales in April ’11 were 62,549    year basis, the company’s sales grew by 39.14%, while
units as compared to 56,255 units in March ’11, register-     sales of Bajaj Auto and TVS Motors increased by 17.7%
ing a 11.19% y-o-y growth. After reporting a steady           and 13.4%, respectively. The Scooter and Scooterette
growth of 4% in the previous month, the goods carrier         segments reported total sales of 1,75,054 units as
segment reported total sales of 8,633 units in April ’11 as   compared to 1,18,232 units in April ’10, demonstrating a
compared to 7,256 units in the previous year, with            growth of 48% on a y-o-y basis.
18.98% rise in sales. However, on a m-o-m basis, the
goods carrier segment reported a decline of 15.7%.            The commuter bikes segment reported best growth
                                                              figures. On a y-o-y basis, the segment clocked a growth
In the passenger carrier segment, Bajaj Auto has reported     of 21.6% at 1,96,504 units. On the whole, despite almost
a 35.16% rise in sales on a m-o-m basis with 45,074 units     steady sales performance, domestic sales have reduced
in April ’11. Piaggio, which is the second largest player     phenomenally from 10,96,233 in March ’11 to 10,43,970
in the three-wheeler market, saw a fall of 21.77% in its      in April ’11, showing a decline of more than 4%.
market share on a m-o-m basis with sales at 14,993 units
in April ’11 as compared to sales of 19,165 units in          THE WAY FORWARD
March ’11. Bajaj Auto has strengthened its presence in        It is estimated that the auto industry would see modera-
the three-wheeler market by rising from 50% share in          tion in growth in the coming two years. Factors such as
March ’11 to 63% in April ’11.                                rising fuel costs, inflation, increasing raw materials and
                                                              more importantly, interest rates are the factors that form
A) Passenger Car Segment                                      the basis of this argument.
For months, passenger car sales have been stagnant. In
April, however, sales of passenger cars declined by           Due to these factors, at present, there are indications of
11.7% on a m-o-m basis. Also, export sales declined by        lower footfalls and conversion rates among automobile
16% on a m-o-m basis in April. Most major players             buyers. In such a situation, many a company would see a
reported a decline in sales. Mahindra & Mahindra has          drop in volumes. It is advisable to be with those compa-
been the only listed player with a positive growth in its     nies which have immediate brand recall and deep
sales. The company’s sales increased by around 2% on a        penetration. Companies such as Mahindra & Mahindra,
m-o-m basis. The super compact car theme in the passen-       Maruti Suzuki and Bajaj Auto are shielded better, consid-
ger car segment has been a hit. It clocked an exceptional     ering their dominance in their respective segments of the
growth of 77% to 18,590 units in April ’11.                   automobile businesS.

Beyond Market 14th Jun ’11                                                                             It’s simplified...   15
                       BREATHING
                    LIFE INTO THE
                  ASTHMA MARKET
                                                         A
                                                                   sthma is a complicated, chronic and often
                                                                   frustrating disease. Food allergies in early
                                                                   childhood heighten the risk of developing
                                                                   severe allergy-related conditions, including
                         The domestic pharmaceutical     asthma. The global asthma market was estimated at
                                                         $12.4 billion in 2009 and is expected to grow at a
                   companies manufacturing drugs to      compound annual growth rate (CAGR) of approximately
                                                         1.5% to $14 billion by 2017.
                  treat asthma are likely to emerge as
                     more competitive and aggressive     USA, the biggest asthma market globally, contributes
                                                         52% in value. However, in terms of volume, the US
                           players in the coming times   market is only 22%. France, Germany, Italy, Spain and

16
     Beyond Market 14th Jun ’11                                                                It’s simplified...
UK contribute 24% of volumes and 20% in value to the         chronic disease that requires maintenance treatment.
global asthma market. And 15% volumes are driven by          Specifically, Indian specialists anticipate that FDC
BRIC (Brazil, Russia, India and China) countries, with       therapies such as long-acting beta2 agonist
3% in terms of value.                                        (LABA)/inhaled corticosteroid (ICS) will experience the
                                                             highest uptake.”
India’s asthma drug market, on the other hand, valued at
$246 million in 2009, is likely to grow at an annual         According to a research analyst, the resources available
growth rate of approximately 10% to reach $403 million       to MNCs are large as compared with domestic players,
by 2014. The Indian Council of Medical Research              resulting in aggressive marketing and endorsement of
(ICMR) reported that 13 million (or around 2%) people        drugs by MNCs.
in India over the age of 15 suffer from asthma.
                                                             Also, since patents of most drugs are about to expire and
According to recent reports, there has been a 30%            there is also an increase in the production of generic
increase in asthma and congestion cases due to smog.         versions by domestic players, people prefer cheaper
Also, infections and genetic factors among others, affect    alternatives over their expensive counterparts, leading to
lung development, either directly or indirectly and cause    a rise in demand.
respiratory problems.
                                                             Moreover, domestic players are more powerful in their
INDIA-BOUND                                                  own right in India. Players like Lupin and Dr Reddys are
                                                             money-spinners with intensive product portfolios and
In 2009, multinational pharmaceutical companies              impressive generic capabilities with the ability to
accounted for 5% of the total sales in the Indian asthma     successfully position their products in the market.
market and it is likely that the uptake of Western-branded
asthma drugs will increase by 2014; however these drugs      BUSINESS OPPORTUNITIES
are likely to face fierce competition from the
less-expensive Indian brands and generics.                   The worst affected countries by asthma are Ireland, UK,
                                                             Australia and New Zealand and hence serve as areas with
Domestic companies have a very strong presence in            good business opportunities.
India’s asthma therapy market, more than multinational
companies. It is difficult to estimate the exact number of   A leading pharmaceutical company’s spokesperson says:
drug manufacturers that cater to this therapeutic segment,   “Asthma is a disease which is prevalent all over the
but there are more than 120 companies.                       world. It is a large global market that is growing
                                                             uniformly due to the increase in pollution caused by man.
Some of the leading players in the domestic market are       Though preventable and curable, it is in most cases,
Dr Reddy’s Labs, Lupin and Cipla. The MNCs that are          inevitable and sadly has a large number of patients who
active in the domain are GlaxoSmithKline, AstraZeneca        are still enjoying their childhood.”
and Merck.
                                                             “Occurrences of death due to asthma have been most
Asthma therapy varies from corticosteroids to                observed in South Korea, USA, South Africa, Japan and
beta-agonists. Due to the availability of multiple drugs     Germany in descending order. Hence, it would be fair to
that act through multiple modes of action, there is          say that these are the top countries with business oppor-
increased scope for different players.                       tunities,” he said.

As the uptake of western-branded asthma drugs will           He added that a majority of these occurrences can be
increase by the year 2014, these drugs will face fierce      attributed to unhealthy lifestyle practices among the
competition from less-expensive Indian brands and            population and increasing pollution due to construction
generics. “I personally feel that the domestic pharmaceu-    and automobiles.
tical companies are likely to emerge as more competitive
and aggressive players in the domestic industry in the         In Australia, one out of six children under the age of 16
coming times. Fixed-dosed combination (FDC) drugs            suffer from this condition.
represent a major opportunity for multinational pharma-
ceutical companies,” an industry watcher said.                 In Western Europe, the number of asthma cases has
                                                             doubled in the last decade.
Furthermore, he added, “The use of combination therapy
as maintenance treatment will increase due to the shift in     In the US, the number of asthma patients has risen by
treating asthma on an as-needed basis to treating it as a    60% since the early 1980s.

Beyond Market 14th Jun ’11                                                                             It’s simplified...   17
        Around 5,000 Americans die of asthma each year.            workshop in New Delhi where experts from India and the
     Asthma is 26% more prevalent in black than white              UK reviewed the current disease burden in their respec-
     American children.                                            tive countries.

        Around 8% of Swiss people suffer from asthma,              The partnership between ICMR and MRC aimed to
     compared with just 2% , nearly 25 years ago.                  combine the strengths of the Indian and UK chronic
                                                                   disease research communities. The government should
        There are an estimated four million asthmatics in          make attempts to educate the public about these
     Germany alone.                                                lifestyle-related diseases; knowledge about the disease is
                                                                   the first step to fighting it.
        Some three million Japanese suffer from asthma. Of
     these, 7% have severe symptoms and 30% have moderate          Chronic diseases like diabetes, cardiovascular diseases,
     problems.                                                     chronic obstructive pulmonary disease (COPD) and
                                                                   other respiratory diseases, including asthma face intense
       In India, the number of asthmatics are estimated to be      patient non-compliance, which stems from lack of educa-
     up to 20 million, with up to 15% of children aged 5 to 11     tion and trust.
     years old showing the symptoms.
                                                                   The government can collaborate with pharmaceutical
        In Brazil, Costa Rica, Panama, Peru and Uruguay, up        companies or with other non-profit healthcare organiza-
     to 30% of children are affected by asthma.                    tions to change the current situation at hand. Indian
     5                                                             specialists too struggle with patient compliance when
       Around 20% of Kenyan children have asthma.                  treating asthma. Consistent maintenance therapy is
                                                                   important because effective therapies are not achieved
     It would be fair to conclude that most of these countries     unless maintenance procedures are administered to
     would prove to be a fair market where value-centric sales     asthamatic patients on a regular basis.
     will be high, based on the affluence and the population of
     the respective economies.                                     The Indian asthma market is likely to benefit a great deal
                                                                   from new, more convenient therapies, which would boost
     WAY FORWARD                                                   compliance by patients. A Nestor Pharmaceuticals
                                                                   spokesperson said, “Greater advocacy is required to raise
     Asthma requires diligent maintenance therapy, with            global awareness of this growing threat and to help dispel
     multiple dose regimen. The therapy is usually compli-         some of the myths surrounding chronic diseases, includ-
     cated and the schedules are not simple. It is often           ing the myth that chronic disease cannot be prevented
     observed that lack of patient education leads to under        and the myth that these diseases only burden high-
     dosing and, hence, ineffective treatment.                     income countries.”

     With a large population of patients being illiterate,         “Smoke from tobacco and indoor and outdoor pollution
     specialists often struggle to provides complete doses and     are the two major causes of chronic diseases. And both
     hence, effective disease management. Fixed Dose               are preventable. But India has no national programme to
     Combination (FDC) treatment could be a possible               tackle the problem,” he added.
     answer to this problem and is bound to ensure a simpli-
     fied treatment regimen, thus ensuring greater compliance      According to the emerging markets report titled ‘Asthma
     by patients suffering from asthma.                            in India’ by one of the world’s leading research and
                                                                   advisory firms for pharmaceutical and healthcare issues -
     ROLE OF THE STATUTORY BODY                                    Decision Resources, this growth will be fueled by
                                                                   improved access to medical care, a growing drug-treated
     With changing demographics, that is, economic develop-        population and a rising number of higher-income,
     ment, changing lifestyle, increasing urbanization and         brand-conscious asthma patients demanding more-
     poor infrastructure leading to greater pollution levels and   efficacious agents.
     nutrition transition among other issues in the country,
     there is currently a growing epidemic of chronic diseases     According to research data provided by Decision
     among the Indian population.                                  Resources, India’s asthma drug market is likely to grow
                                                                   to $403 million by 2014, at an annual growth rate of
     The government has taken a few initiatives in the past in     10%, offering immense growth potential to domestic
     this regard. In November ’09, the ICMR and the UK             pharma companies involved in the manufacture of
     Medical Research Council (MRC), jointly hosted a              asthma drugS.

18
     Beyond Market 14th Jun ’11                                                                              It’s simplified...
                                                                   ,
              The listing of LinkedIn has thrown open the debate as to whether the
               Internet companies are here to stay or that the hype is just a bubble
                         waiting to burst, much like the tech bust of 2000



                       I
                            nternet companies are back in vogue not only in the international markets
                            but also in India, with some of them getting private money at very high
                            prices. But the noise is getting louder in the international markets now,
                            post the listing of US social networking company, LinkedIn.

                        LinkedIn got listed at about 100% premium to its issue price few days back.
                        Post listing, the company was valued at over $8 billion, which is equivalent to
                        about `36,000 crore. Importantly, investors are ready to pay the price to
                        earnings, which is in excess of 400 times for this company.

                        Even on the basis of the price to book value, which is in excess of 150 times
                        and price to sales ratio at about 30 times, LinkedIn is being counted among the
                        most expensive stocks in the US. What is even harder to imagine is the fact that
                        this young company was founded by 44-year-old Reid G Hoffman in the year
                        2003 and within a very short time, got listed and commanded a huge market
                        capitalization, something that old companies took many years to achieve.

                        THE BIGGER PICTURE

                        The listing of LinkedIn could be just the tip of the iceberg. There are bigger
                        examples of money being created in the Internet space. Most of us may have
                        heard about the social networking websites Facebook and Twitter. Bigger
                        games are being played in the markets today. The valuation of Facebook is now
                        in the public domain. The company is valued at a whopping $76 billion, which
                        in Indian currency comes to `3,40,000 crore - more than the market capitaliza-
                        tion of Reliance Industries, Coal India and ONGC. Understand that we are
                        comparing a 7-year-old company with established names that have a long
                        history of operations.

                        Facebook was founded by Mark Zuckerberg at the age of 26 with his college
                        roommates and fellow computer science students Eduardo Saverin, Dustin
                        Moskovitz and Chris Hughes. The website’s membership was initially limited
                        to the students of Harvard, but was later extended to everyone, which later
                        brought great fortune to its founders in a very short span of time. Facebook
                        currently has 600 million users compared to 100 million users in the case of
                        LinkedIn and 200 million users in the case of Twitter.

20
     Beyond Market 14th Jun ’11                                                                            It’s simplified...
A FAIR COMPARISON                                             reminds us about the formation of another technology
                 Facebook       Twitter       LinkedIn        bubble, similar to that of early 2000, where a lot of
  Founded        2004          2006           2003            companies got listed on the bourses at expensive rates
  Users (in mln) 600           200            100             and every other entrepreneur wanted to get into the
  Sales          $ 2 billion   $150 million   $292 million
  Valuations     $75 billion   $10 billion    $8 billion      technology business.
Source:Company Websites
                                                              In the year 2000 when interest rates were low, such tech
Interestingly, Twitter which is again a social networking     companies opened up offices and with the help of
and micro blogging website has a similar story to tell. It    venture capitalists and bankers and got themselves listed.
is often called as the ‘SMS of the Internet’. It was          The share prices of such companies were soaring at an
founded by Jack Dorsey at the age of 34 and is now            alarming pace without any reference to their fundamen-
valued at more than $10 billion or `45,000 crore.             tals or earnings.

Since its creation in March ’06, it gained popularity         Finally, in the year 1999-2000, the bubble burst as the
worldwide. The company witnessed a spike in its valua-        Fed raised interest rates by over six times as the fear of
tions as it started selling advertisements in mid-2010.       Y2K was also gaining strength. The share prices of most
The company earned a revenue of $45 million, which is         technology companies were down in excess of 70% to
expected to more than tripled to $150 million in the          80% and many of them shut their offices. Those who
current year as it widens its marketing reach. In this        remained in the business are yet to see their prices reach
scenario, the valuations too have moved up from $7            the pre-crisis levels.
billion a couple of months back to over $10 billion,
which is a whopping 60 times its projected revenue.           This time around things are different. There are people
                                                              who say that post the crash of the year 2000, a lot of
However, in terms of size and valuation, Facebook has         things have changed for good. For instance, the number
achieved bigger success. Facebook too is likely to hit the    of internet users has gone up dramatically owing to the
market with an Initial Public Offer this year or next year.   penetration of computers and wireless devices such as
On the back of growth, size and business fundamentals, it     mobile phones.
is estimated that the company could be valued at about
$100 billion (`4,50,000 crore) when it goes public. This      Especially in Asian markets and Africa, where 75% of
is higher than the current valuation, believed to be around   the world population resides, a sudden spurt in the use of
$76 billion.                                                  internet has added to the fortunes of these internet
                                                              companies. Even internet companies have business
In October ’07, Microsoft bought about 1.6% share in          models, which are backed by revenues and earnings.
Facebook for $240 million, which valued the entire            Also, not many companies are keen on going in for an
company at around $15 billion. But later on, the              IPO except those with a sizeable presence in the market
company announced several plans of increasing its reach       and revenues to boot.
and spreading its presence in the international markets.
                                                              However, this still does not convince those who see a
In fact, with its solid strategy and user-friendly applica-   bubble. Their argument is that the real bubble is still
tion of its services, the company was able to increase its    forming in the private equity markets.
member count six-fold from just about 100 million in the
year 2008 to the current figure of 600 million.               Several such companies have attracted a lot of seed
                                                              capital providers or private equity providers, who are
This also led to an improvement in the revenue and            already sitting on huge profits and want them to get listed
overall rating of the company or the perceived value. By      to realize their fat profits in the coming years. Secondly,
the end of 2010, it was valued at about $41 billion and       the valuations at which some of these companies got
later on at about $70 billion. In fact, the company is now    listed and are commanding in the private market, give no
also touted to be a serious threat to Google, whose           comfort to cautious investors.
current market capitalization is $168 billion. This is
possible as Facebook is starting different services like      If Facebook gets listed at $100 billion, it will create
email and integration of other value-added services.          history by being one of the few Internet companies in
                                                              recent times to have such a high market cap. For instance,
IS THIS A BUBBLE?                                             Facebook will have a larger market capitalization than
                                                              Amazon’s current market capitalization of about $90
These are all interesting stories of how wealth has been      billion, and more than three times the size of wireless
created in a very short span of time. However, this           phone maker Nokia.

Beyond Market 14th Jun ’11                                                                              It’s simplified...   21
         Even these valuations are twice the valuations of some                India Ltd, which is the holding company for the online
         old economy stocks like Boeing (Aircraft manufacturer)                business of Naukri.com, Jeevansathi.com and
         and automobile giant Ford, with a market capitalization               99acres.com, among other websites that the company has
         in the region of $55 billion to $58 billion.                          in its portfolio.

         Is this a bubble which will burst or will it be different this        Info Edge has a market capitalization of `3,788 crore.
         time around? These are all probable outcomes and only                 Besides the listed space, in India, more action is happen-
         time will tell what lies ahead. Meanwhile, like in the past,          ing in the private market where a lot of new internet
         the bubble is also spreading to other countries, including            companies have sprung up and have been successful in
         China and India.                                                      the business. There are a couple of private investments
                                                                               that have invested in some of the prominent or emerging
         INDIAN PERSPECTIVE                                                    online businesses.

         Currently, China is leading the race. Many well-known                 Bangalore-based Pilani Soft Labs Pvt Ltd, which runs
         Chinese Internet companies have been listed in the                    bus ticketing site RedBus.in has raised $6.5 million in the
         international and domestic markets. In fact, they are                 past. Redbus.in was founded in 2006 by three BITS
         valued higher than their peer group companies in the                  Pilani graduates. Today the company has revenues in
         western world.                                                        excess of `500 crore. The company has crossed 3.5
                                                                               million passengers, who have journeyed with the help of
         China’s Facebook or the social networking company                     its portal.
         Renren Inc got listed recently and is valued at $5 billion.
         And the so called Chinese YouTube ‘Youku’ too is listed               Earlier Flipkart, the online bookseller raised about `25
         at a valuation of about $4.8 billion. The leading Chinese             crore in mid-2010 through the private equity route and
         language search engine Baidu.com too is listed with a                 has crossed revenue in excess of `100 crore as against the
         market capitalization of a whopping $47 billion. All this             revenue of `25 crore last year. The company was started
         points to the fact that Chinese companies have been                   in the year 2007 by IIT Delhi classmates Sachin Bansal
         ahead of their Indian counterparts.                                   and Binny Bansal, who worked at Amazon before script-
                                                                               ing their own success story with the new venture in the
         In India’s case, there are not many listed companies in               name of Flipkart.
         this space. Recently, MakeMyTrip Ltd, an online travel
         company, which provides travel products and solutions                 These are a few names of companies in the Indian
         in India and the United States, got listed with a market              domain. However, a lot of new businesses are emerging
         capitalization of about $791 million.                                 especially post the fact that India’s Internet and mobile
                                                                               penetration is on the rise and companies want to leverage
         Other companies in the Indian space include Info Edge                 on this growtH.




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22
         Beyond Market 14th Jun ’11                                                                                                                             It’s simplified...
 PLUNGING IN  Indian companies are leaving no stone unturned to make the most of
                       the opportunities in the online and mobile ad space



R
           ecently, a senior executive of a well-known          a number of Indian ad networks and complete interactive
           multinational company was on a visit to India        agencies that have come up online to cater to the
           to attend a seminar. While he has been a             exponential growth in online advertising in India.
           frequent visitor to India and is familiar with the
traffic problems in most Indian cities, this time he was in     This is in contrast to some years ago when an Indian
for a surprise.                                                 company wanting to advertise online was hampered by
                                                                the lack of ad networks, which catered to the Indian
An Indian colleague lent him his 3G broadband card to           audience. However, over the past 2-3 years, a number of
use during his stay in India. And thanks to connectivity,       companies that offer customized advertising solutions
he did get a lot of work done even when he was stuck in         have sprung up.
a 45-minute traffic en route from South Mumbai to the
Mumbai domestic airport (those who are familiar with            Further, online ads have evolved from CPI (Cost Per
this, you will surely know how frustrating it can get!).        Impression) or CPM (Cost Per Mille-1000 Impressions)
                                                                to CPC (Cost Per Click) to CPA (Cost Per Acquisition)
A call on Skype right before the seminar with his Indian        and this transition is observed among advertisers. With
counterpart in Delhi spared him a lot of hassle and he          more such innovations, it is possible to buy a lot of inven-
could do all this from his car while stuck in traffic. Not      tory and page views easily, which has made marketing
just work, he also shopped online for his family from           much more plausible.
India, thanks to brilliant deals on Indian jewellery.
                                                                Online advertising can basically be done through text ads
CHANGING TIMES                                                  where in, advertisements made up of text (displayed
                                                                largely as sponsored links on search engines), that are
That is the blessing of technology you would say and            backed by hyperlinks which when clicked, takes the
now Indian companies are leaving no stone unturned to           potential customer to the advertiser’s web site. Text ads
make the most of opportunities such as these. There are         generally cost less than banners, as they are simple and a

Beyond Market 14th Jun ’11                                                                                 It’s simplified...   23
     lot of web sites accept them.                                 THE BIGWIGS

     The other category is that of display advertisements that     The verticals with the largest spend online are auto,
     can be placed at various points on a web page. These          financial services, online publishers, travel, IT and
     typically contain text, logos, photographs or other           telecom. The financial services sector is one of the long-
     images. Banner ads are priced slightly higher than text       standing advertisers online. Financial companies includ-
     ads and are known to be more effective. The most              ing banks, non banking financial companies, insurance
     intriguing part of online advertising is that one gets to     companies, asset management companies and credit
     publish information immediately and is not constrained        rating agencies have resorted to online advertising with
     by geography or time.                                         great results. Similarly, the auto industry comprising
                                                                   cars, passenger vehicles, tyre manufacturers are big
     CHEAPER AND BETTER SOLUTIONS                                  contributors to the online ad space.

     It would not be an exaggeration to say that online adver-     Both these segments saw a setback in their online spends
     tising has exploded in recent years in India, thanks to the   in FY08 and FY09 because of the economic slowdown.
     rapid growth of internet users here. There are close to 70    But with the economy back on track, online advertising
     million internet users in India now and with the availabil-   from the BFSI sector is expected to go up from `141
     ity of 3G, this number is expected to go up to as many as     crore in FY10 to `177 crore in FY11, while the auto
     500 million by the end of this calendar year alone.           industry is expected to see a rise from `39 crore to `62
                                                                   crore in the same time frame, according to the annual
     Reports of the size of the Indian online advertising          report of IAMAI.
     market vary, but by all estimates, it has witnessed 40% to
     50% y-o-y growth for the past few years. According to         ENDLESS OPPORTUNITIES
     the Internet And Mobile Association Of India (IAMAI),
     the total online advertising market in India was estimated    And that’s not the end. If you thought online advertising
     at `785 crore for FY10 and is expected to grow to `993        is for the big and mighty Indian companies, then you
     crore in FY11. Needless to say, the opportunity in this       need to rethink. There is a lot of scope for small and
     segment is huge. There are a few fundamental reasons          medium industries whose baby steps in advertising can
     why online advertising has huge scope.                        be traced to the popular medium of the mobile telephony.
                                                                   With over 771 million mobile phone users in India, many
     Advertising online for Indian companies presents a            small brands are seeing mobile marketing as a more
     unique proposition. Firstly, the majority of online users     effective alternative to the existing modes of advertising
     belong to the coveted 18-35 years age group. This is the      and connecting with their consumers.
     age group that has benefitted most from the liberalization
     of the economy over the past two decades, has income to       Not only does mobile advertising allow a company to
     spare and is well versed with technology and most             market its merchandise by sending out messages to its
     importantly perhaps, is open to consumerism through the       customers, but it also works as a source of information
     digital platform. Thanks to the willingness to spend          that keeps people updated about new developments. In
     money online through credit cards and internet banking,       contrast to other modes of marketing, it allows more
     as opposed to times when such transactions used to be         targeted advertising, which in turn, saves money and
     considered unsafe.                                            time for both the company and the consumer. As opposed
                                                                   to sending out bulk messages that infuriate customers,
     The other big opportunity is in the social media space.       companies are working on various non intrusive models
     With social media networks such as Facebook, Orkut and        of mobile marketing that send out information that a
     Twitter becoming so popular, social media advertising         customer can have at his disposal.
     has immense benefits and has become a highly profitable
     medium that Indian companies are now exploiting.              This form of online and mobile marketing is a never-
                                                                   ending story and also an ever-evolving field. Broadly
     Rather than paying a bomb for traditional advertising         speaking, following key drivers will enable the growth of
     media such as print and television, internet advertising      this medium – rising broadband penetration, emergence
     offers branding solutions that can be tailor-made to suit     of social media and video advertisements, increased
     the specific needs of a company and yet get the eyeballs      investments by various companies as well as a positive
     in a cost-effective manner. It is estimated that about 11%    macroeconomic situation in India. With the availability
     of the total online advertising was done on social            of 3G services, it can be safely concluded that what we
     networking sites in FY10 and is expected to grow to 18%       are witnessing in online and mobile marketing is history
     in FY11.                                                      in the makinG.

24
     Beyond Market 14th Jun ’11                                                                             It’s simplified...
W
               ith the advent of Unit Linked Insurance        tory Authority of India (IRDA). Recently, IRDA made it
               Plans (ULIPs), there has been a paradigm       mandatory for insurers to record as well as preserve all
               shift in India’s insurance industry. From a    calls made by their corporate agents or brokers to
               sedate life insurance product, which           prospective customers. This strict dictum clearly points
continues to be the preferred choice of an average            towards the prevalence of mis-selling.
insurance-seeker, today, ULIP has added an extra zing to
complete the product offering of insurance companies. It      But what exactly is mis-selling, which has struck a wrong
caters to the new-age mantra of a full platter with delec-    note with IRDA? What would be the implications of the
table cuisines.                                               new guidelines for the industry? Here, we present to you
                                                              the repercussions of mis-selling. We also delve into
Quite understandably, ULIP - a product that gives the         various investment pitches that salespersons and other
coverage of an insurance policy and an option to invest in    company representatives put forth to mis-sell. Consider-
stocks, bonds or mutual funds - has become an instant hit     ing the wide spectrum of people from varying economic
with new-age investors, who have the tendency to go for       classes that ULIP caters to, it is more critical to under-
hybrid beneficial products. For fiscal year 2011, the         stand these things.
growth in the business of ULIPs has been an encouraging
15% on a year-on-year (y-o-y) basis.                          THE GAME

Despite such an optimistic situation, there have been         Mis-selling can be defined as false pitching of a product
unsavoury practices in the industry that have attracted the   that can mislead an investor. Typically, salespersons
critical eye of the insurance regulator, Insurance Regula-    leave out certain important differentiators in a product,

Beyond Market 14th Jun ’11                                                                             It’s simplified...   25
     quite understandably, due to ulterior motives and dupe        agents show a performance chart to the investor, which is
     investors by coaxing them to buy the product they are         invented by themselves and not LIC. The performance
     trying to sell them.                                          chart shows an impressive compounded annual growth
                                                                   rate (CAGR) returns of around 20% to 25% over a period
     For instance, recently an investor on a consumer forum        of one year.
     complained that she had taken an insurance policy from a
     life insurance company and the premium for the policy         Such instances are frequent and occur on a larger scale
     was suggested to be annual. However, when the investor        even in foreign markets. In the UK, it was found in a
     checked the policy documents, she found it was                survey that one third of the 45 firms sold policies, which
     half-yearly.                                                  customers would not need and could not claim. It was
                                                                   also found that details of the product provided to the
     The investor also complained that her signature was           customers were inadequate and incorrect. Many agents
     forged in one of the policy documents. She took the case      and company executives used false investment
     to the consumer court as well as to the Insurance             arguments for increased commissions.
     Ombudsman. Such malpractices have convinced indus-
     try experts that mis-selling is prevalent to a very large     III Inadequate Disclosures
     extent in the insurance industry.
                                                                   Some agents promote ULIP as a combination of
     There are various investment arguments a typical              insurance and a pure plain vanilla investment. At present,
     salesperson or company representative presents. Here is       ULIP provides over five options to an investor who can
     an encapsulation:                                             invest 100% in equity or in debt securities. Also, the
                                                                   insurance cover involved is not free in it. It involves
     I Free Insurance Along With Equity Exposure                   mortality charges (this is an actual cost that an insurance
                                                                   company charges to an individual; younger the insured,
     This investment argument here caters to the ever-             lower the charges).
     increasing mentality of buying into products that give
     you maximum benefits with an iota of tax incentives.          Moreover, most agents do not tell buyers about the
     Mutual funds give equity exposure and insurance gives a       upfront charges involved in an ULIP scheme. These
     decent life cover.                                            charges are astronomical and vary from 15% to 71% of
                                                                   the premium paid in the first year.
     Many a time, a pitch is made to an investor about a
     mutual fund that provides free insurance. But in reality,     So if you pay `50,000 as an annual premium and the
     the salesperson is wrongly selling an ULIP scheme by          ULIP has a premium allocation charge of 30%, then only
     using alluring expressions.                                   `35,000 is invested. The remaining `15,000 is deducted
                                                                   as policy administration charges. Most agents
     II Case Of Abnormal Returns                                   consciously skip this information. Many an agent also
                                                                   use certain tactics such as cash back guarantees, doubling
     A case was discussed in the consumer court forum about        of money and paying for a limited period and getting
     a client who had been promised abnormal returns on            cover for the total period.
     investment in an ULIP. The client was sold an LIC policy
     for which she made a one-time premium payment of `1           In actuality, these tricks are done at the expense of the
     lakh for 10 years.                                            money a person has invested. Considering such practices,
                                                                   the insurance regulator has come out with guidelines that
     After the vesting period, she was promised a monthly          clearly address these issues.
     pension of `5,000 (`60,000 annually) for the rest of her
     life. This sounded too good to be true. At this rate, the     THE GUIDELINES
     client’s entire notional corpus is likely to get eroded.
     From where will the insurance company fund this kind of       To prevent mis-selling, the insurance regulator IRDA has
     money? It is hard to believe that the insurer would sell      proposed that every insurer needs to prepare and file a
     such a product.                                               ‘standardized script’ for presentation of benefits, features
                                                                   and disclosures under each of the products. It maintains
     On certain calculations, it was found that the return being   that the script be approved by it, especially before it is
     promised by the policy worked out to be 25%                   pitched to a customer.
     compounded annually. A debt-oriented product cannot
     offer a return of more than 6% to 7%. Even equity-linked      The guidelines have also put a ceiling on the sale of unit
     products can manage 15% returns at the most. Often,           linked insurance plans through the telephonic mode. The

26
     Beyond Market 14th Jun ’11                                                                               It’s simplified...
                      regulator has said: “Insurers shall not solicit ULIPs of                                                                                                                  the decrease in the product mix. The annual premium
                      non-single premium type for annualized premiums                                                                                                                           equivalent for LIC grew by 48% on a y-o-y basis, while
                      exceeding `50,000 and `1 lakh for single premium over                                                                                                                     it declined by around 18% on a y-o-y basis for private
                      telephonic mode. It has proposed that no variable                                                                                                                         insurers. This has resulted in the decline in margins for
                      insurance product shall be solicited or sold over distance                                                                                                                most private insurers.
                      marketing mode.
                                                                                                                                                                                                For investors, it is important that documents are read
                      The regulator has also increased the lock-in period of an                                                                                                                 carefully. Many investors do not do due diligence on the
                      insurance plan to five years. It advised against paying                                                                                                                   hefty administration charges that an ULIP entails.
                      hefty commissions to distributors, sales agents and other
                      intermediaries. It has proposed that the commission be                                                                                                                    Today, with the Indian stock markets growing, any
                      less for the first year to ensure prolonged commission                                                                                                                    investment needs to be done keeping in mind the track
                      payments for five years and consistent income for the                                                                                                                     record of the scheme. In case of ULIPs, an investor may
                      buyer in the future.                                                                                                                                                      not get a clear picture of the performance potential of the
                                                                                                                                                                                                scheme since it is a relatively recent product.
                      One major development due to these norms is the decline
                      in the growth of the industry. Thanks to aggressive                                                                                                                       In such a situation, it is better an investor compares one
                      pushing of products by salespersons and agents, a large                                                                                                                   product of an insurance company with another insurance
                      part of the growth came in the first half of the fiscal.                                                                                                                  company. A lot, however, depends on periodical inspec-
                                                                                                                                                                                                tion of one’s investment rather than erratic phone calls
                      However, after the guidelines, private players suffered a                                                                                                                 that just result in assurances and an inadequate picture
                      lot in comparison to LIC. A significant reason for this is                                                                                                                from the agenT.




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                       Beyond Market 14th Jun ’11                                                                                                                                                                                                                                                                                                                                                                        It’s simplified...                                                                                                         27
                                                                 The interest rates charged are atrociously high between
                                                                 32% and 40% per annum.

                                                                Do not forget that your problem is not solved by simply
                                                                paying the minimum amount payable on your credit card
                                                                bill as you will be charged interest on the whole amount.
                                                                 You’ve got to pay the entire outstanding amount in a
                                                                        timely fashion so as to avoid falling into the trap
                                                          CAR            of paying high interest rates that the credit card
                                                              D
                                                                        companies would charge.
                                                  CARD
               4215                                                   Also, the cash-back that the credit card company
                                                                     provides is essentially the commission that
            SPEN                                                    merchants pay the credit card company - a percentage
                      D TO                                         of the transaction amount. Credit card companies
                             SAVE      VALID
                                      THR
                                          U

                                                                 choose to share this commission with customers by
                                                                 providing cash-back offers.

            4215
                                    VALID
                                    THRU
                                                                 When a customer buys from a supermarket for example,
                                                                 the retailer is charged a fee by the credit card company.
           SPEND TO SAVE                                         The company, in turn, shares a part of its profit earned
                                                                 with its end customer with a view to increasing its


     SPEND TO SAVE
                                                                 customer base.

                                                                 No doubt a cash-back card is a great saving proposition
     If selected appropriately and used smartly,                 for the customer. Example: 3% cash-back on purchases
                                                                 at selected super markets. Does it mean you should opt
     cash-back credit cards could be an instrument               for one? You need to answer the next two questions to
            to enhance savings for customers                     get your answer.




     F
             reebies, incentives and discounts are among the     Firstly, will I be able to pay off the entire outstanding
             best ways to attract customer attention. It gives   balance on the credit card on an on-going basis? If your
             companies a chance to showcase their product        answer is in the negative, it is straightforward. Do not opt
             and also an opportunity to convince customers to    for a credit card at all. The interest charged on it is so
     give in to the marketing gimmick by showcasing the          high that on most occasions the benefit received by way
     benefit element (savings!) as customers are willing to      of cash-backs will not only be nullified but you will end
     give them their time. Who does not feel good about          up paying much more by way of interest. So you will end
     saving a little extra money on planned purchases? It is     up losing money.
     that feel-good factor that credit card companies and
     banks want to capitalize on.                                Secondly, do I have an existing credit card which I am
                                                                 currently not able to service? If the answer to this is in the
     Credit card companies resort to the same marketing tactic   positive, taking another credit card could put you in
     by providing cash-back on credit cards. Cash-backs are      trouble as you would be tempted by the additional
     provided to encourage customers to spend using their        purchasing power it provides. Also, your credit score
     credit cards.                                               (provided by CIBIL and any other individual credit
                                                                 rating agencies) will be negatively affected, thus impact-
     It is, essentially, a reward that the credit card company   ing the rate at which you borrow money.
     provides the customer for using the card. This card gives
     back a percentage of the total amount spent by you for      If you already have more than two credit cards, you may
     using it.                                                   need to evaluate the cards that you have and if the new
                                                                 cards are more beneficial you could opt to discontinue
     What’s in it for the credit card company? How can they      some of your old credit cards.
     afford to provide such benefits to customers? Credit card
     companies make money by charging customers a high           Having decided on whether you should opt for a cash-
     rate of interest on the outstanding bill amount if the      back card or not, it’s time to understand the nuances of
     payment is not made within the time line sketched out.      cash-back credit cards.

28
     Beyond Market 14th Jun ’11                                                                              It’s simplified...
WHAT KIND OF CASH-BACK CREDIT CARDS                            maximum of `2,000 and you purchase furniture worth
ARE AVAILABLE?                                                 `40,000, you will not be permitted to split this transac-
                                                               tion into two to get a cash-back of `4,000. You will get a
Cash-back facility is restricted to certain kinds of spends.   cash-back of `2,000 only.
While you may have a card which provides cash-back on
groceries, apparel, entertainment and travel, another card     WILL YOU GET THE CASH-BACK IMMEDI-
may have cash-back only on movies and dining and some          ATELY?
other may have only on fuel spends, utility bills, etc.
                                                               Cash-back offers do not kick in immediately after the
Different bank/credit card companies provide different         purchase is made. It can take between seven to 21 days
kinds of incentives. Example: Standard Chartered Super         for the money to be credited. If it is not credited, you
Value Titanium card offers cash-back only on petrol,           have up to three months from the date of purchase to
telecom and utility bill payments, while Axis Bank             claim it.
Platinum Advantage card lets you earn free money only
on movies and dining                                           IS THIS CARD OFFERED FREE OF COST?

WHAT KIND OF CARDS SHOULD ONE OPT                              Credit card issuers do charge an annual fee for cash-back
FOR?                                                           cards. However, this fee is waived off if the spend in the
                                                               first few months is above a threshold in some cases. For
Individuals’ needs differ. Hence, it is important to           waiver of the second year fees, many card companies
identify your need and accordingly select the right cash-      expect the customer spend on the card to be above a
back credit card to maximize the benefits. If the cash-        particular threshold.
back card is selected prudently, the savings arising from
these cards could be quite significant as a percentage of      WHAT ARE THE KEY POINTS THAT SHOULD
the total spend.                                               BE CONSIDERED WHILE USING A CASH-BACK
                                                               CARD?
So, if you do not dine out and go out for movies
frequently, the above mentioned Axis Bank Platinum             Where Can It Be Used?
Advantage card does not make any sense for you. If your        Normally credit card companies will provide a list of
petrol consumption is high, it makes sense to opt for a        stores, shops and super markets, among other things,
card that provides cash-back on fuel spends. Analyze           which are approved and where the cash-back facility is
your options and look for the card that you will               applicable. Make a note of these places so that you spend
frequently use so as to maximize the cash-back benefit.        in places where cash-back is available.

WHAT’S IN THE FINE PRINT?                                      What Are The Caps? (Minimum Spend And Maximum
                                                               Cash-back Permissible):
Most cash-back cards have a minimum threshold spend            Normally, cash-back cards will provide the cash-back
for the customer to avail of the cash-back and also a          facility on a certain minimum spend. So to avail of the
maximum limit on which the cash-back is permitted, that        cash-back facility, you need to spend above that set
is, they cap the cash-back. You need to take note of these     threshold. Also, credit card companies may cap the
riders so that the card can be put to effective use.           cash-back. So even if your spend is higher, you will be
                                                               eligible only for the predetermined amount.
If the product feature reads 10% cash-back on all dining
and movie spending; it may not necessarily mean so. It         If the cash-back card is selected appropriately and put to
could be the cash-back is at 10% but up to a maximum of        use smartly, it could be an instrument to enhance savings
say `2,000 per billing cycle.                                  for customers. So read the fine print and put the card to
                                                               effective use. It is important to comply with the payment
Similarly, many cards have a minimum spend threshold.          deadlines of credit card companies because that could
So spend `1,000 in a single transaction and get back           make all the difference.
`250. Also, some card companies do not allow multiple
transactions in a single purchase. Say, a credit card offers   The interest charged could completely overshadow the
you a cash-back of 7% with a cap of `2,000.                    benefits provided by the cash-back card. Hence, it is
                                                               important that you do not overspend. Money saved is
Credit card companies also do not allow customers to           money earned so maximize the benefits arising out of the
split the single purchase transaction to take advantage of     cash-back card by smartly putting it to use and by adher-
the cash-back. So if the cash-back is 10% up to a              ing to payment obligationS.

Beyond Market 14th Jun ’11                                                                              It’s simplified...   29
     NOW,
     LOANS
     AGAINST GOLD
     People can now take loans by
     pawning their gold, thus making the
     most of the skyrocketing prices of
     the yellow metal
30
         Beyond Market 14th Jun ’11        It’s simplified...
“J
            ab ghar mein pada hain sona, phir kaahe ko         between 16% pa to 24% pa, where a gold loan scores
            rona?” (when you have gold ornaments at            over a personal loan, apart from the ease of the transac-
            home, why worry about financial troubles?)         tion, is the fact that a gold loan offers a partial repayment
            urges a television jingle of a south-based         facility. If you have some cash that is freed up, you can
non banking finance company (NBFC) that doles out              make a partial repayment. With this, your outstanding
gold loans.                                                    amount and your rate of interest comes down. But the
                                                               catch in this case is that you do not get to free up any of
With the yellow metal touching a high of $1,550/ounce,         your gold till the principal amount is repaid.
it does seem like a good idea to take a gold loan. In the
last couple of years, there has been a flurry of activity in   Not just individuals but also the economy at large will
this space, as not only NBFCs have scaled up their             benefit from gold loans. India has the world’s largest
business, even public and private sector lenders have          stock of privately-held gold with informed estimates
jumped onto the bandwagon with newfound enthusiasm             ranging from 15,000 to 20,000 tonnes of gold. When this
to lure the common man to take a loan against gold which       gold is left idle in lockers and vaults, it is a huge drag on
might be lying idle in a bank locker.                          the Indian economy.

ALL THAT GLITTERS                                              It has the effect of keeping billions of dollars in savings
It is really a win-win situation for both banks as well as     (about $480 billion to $650 billion) out of the financial
the customers. For the self employed or those in the           system. This is a huge sum that otherwise could have
unorganized sector, gold loans can be a smart option in        been lent out to industries and to build infrastructure.
case of an emergency. Once a person gets over the              When people borrow against gold (technically called
emotional aspect and the age old taboo against ‘pawning        ‘monetization’), the impact is to set in motion a whole
of family jewellery’, gold is his best bet.                    new chain of economic activity boosting demand and
                                                               consumption expenditure in the economy.
Conventionally, banks give a personal loan to anybody in
the unorganized sector or self-employed category as their      TREAD WITH CAUTION
appraisal and credit scoring is based on formal documen-       While the gold loan market is taking off, it is wise not to
tation. For gold loans, he does not need documentation         get excited about this boom in the making. After all,
and can get his gold valued across the counter. In fact, he    India is still reeling under the microfinance debacle, as
gets the cash in less than a couple of hours. The gold is      aggressive recovery practices and overleveraged borrow-
valued on the karats it is worth, based on which the value     ers have come to the fore. The biggest risk that the sector
is assessed. Banks typically give 60% to 80% of the gold       faces today is the risk of negative regulations, opine
value. Coins and bars with higher purity offer more value      those in the thick of the action. Since the spreads and
than gold jewellery.                                           margins in this business are high, it is likely to draw
                                                               regulatory attention.
For lenders, such loans are considered to be safer than
any other unsecured loan, because of the subtle moral          Already, the sector has faced regulatory action. In Febru-
pressure involved. Unlike other secured loans, the under-      ary ’11, the central bank removed gold lending's ‘priority
lying asset is not subject to depreciation. At the same        sector’ status under which banks could meet regulatory
time, unlike land, it is a liquid asset and the transaction    requirements by buying gold loan portfolios, which
costs involved are minimal. The lender, therefore, always      provided a ready and relatively cheap source of funding
enjoys a degree of comfort not available in other loans        for gold lenders. Analysts are now anticipating other
and he does not have to unnecessarily bother about             regulatory risks such as a possible cap on interest rates or
timely repayment of instalments.                               rules imposed by individual states.

Consider this: The non-performing assets accounted for         Moreover, with competition intensifying there is always
less than half a per cent of Muthoot’s retail loan book in     the risk of newcomers engaging in aggressive practices
recent years (Muthoot Finance a south-based NBFC               that might show this burgeoning industry in a negative
recently listed on the BSE at a 2.85% premium to its offer     light. On a positive note, however, the rise in the number
price). Its gold loans stood at $2.9 billion at the end of     of players could raise standards for the industry on the
November, about six times their total in March ’08, a          whole, which is still dominated by unregulated players.
listing document showed.                                       For those who are planning to opt for a gold loan, a word
                                                               of advice: Look out for the track record of the company.
THE GOLDEN EDGE                                                It is best to stick with those who have been there and
While personal loans and gold loans can be called similar      done that for a considerable amount of time, instead than
as the interest on the loan for both could be anything         going for a newbiE.

Beyond Market 14th Jun ’11                                                                                 It’s simplified...   31
                                                                    Leap
                                                                     Of
                             Analyze the situation, draw your
                                                                    Blind
                                                                    Faith
                          conclusions and stand by your view
                             even if it is contrary to others, as
                         following the crowd may not be the
                                               right thing to do

32
     Beyond Market 14th Jun ’11                                       It’s simplified...
M
              oney-making is not an easy task. We all          Take for example the recent financial crisis. Stocks were
              acknowledge the fact that considerable           battered badly as many foreign investors were withdraw-
              amount of time and patience is required to       ing from the Indian markets on account of their own
              manage investments so as to ensure good          concerns, which were not related to the Indian markets at
returns. In spite of knowing this, come a lucrative invest-    all. The mood was so negative that stocks were available
ment scheme, most people fall into the trap of making          at dirt cheap valuations.
‘quick money’.
                                                               Yet most of us preferred fixed deposits over investing in
Greed and comfort in doing what others are doing makes         stocks because everybody else was fleeing this asset
us fall into the trap. Many a times we think what others       class. We were worried about the return of investment
are doing is right. The thought process usually is ‘if so      rather than return on investment. Imagine, if you had
many are investing and making money, I’m sure it must          taken a contrarian view, your money would have fetched
be a good bet. All of them are not crazy’. This holds true     you great returns.
even when the key decision of exiting an investment has
to be taken. If nobody is selling, why should I? It means      Warren Buffet, the investment guru has always said,
there is more on the table to take.                            “Buy when others are fearful and sell when others are
                                                               greedy.” When others are fearful, you will find value
Take for example the housing market in the US. Prices          investments, as herd mentality would have caused the
kept rising and since others were not exiting, people who      markets to fall.
made investments in real estate held on to their positions
only to know that today they are valued lower than their       When you begin to hear about a good investment, to the
cost of purchase. Following what others are doing, (herd       extent that people like taxi drivers having limited know-
mentality) does not let you exit at the right time, as you     how of the stock markets talk about it, be rest assured that
will be waiting for others to exit. You end up losing out      tonnes of people are flocking to make investments.
on a good opportunity to make money.                           Therefore, it is time for you to be cautious. In other
                                                               words, when you see too many people following one
We all want to profit when others are profiting by follow-     investment strategy, it is time you are on your guard.
ing them. This is what we call herd mentality - getting
influenced by what your peers are doing and following          When it comes to an illness, we all run to the doctor,
them. How many of us have bought an advanced technol-          because we believe in taking the opinion of a person who
ogy hand phone because friends or peers had bought             has the know-how on the subject. Then why don’t we
them? This may not have hurt you much, but investment          follow the same approach when it comes to our invest-
decisions made in this manner can certainly dent your          ment decisions?
investment portfolio.
                                                               When it comes to financial matters, we are fine to follow
An individual who had actually invested in this one            those that have limited knowledge on the subject. Irratio-
scheme and also doubled his money once already,                nality sets in because, as human beings, we seek connec-
re-invested the entire corpus for another 14 months to         tions with other fellow beings. Handle your investments
double it. However, those who followed him without             with more care and remember the most important rule of
verifying the authenticity of the scheme burnt their           personal finance - ‘avoid herd mentality’.
fingers after it went kaput. What actually happened is
people were given returns to attract more investors and        Analyze the situation, draw your conclusions and stand
those who followed suit, lost their money.                     by your view even if it is contrary to others. While you
                                                               may use your resources for making investment decisions,
This brings to fore two important factors that people          it would actually be beneficial if you sought expert
usually ignore about such investment schemes. Firstly,         advice. More often than not, people having a contrarian
they are tempted by the idea of making quick bucks             view end up making money, because they tend to make
easily. Secondly, the fact that somebody else has already      value investments and exit when there is overheating.
made a quick buck from the scheme is too tempting for
them to avoid.                                                 Cautious as you may be, taking a contrarian call needs
                                                               you to have adequate knowledge about your view and
Scamsters are successful in their endeavours because           faith in your own self, which at times, may be difficult
they take advantage of this pull factor that individuals       when all those you know do just the opposite. But you’ve
have, that is, roping in others to follow suit. Herd mental-   got to reason it out and remember that following the herd
ity is applicable to all investment products be it mutual      may give you temporary comfort, but it has the ability to
funds, stocks or even real estate.                             dent your investment portfoliO.

Beyond Market 14th Jun ’11                                                                                It’s simplified...   33
                   POWER PLAY
                  KEC INTERNATIONAL LIMITED



                 The merger, acquisition and diversi cation into new high-growth sectors will boost
                             KEC International’s growth and pro tability, going forward



     A
                 global player in the   The Company Has Five Functional Divisions:
                transmission       &
                distribution space,                                                  Tower supply and tower testing up to 1200 KV
                                          Power Transmission                         Turnkey transmission line up to 1200 KV
                KEC International
     (KEC) is a part of the US
     $3.7bn RPG Group. It is                                                         Distribution includes design and construction of
     mainly involved in the execu-
                                             Power Systems                           substation, rural electri cation, e-BOP
     tion of EPC projects in power
     transmission and distribution.
                                                                                     Power and control cables
                                                    Cables                           Telecom cables
     It has presence in 40 countries
     across South Asia, MENA
     region, Central Asia, North and                                                 Civil infrastructure - construction of bridges, tunnels, etc
                                                  Railways                           Track laying, signalling and railway electri cation
     South America. Apart from the
     T&D space, KEC is also
     actively involved in railways,
     telecom towers, cables and                   Telecom                            Telecom towers on turnkey basis
     water business. The total order
     book of KEC is around `7,800
                                                                                     Construction of dams, canals, etc
     crore, with the transmission                   Water                            Irrigation projects, ood control and embankment
     segment accounting for 74% of
     the total order book.              Source: Company Data, Nirmal Bang Research


34
     Beyond Market 14th Jun ’11                                                                                          It’s simplified...
On the transmission front, KEC service portfolio                ment is cumulative of the generation-linked evacuation
includes design, testing and erection of transmission           systems, upgrading and strengthening of the existing
towers. On the distribution side, the company executes          system by taking into account the increased requirements
various substation projects, both in the international and      of independent power products (IPPs) and other critical
the domestic markets.                                           issues necessary for the operation of a reliable grid.
Key Manufacturing Facilities
                                                                KEC International Is Well Placed To Secure Orders
 No Key Manufacturing Facilities                 Capacity
                                                                From Domestic Companies
   1      Transmission facility in India:        151000 MT
          Nagpur, Jabalpur and Jaipur                           KEC International is currently executing more than
   2      International-SAE Towers:              100000 MT      30-35 projects for domestic companies, especially
          Mexico and Brazil                                     PGCIL as well as Private and State utilities. Thanks to its
   3      Cables: Thane, Silvassa                25780 Kms      strong domestic client base, execution capabilities and
          and Mysore                                            massive investment in the power T&D sector, we believe
Source: Company Data, Nirmal Bang Research
                                                                KEC is well-placed to capitalize on the opportunities on
                                                                the domestic front.
INVESTMENT RATIONALE
                                                                For the first half of FY11, we have witnessed subdued
Power Transmission Capex To Increase By 71% In                  order inflow from PGCIL. But from Q3FY11 onwards,
12th Plan                                                       we have already seen traction in order intake as KEC has
                                                                secured a good amount of orders. For FY11, KEC
Historically, the power transmission segment in India has       bagged orders worth `800 crore from PGCIL.
not received the attention it deserves, due to the succes-      KEC’s Share In PGCIL Across Different Segments
sive Planning Commissions’ focus on the power genera-
                                                                  0.18
tion segment. As a thumb rule, every rupee invested in            0.16
                                                                              16%
                                                                                                                                     14.4%
power generation is matched by an equal investment in             0.14                      12.6%                            12.8%
                                                                                                                                             11.7%
the T&D segments. However in India, it has been differ-           0.12
ent, with only 50% of the capex of generation being                 0.1

incurred on T&D.                                                  0.08
                                                                  0.06
                                                                  0.04
Things are changing though. In recent times, emphasis is          0.02
                                                                                                     1.7%           1.2%
                                                                                     0
being laid on improving the country’s T&D infrastruc-                0
ture due to the realization that a robust and adequate                              FY09                     FY10                    9MFY11
power transmission network is essential to complement                     Towers Packages     Substa on     Rural Electri ca on, Towers & Others
                                                                Sources:- PGCIL, Nirmal Bang Research
growth of the power generation segment.
                                                                Global Opportunity
Power demand is estimated to grow at 7.8% between
2010 and 2015 on the back of GDP growth of 8% to 8.5%           Expansion Of KEC’s Foot Prints (Year 2007-2015e)
over the next five years. In line with the power require-            Geographical           Capacity Generation Transmission Distribution
                                                                       Region               Addition     In          In           In
ment of the country, 100 GW of power capacity is                                              (GW)    USD bn       USD bn      USD bn
expected to be added in the 12th Five-Year Plan (2012-            North America               215          379             121           260
17). The increase in generation capacity would require            Europe                      221          457              93           281
the addition of transmission systems for the evacuation           Pacific                      78          146              65           115
of power.                                                         E. Europe/Eurasia           137          180              55           183
                                                                  Asia                        781          794             433           894
Investment By The Ministry Of Power                               Middle East                  78           59              32            67
     ` Crs        10th Plan 11th Plan 12th Plan                   Africa                       59           59              58            58
                                                                  Latin America               121          123              41            84
  PGCIL Capex                        18900   55000    120000      Total                      1690         2197             898          1942
  State                              28500   67000    120000    Sources: Company Data, Nirmal Bang Research

  Private                              -     18000      -       Over the years, KEC has marked its presence in the
  Total Investment                   47400   140000   240000    international market from a mere 20 countries in FY06 to
Sources: CEA, Nirmal Bang Research                              more than 44 countries in FY11. KEC has made a strong
From the table, it is clearly indicative that the Ministry of   presence in the international T&D market by bagging
Power has envisaged an investment of approximately              some prestigious orders and executing them in difficult
`2,40,000 crore in the transmission sector in the 12th          terrains. Some of the prestigious orders include the `942
Plan (a 71% growth over the 11th Plan). This require-           crore order from Kazakhstan electricity grid for the

Beyond Market 14th Jun ’11                                                                                                  It’s simplified...       35
     construction of 38 substations from 110KV to 150KV,                       EPC and project execution activity in the long term in the
     `98 crore order from South Africa for transmission line,                  American markets. SAE Towers holds the highest
     order from Saudi Electricity Company worth `78 crore                      market share in both North America and South America.
     for 132 KV transmission line on turnkey basis, `150                       With this acquisition, KEC has become the largest global
     crore order from SAE towers for the supply of towers to                   transmission tower player.
     the US and Brazil, etc.
     KEC’s Revenues From Exports (` in crore)                                  SAE Towers commands EBITDA margin in the range of
                                                                               12% to 13% against KEC’s 9% to 10%. SAE Towers
                                                                  2371.3
                                       2117.2        2164.1                    currently operates at a capacity utilization of 60% to 65%
                                                                               and going forward, the management expects the capacity
                        1739.8
                                                                               utilization to exceed 75% in FY12E.
         1257.8
                                                                               Jay Railway to provide platform in signalling work:
                                             61.8%                             In September ’10, KEC acquired a railway signalling
                                                          55.4%
                              61.8%                                    53.0%   automation systems and technology company, Jay
                61.6%
                                                                               Railway Signaling Pvt Ltd, for an enterprise value of
                                                                               `13.96 crore. With its strong EPC base, KEC has the
             FY07           FY08          FY09         FY10         FY11
                                                                               capability to undertake civil infrastructure, track works
     Sources: Company Data, Nirmal Bang Research
                                                                               and railway electrification work.
     KEC has a strong presence in the MENA region, South
     Asia and Central Asia. With the acquisition of SAE                        However, it lacked the expertise to provide signalling
     towers, KEC has increased its presence in North and                       work that requires high technical skills and experience.
     Latin America, which is also where significant invest-                    Jay Railway Signaling, on its part, undertakes turnkey
     ment is taking place.                                                     contracts for the Indian Railways, having revenues of
                                                                               `10 crore.
     KEC accounts for 50% to 60% of revenue from interna-
     tional markets and going by the massive capacity                          The acquisition of Jay Railway Signaling gave KEC the
     addition in the next 3-4 years, we believe that KEC is all                ability to offer services for the entire gamut of railway
     set to tap the opportunity.                                               infrastructure projects such as railway electrification,
                                                                               civil infrastructure (including track lying) and signalling
     Acquisitions To Add Synergy With Diversification                          works. With an order backlog of `389 crore of the
                                                                               railway segment, we believe KEC’s growth in the
     In the last one year, KEC has grown inorganically to                      railway infrastructure projects can be quite strong
     diversify into new businesses (RPG Cables and Jay                         considering the Indian railways’ investment plans.
     Singling) and to create synergy for the existing one (SAE
     Towers). Apart from the acquisition, KEC has grown                        Merger with RPG cables adds competitive advantage:
     organically into business verticals like water business,                  In March ’10, RPG cables merged with KEC Interna-
     e-BOP and telecom towers, among others.                                   tional. The merger provided KEC with an in-house
                                                                               capacity for cable, while helping it to become an
     Acquisition of SAE Towers, has made KEC one of the                        integrated infrastructure project management player.
     largest global tower manufacturing players:
     In September ’10, KEC International acquired a 100%                       To further strengthen its business, the company is now
     stake in US-based transmission tower supplies company                     setting up a new cable unit with a capacity of 3,000
     valued at $95 million. SAE Towers has a capacity of                       cables km/PA, at Vadodara and the production is
     1,00,000 Mts, with manufacturing facilities in Mexico                     expected to start from FY13 onwards. The total capex is
     (35,000 Mts) and Brazil (65,000 Mts).                                     around `150 crore.

     We feel this acquisition will positively impact KEC’s                     New Business Vertical To Boost Revenue And
     overall business growth in the long run, given the strong                 Growth, Going Forward
     outlook for T&D capex from the US, Canada and Latin
     America. For now, KEC’s management intends to                             KEC has ventured into new business verticals to diver-
     continue its business of tower for SAE Towers in Mexico                   sify its revenue stream.
     and Brazil and has declined entry into engineering,
     procurement & construction (EPC) jobs in these regions.                   Water Business:

     We, however, believe that the company will venture into                   Recently, KEC ventured into the water business by
36
     Beyond Market 14th Jun ’11                                                                                          It’s simplified...
bagging its maiden order worth `31 crore from the Water       KEC has posted a 26% CAGR in its order book over
Resource Department of Madhya Pradesh. The project            2007-11. KEC’s order book is dominated mainly by the
comprises of renovation, repair and remodeling of canal       transmission segment, which accounts for 73% of the
under the Urmil Tank Project.                                 total order book and on a geographical basis, 47% is from
                                                              South Asia alone.
The company intends to mark its presence in the
complete value chain of Water Treatment and Water             Order Book & Order Backlog (` in crore)
Resource Management, which includes irrigation,                 12000                                           Order Backlog       Order In ow
                                                                                                                                       10961
embankment, flood control and construction of dams,             10000                                                        9525
barrages, canals, tunnels, etc.                                                                                    7833                     7986
                                                                 8000                                                             7260
                                                                                                                      6600
                                                                 6000                                    5707
The company recently tied up with a German company                                 4318 4046
                                                                                               5163
                                                                                                            4451
                                                                                                  4272
Bioworks AG for advanced technologies such as                    4000    3086
                                                                                2621
Activated Sludge Process, Sequential Batch Reactor,              2000
Rotating Bed Bio Reactor, Moving Bed Bio Reactor, etc.               -
Bioworks AG is specialized in design and execution of                       FY07       FY08    FY09       FY10      FY11E       FY12E    FY13E
water and wastewater treatment systems and executed           Sources: Company Data, Nirmal Bang Research
projects in several countries across North America,
Europe and Asia.                                              We expect the company to report a robust order inflow in
                                                              FY12 being the last year of the 11th Five-Year Plan. We
E-BOP:                                                        expect healthy order inflows to continue over the next
                                                              two to three years on account of the increase in domestic
KEC international ventured into e-BOP (Electrical work        orders from major companies like PGCIL as well as
in Balance of Plant) by bagging its first ever contact from   other state utilities.
NMDC worth `40 crore.
                                                              Thus, owing to superior execution skills and excellent
Distribution Space:                                           track record, KEC is well poised to bag more orders from
                                                              PGCIL, going ahead.
KEC has entered into a strategic alliance with Power
Engineers Inc, USA to provide complete designing and          RISK CONCERNS
engineering of substations up to 500 KV in India and
overseas. KEC international has made a significant            Delay in executing the projects, volatility in the prices of
breakthrough in the substation space by bagging a major       raw materials, concerns in the MENA region and rising
order of 1150 KV from Kazakhstan.                             interest rates could pose hurdles to the company.

We believe the successful execution of the order from         OUTLOOK AND VALUATION
Kazakhstan will help KEC International to enter into a
765 KV substation project contract with PGCIL. Further,       KEC has grown at a CAGR of 22% on top line between
KEC bagged two orders of 400 KV substations from              FY07 and FY11 on account of robust investment in the
PGCIL. This will give KEC the opportunity to bid for          power transmission and distribution sector. The 12th
orders from PGCIL for High Capacity Power Transmis-           Five-Year Plan has proposed an investment of `2.4
sion Corridors (HCPTC).                                       trillion, which is expected to throw up substantial oppor-
                                                              tunities for T&D players like KEC International over the
We believe KEC’s recent merger, acquisition and diver-        next 3 to 5 years.
sification into new high growth sectors will boost its
growth and profitability, going forward.                      On the global front, KEC’s international operations are
                                                              also expected to do well on account of recovery in
Robust Order Book Gives Revenue Visibility                    international markets and robust investments. The total
                                                              order book of the company is around `7,800 crore
KEC International has an order book of `7,800 crore,          (1.75x) FY11 revenue gives strong revenue visibility.
which is 1.75x of the FY11 revenue. In spite of the           Further, recent acquisitions and diversification in new
slowdown in inflow in domestic order (delay by PGCIL),        areas and geographies are likely to fuel growth of the
KEC bagged large amount of orders from the interna-           global company.
tional market. During Q4FY11, the company registered
an order inflow of `1,390 crore, an increase of 75%           The stock is trading at 7.79x FY12E earnings with an
year-on-year.                                                 EPS of `10.27 at the current market pricE.

Beyond Market 14th Jun ’11                                                                                                  It’s simplified...     37
     Fortnightly Outlook For Commodities

     I
           n the previous fortnight, a lot of international        INDUSTRIAL METALS
           commodities were affected by debt problems in the       Industrial metal prices could not hold on to the
           Euro zone nations, weakness in the US dollar,           gains,which were seen as a rebound from their multi-
           interest rate hike expectations from the Euro zone,     month lows. Economic data from key nations have not
     surging unemployment levels in the US and weak manu-          been encouraging. PMI surveys confirm that industrial
     facturing PMI numbers from across the globe.                  demand is weakening, thus undermining the prices of
                                                                   base metals. But, supply concerns from major mines
     The prices of precious metals were well supported.            supported the prices of metals. Nickel was the worst
     While gold prices reached a one-month high, silver            performer in the industrial metals complex. The US ISM
     prices attracted buying at lower levels. Industrial metal     Manufacturing PMI data for May grew at its slowest
     prices traded weak with a series of unfavourable manu-        pace in two years. In China too, manufacturing PMI
     facturing data reported from major developed and devel-       numbers suggest a slowdown in manufacturing activity
     oping nations. Crude oil prices too were seen under           in the country.
     pressure as global equities tumbled. However, a weaker
     US dollar overseas supported the prices of crude oil.         Codelco’s El Teniente, Chile’s fourth-biggest mine, was
                                                                   working at less than half its capacity to avoid violence by
     PRECIOUS METALS                                               striking contractors, the company said. El Teniente,
     Precious metal prices rebounded from lower levels that        which produces about 2.5% of the world’s mined copper
     were seen in the previous fortnight. Gold prices, in          or 4,04,000 tonnes a year, continued to work with a
     particular, were supported as a safe-haven investment         skeleton staff to keep production at 40% of the capacity
     option by the concerns of the debt-laden Euro zone            by processing stocked material.
     nations, led by Greece. Also, a weaker US dollar
     overseas added additional investment interest in the          We expect the weakness in base metals to continue as
     yellow metal. Gold prices once again reached                  global economic growth seems to be flattening.
     $1,550/ounce on the Comex reaching its one-month high         Aluminium, a strong performer among base metals, is
     level in the previous fortnight.                              also expected to weaken, tracking easing crude oil prices.
                                                                   We expect aluminium prices to drop back to $2,450-
     Silver prices too were supported by the weakening of the      $2,470/tonne on the LME and `108-`110/kg on MCX.
     US dollar. But weakness in the base metals complex
     added pressure to the prices of silver at upper levels.       CRUDE OIL
     Being well supported by the yellow metal, silver prices       Crude oil prices are trading at $99.05/barrel on NYMEX
     once again traded above $38/ounce on the Comex.               after reaching $102.7/barrel on NYMEX, witnessing a
                                                                   slight correction in the previous fortnight.
     A few problems related to the Greece bailout still mounts
     on the financial markets. The German government said it       Based on the economic data points and inventory data
     will not decide on fresh aid for Greece until the review of   released during the fortnight, oil prices are still trading in
     the current rescue plan from the European Commission.         the range of $98-$102/barrel on the NYMEX without
                                                                   showing any major correction, matching expectations.
     Fitch Ratings has asked bondholders to voluntarily swap       China is facing its worst power crisis in seven years,
     existing Greek debt for new debt ‘with materially less        which has increased the diesel consumption, leaving the
     advantageous’ terms, which could still mean a default.        world’s second largest economy as a net importer.
     Going forward, the important factor to watch out for is       Further, the outcome of the OPEC in Vienna will decide
     the Greece bailout plan. If the Euro zone manages to          the direction of the oil prices in the coming fortnight.
     provide some road map for Greece, it may lead to some
     stability in their debt markets, leading to the fading away   Apart from the ongoing geo-political tensions across the
     of the risk premium attached to precious metals.              globe, the demand for crude oil may ease from the
                                                                   world’s largest consumer due to sluggish growth outlook
     Thus, we expect the prices of precious metals to take a       of its economy. OPEC is also planning to boost the
     breather as the risk premium would be wiped away.             output up to 2,00,000-3,00,000 bpd for the coming
     Hence, we may witness some sell-off in precious metals.       quarter. Going forward, we expect oil prices to weaken
     We expect gold prices to test $1,500-$1,510/ounce until       further and any spike in prices can be considered as a
     the next fortnight.                                           good selling opportunitY.

38
     Beyond Market 14th Jun ’11                                                                                 It’s simplified...
     Fortnightly Outlook For Currencies

T
         he fortnight gone by was quite volatile as the      employment report and a slightly dovish tone to the Bank
         global economic data did not give any direction     of England’s policy minutes.
         to the traders, bringing the fundamental link
         between safe havens and high-yielding assets        The sterling also made a low of 1.6058 as the US dollar
to the fore. On several occasions, emerging markets          strengthened against the basket of currencies. Weak
encouraged investors to pick assets with higher returns.     fundamental data points of the US made the sterling
Risk aversion in the markets caused the Japanese yen and     bounce to 1.6546. Gains were capped by expectations of
the Swiss franc to be on the gaining side.                   an uneven recovery in the UK and steady interest rates.
                                                             Fundamentally, we are bearish on the sterling as we do
The past week was a nightmare for the US dollar as it fell   not expect further rate hikes and the recovery too may
sharply due to discouraging fundamental indicators,          remain sluggish in the UK.
aggravated by dismal non-farm employment data. Also,
there were talks of a second bailout package for Greece,     The Japanese yen was trading in the tight range of 80 to
which lifted sentiments and fuelled interest rate expecta-   82 throughout the fortnight as BOJ is maintaining its
tions in the Euro zone and emerging markets, further         ultra-loose monetary policy and has indicated its
intensifying the weakness in the US dollar.                  readiness to ease further if the damage from last month’s
                                                             tsunami proves bigger than expected.
In the past fortnight, the dollar index made a high of
76.37 mainly on the back of the sharp fall in the euro due   One correlation that only seems to strengthen of late is
to the ongoing debt crisis, and was also supported by the    between the USDJPY pair and US Treasury Bond/Note
hope of a recovery in the US, with cues from the minutes     Yields. The benchmark 10-year Treasury note closed
of the FOMC meeting.                                         below the psychologically significant 3% mark for the
                                                             first time since November on disappointing US non-farm
However, the gains in the dollar index got eroded and        employment data.
fell to 73.64 due to the weak unemployment and
non-farm employment data. While unemployment rate            As the outlook for Fed is bearish, the currency might
stood at 9.1%, the non-farm employment change was            appreciate against the US dollar. Further, the gains may
38,000, according to Reuters.                                be capped as the currency may be used to fund the
                                                             positive-risk position.
Low yields too punished the US dollar against the
interest-rate sensitive Japanese yen. Going forward,         The rupee traded with a positive bias in the previous
interest rate decisions by Australia, New Zealand,           fortnight, taking cues from the overall weakness in the
England and the European Central Bank could adversely        US dollar and the overall risk appetite that was witnessed
hit the US dollar.                                           in the global markets.

The euro stood at 1.42 against the dollar in the early       On the domestic front, the timely arrival of the southwest
fortnight; it was rallying despite continued fears of        monsoon induced positive sentiments for local equities,
Greek fiscal solvency and risks to the euro zone. The        thereby supporting the rupee. The trading range for the
euro made a low of 1.3966 due to uncertainties like          rupee was 44.70-45.20, in line with our expectations.
whether the IMF will disburse its next tranche of aid to
the beleaguered Greek government.                            Going forward, we expect the rupee to strengthen further
                                                             since we do not see any significant turnaround in the
Moreover, few newspapers reported that Greece was            dollar weakness. Besides, the rising interest rate differen-
looking at taking austerity measures to reduce its debt,     tials between the US and other economies would not
followed by expectations of the second bailout package,      work in favour of the US dollar. On the other hand, the
which offered hope to worried investors and caused the       Greece bailout seems to be coming sooner than expected,
euro to surge to 1.466. We are bullish on the euro as we     which would also turn out to be positive globally.
expect the interest rate hike in the coming ECB meeting
could push the euro to 1.49 to 1.50 against the dollar.      While on the domestic front, healthy monsoons and
                                                             debt-related inflows would continue to support the rupee,
The sterling opened at 1.6249 against the dollar and later   we recommend investors to go short in USDINR pair at
slipped against the majors as there was a mixed UK           44.81-82 for a target of 44.50 in spoT.

Beyond Market 14th Jun ’11                                                                              It’s simplified...   39
               A
               Safer
               Alternative
                  W
      FMPs are suitable for investors                 ith interest rates remaining at elevated levels in the last few months
                                                      due to high inflation and uncertainty in the global crude prices, short
     seeking low-risk avenues with a                  term rates have turned attractive. This move has induced fund houses
     short-term investment horizon                    to launch short-term fixed maturity plans (FMPs) for the period of
                                        3-6 months.

                                        In the last few days, fund houses such as HDFC MF, Principal PNB MF and DSP
                                        BlackRock MF have launched three-month FMPs, while Reliance MF, Religare
                                        MF and SBI MF are planning to come out with such short-term FMPs soon.

                                        Market participants say that with yields of 3-month certificates of deposits (CD)
                                        and commercial papers (CP) going over 9% in the last few days, fund houses have
                                        found this opportunity to invest in short-term papers. FMPs usually invest in certifi

40
       Beyond Market 14th Jun ’11                                                                           It’s simplified...
cates of deposits (CDs) and commercial papers (CPs).           Even though FMPs do not offer a fixed return like bank
Currently, three-month yield of CDs is around 9% to            fixed deposits (FDs), the risk is reasonably low
9.15%, while CPs are trading at around 9.50% to 9.65%.         compared with other equity-related mutual funds. Most
                                                               FMPs can do well with the close-ended nature and inves-
Though the capital market regulator, the Securities and        tors allow the money to remain in the scheme itself till
Exchange Board of India (SEBI), in January ’09, banned         the maturity period.
FMPs from giving indicative yields, 3-month FMPs can
easily offer 8% to 8.5% returns at current market levels.      From the tax point of view, FMPs fall under the Capital
                                                               Gain Tax and attract only 10% or 20% tax as the case
Earlier, fund houses used to declare indicative yields at      may be. But bank FDs attract straight 30% tax for the
the time of launching an FMP. However, some fund               highest tax brackets.
houses keep changing maturities to help investors park
their money for different periods (3 months, 6 months          Debt fund managers also say that in the coming days,
and 1 year), depending on their capital requirements.          short-term rates are likely to remain at elevated levels,
                                                               following weak liquidity and borrowings by several
Currently, short-term FMPs are in demand as no finan-          capital-starved companies.
cial product is generating such high returns in the current
market situation. At present, volatility in the equity         Even if rates go up in the coming days, investors can
markets is giving negative returns to investors.               invest at different levels of rising yields in short-term
                                                               FMPs. And during maturity, if interest rates decline,
Market players say that at this point it makes all the more    investors can book capital gains when bond prices move
sense to bring out short-term FMPs as three-month rates        above the levels where the money was invested.
are above 9% and along with institutional investors even
retail investors are participating in short-term FMPs.         FMPs invest in debt securities and their returns are
With fund managers getting superior yields from bank           locked-in at the start of the plan, as it reduces interest rate
CDs, they are not taking much credit risk by investing in      risks by a good measure. However, being close-ended
lower rate commercial papers, a move which will benefit        schemes, FMPs are not easy to redeem midway as there
small retail investors.                                        are no major buyers for FMPs.

FMPs are close-ended debt schemes that come with a             As these schemes are listed on exchanges, the trading
specific tenure, typically three months to a year. These       volumes of FMP units are very low on the board. In such
schemes invest in debt securities that mature just before      a scenario, investors will have to redeem their invest-
or on the date of the scheme’s maturity. Around the            ments at a loss. Fixed-term plans are for investors who
maturity date, it sells all its securities and pays back the   can stay with the scheme till its maturity.
money to its investors.
                                                               According to the data from the Association of Mutual
FMPs are suitable for investors seeking low-risk avenues       Funds in India (AMFI), FMPs had collected over `3,000
with a short-term investment horizon of up to 12 months        crore in the month of April as 22 schemes were launched
to 15 months. They are also more tax-efficient compared        during that period. Fixed-term plans become attractive
to traditional fixed deposits. In the past few months, there   when short-term rates move up.
has been a lot of demand for FMPs as we have seen a
constant rise in the rates of CPs and CDs.                     People or corporates, who have investible surpluses and
                                                               a three-month to one-year investment horizon can invest
A Fixed Maturity Plan is a type of mutual fund, which          in FMPs at current levels and earn high yields at
gives a fixed return for a period of time. It is just like     maturity. The lacklustre performance of the equity
fixed deposits in banks, but the main difference is that the   markets will also result in investors shifting their portfo-
return is not guaranteed, even though it gives more return     lios to short-term plans.
than bank fixed deposits (in some cases).
                                                               To sum it up, Fixed Maturity Plans are close-ended debt
It has a low amount of risk and when compared with             schemes, which are highly tax-efficient and normally
no-risk fixed deposits, the return on FMPs is not guaran-      offer encouraging returns. FMPs can be an excellent
teed. At the time of a new offer, the time period is also      investment option for investors who clearly understand
disclosed as it is a close-ended scheme. One can invest in     the risks associated with them. Due to its short-term
FMPs only at the time of the initial offer and can redeem      nature, Fixed Maturity Plans are convenient for the
only after the stipulated period. But most FMPs allow a        investor to plan his investment to satisfy his short-term
premature exit with an exit load.                              and long-term financial goalS.

Beyond Market 14th Jun ’11                                                                                  It’s simplified...   41
 CHANGE IN PRICE AND OPEN INTEREST
                              CHANGE IN PRICE AND OPEN INTEREST OF THE NIFTY 50 COMPANIES
                                         18 May'11        07 June'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                          5424.05   29785450    5562.70   26173100    138.65   -3612350       2.56         -12.13
     Bank Nifty                            10597.60    2023975   10880.10    1579750    282.50    -444225       2.67         -21.95
     ACC Ltd                                 988.10    1510500    1029.65    1141500     41.55    -369000       4.21         -24.43
     Ambuja Cements Ltd                      134.35   17826000     141.15   14444000      6.80   -3382000       5.06         -18.97
     Axis Bank Ltd                          1220.50    4035750    1237.65    3476750     17.15    -559000       1.41         -13.85
     Bajaj Auto Ltd                         1290.60    2077500    1317.60    1645000     27.00    -432500       2.09         -20.82
     Bharti Airtel Ltd                       373.30   11862000     380.15   13888000      6.85    2026000       1.83          17.08
     Bharat Heavy Electricals Ltd           2064.75    2884500    1919.50    2668375   -145.25    -216125      -7.03          -7.49
     Bharat Petroleum Corporation Ltd        618.70    1270000     618.40    1695000     -0.30     425000      -0.05          33.46
     Cairn India Ltd                         340.20   15323000     337.20   15932000     -3.00     609000      -0.88           3.97
     Cipla Ltd                               305.55    3792000     340.00    3982000     34.45     190000      11.27           5.01
     DLF Ltd                                 230.20   19554000     235.60   21623000      5.40    2069000       2.35          10.58
     Dr Reddy's Laboratories Ltd            1595.40     913750    1611.95     751250     16.55    -162500       1.04         -17.78
     GAIL (India) Ltd                        423.55    2146500     438.10    2310500     14.55     164000       3.44           7.64
     Grasim Industries Ltd                  2294.65     580625    2297.30     471125      2.65    -109500       0.12         -18.86
     HCL Technologies Ltd                    505.10    2196000     515.30    2312500     10.20     116500       2.02           5.31
     HDFC Ltd                                647.35    5859000     664.50    5041000     17.15    -818000       2.65         -13.96
     HDFC Bank Ltd                          2263.00    3126625    2383.95    3597875    120.95     471250       5.34          15.07
     Hero Honda Motors Ltd                  1821.60    2917000    1828.80    2673375      7.20    -243625       0.40          -8.35
     Hindalco Industries Ltd                 196.55   14780000     189.05   16102000     -7.50    1322000      -3.82           8.94
     Hindustan Unilever Ltd                  307.20   26016000     308.95   23270000      1.75   -2746000       0.57         -10.56
     ICICI Bank Ltd                         1036.45    9795750    1062.50    9730000     26.05     -65750       2.51          -0.67
     IDFC Ltd                                129.30   27216000     137.60   24158000      8.30   -3058000       6.42         -11.24
     Infosys Technologies Ltd               2827.40    4175125    2898.60    3273875     71.20    -901250       2.52         -21.59
     I T C Ltd                               189.60   12890000     190.15   20350000      0.55    7460000       0.29          57.87
     Jindal Steel & Power Ltd                640.20    3823000     639.85    4368500     -0.35     545500      -0.05          14.27
     Jaiprakash Associates Ltd                81.55   37714000      84.70   34768000      3.15   -2946000       3.86          -7.81
     Kotak Mahindra Bank Ltd                 412.40    4977500     450.15    3734500     37.75   -1243000       9.15         -24.97
     Larsen & Toubro Ltd                    1506.85    4379875    1715.45    3184000    208.60   -1195875      13.84         -27.30
     Mahindra & Mahindra Ltd                 672.05    2359500     665.50    3533500     -6.55    1174000      -0.97          49.76
     Maruti Suzuki India Ltd                1196.65    2687500    1234.70    2264250     38.05    -423250       3.18         -15.75
     NTPC Ltd                                171.25   23650000     174.25   17713000      3.00   -5937000       1.75         -25.10
     ONGC Ltd                                274.85   10839000     278.45    9941000      3.60    -898000       1.31          -8.28
     Punjab National Bank                   1054.15    2747250    1062.80    2431750      8.65    -315500       0.82         -11.48
     Power Grid Corporation of India Ltd     101.70   11384000     101.70   10424000      0.00    -960000       0.00          -8.43
     Ranbaxy Laboratories Ltd                501.60    2696000     545.40    2251500     43.80    -444500       8.73         -16.49
     Reliance Communications Ltd              86.35   29222000      92.65   28070000      6.30   -1152000       7.30          -3.94
     Reliance Capital Ltd                    509.50    4920500     538.75    4777500     29.25    -143000       5.74          -2.91
     Reliance Industries Ltd                 906.05   16222500     961.30   13205750     55.25   -3016750       6.10         -18.60
     Reliance Infrastructure Ltd             562.45    5587000     562.00    6015500     -0.45     428500      -0.08           7.67
     Reliance Power Ltd                      111.15   19552000     119.00   18824000      7.85    -728000       7.06          -3.72
     Steel Authority of India Ltd            144.10   10785000     146.60    8447000      2.50   -2338000       1.73         -21.68
     State Bank of India                    2338.80    6077500    2328.85    4836750     -9.95   -1240750      -0.43         -20.42
     Sesa Goa Ltd                            297.70    8636000     285.55    7581000    -12.15   -1055000      -4.08         -12.22
     Siemens Ltd                             844.00     762000     901.40     570000     57.40    -192000       6.80         -25.20
     Sterlite Industries (India) Ltd         167.50   18178000     169.40   15846000      1.90   -2332000       1.13         -12.83
     Sun Pharmaceutical Industries Ltd       434.95    2881250     491.50    2919125     56.55      37875      13.00           1.31
     Tata Motors Ltd                        1149.85    9194000    1032.25    9774250   -117.60     580250     -10.23           6.31
     Tata Power Co Ltd                      1249.25     931000    1250.50     822000      1.25    -109000       0.10         -11.71
     Tata Steel Ltd                          573.35   20553000     578.30   19088000      4.95   -1465000       0.86          -7.13
     Tata Consultancy Services Ltd          1153.90    3169250    1173.50    3536000     19.60     366750       1.70          11.57
     Wipro Ltd                               446.20    3557500     439.50    3360000     -6.70    -197500      -1.50          -5.55
                                                                                                                       Source: NB Research

42
          Beyond Market 14th Jun ’11                                                                        It’s simplified...
PRICE TO BOOK VALUE
The table represents companies listed on the
BSE that are low on Price to Book Value

                       Company Name                  Book Value   Current Market Price       Price /
                                                                       7th Nov'10
                                                                      11th Jun'11          Book Value
    Allied Digital Services Ltd                         154.76           46.60                  0.30
    Reliance Communications Ltd                         240.99           92.00                  0.38
    Ansal Properties & Infrastructure Ltd               101.52           42.20                  0.42
    PSL Ltd                                             171.05           71.80                  0.42
    IVRCL Assets & Holdings Ltd                         121.38           51.20                  0.42
    Bharati Shipyard Ltd                                320.02          136.35                  0.43
    Mahanagar Telephone Nigam Ltd                       105.10           45.25                  0.43
    Piramal Healthcare Ltd                              857.02          369.00                  0.43
    Bartronics India Ltd                                150.90           65.70                  0.44
    Bajaj Hindusthan Ltd                                142.40           67.85                  0.48
    Varun Shipping Company Ltd                           55.11           26.95                  0.49
    Orbit Corporation Ltd                                84.03           44.70                  0.53
    Moser Baer India Ltd                                 76.39           41.05                  0.54
    JK Lakshmi Cement Ltd                                85.74           46.80                  0.55
    D B Realty Ltd                                      137.83           75.40                  0.55
    Electrosteel Castings Ltd                            53.20           30.15                  0.57
    Marg Ltd                                            163.89           94.85                  0.58
    Videocon Industries Ltd                             319.39          185.60                  0.58
    Punj Lloyd Ltd                                      107.79           63.55                  0.59
    Anant Raj Industries Ltd                            122.75           73.25                  0.60
    Provogue (India) Ltd                                 64.36           39.00                  0.61
    Prakash Industries Ltd                              118.74           72.15                  0.61
    JK Tyre & Industries Ltd                            157.67           99.50                  0.63
    Amtek India Ltd                                     133.34           85.05                  0.64
    Kesoram Industries Ltd                              283.64          185.60                  0.65
    Shipping Corporation Of India Ltd                   160.95          105.80                  0.66
    ICSA (India) Ltd                                    174.54          115.70                  0.66
    Gujarat Narmada Valley Fertilizers Company Ltd      150.92          101.65                  0.67
    Sasken Communication Technologies Ltd               216.19          146.80                  0.68
    Dredging Corporation Of India Ltd                   488.77          335.75                  0.69
    JK Cement Ltd                                       164.82          113.85                  0.69
    Alok Industries Ltd                                  39.26           27.15                  0.69
    Gujarat Alkalies & Chemicals Ltd                    201.98          140.75                  0.70
    K S Oils Ltd                                         37.56           26.20                  0.70
    Mastek Ltd                                          141.79          101.35                  0.71
    Vardhman Textiles Ltd                               333.95          239.30                  0.72
    Geodesic Ltd                                        112.21           80.85                  0.72
    Parsvnath Developers Ltd                             58.88           42.45                  0.72
    Gammon India Ltd                                    137.99           99.70                  0.72
    India Cements Ltd                                   117.08           85.55                  0.73
    Indiabulls Real Estate Ltd                          160.58          118.10                  0.74
    Great Offshore Ltd                                  304.56          232.95                  0.76
    Escorts Ltd                                         168.09          128.75                  0.77
    Firstsource Solutions Ltd                            24.55           18.95                  0.77
    B. L. Kashyap and Sons Ltd                           27.54           21.45                  0.78
    Patel Engineering Ltd                               198.57          155.70                  0.78
    Brigade Enterprises Ltd                             101.98           80.10                  0.79
    The Great Eastern Shipping Company Ltd              370.21          292.10                  0.79
    Housing Development & Infrastructure Ltd            226.67          179.35                  0.79
    United Breweries Holdings Ltd                       224.30          178.10                  0.79
Source: Capital Line



          Beyond Market 14th Jun ’11                                                It’s simplified...   43
      TECHNICAL OUTLOOK FOR THE FORTNIGHT
     KEY HIGHLIGHTS                                             The Options data shows that the Put activity was at
                                                                5,400-5,600 strikes, while Call writing was observed
     Index heavyweights like Infosys Technologies Ltd,          mainly at the 5,700 strike, indicating that the market
     State Bank of India, Bharat Heavy Electricals Ltd,         will remain volatile and oscillate within a range in the
     ONGC and Tata Motors Ltd, among others failed to           days to come.
     meet market expectations and posted disappointing
     quarterly results in the earnings season, which ended      In the Options activity at the OTM (out-of-the-money)
     recently. Their stock prices corrected almost 10%-         strikes, the highest build-up continues to be at the
     15% in a short time frame.                                 5,800 and 5,400 levels to the tune of 8.88 million and
                                                                9.63 million for Call and Put, respectively. This data
     The market still has to deal with a few headwinds like     suggests that for the June series, the Nifty could trade
     high oil prices, rising interest rate cycle and the 2G     in the range of 5,400 and 5,800.
     scam. However, not all risks would dramatically
     impact the markets. The markets are likely to remain       Technically, the Nifty is taking a lot of time to cross its
     range-bound, with the Nifty hovering around the            200-exponential moving average of 5,613 in the
     5,300-5,650 levels for some more weeks before break-       absence of any big positive trigger. However, it is
     ing out of this trading band. However, IT, FMCG and        quite resilient in this negative environment where
     pharma sectors are likely to be defensive in such a        global markets are correcting and the Nifty is also
     macro environment.                                         holding its May low of 5,328 level. Looking at the
                                                                current development, it seems the markets are not in a
     STRATEGY                                                   hurry to make fresh highs. Instead, they are consoli-
                                                                dating and have not made lower top and lower bottom
     In the coming fortnight, a pullback rally is on the        formations, forcing us to believe that they may rally in
     cards. The Nifty has smartly bounced back from 25th        the coming days.
     March’s low of 5,328, which was the gap area (at
     5,329) of 11th February. Going forward, if the Nifty       The spot Nifty at the 5,556 level is expected to find
     holds this level, then we may see a bottom formation.      resistance near the 5,628 level. Any stability above
     It seems the range of 5,580 to 5,635 is still a sticky     this level could take the index further up to the 5,670-
     area for the market to break and the 5,440 level might     5,765 levels in the near term. A strong support is
     act as an important support for the Nifty.                 placed in the 5,440-5,370 region and only a break
                                                                below the 5,370 level could damage this current
     The short-term bias continues to remain positive.          uptrend in the markets.
     However, we feel too much negativity and gloom has
     actually clouded the market for the medium-term.           The Bank Nifty at the 10,880 level looks quite strong
     Hence, we believe that the market will first correct to    as the index has shown strong resilience after making
     the 5,430-5,385 levels, consolidate and then move          a double bottom formation of 10,330 on 23rd and 24th
     back to the 5,750 level. The two major events in June      March. Going forward, we could see a big spurt in the
     - the EGoM meeting and the RBI’s monetary policy           banking index up to the 11,280-11,580-11,675 levels,
     review - will also play an important factor in position-   if the index holds the 10,940-10,980 levels. On the
     ing the market.                                            lower side though, we see strong support at the
                                                                10,430–10,330 levels.
     Globally too, the markets have started correcting.
     From a technical point of view, the US markets were        STOCK IDEAS
     resilient as the S&P 500 was holding the 1,295 level,
     which is now been broken and the Dow Jones is above        Technically stocks like Apollo Tyres Ltd, Biocon Ltd,
     the 12,000-mark. The next support for the S&P 500 is       Cipla Ltd, Development Credit Bank Ltd, HDFC
     seen around the 1,250-1,230 levels. The fall in the        Bank Ltd, Infosys Technologies Ltd, Ranbaxy Labo-
     Dow Jones and S&P in the coming days could possi-          ratories Ltd, Reliance Industries Ltd and Mangalore
     bly push the Indian markets to lower levels. Thereaf-      Refinery & Petrochemicals Ltd can be bought on a
     ter, the markets are likely to move up again.              correction from a trading perspectivE.

44
     Beyond Market 14th Jun ’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 18th MAY ’11 TO 7th JUN ’11                                                   Price (Rs)
  Ex      Date                       Company                                              Client                       Trade     Quantity     % of Eq   Traded       Close
 BSE   26 May'11        Asahi Infrastructure & Projects Ltd             Chiripal Exim LLP                               Buy       500000       1.43       15.50        9.00
 BSE   19 May'11        Marg Ltd                                        Citigroup Global Markets Mauritius Pvt Ltd      Sell     1693460       4.44       88.00       96.50
 BSE    08 Jun'11       Nova Iron & Steel Ltd                           Bhushan Power And Steel Ltd                     Buy     22250000      14.78       11.71       12.19
 BSE    08 Jun'11       Nova Iron & Steel Ltd                           Nova Corporation Ltd                            Sell    19750000      13.12       11.69       12.19
 BSE    08 Jun'11       Sharyans Resources Ltd                          DCB Power Ventures Ltd                          Sell      176000       1.18       56.70       58.05
 BSE   19 May'11        Vikash Metal & Power Ltd                        India Max Investment Fund Ltd                   Buy       400000       1.14       23.00       22.95
 BSE   20 May'11        Crew B.O.S. Products Ltd                        Reliance Mutual Fund                            Buy       575147       4.46      101.00      101.55
 BSE   20 May'11        Sayaji Hotels Ltd                               Ahilya Hotels Ltd                               Buy       505000       2.88      130.00      124.15
 BSE   20 May'11        Sayaji Hotels Ltd                               Clearwater Capital Partners                     Sell      500000       2.85      130.00      124.15
 BSE   20 May'11        Ventura Textiles Ltd                            Industrial Development Bank Of India            Sell      140616       1.43        4.80        5.26
 BSE   20 May'11        Vikash Metal & Power Ltd                        India Max Investment Fund Ltd                   Buy       400000       1.14       23.00       23.00
 BSE   25 May'11        Kirloskar Brothers Ltd                          Kirloskar Industries Ltd                        Sell      551209      10.42      515.10      515.80
 BSE   25 May'11        JSW Energy Ltd                                  Ispat Industries Ltd                            Buy     23625000       1.44       69.00       68.75
 BSE   25 May'11        Impex Ferro Tech Ltd                            Concast Ispat Ltd                               Sell      600000       1.20       10.63       10.63
 BSE   27 May'11        Aanjaneya Lifecare Ltd                          Cresta Fund Ltd                                 Buy       236615       1.88      246.70      311.25
 BSE   30 May'11        Vikash Metal & Power Ltd                        India Max Investment Fund Ltd                   Sell      400000       1.14       20.05       20.05
 BSE   31 May'11        Sayaji Hotels Ltd                               Clearwater Capital Partners (Cyprus) Ltd        Sell      350000       2.00      130.00      120.90
 BSE   31 May'11        Tata Chemicals Ltd                              Tata Sons Ltd                                   Buy      4200000       1.65      372.45      380.05
 BSE   31 May'11        Tata Chemicals Ltd                              Tata Global Beverages Ltd                       Sell     4200000       1.65      372.45      380.05
 BSE    03 Jun'11       CIL Nova Petrochemicals Ltd                     Chiripal Industries Ltd                         Sell      500000       1.85       16.85       17.00
 BSE    06 Jun'11       CIL Nova Petrochemicals Ltd                     Nandan Exim Ltd                                 Sell     1000000       3.69       19.20       17.40
 BSE    07 Jun'11       Somi Conveyor Beltings Ltd                      Dhanlaxmi Cotex Ltd                             Sell      125016       1.06       13.05       13.90
 BSE    08 Jun'11       Somi Conveyor Beltings Ltd                      Melchior Indian Opportunities Fund Ltd          Sell      240262       2.04       13.74       14.10
 BSE    08 Jun'11       CIL Nova Petrochemicals Ltd                     Chiripal Exim LLP                               Buy       500000       1.85       17.40       16.50
 BSE    08 Jun'11       CIL Nova Petrochemicals Ltd                     Nandan Exim Ltd                                 Sell      500000       1.85       17.40       16.50
Source: NSE and BSE




       MUTUAL FUND, FII ACTIVITY AND NIFTY
       This graph and data represent the Mutual Fund and FII
       activity that took place in the last fortnight, whether the                                         Date             MF Net*     FII Net *          Nifty
       Fund Houses were buyers or sellers.                                                              18 May'11           -129.60         -242.20       5420.60
                                                                                                        19 May'11             28.20         -259.90       5428.10
                                                                                                        20 May'11            226.10           -7.10       5486.35
                                                                                                        23 May'11            -89.40          -75.10       5386.55
        1400                            MF Net , FII Net & Nifty                             5650
        1200
                                                                                                        24 May'11            -65.20         -138.20       5394.85
                                                                                             5600
        1000                                                                                 5550
                                                                                                        25 May'11            -12.90           35.20       5348.95
         800                                                                                 5500       26 May'11            216.10         -418.50       5412.35
         600                                                                                            27 May'11            286.50         1222.60       5476.10
                                                                                             5450
         400
         200
                                                                                             5400       30 May'11            151.50          253.70       5473.10
           0                                                                                 5350       31 May'11             82.10          118.60       5560.15
        -200                                                31 May'11                        5300        01 Jun'11            26.40         1261.30       5592.00
                            23 May'11
        -400                                                                 03 Jun'11       5250
                                                                                                         02 Jun'11          -142.80          689.60       5550.35
        -600                                  26 May'11                                      5200
            18 May'11                                                                                    03 Jun'11          -279.90          150.80       5516.75
                                         MF       FII     NIFTY (RHS)                                    06 Jun'11           175.30          537.60       5532.05
                                                                                                         07 Jun'11                --        -423.00       5556.15
                                                                                                      Source: NB Research                        *Net activity in Equity



              Beyond Market 14th Jun ’11                                                                                                       It’s simplified...          45
       MOVERS AND LAGGARDS IN MUTUAL FUND SCHEMES
                                                                                             Absolute %
                                                                                  NAV
                                       Scheme Name                                         (Point to Point)
                                                                               (07 Jun'11)
                                                                                              2 Weeks
         Equity Schemes
         Movers
         SBI Magnum Sector Funds Umbrella - Pharma - Gr                              46.10             5.06
         UTI Pharma and Healthcare Fund - Gr                                         41.50             5.04
         Reliance Pharma Fund - Gr                                                   57.64             4.82
         SBI Magnum Midcap Fund - Gr                                                 22.58             4.73
         Religare Banking Fund - Reg - Gr                                            19.99             4.60
         Laggards
         Birla Sun Life Commodity Equities Fund - GA - Ret - Gr                      16.06            -3.26
         Birla Sun Life Commodity Equities Fund - GPM - Ret - Gr                     13.22            -1.58
         Birla Sun Life Commodity Equities Fund - GMC - Ret - Gr                     13.55            -1.36
         Tata Growing Economies Infrastructure Fund - Plan A - Gr                    11.60            -1.33
         Birla Sun Life International Equity Fund - Plan A - Gr                       9.85            -1.30

         Debt Schemes
         Movers
         ICICI Prudential SMART Fund - Series G - 36 Months - Ret - Gr             18.89*              3.13
         Birla Sun Life Equity Linked FMP - Series A - Ret - Gr                    12.86*              3.10
         ICICI Prudential SMART Fund - Series H - 36 Months - IP - Gr              16.15*              2.16
         ICICI Prudential SMART Fund - Series H - 36 Months - Ret - Gr             16.15*              2.16
         DWS Hybrid FTF - Series 2 - Gr                                             10.51              1.57
         Laggards
         UTI Fixed Income Interval Fund - Half Yearly Plan I - IP - Gr               10.04            -3.65
         Escorts Income Bond - Gr                                                    29.02            -1.49
         Sundaram Bond Saver - I P - Gr                                              32.33            -0.13
         Sundaram Bond Saver - Gr                                                    28.64            -0.13
         UTI Dynamic Bond Fund - Gr                                                  10.63            -0.13

         Balance Schemes
         Movers
         Sundaram Balanced Fund - Gr                                                47.88              3.25
         Escorts Balanced Fund - Gr                                                 61.84              2.76
         HDFC Balanced Fund - Gr                                                    57.05              2.76
         HDFC Prudence Fund - Gr                                                   214.25              2.73
         Reliance RSF - Balanced - Gr                                               21.97              2.60
         Laggards
         Escorts Opportunities Fund - Gr                                             28.03             1.00
         Baroda Pioneer Balance Fund - Gr                                            28.64             1.67
         JM Balanced - Gr                                                            22.17             1.69
         SBI Magnum Balanced Fund - Gr                                               49.26             1.69
         Canara Robeco Balance - Gr                                                  60.98             1.87
       * (01 Jun'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.

46
     Beyond Market 14th Jun ’11                                                                    It’s simplified...
              The 59-year-old Executive
              Director of the Securities and
              Exchange Board of India is a
              key force in the workings of
              the stock market regulator



     Usha Narayanan:
     Woman At The Helm

     U
                sha Narayanan, 59, is the Executive Director of     investors, collective investment schemes including
                the Securities and Exchange Board of India          plantation schemes, foreign institutional investors,
                (SEBI) since 2006. She is the only woman            portfolio managers and custodians.
                from within stock market regulator SEBI’s
     ranks to have become an Executive Director. Narayanan          Narayanan graduated in economics and commerce from
     is at the helm of things at a time when there is an explo-     Delhi University and completed her post graduation in
     sion in public offerings and FII inflows. “SEBI is a           economics and political science from Mumbai Univer-
     happening place and there is a lot to learn. The job is        sity. She accomplished her masters in Business Law
     demanding and there are challenges, but you have to take       from the National Law School in Bangalore. She humbly
     it as it comes and not worry about them,” she says.            started her career as a clerk with the Bank of India.
                                                                    Narayanan joined SEBI in the year 1991 and now, 20
     She presides over the Corporation Finance Department           years later, has garnered extensive experience during her
     and the Division of Foreign Institutional Investors (FIIs)     senior positions in the divisions of primary market,
     and Custodians in the Investment Management Depart-            takeover, foreign institutional investors, investigation
     ment. The Corporation Finance Department mainly looks          and market intermediaries department.
     into matters relating to issuance and listing of securities,
     corporate governance and accounting/auditing standards,        She has also been a member of various committees of the
     corporate restructuring through takeovers/buy backs and        Government of India, the Reserve Bank of India, the
     delisting. The Investment Management Department                Institute of Chartered Accountants of India and the
     deals with the registration and regulation of mutual           International Organization of Securities Commissions
     funds, venture capital funds and foreign venture capital       (IOSCO) Working Group on Risk-based Inspection

48
     Beyond Market 14th Jun ’11                                                                              It’s simplified...
Methodologies. She has also been a part of the RBI             listed companies have to inform each stock exchange
Committee on Conflict of Interest, the High Powered            separately and are on the lookout for a solution to these
Expert Committee of the government on making                   multiple reporting obligations. Narayanan said, “We
Mumbai a ‘Regional Financial Centre’ and the GOI               have already called for a tender to set up a unified
Committee to review the ADR, GDR and FCCB policies.            platform. Once this comes through, listed companies
                                                               would not be required to file information in both the
Narayanan was elected as one of the seven At-Large             stock exchanges. Today it is to two (exchanges), tomor-
members of the 2010 Steering Committee of XBRL                 row it could be two, three or many more.”
International Inc. The At-Large members are persons
who are greatly influential in the field of ‘extensible        CORPORATE GOVERNANCE NORMS
business reporting language’ (XBRL) development and            SEBI has proposed stringent corporate governance
adoption. She has been instrumental in promoting XBRL          norms for listed companies and wants no regulatory
in the Indian financial markets; the evidence of which         overlap in this field. Narayanan is of the view that the
lies in SEBI setting up a XBRL-enabled platform for            market regulator should be designated as the singular
corporate reporting, advocating ICAI to get recognition        agency to oversee the compliance of corporate gover-
as XBRL India provisional jurisdiction and pushing the         nance by listed companies.
development of official departments.
                                                               “We have requested MCA (Ministry of Corporate
She said, “SEBI would be making XBRL mandatory in              Affairs) to broaden the scope of section 55 of Companies
phases. To start with, we will ask mutual fund companies       Act 1956 that is now clause 22 of the new Companies
to adopt this reporting tool. The companies filing their       Bill pending before the Parliament. The new model of
financial statements with the board will be required to do     corporate governance will be designed in such a manner
so in an XBRL-compatible format. We have already               that it will suit the needs of Indian companies. The Stand-
mandated it for the top 100 companies in India.”               ing Committee on finance has also sought more stringent
                                                               rules, than in the present act that governs companies,”
IPO ISSUES                                                     Narayanan said.
Investors have suffered massive losses due to the deplor-
able performance of initial public offers in the last finan-   SEBI and MCA have also formed an inter-regulatory
cial year. Almost 70% of the 51 IPO listings had fallen        committee for better coordination to check compliance of
below their offer price. The estimated wealth erosion for      norms by India Inc and Narayanan will be leading the
investors in these issues was just above `3,600 crore,         panel from SEBI. “The body will interpret laws in a clear
excluding the gains from the Coal India issue.                 way and bridge the existing gaps,” Narayanan said. She
                                                               said that SEBI was working on designing an integrated
As Narayanan manages the listing and issuance of securi-       platform that will facilitate companies to file their finan-
ties, she has repeatedly voiced her concern over the           cial reports on just one platform.
unrealistic price bands of several IPOs that the merchant
bankers come up with. Cautioning them on the unreason-         LIFE OUTSIDE WORK
able price band, she said “What is the investment banker       Narayanan has been acknowledged as one of the top 25
there for? He needs to advise promoters to leave some-         influential women in Indian Business by one of India’s
thing on the table. Some thoughts need to come out from        top-selling business magazines as well as one of the top
within (the industry).This is more like self-regulation.”      50 powerful women by a leading Indian business daily.

On the predicament of control over the end use of IPO          Regardless of her enviable position at the highest rung of
money, Narayanan said that it is entirely in the domain of     the ladder, she is also devoted to her family and cooks for
the Ministry of Corporate Affairs as SEBI only scruti-         them every day. Narayanan has been actively involved in
nizes disclosures by the companies. “We pitch in with          all aspects of her son’s education, from schooling to his
required details about various listed companies to             engineering course in the US. This is how she manages to
support the MCA’s early warning system, a programme            remain close to her roots.
which closely monitors market movement of compa-
nies,” she said.                                               Parallel to her professional and family life, she also sets
                                                               aside time for indulging in her passions; music and
MULTIPLE REPORTING MATTERS                                     reading. Narayanan hopes to learn how to play a musical
SEBI plans to set up a new system of reporting price-          instrument some day. She has also shown interest in
sensitive information wherein the listed companies need        bhajan and satsang programmes in the past several
to inform only SEBI, which will then broadcast this            years. Narayanan says, “Apart from peace of mind, it
information electronically to stock exchanges. Currently,      helps me to understand life betteR.”


Beyond Market 14th Jun ’11                                                                                It’s simplified...   49
     Noted for following the philosophy
     of value investing and for his
     personal frugality despite his
     immense wealth, American investor,
     philosopher and philanthropist,
     Warren Bu ett’s principles can
     surely change the fortunes of people



     WORDS FROM
        THE WISE
                                      W
                                                    hen we talk of great investors across the globe, there is one name that
                                                    towers above all else. He is none other than Warren Edward Buffett.
                                                    He is called by different names like ‘The Oracle of Omaha’, ‘The
                                                    Sage’, or simply the most influential and successful investing mind
                                      the world has ever seen.

                                      Some of the things that make Buffett a living legend are personal wealth worth
                                      billions of dollars, helping his clients and shareholders make millions along with
                                      being ranked the richest person in the world in 2008 and the third richest person in
                                      the world in 2011. Besides, he has set an example in clean and transparent corporate
                                      governance in front of the world. Yet, he is humble and down-to-earth despite the
                                      royalty and fame he has garnered.

                                      Of course, these are great achievements in their own rights, but are these the only
                                      things that make Buffett a great investor? No. It is not the money that makes him
                                      great. In fact, it is what he has chosen to do with this money that places him a cut
                                      above the rest.

                                      Amassing a huge fortune and becoming a billionaire is not a measure of one’s
                                      success. The money utilized for the welfare and betterment of the underprivileged
                                      sections of the society and humanity on the whole is what differentiates a philanthro

50
         Beyond Market 14th Jun ’11                                                                       It’s simplified...
pist from a wealthy person. Buffett exemplifies the truth       words, he says investors must look for a few select stocks
that wealth accumulation should only serve as a means to        that are likely to yield above-average returns in the long
this end and should not be the ultimate goal of life, better    run and then divert most of their allocation towards these
than anyone else.                                               stocks, buy in large quantities and then hold on to it with
                                                                a 5 to 10-year horizon without focussing much on the
Buffett has already donated millions of dollars to charity.     short-term market movements.
While most of our industrialists and billionaires would
cringe at the idea of giving away even 1% of their wealth,      The genius of Warren Buffett is evident from the fact that
Buffett has pledged to donate more than 99% of his              even though he has not written a single book on investing
wealth to charity, most notably via the Gates Foundation        during his entire career, the moment you enter any
(founded by Bill Gates and Melinda Gates) and the               bookstore, majority of books on investing are either
remaining to various other charities.                           about Warren Buffett or have a mention of his works in
                                                                some form or the other.
Imagine if all the able people of this country decided to
donate even 1% of their wealth to charity, poverty can be       When you are great, you don’t need to brag, the world is
eradicated in a day. It is this aspect of Buffett’s life that   already singing praises of you. It is almost impossible to
we should try to emulate and put in practice. But first, we     do justice to all the investing principles and tenets of
have to learn to amass great fortunes just like him so that     Buffett in one article but let us just list out some of the
we too can serve humanity on a much grander scale and           doctrines briefly to serve as a guideline for both experi-
actually hope to make a difference.                             enced and novice investors.

Warren Buffett is greatly influenced by legendary inves-        1. Be fearful when others are greedy and be greedy
tor Benjamin Graham and his concepts of value invest-           when others are fearful: In other words, buy when
ing, that is, identifying stocks that are undervalued, in       people are selling and sell when people are buying.
other words, trading for less than a stock’s intrinsic
value. But Buffett takes this concept a notch higher.           2. If you don’t understand a business, don’t buy its
Buffett believes in buying businesses and not stocks,           stock: Find out the industries which you are more famil-
since he strongly believes that stocks are just not pieces      iar and comfortable with and then look for strong compa-
of paper, rather a part ownership in a business. So when        nies within that industry instead of venturing into the
you are investing, think like a prospective owner.              unknown and then shooting in the dark.

Buying good businesses below their intrinsic value              3. Invest with a long-term horizon: Buffett clearly
allows investors to have enough safety nets in case of          states that if you are not willing to own a stock for 10
unforeseen events or errors in assumptions. Buffett             years, do not even think of owning it for 10 minutes.
computes the intrinsic value of the company and                 Patience is the key to a successful and long-lasting career
compares it with the current market capitalization of the       in the stock markets.
company. If the current market capitalization of the
company is lower or may be about 25% lower than its             4. Don’t listen to others: Avoid trading and investing
intrinsic value, Buffett terms it as one that has value.        based on recommendations and tips from others. Do your
                                                                own research, invest independently, learn from your own
Buffett’s main checklist before he ventures out to buy          mistakes and keep on refining your technique.
any business:
1. The company should be in a business that he under-           5. Be a fundamental investor: Evaluate the strength of
stands.                                                         a business based on parameters such as profit and loss,
2. The company should have a consistent earnings                balance sheets, debt, cash flow, sales, etc before invest-
history.                                                        ing in them.
3. The company should have good long-term prospects.
4. The company should give a decent return on equity            6. Avoid investing based on charts: Technical charts
(ROE)                                                           plotted on the basis of historic volume and price action
5 The company should have low debt.                             should be avoided by investors while making long-term
6. The company’s management should be honest and                investment decisions.
competent.
7. The company should be available at an attractive             7. Look for companies that are in the same business
price.                                                          for more than a decade: Companies that do redundant
                                                                and boring things are better investing candidates accord-
Warren Buffett calls himself a focused investor. In other       ing to Buffett because, over the years, these companies

Beyond Market 14th Jun ’11                                                                                It’s simplified...   51
        have learnt the tricks of their trade and become better at   organization is only as good as the person running it. The
        what they do. Also, they are less likely to commit any       management should be focussed towards shareholder
        serious blunders since they have learned from the            welfare. It should be honest and transparent in its
        mistakes of their past.                                      accounting practices and should be forthright in their
                                                                     communication with their shareholders. Buffett puts
        8. The Diversification Theory is highly overrated.           premium on extraordinary management. He looks for
        Don’t be misled by it: The common perception that            leaders, not followers. Importantly, is the management
        over-diversification helps reduce risk is not always true.   wise when it comes to reinvesting the profits of the
        In fact, more the number of stocks in a portfolio, the       company or returning profits to shareholders in the form
        harder it becomes to keep track of the stocks and make       of dividends? It is important to distinguish between the
        necessary changes in the portfolio as and when required.     management that is greedy and that which tries to
        Instead concentrate on few (5 to 10) good stocks with        maximize its own wealth and rewards its shareholders.
        strong fundamentals and good management, available at
        an attractive valuation and buy in huge quantities.          1.    Don’t be afraid of crashes: A downturn in the
                                                                     market is not always a bad thing and should not be
        9. Do not be a compulsive trader: Avoid excessive            frowned upon. Instead, it should be viewed as an oppor-
        buying and selling in the markets. Frequent trading          tunity to buy stocks of your liking, which in all likeli-
        causes your brokerage and taxes to rise greatly thereby      hood, are available at a discount during a fall. If you have
        reducing your overall returns. Frequent trading just for     an existing portfolio of strong stocks, such falls can help
        the sake of trading without any real opportunity present-    you accumulate more stocks at a much lower price
        ing itself is most likely to result in losses.               thereby reducing your average acquisition cost.

        1. Ignore the ticker: Once you have initiated a buy          OTHER KEY LEARNINGS
        with a long-term perspective, stop checking price
        fluctuations on a daily, weekly or even a monthly basis.     Buffett believes that the best way to outperform the
        These daily price fluctuations can not only cloud your       market in the long term is to avoid trading in stocks. He
        judgment and cause you to act irrationally, but also throw   feels investors should avoid any sort of leveraging while
        you off track from the initial plan.                         investing in equities as it could be a double-edged sword.
                                                                     He advises investors to stay away from derivatives,
        1. Check the credibility of the management: An               which he calls instruments of mass destruction.

     STARTING YOUNG
       Buffett was born on 3rd Aug ’30. In fact, from the days of his childhood, he developed keen interest in making and
       saving money. He used to sell chewing gum, Coca-Cola and weekly magazines. During his schooling, he carried out
       several successful money-making ideas.

       While he was little over 11, he bought three shares of Cities Service Preferred for himself and while in high school, he
       invested in a business owned by his father. He filed his income tax return at the age of 14. According to one estimate,
       by the time he finished college, Buffett had accumulated more than $90,000 in savings (measured in 2009 dollars).

       Since his childhood, Buffett was very fascinated by investing and stocks. Buffett graduated from Columbia and wanted
       to work on Wall Street. However, both Ben Graham and his father advised him against doing so. In fact, Buffett offered
       to work for Graham without any fee or salary, but Graham refused. Later, Buffett got the opportunity to work with him
       in 1954 and he acknowledged the privilege to work with Graham. Later, Graham retired and Buffett started a limited
       partnership in Omaha, using capital contributed by family and friends. The partnership was a great success with invest-
       ments compounding at more than 23% annually. But that was not all; Buffett was looking to do even bigger.

       Through the partnership, Buffett bought an interest in Berkshire Hathaway in 1965, which was a financially distressed
       textile company. He paid around $14 per share, whereas the company had a working capital of $19 per share apart from
       fixed assets. Around this time, Buffett also came across and developed friendship with Charles Munger, who eventually
       joined Berkshire as its Vice-Chairman.

       Berkshire gave a good start to realize his potential. Through the company, Buffett built the insurance business and
       played a larger role in investing in stocks and buying companies. By the end of 1979, share prices of Berkshire rose to
       $1,310. And the net worth of Buffett reached $620 million, which also placed him in Forbes 400 for the first time.

52
        Beyond Market 14th Jun ’11                                                                              It’s simplified...
Derivatives are complex products designed to hedge             CONFIDENCE AND CONVICTION
against risks, but are rarely used for that purpose and
main street traders use them for speculation or to make        Successful investors like Buffett have a very high level
quick money. In fact, the global financial crisis in 2008      of confidence and conviction. Very few people display
was stoked by the use of derivatives in equities as well as    these qualities in what they do. It was the result of this
other asset classes like commodities.                          confidence and conviction that one of the greatest inves-
                                                               tors history has produced, George Soros, was able to
He also says ignore macro factors and focus on micro           make a clean profit of $2 billion on a single trade against
factors. According to him, it is not possible to predict the   the British pound in expectations of its large devaluation
economic growth, interest rates, inflation and to read         in early 1990s.
many other leading economic indicators. He simply
focuses on businesses and their dynamics.                      The level of faith and certainty allowed these legends to
                                                               put a large sum of money into the investment which
COMPANIES TO AVOID                                             ultimately led to huge gains. In investing, even if you are
                                                               able to identify an opportunity, it will not lead you
Buffet has always avoided investing in companies that          anywhere if you do not have enough conviction in your
require a lot of research. He avoided technology and           decision. It also holds true when it comes to avoiding
pharmaceutical companies, which is also the reason why         certain decisions and mistakes.
Buffett was able to stay away from the tech bubble and
its crash in the year 2000.                                    Warren Buffet avoided technology stocks due to which
                                                               he was able to survive the tech burst. He was never
He also stays away from commodities and companies              convinced about the sustainability of their businesses and
that depend excessively on a particular commodity. For         valuations apart from the fact that investors knew very
instance, the airline industry - due to the simple reason      little about their business models.
that they exhibit volatile earnings and less predictability
given the dependency on the outlook of a particular            DO WHAT YOU ENJOY DOING
commodity, that is crude oil.
                                                               A famous saying goes thus: Do what you love and every-
Buffett also avoids businesses which have a very long          thing else will follow. Not just Warren Buffett but most
inventory cycle. He stays away from businesses which           successful investors do what they love to do or what they
require huge capital expenditure year after year for           enjoy doing. Buffett has tremendous passion about
additional growth owing to the simple reason that these        investing. He is so passionate about his job that he
businesses eat a lot of cash, which otherwise could have       continuously thinks, reads and talks about stocks, compa-
been returned to the shareholders.                             nies, portfolios, etc. His ability to stay in touch with the
                                                               subject has made him different from the rest.
BEYOND THEORIES
                                                               LEARN FROM MISTAKES
There is another school of thought which states that
simply knowing more about Buffett or reading his books         Legends too make mistakes, but what sets them apart is
and learning his style of investing just do not work. Even     the fact that unlike ordinary people, most of them accept
if you have all the qualities and additional relevant          their mistakes, analyze them and learn from them. The
qualifications, it is very rare to compound money in           process of learning from mistakes allows legends to
excess of 20% to 25% annually over a period of time.           avoid them.

ABILITY TO STAND APART                                         HIGH LEVEL OF COMMON SENSE - A MUST

What makes him different is his ability to do what he          Common sense or the ability to think in a simple manner
preaches. Thinking differently does not pay if it is not       about everything that successful investors do is very rare.
implemented. The ability to stand apart and do things          Many investors, including Warren Buffett, do not need
differently from the crowd cannot be taught in books or        computers to tell them which stock to buy and what to
in MBA colleges. During the 2008-09 market crash,              avoid. For them, investing is simple and is derived from
banks collapsed and their prices fell to their historical      common sense.
lows. No one had the courage to buy those distressed
assets of the insolvent banks. Buffett, however, bought        Hence, following the simple tenets of investing laid
stake in some of the distressed banks despite criticism        down by a maverick investor like Warren Buffet will
that followed the event, calling them junk assets.             surely bring you good fortune in the days to comE.

Beyond Market 14th Jun ’11                                                                                It’s simplified...   53
             DATE: 7th May, 2011
     VENUE: Le Méridien Hotel, New Delhi




54
       Beyond Market 14th Jun ’11   It’s simplified...
Investor Education Takes                                                  The Beyond Market camp endeavours to impart


      On A New Meaning
                                                                          knowledge that will help market participants to
                                                                          take informed investment decisions

 W    ith the aim of enabling market participants to gain the understanding, skills and knowledge necessary to become
 informed investors, Nirmal Bang Securities Pvt Ltd in association with ET Now, organized the first-of-its-kind investor
 education camp ‘Beyond Market’ at Le Méridien Hotel in New Delhi on 7th May this year.

 The event began with the introduction of the speakers Ajay Bagga, Managing Director and Head of Private Wealth Manage-
 ment, Deutsche Bank AG; Ashwani Gujral, Technical Analyst and Mehraboon Irani, Principal and Head - Private Client
 Group (PCG), Nirmal Bang Securities Pvt Ltd by ET Now’s anchors Devina Menon and Niraj Shah.

 The duo shed light on the current economic scenario before asking Ajay
 Bagga, the first speaker of the day to take the proceedings further. Bagga
 began by speaking about the macroeconomic factors across the world,
 including the overheating Chinese economy, oil crisis owing to the uprising
 in the Middle-East region, the sovereign debt crisis in the Euro zone and the
 aftereffects of the natural calamity that hit Japan, impacting other global
 economies.

 Bagga said, “The European crisis is a big risk to the Indian markets. The
 bailout package is already one trillion euros. Yet, it seems inadequate. If an
 economy as large as Spain gets into trouble, then the package would
 definitely be insufficient. Also, the exposure of international banks to these
 bonds is another cause of concern,” said Bagga.

 He said since Greece was considering of opting out of the euro zone, inves-
 tors need to think of other countries like Ireland, Portugal and larger nations
 like Spain, France and UK. Even though UK is not in the Euro zone, the            Ajay Bagga
 levels of debt in the UK are significantly high.                                  Managing Director & Head-Private
                                                                                   Wealth Management at Deutsche Bank
 The uprisings in the Arab world is another factor of concern. There has also      AG
 been a shift to safer investment havens. Also, the question before us is how      As the head of Private Wealth Management at
 will Japan cope with the near-zero interest rate coupled with the huge deficit,   Deutsche Bank, he is responsible for Deutsche Bank’s
 following the colossal damage caused by the tsunami to the island nation.         local private wealth management business that focuses
                                                                                   on serving the wealth management needs of high net
                                                                                   worth and entrepreneurial clients. He has 19 years of
 Speaking of China, he discussed how its economic dominance will pan out.          experience in the financial services sector and was
 A lot of goods are made in China. In fact, of the many toys, shoes, computers,    previously serving as the chief executive officer of
                                                                                   Lotus India Asset Management. He has also served
 cookware, radios, textiles, glassware, furniture and sports goods that are sold   with Citibank India, GE Capital-SBI Cards, Kotak
 in the US are made in China. This gives China a competitive edge over other       Mahindra Asset Management and Kothari Pioneer
                                                                                   Asset Management in various capacities.
 nations. Further, China also has the infrastructure needed to take care of huge
 labour costs.

 The Korean government has sought permission from China to invest in yuan-denominated bonds. In the late 1800s, the
 reserve currency of the world was the British Pound, which later shifted to the US dollar. Today 64% of the world’s wealth
 is in US dollars, 25% in euros and smaller amounts in other currencies like pounds, yen, swiss francs, among others. The
 Chinese currency is now gradually moving to become a reserve currency.

 Futuristically speaking, Bagga said he expected the world to move eastwards. “India and China will not only be the most
 populous countries but also among the prosperous nations too, contributing more than 50% to the GDP, over the next 50
 years,” he elaborated.

 China will move from an export-driven economy to a consumer-driven one. But what needs to be considered is how the new

    Beyond Market 14th Jun ’11                                                                                    It’s simplified...       55
     might of China will impact the world. Will it be playing a role which is congenial globally or will it be in conflict with the
     US. It has been noticed that China is slowly reducing its holdings of US bonds and shifting to gold.

     Speaking of India, Bagga said political uncertainty in the country will impact growth. All the past three governments were
     coalitions. Power has shifted to the states. The electorate is clearly voting for the state government, which is delivering on
     development. Corruption is rampant. From the mining scam, to real estate and land scams, to the telecom scam, all have kept
     the government on its toes. With increased activism, India today is more like the US of the early 1900s when corruption was
     widespread, infrastructure was low and the US was still an emerging market.

     However, India’s oil bill could derail its calculations. “Our oil bill last year was around $104 billion out of $240-$250 billion
     of imports that we made. If this oil bill goes up, it can derail our calculations. It will also have an impact on our fiscal deficit,”
     said Bagga.

     Retail oil prices contain around 40% to 50% of central and state government taxes. In the US, the price is around `48/litre.
     This means that we in India pay 50% more than an economy which, in purchasing power terms, is five times more expensive.
     That is the kind of cost put on the industry and still there is a huge subsidy burden.

     Moreover, factors like demographics, infrastructure unlocking, service growth, the huge amount of money flowing to rural
     India through schemes like NREGS and other schemes, the minimum support price going up, will surely have an impact on
     growth.

     Talking about commodities, Bagga said, “Many commodities did well, especially gold. But huge sell-off was seen in the
     commodity space following the assassination of Osama bin Laden by the US. Even commodity exchanges were forced to
     increase their margins.”

     As an asset class, gold outperformed all other asset classes, decade by
     decade, till the 1980s. After that, equities took over and continues to remain
     the top performing asset class compared to fixed income and real estate.
     Although there has been a long bear market for the last few years, equities
     has still outperformed. “If one wants to be a part of the Indian growth story
     and beat inflation too, then he must participate in equities and remain diversi-
     fied,” emphasized Bagga.

     Looking ahead, he said India will grow at around 8% this fiscal year.
     However, the first half of this fiscal looks a bit tough. He feels that inflation
     will remain high in the 7.5% to 8% range. The yield on long-term papers will
     rise. He suggested that investors must participate in equities.

     He also said that in the next 2-3 months, investors can expect some turbu-
     lence in the markets, which may move sideways or downwards due to the
                                                                                               Ashwani Gujral
     global turmoil and interest rate hike.
                                                                                               Technical Analyst
     “Although our economy has grown, there is a chance that a slowdown will be                Ashwani Gujral is a Technical Analyst, Author,
     seen. However, the foreign influx of capital could take away some of this                 Commentator and Trainer who follows both
                                                                                               Indian and the US markets. He is a frequent
     downside,” he assured.                                                                    contributor to various US specialist trading
                                                                                               magazines like Stocks & Commodities, Futures,
     After Bagga, Ashwani Gujral took over the discussion with ‘Guerrilla                      Stocks, Futures and Options and Active Trader.
                                                                                               He is on the exclusive panel of ET Now.
     Trading Tactics’. He believes that this tactic can benefit traders even if                Ashwani Gujral’s academic background spans
     markets are highly volatile and keep fluctuating. This strategy can be used               engineering and finance. He is BE (Electronics
     even if the markets are moving sideways.                                                  and Communications) from MIT Manipal and
                                                                                               MBA (Finance) from Georgetown University,
                                                                                               Washington DC, USA. He is also the author of
     Gujral compared guerrillas with Maoists. He said that the Maoists win                     two books: How to Make Money Trading
     because of guerrilla tactics and they are the ones who decide when to strike.             Derivatives : An Insider's Guide and How to
                                                                                               Make Money Trading with Charts.
     By using guerrilla tactics, people can take advantage of the opportunity as
56
        Beyond Market 14th Jun ’11                                                                                        It’s simplified...
and when it arises.

This technique has a very high accuracy rate. By using this technique, market participants will have something to trade
almost every day. A guerrilla trader will watch others lose, while he himself may be on a winning spree.

Broadly speaking, there are four styles of trading:

1.   Medium-term trading that may last anywhere from several weeks to several months
2.   Swing trading wherein one can hold on to their stocks for two to five days
3.   Guerrilla trading is a one to two-day type strategy
4.   And finally, intra-day trade

While medium-term trading and swing trading are wealth-producing methods, guerrilla trading and day trading are income-
producing methods, wherein one can generate an income within a day or two.

He said that in the market, it is better to be a bull or a bear but not a pig. “Trading does not involve looking for the lowest
PE, the best management or the best business. Company managements are like cheerleaders, always positive about their
companies. Trading, is about catching an idiot – someone who purchases after the index has rallied for a long period or a
person who sells when the market has gone down significantly. Markets are about trading human emotions of greed and
fear,” said Gujral.

Sharing his views on diversification, Gujral says, “Expecting one or a few stocks in a basket of stocks to perform is like
throwing 15 balls expecting one of them to hit the target, which indicates the lack of knowledge.”

“There are two groups of traders. One group consists of those who buy
expensive, while those from the other group sell cheap. Identifying these
participants in the market is possible by studying the charts. It may be
extremely easy to justify things after the facts are out in the open. Unfortu-
nately, this is what the media does. But in order to forecast the price move-
ment, one must look at the charts as they can discount the news even before
it is out,” said Gujral. He ended his talk with a slide show on how to trade in
the markets using bar charts.

The last speaker of the day, Mehraboon Irani, dwelt on how fundamentals
can be used to pick the right stocks and shared his views on investing to help
individuals create wealth. “A major problem is that people try to earn income
every passing day without realizing that more income is generated for the
stock brokers and for advisers and less for the investor. Wealth creation            Mehraboon Irani
happens when one selects a stock, studies the fundamentals and invests in it,”       Principal and Head - Private Client
he opined.                                                                           Group (PCG),
                                                                                     Nirmal Bang Securities Pvt Ltd
He focused on the common mistakes committed by investors. “One needs to
accept mistakes, learn from them, respect the market and be disciplined.             Mehraboon J Irani is the Principal and Head of
However, one error committed by individuals is that they do not ask if the           the Private Client Group at Nirmal Bang
                                                                                     Securities Pvt Ltd. Previously he was associated
stock price will increase in a bearish market. This reflects their fear that if a    with FCH Centrum Wealth Managers Ltd. He
stock is falling, it will continue to fall. Moreover, if the stock was at a peak,    has over 20 years experience in capital markets.
everyone wants to know how much will it rise. They are greedy when the               At Nirmal Bang, he works on increasing brand
                                                                                     visibility, improving client base, retaining and
stock is at its height and fearful when it is at its low.”                           improving business with the existing client base
                                                                                     as well as providing active advisory services. His
                                                                                     previous stints include FCH Centrum Wealth
He said markets have gone up since Apr ’11 mainly due to banking, auto, IT           Managers Ltd (3 yrs) as Senior Vice President –
and pharma sectors. Infra, construction, real estate, telecom and cement have        PMS, Darashaw & Company Ltd (4 yrs) as Vice
given zero or negative returns. Since the beginning of 2010, Sensex is up            President – Equities and Afternoon Despatch and
                                                                                     Courier (12 yrs) as Business Editor.
3.7%, while the Nifty is up 4%. He cited names of companies from various
sectors that have performed positively and negatively. He said, “If one’s

Beyond Market 14th Jun ’11                                                                                    It’s simplified...          57
     portfolio contains underperformers, one should not blame the market.”

     He insisted that an investor’s portfolio should be a combination of 10% to 40% blue-chip stocks, 50% to 80% stocks of
     fundamentally strong companies, 0% to 10% in Futures & Options and 0% to 20% in steady stocks. Most importantly, a
     portfolio should be formulated considering an investor’s age and risk profile.

     According to Irani, every investor should have stocks like Sun Pharma, Colgate, HDFC Bank, Crisil, Bajaj Auto,Tata Motors
     and Infosys as part of his core portfolio.

     Investors should also pick stocks depending on the business of a company. Educomp, Cox & Kings, Mahindra Holidays,
     Jubilant Foodworks, etc are some of the examples of this kind. He also spoke of Dish TV, which he likes personally despite
     the losses that the company has been incurring since the past few quarters. Stocks like Dish TV can be considered irrespec-
     tive of the profits or losses they make as these companies keep on growing. Investors must also learn to be ‘pied pipers’ at
     times and not just follow the crowd, he advised. Also, stocks like Balmer Lawrie Investment, NIIT Tech, etc can be consid-
     ered for the steady dividends they offer.

     Interest rates, inflation and growth remain key concerns in the markets. Irani is of the opinion that government borrowings
     could exceed the projected figure. He feels that post Infosys and Reliance numbers, Indian markets could be a little de-rated.
     He said, India as an economy, cannot afford to have a consistently high growth rate. It is the job of the government and the
     bureaucrats to show a positive figure, he concluded and threw open the event to a round of questions and answers.



                                   The next camp in the series was held at Bhopal on 4th June.




58
          Beyond Market 14th Jun ’11                                                                            It’s simplified...
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