1991 - nirmal bangbeyondmarket.nirmalbang.com/issue69/download/magazine.pdf · 2012-07-18 · 1991...

For Pr ivate Circulat ion Volume 1 Issue 69 19th Jul ’12

19912012HISTORY MIRRORED?

Economists are of the opinion that the situation in 2012 is very similar to the one in 1991 but India is better placed now than it was two decades back

It’s simplified...Beyond Market 19th Jul ’12 3

DB Corner – Page 5

Pension Bill In The RedThe UPA has again deferred the Pension Bill due to the opposition by its ally Trinamool Congress leader Mamata Banerjee – Page 6

A Healthy GainAlthough the new changes proposed by IRDA in health insurance are in the interest of policy holders, companies are fuming nonetheless as it could hurt their profitability – Page 9

History Mirrored?Economists are of the opinion that the situation in 2012 is very similar to the one in 1991 but India is better placed now than it was two decades back – Page 12

A Forward-Thinking PlanTRAI’s proposals are hoped to bring about a comprehensive and measurable growth in the entire cable industry – Page 16

Paused Over DelaysRegulatory clearances and problems pertaining to land acquisition have delayed a numbers of infrastructure projects in the country – Page 19

TaintedFollowing the CAG report on irregularities in allocation of coal blocks to private players, the sector seems to have taken a beating – Page 22

Hunting For BargainsBargain hunting is a technique to pick stocks that are available at prices less than their actual worth – Page 24

LIC HFL: Resting On A Strong FoundationDomain knowledge and expertise apart from strong loan growth, improving NIMs and lower operating expenses places the company ahead of the competition - Page 27

Technical Outlook For The Fortnight – 3

Commodities Losing LustrePrecious metals, non-ferrous metals and the energy complex in the Indian commodity exchange have witnessed a volatile session since the start of 2012 – Page 34

One Size Fits AllAsset allocation fund allows spreading of fund holdings across a variety of asset classes to help smoothen the ups and downs of the market - Page 38

Myths BustedLike all spheres of life, myths abound even in the stock markets and must be dispelled to make right investment decisions and benefit from the same – Page 40

Volume 1 Issue: 69, 19th Jul ’12

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

Marketing & Operations:Divya Bhurat, Afsana Tamboli

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Research Team: Sunil Jain, Kunal Shah, Silky JainDipesh Mehta, Anand Shendge, Manav Chopra, Vikas Salunkhe

19912012

It’s simplified...Beyond Market 19th Jul ’124

The year 1991 went in the annals of Indian history as the year with grave economic and currency crises. This financial exigency resulted in the introduction of life-changing reforms and withdrawal of a number of restrictions, which propelled India’s growth and brought it at par with other emerging economies like China and Russia, among others.

Cut to the year 2012 and we are once again in the midst of an economic turmoil, which has forced many experts to argue that India may face tough times even now much like the year 1991. Others insist that the situation may be similar but the country is better placed now in most areas, which has reduced the risk of a major catastrophe at the national level.

However, all’s not well with India, despite tall claims otherwise. The problem lies in the fact that India is now an interdependent global economy and external factors impact the country as much as internal factors do. With a number of developed nations witnessing deteriorating economic growth, coupled with high debt, India could face tough times at the macro level in addition to the problems it faces within the country.

The cover story in the latest issue of the magazine attempts to understand the deep-rootedness of the economic problem by compar-ing the period 1991 with 2012 and figure out whether the situation is going to worsen or whether the necessary steps are being undertaken to arrest the economic crisis.

Apart from this topic, there are interesting articles on how the Pension Bill was deferred to a later date due to political pressure, the proposed changes in the guidelines of health insurance, the numerous problems faced by the coal sector and the proposals put forward by the Telecom Regulatory Authority of India (TRAI) to streamline the cable industry. There is also an article on bargain hunting – a tried and tested investment technique, which helps pick companies that are available at prices lesser than their actual worth in the stock markets.

The Beyond Commodities section dwells on the volatility in the commodities market and the reasons why this asset class is in disfavor with market participants on the whole, despite a dream run it witnessed for a long time in the past. Finally, there is an article on the misconceptions that market participants harbour in their minds about stocks as well as the markets, in the Beyond Learning section. This is a must-read for them as it will help them to take wise investment decisions.

Tushita NigamEditor

ACTION REPLAY?


Disclaimer 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 decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Nifty: 5,227.25Sensex: 17,213.70

(As on 13th Jul ’12)

n the previous fortnight, European Union leaders reached an agreement to infuse direct equity in Spanish

banks and purchase bonds of other countries at a two-day summit in Brussels in June end.

However, the impact of the decision on Spanish and Italian bond yields is yet to be seen and problems in the Euro zone continue to remain a challenge. Also, the growth in the US is witnessing moderation.

During this period, a few companies released their Q1 earnings results, which were in line with market expectations. However, the earnings result of IT bellwether Infosys was rather disappointing.

Also, the decline in crude oil prices and lower gold imports have helped reduce trade deficit in the month of June, which will help the rupee to appreciate. The rupee seems to have peaked out and it is likely to appreciate in the coming months.

I Low progress of monsoon continues to be a cause of worry and traders and investors are advised not to take any positions in the markets till there is clarity on the rainfall in the country. They should also watch out for the direction that the markets are likely to take after the first quarter results of India Inc are announced.

Investors are advised to buy on declines around the 5,100 level on the Nifty. The stocks that can be considered on declines are Wockhardt Ltd (LTP: `912.40), CCL Products (India) Ltd (LTP: ̀ 256.30), Persistent System Ltd (LTP: `390), Atul Ltd (LTP: `245), Cera Sanitaryware Ltd (LTP: `294.20), MindTree Ltd (LTP: `658.15), Hyderabad Industries Ltd (LTP: `399.60), Atlas Cycles (Haryana) Ltd (LTP: `407.65),

Dewan Housing Finance Corporation Ltd (LTP: `165.50) and ING Vysya Bank Ltd (LTP: `389.10).

In the coming fortnight, the street is expecting the Reserve Bank of India (RBI) to cut interest rates in the monetary policy review to be announced later this month. Since liquidity position has improved in the system, which is visible in the short-term lending rates, the likely rate cut will see the banking sector pass on the benefitS.

Investors are advisedto buy on declinesaround the 5,100 level on the Nifty.

mid the political drama that our countrymen are experiencing these days, the financial sector

witnessed yet another setback. The UPA government gave in to the pressure of its political allies and deferred the Pension Bill, yet again. This time on the opposition of

A

The UPA has again deferred the Pension Bill due to the opposition by its ally Trinamool Congress leader Mamata Banerjee

PensionBill InThe Red



on the government of India has been growing substantially. Take a look at some important statistics. From a mere 4% of their revenues that was spent on paying pensions in 1991, the amount has doubled to 8% currently!

In order to rectify this flawed system of paying pensions to government employees, an attempt was made in the year 2004 by the then Finance Minister Yashwant Sinha.

He introduced the New Pension Scheme where all government employees were expected to contribute a tenth of the salaries towards their retirement fund and the government would match the same amount. This was quite a radical move and was definitely better in its spirit than the previous one.

The New Pension Scheme still had some gaping holes. Firstly it covered only government servants that left more than 90% of the Indian citizens outside its ambit.

Secondly, the cost of managing this corpus was still high. This is because the entire fund was providing a low rate of return as it was totally being invested in government bonds.

AN ATTEMPT TO RECTIFY ISSUES

What the Pension Bill proposed to do was rectify these issues. Firstly it proposed that citizens be included in the ambit of the NPS. However, there would be no matching amount that would be paid by the government.

There is another downside to the NPS, which does not make it too attractive for non-government employees. The returns of the NPS are taxable as compared to the PPF, which is tax-free.

The second and the most important modification to the NPS that the Pension Bill proposed was that the beneficiary of the NPS be given the choice to pick the fund manager of his corpus. Currently, the entire corpus of pension funds is being managed by the State Bank of India alone.

It was perceived that with private and foreign entities being given a chance to register themselves as fund managers of pension funds, a beneficiary of the fund would have the opportunity to garner better returns over time.

It is needless to say that foreign investors were indeed waiting for this Pension Bill to be passed as they would then get an opportunity to tap this huge market which lies untapped at the moment.

The premise of letting foreign players enter the game was that a beneficiary would get the chance to take higher risks in order to get better returns.

Unlike the current structure where 85% of the corpus has to be mandatorily invested in government guaranteed bonds, this modification would allow a beneficiary to invest a higher amount in equities.

For instance, pension funds in the UK can invest as much as 60% of the corpus in shares.

However, it must also be mentioned here that during the global recession of 2008-09, pensioners in developed countries lost a huge share of their payouts due to this very provision.

BASELESS ALLEGATIONS There are two main reasons why this Bill is being opposed. Firstly, the Bill has no provision, which guarantees returns on investments. Secondly and more importantly the TMC is of the

Trinamool Congress (TMC) supremo Mamata Banerjee.

Despite being discussed threadbare in numerous forums and being on the anvil for nearly a decade, TMC refused to see the benefits of the Pension Bill. Evidently, the UPA government too has turned a blind eye to financial reforms.

TMC OBJECTS, UPA COMPLIES

The Trinamool Congress’s main contention is that pension funds, which are meant to support senior citizens in their golden years are being subjected to market risks as per the proposition of the Bill.

Raising the hackles on behalf of the common man, Banerjee at her vociferous best, declared that the Bill was against the interests of the ‘aam aadmi’ as it was only aimed at facilitating the entry of foreign investors into the country.

This is an allegation that is unfounded and against the interest of the progress of financial reforms.

Experts in the pension sector say that the Bill should be passed without any further delay because it is one of the major factors that is responsible for the worsening fiscal situation in the country. Here’s why:

THE CROSS THAT THE GOVERNMENT BEARS

Till the year 2003 employees were not required to contribute towards their own pension. It was the ex-chequer that paid all government employees pension from their own kitty.

The previous governments used the services of a government employee and then passed on the pension liability to the subsequent governments. As a result, the burden


opinion that the Pension Bill paves the way for “speculation”.

Both these allegations seem pointless. Firstly, on the issue of guaranteed returns, it’s a case of wanting to have your cake and eat it too.

Government employees want to be given the opportunity to get better returns by investing a large portion of their retirement corpus in equities, but they also want the government to cover their back with a minimum guarantee of returns in case they incur a loss.

This is unfair on the government and more importantly the ‘aam aadmi’ to say the least! While the government employees may benefit, the burden of the losses will have to be borne by the government who will ultimately squeeze it out of the taxpayer’s hard-earned money.

Secondly, there is the issue of opening up the pension industry to a whole lot of risks. It is important to note that the Pension Bill merely suggests an alternative option for beneficiaries.

Only if the beneficiary is willing to take higher risks, can he choose to change his management agency. Also, the investments will be made only after the employee has given instructions to do so.

To conclude, it may be said that the objections to the Pension Bill are rather unfounded. Despite certain loopholes, this Bill would have paved the way for a system where we would witness better management of assets, a transparent method of selecting fund managers as well as a better system of disclosures.

Given the fact that there would be competition among the designated players, it would have made for better performance, as welL.

The New Pension Scheme

The New Pension Scheme or the NPS is a pension scheme based on defined benefits. This scheme is open to all Indian citizens within the age of 18-55 years.

According to the norms of this scheme, an individual is open to contribute a fixed sum of money on a monthly basis that will be invested according to his/her preferences. The individual can withdraw the money after he/she reaches the age of 60.

What Options Are Offered In NPS

There are two options of investing money in NPS: Tier I account and Tier II account. The essential differences between the two is how each allows you to withdraw your money before retirement.

In the Tier I account there are quite a few restrictions. Till you reach the age of 60, 80% of the funds you invest must mandatorily be kept in an annuity scheme of the IRDA, the remaining 20% you can withdraw from, before attaining retirement age.

Even after you reach the age of 60, 40% has to be invested in an annuity of IRDA. You can choose to either withdraw the remaining funds in a lump sum or in a phased manner.

In the Tier II account, there are no such restrictions and you are free to withdraw from your pool of retirement savings at any time of your choice. You will, however, need to maintain a minimum balance of `2,000 in this account. The prerequisite for this type of account is to have a Tier I account.

Asset Allocation Process

There are two options here. You can either choose the active choice or the

auto choice option. In the auto choice, your fund manager decides which among the different categories is the best to invest your money in.

You can choose between government bonds (ultra safe), fixed income securities other than government bonds (safe) and equity products that are based on the benchmark indices (medium risk). Note that investment in equities is, however, restricted to 50% of the total portfolio.

In the active choice option you can choose how much of your corpus will be invested in each class.

There are various pension fund managers and you have the option of selecting which fund manager will handle your money. This is both in case of active or auto choice.

Minimum Amount Needed To Invest In NPS

In order to open an NPS account (Tier I) you need to contribute at least `6,000 in a year and make at least four contributions yearly. The minimum contribution can be as less as `500. Where Can One Open An NPS Account

Seventeen banks in the country have been authorized to sell NPS. These banks are SBI and its associate banks, Union Bank of India, Axis Bank, ICICI Bank, Citibank, Kotak Mahindra Bank, Allahabad Bank, Oriental Bank of Commerce, IDBI and South Indian Bank.

Also, LIC, UTI Asset Management, Reliance Capital and IL&FS have been authorized to sell NPS. These are known as points of presence (PoP). You can choose to shift your account from one PoP to the other in case you are not satisfied.


AHEALTHY

GAINAlthough the new changes proposed by IRDA in health insurance are in the interest of the poli-cyholders, compa-nies are fuming nonetheless as it could hurt their

pro�tability

ith the stressful modern day lives that we lead today, health is increasingly

becoming a cause of concern.

To avoid hassles of huge medical expenses in case of an unforeseen illness, having an adequate health insurance cover is recommended time

W and again by financial planners. But if past experiences are anything to go by, health insurance policy holders have had to run from pillar to post at the time of settlement of claims. Settlement would take forever and even when you did receive a settlement cheque, only a part of your medical expenses used to be covered

without any plausible explanation as to why only a certain part of your claims was covered and the other part was rejected.

In order to address these longstanding grouses that insurers had against insurance companies, the insurance regulatory authority of India, Insurance Regulatory and


the end of third party administrators, which used to delay the payment process greatly. Besides, it was impossible for a customer to find out whether the entire amount that had been sanctioned by the insurer had been passed on to the claimant or not. PROVIDE STANDARD DEFINITIONS

Currently there is a lot of ambiguity about the various illnesses that are critical and those that have been permanently excluded from the purview of health insurance policies.

In order to rectify this, the IRDA has suggested that all health insurance companies be provided with standard definitions of terms that need to be understood by customers before they make a prudent choice. This is an important change and is expected to go a long way in altering the way health insurance policies are sold in the country.

SPECIFY REASONS FOR CLAIM DENIAL

In case a health insurance company is rejecting a claim, it has to explain in writing the reasons why the claim is being rejected. This is as opposed to the current practice of rejecting claims on grounds that are utterly flimsy or worse still, rejecting claims without any explanation at all.

MAXIMUM BENEFITS FROM MULTIPLE POLICIES

Until now, if a claim was made on two policies, it used to be split between the two health insurers in the ratio of the sum that was insured.

The new regulations, however, propose that the claimant will get to choose between the two policies that he holds. This will be particularly beneficial for those who get an

insurance policy as part of their employee benefits and also take individual policies.

As long as they are in service of the company that is providing such benefits, they can claim from that policy, but when the service period is over, they can make a claim from their individual policies.

CUMULATIVE (NO-CLAIM) BONUS TO BE STANDARDIZED

IRDA has proposed that insurers provide complete clarity about no claim of bonus. In case a claim has not been made in a particular year, the no claim bonus will have to be rolled back at the rate at which it was offered or has to be made a part of the total sum insured after the premium has been charged to this additional cover.

JUSTIFICATION FOR INCREASE IN PREMIUM IF ANY

Customers will no longer be in for a nasty surprise when the time arrives for the renewal of their policies. IRDA has said that insurers can only hike premiums if they can justify it to the IRDA on the basis of the preceding years of claim experience (at least three years). They will also have to explain the rationale behind the hike in prices as well.

Insurers will also be expected to disclose the likely hikes in future premiums at the time when the policy is being issued.

Insurers, however, seem to be a little sceptical about the adherence to this norm. They say that it is rather impossible to disclose hikes in future premiums as it depends upon several factors such as the risk profile of the customer, the medical inflation and the change in the salary or income structure of the customer.

Development Authority of India (IRDA) is making an attempt to “clean up” the grey areas and present the Indian citizens with better health insurance policies.

Earlier this year, IRDA released new draft regulations for health insurance, which have currently been put up for public review. Here is a closer look at the main changes that have been proposed by IRDA. RENEWABLE FOR A LIFETIME

Henceforth, all insurance policies are proposed to be renewable for life. This means that senior citizens who are most likely to need health insurance in advancing years to take care of their medical expenses are not left out of the ambit of the health insurance policies.

A DEADLINE OF 30 DAYS TO CLAIM SETTLEMENT

Unlike the current scheme of things where claiming settlement can take up to as much as six months and can be very frustrating for the claimants to say the least, the new regulations propose that claims need to be settled within a time frame of a maximum of 30 days after all the required documents have been submitted.

If the claimant does not receive his claim within 30 days, he can question his insurer. Interestingly, this clause was present in the original draft of the health insurance regulations in India, but was never implemented by health insurance companies.

DIRECT PAYMENT TO HOSPITALS

IRDA has proposed that all payments be made directly to hospitals in order to make the payment process smooth and hassle free. So far, settlement- claiming cheques used to come from


For instance, if a customer is buying a policy at the age of 20, and lives till the ripe age of 90, it will be impossible to deduce the hikes in future premiums at the time he is purchasing the policy.

FIFTEEN DAYS FREE LOOK IN PERIOD

The most radical change that IRDA

suggests is the free 15 day look in period, wherein it provides an aspiring customer to keep the policy and study it for 15 days absolutely free of cost. If he is not convinced about the benefits of the policy, he will have the liberty to return the policy to the insurer after a period of 15 days.

While most of these new regulations

seem lucrative from the customer’s point of view , insurance companies do not seem to be overtly enthused.

If and when these regulations proposed by IRDA are implemented, they are likely to come at a higher price. Therefore, as the insurance industry takes baby steps to achieve transparency, it looks like it will be at the cost of the policyholderS.

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19912012HISTORY MIRRORED?

he year ‘1991’ and the word ‘liberalization’ are often spoken in the same breath. It always serves as

a benchmark when any kind of reform is undertaken in the Indian economy. Surely, that year was not just another

T year in the history of India.

For someone who has been there and seen that knows the significance of the year 1991 post which India stepped out of the socialist regime and embraced capitalism by opening

up to foreign direct investments. Two decades of gradual liberalizing and we as a nation are still enjoying the fruits of it. However, of late the edit pages of newspapers and speeches of economic experts have

Economists are of the opinion that the situation in 2012 is very similar to the one in 1991 but India is better placed now than it was two decades back


markets like the US and USSR led to exporting slowdown. These two factors distorted the balance of payment situation.

In fact, India was on the verge of defaulting on its debt and had only two weeks of foreign exchange reserves to meet its import obligations. At the same time there was no political stability.

This was the time India had to tap the International Monetary Fund (IMF), pledge its gold and take loans from other friendly countries like Japan and the US. This was followed by devaluation of the Indian rupee, which was complimented by unprecedented structural reforms.

The government took steps to improve the fiscal performance. It undertook the trade, industrial and public reform. Liberalizing foreign direct investment was another important part of India’s reforms.

Reforms in the financial sector, agriculture and infrastructure were also gradually undertaken. Eventually (over a period of two decades), all the macroeconomic indicators improved. THE YEAR 2012

The sub-prime crisis in the US in 2008 and the European sovereign debt crisis in 2011 set the backdrop for the current situation in our economy. The weakness in the West has impacted India at two levels.

One, exports to those destinations has dried up and capital flows have become volatile and short-term in nature. Local issues such as delays in decision making and political instability are also some of the self inflicted pains that India has thrust upon itself.

Sticky inflation, depreciating Indian

rupee and twin deficit of fiscal and current account all show India in poor light. India’s GDP grew by 5.3% for the January-March quarter this year, lowest in the last nine years. Reform process has stalled with the government unable to clear any major policy in the parliament.

BALANCE OF PAYMENT (BoP), CURRENT ACCOUNT DEFICIT (CAD) AND FOREIGN EXCHANGE RESERVE

1991

The crisis of 1991 was primarily a balance of payment crisis. This was mainly on soaring oil prices due to the gulf crisis. The break up of USSR and slowdown in the US had also impacted exports. Remittances from gulf countries had dried up, impacting the BoP negatively.

The current account deficit had widened to more than 2.5% of the GDP. It was near 2% of the GDP for several years before 1991. Capital flows were negligible. India had foreign exchange reserves, which could be sufficient to finance imports for just two weeks.

2012

The BoP position in 2012 has once again become a worry. It posted a second consecutive quarterly deficit during the January-March ’12 quarter. In the last decade it only happened twice for the Q2 and Q3 FY 08-09. CAD for January-March ’12 quarter stood at 4.5% of the GDP. Exports to the western world still remain a drag, while oil and gold import bills are negatively impacting the CAD. Even though capital flows have been decent it has proved to be insufficient to fill the gap. The fact that the foreign exchange reserve stands at a comfortable level of US $290 billion

brought the year 1991 and the year 2012 on the same page. A stark comparison has been made between the periods and questions are being raised about the fate that awaits us in a somewhat 1991-like situation that India is in currently.

While there are similarities between the two periods in terms of high fiscal and current account deficits, India is more comfortably placed today as far as the country‘s foreign exchange reserves are concerned.

The crisis of 1991 had just about two weeks of foreign exchange reserves, which currently is at a comfortable 7 months as on March ’12. India is structurally a better economy in 2012 than it was in 1991. The banking system currently is robust than what it was two decades back. Having said that, there are challenges that did not exist way back in 1991, especially from the external sector. This article compares various macroeconomic indicators of both the periods - 1991 and 2012.

THE YEAR 1991

A major crisis had surfaced in the Indian economy in early 1991. However, the crisis was not an outcome of a single day or a month or a year. The macroeconomic imbalance was the result of profligacy of the government’s expenditure all through the 1980s. All major macro indicators were worrying. Even after three bumper crops, inflation reigned in double digits.

To add fuel to the fire was the gulf crisis in the late 1990s. Oil prices shoot up. India’s oil import bill rose, impacting the balance of payment equation. Remittances from the Gulf had fallen.

Slowdown in major exporting



as on March ’12 and is enough to pay import bills for the next six months, gives confidence that a 1991-like situation may not repeat again. While experts believe that CAD has peaked at 4.5%. Their assumption is based on falling oil prices in the international markets and deterrents put by the government and the RBI in importing gold, which will help to minimize the import bill. Even government officials have been saying that they are confident of taming the CAD near the 3% level over the next few years.

THE INDIAN RUPEE

1991

It was in 1991 that the rupee was made to depreciate on purpose. A two-step downward adjustment in the exchange rate of rupee was undertaken on 1st July and 3rd July of 1991, resulting in devaluation of the India rupee of around 18%.

This helped the competitiveness of the export sector, which in turn helped the balance of payment. Even the reforms announced in the budget session also complimented the devaluation move by the government.

2012

In 2012, the Indian rupee depreciated by more than a quarter of its value, touching a lower level of 57. Market forces pulled the rupee to lower levels on concerns of weakening macroeconomic indicators like CAD and fiscal deficit.

One key negative in the current situation is the lack of reforms from the government. Also, given the high component of the short-term debt in the overall external debt, the RBI has been sparingly using the foreign exchange reserve to tame the fall.

EXTERNAL DEBT

1991

External debt in 1991 stood at a humongous 28.6% of the GDP. In order to plug the deficits, the government had to borrow from overseas. Short-term debt of the overall external debt and the debt servicing ratio (interest payment) had also become perturbing. The debt service burden, according to the budget speech of 1991-92, was estimated at about 21% of current account receipts in 1990-91.

2012

External debt of the government in 2012, and more specifically as depicted by the recent data for March ’12, gives us a 1991-like situation. According to the recent data, external debt repayments maturing within one year stand at 50.1% of our foreign exchange reserves as on 31st Mar this year, which is slightly more than half of India‘s foreign exchange reserves.

Though over 1991, the composition of India’s borrowing has changed, which now is predominantly by Indian companies in the form of external commercial borrowings (ECBs), is giving some respite.

FISCAL DEFICIT

1991

In the run-up to 1991, fiscal deficit which is the difference between the government’s revenue and its expenditure widened. Fiscal deficit was at elevated levels all through the 1980s. The figures for 1991 stood at 8% of the GDP only for the centre. This huge fiscal deficit had to be met by borrowing.

As a result, internal public debt of the Central government accumulated to

about 55% of the GDP. The burden of servicing this debt had become onerous. Interest payments alone contributed to about 4% of the GDP and constituted almost 20% of the total expenditure of the government at the centre.

2012

Taming fiscal deficit was the most important achievement of the government in the past decade. However, over the past two years it has been reigning high, forcing many long-term investors and rating agencies to have a negative outlook on India.

The fiscal deficit for the year-ended March’12 stood at 5.9% of the GDP, which was way above the budgeted figure of 4.6%. For 2012-13, the government has budgeted fiscal deficit at 5.1%, which experts believe to be a tall order to achieve. The subsidy bill and non developmental schemes of the government and falling revenue from taxation are major downsides to the expectations.

INFLATION

1991

Even after three bumper seasons of farm produce before 1991, inflation was at higher levels. The wholesale price index stood at 12.1% and consumer price index stood at 13.6%.

2012

Cut to 2012, and inflation still remains a humongous challenge for India even after record production in some food grains. The Reserve Bank of India (RBI) has been fighting tooth and nail to tame inflation even at the cost of growth. The logistics and supply side infrastructure still remains a challenge for the government of India.


Now, the question arises whether there is a case for comparing 2012 with 1991!

Analysts who believe that the comparison is misplaced argue that India has come a long way from growing by 1.3% (adjusted to the 1999-2000 prices) to nearly 7.5% in the last five years. Indian corporates are healthier than ever before. The balance sheet of the government, though precarious, is not worst. Economic infrastructure including the stock markets, banks and regulators are anytime better placed than they were in 1991. The spending capacity of Indians is strong enough to support growth locally as compared to 1991.

Then what is the apprehension all about? For one, in 1991 there was an awareness that the Indian economy was in a mess and something needed to be done to turn the economy around. Currently, there is a sense of complacency as far as decision making is concerned both at the government as well as the corporate level.

By not taking a quick decision India has missed the growth momentum. Further, the global scenario in 1991 was benign, while the situation today is far from favourable. America’s recovery is tentative and the European crisis is far from over. Fresh concerns in the Middle East and North Africa can create havoc to oil prices. Lastly, a slowdown back home has impacted tax collections. This along with rising subsidy and other non developmental expenses of the government can keep fiscal deficit stubborn. Hence, a lot depends on the government to boost the dented confidence of investors, tackle twin deficits and prove that growth in the last one decade was not an aberratioN.

GDP GrowthSavings Rate To GDPDomestic Debt To GDPForeign Investments Exchange RateCurrent Account DeficitFiscal DeficitForeign Exchange Reserve

Oil PricesOther CommoditiesDebt Service RatioShort-term Debt By Residual Maturity To Total External DebtExternal Debt Service RatioExternal Debt To GDPShort Term Debt By Residual Maturity To Forex Assets WPI

CPI

A Comparison Of Various Macroeconomic Parameters

Macroeconomic Parameters

1.3% (At 1999-2000 Prices)20%73.16%Negligible`18 per dollar >2.5%8% (only central)$1.2 billion (sufficient to finance imports for a mere fortnight)Lower as compared to 2012Higher than 201235.30%14.6

35.328.7% of GDP60.90%

12.1% (The prices of these commodities rose despite the three good monsoons in a row) 13.60%

1991

5.3% (In March’12)31.6% (36.9% In 2007-08)67%US$39.2 (FDI+FII) FY12`54 per dollar4.5% (for Q4 FY12)5.9% (only central) $290 billion (sufficient to finance for over six months)Higher than 1991 pricesLower than 19915.60%42.7

4.618.6% of GDP 50.10%

7.50%

10.30%

2012

Source: Budget Data, RBI, Finance Ministry


very slim connection with Direct-to-Home (DTH) players, who at present offer complete digitised experience through their various channel offerings.

An upshot of the digitalisation of the cable industry could be that some subscribers might migrate to DTH players. However, there is a consensus that a large number of subscribers would continue with their local cable operators.

It is believed that post-digitalisation, the experience offered by cable players would nearly be the same as the visual experience provided by DTH players such as Dish TV, Tata Sky or Airtel.

There are a few proposals which mean a lot for both the broadcasters as well as select cable companies. We present the proposals which concern broadcast companies and are positive for them. Here are a few of them:

broadcasters ‘must provide’ channels and cable operators ‘must carry’ channels provided by the broadcasters. Besides this, the regulator has made it compulsory that if a cable operator demands a ‘must provide’ from broadcasters then, the operator must not levy carriage fees. This is a positive for broadcasters. And these broadcasters can now command subscription from 5% subscriber base.

carriage fee from a broadcaster to carry the channel in his bouquet of channels. This is expected to reduce significantly as TRAI has made it compulsory for cable operators to have a capacity of 500 channels.

remain set at 42% of the rate they charge in non-addressable systems.

Earlier broadcasters would have a

very less bouquet rate of channel offerings of a cable operator. Now with the new regulation, broadcasters would earn a higher rate from cable operators. It is estimated that broadcasters would have higher market rates than what is offered by Direct-to-Home (DTH) companies. This will benefit broadcasters, who are into dissemination of news.

Here are a few proposals, which would impact multi-speciality operators (MSOs):

uniform carriage fees for a span of two years. This will impact carriage fee revenues of MSOs.

capacity creation for 500 channels will increase capital expenditure for cable companies.

carte rate for MSOs, which should not exceed three times the average bouquet rate. It has also proposed that

forming a bouquet should not exceed 1.5 times the rate of the bouquet. This would marginally limit the MSOs’ flexibility in pricing. MSOs would have better bargaining power, however, with small broadcasters.

GOING AHEAD

Digitalisation of the cable industry in a phased manner provides a strong source of revenue for broadcast and select cable companies amidst flat advertising revenues and under-declaration of revenues by local cable operators (LCOs).

Though the deadline for digitalising, which starts with metros, has been postponed till 31st October this year from 1st July, in the long-term, broadcasters stand to benefit highly, though select cable companies which have invested in digitalisation would also gain meaningfully.

new success story is in the making in the media and entertainment industry. After changing

the norms of businesses in the radio and exhibition segments, it is time for the triumvirate: broadcast companies, multi-speciality operators and select cable companies to cheer about.

The Telecom Regulatory Authority of India (TRAI) has brought about significant changes not only in the ways revenues would be recognized in the coming years, but also the visual experience of the viewers.

These proposals from the apex regulatory body of the telecommunication industry, which are aimed at comprehensive digitalisation of the cable industry, would be implemented in a phased manner. This would bring about transparency in the whole value chain of the cable industry. This time we explore the various proposals laid down by TRAI for comprehensive and measurable growth of the entire cable industry.

THE BASICS

The value chain in the cable industry works this way: broadcasters provide their channels to players, which are called multi-speciality operators (MSOs). These players own and control local cable operators. Companies that acquire MSOs are called cable companies.

There are several proposals presented by TRAI to augment the pace of digitalisation of the cable industry. Once the cable industry is digitalised, there would be considerable amount of transparency as regards declaration of revenues by each player in the complete value chain of the industry.

It must be noted that this digitalisation of the cable industry has

A


For Multi-Speciality Operators (MSOs) - players above local cable operators in the value chain - the proposed revenue sharing ratio of 55:45 between them and LCOs in case of free-to-air channels and 65:45 in case of pay channels clearly works in their favour.

Among various operators, Hathway Cable & Datacom is set to potentially benefit from the digitalisation drive. Hathway has presence in 140 cities, while its peer Den Networks has presence in 88 cities.

Even in 140 cities, Hathway has a deep-pocketed presence than its peer Den Networks. Hence, the company would convert more subscribers than Den Networks.

Hathway has already planned a capital expenditure of `750 crore, which is manageable due to low debt to equity ratio of 0.3. It has been periodically investing in the digitalisation of its subscribers. This is reflected in the high depreciation of

the company. In FY12, the company’s depreciation as a percentage of its net sales was 21%, while for Den Networks it was 7%, indicating the extent to which the company has invested in seeding the set top boxes. For broadcasters, who have been losing revenues due to under-declaration of revenues by local cable operators, the proposal that MSOs ‘must carry’ all channels provided by them would bring transparency in recognizing revenues. It is estimated that only 15% of the total subscribers’ payments reach the respective broadcasters.

The TRAI has also proposed that MSOs must have uniform carriage fees. This also comes as a breather for the broadcasters. For years together, broadcasters have been paying very high and varying carriage fees and, hence, uniform fees would save them huge costs, which would translate into revenues.

In the coming quarters, due to the

“must carry” clause broadcasters would have an alternative source of revenue in the form of subscription revenues, which, in the long-term, would compensate for the fall in advertising revenue. This works well for established broadcasters like Sun TV Networks and Zee Entertainment Enterprise whose channels have a huge demand in the market.

These companies have already completed their expansion and offer channels in different genres of entertainment (especially regional) and are also virtually debt-free.

These factors would give them high bargaining power with MSOs in terms of tariffs, which can be around 42% of the rate of the bouquet offered by MSOs. This would enhance their earnings in the coming quarters.

For subscribers, the minimum monthly subscription of `100 for basic channels and `150 or less for pay channels is a good initiative by the telecom regulatoR.

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ndia’s infrastructure sector has been in the doldrums for quite some time now because of huge delays in infrastructure

projects. The situation is so grim that Prime Minister Manmohan Singh called for a meeting on the 6th of June to review the status of the beleaguered industry.

I

Regulatory clearances and problems pertaining to land acquisition

have delayed a number of infrastructure projects in the country

The finance ministry estimates that infrastructure projects worth `1.46 lakh crore have been delayed. The projects have been delayed largely on account of delays in obtaining regulatory clearances and land acquisition problems. The list of delayed projects includes the ambitious $90 billion Delhi-Mumbai

Industrial corridor and the $12 billion Posco steel project.

In the road sector, projects have been delayed because of land acquisition and environmental issues. Consider this. Sixteen major highway projects worth `15,000 crore in four states have been stalled. These include the

PAUSEDOVER DELAYS



any issue related to illegal encroachment. Furthermore, the second phase of the sea link connecting Worli to Haji Ali has not even started.

The Mumbai Metropolitan Region Development Authority (MMRDA) granted extension to the monorail project for the fifth time recently.

The metro phase-I linking Versova to Ghatkopar faces the same problem of resettlement and rehabilitation of project affected families and delays in obtaining clearance from the ministry of environment and forests. The project was awarded to Reliance Infrastructure in 2006.

The project implementation of metro phase-II has not even started. Chavan blames this on the Ministry of Environment and Forests, which had objected to the site proposed for the metro car depot, saying that the site was covering the mangroves and washing of metro cars may pollute the existing mangroves.

The MMRDA had suggested another site but even that is awaiting approval from the ministry. According to the original plan, the metro phase-II should have been completed by 2013.

Another project which has not started is the Navi Mumbai airport. The project has been delayed for several years now and the issues relating to land acquisition are still pending. It is noteworthy that the International Air Transport Association (IATA) had recently criticized the delay in infrastructure projects.

The good news here is that the PM recently announced that work will begin soon on the Navi Mumbai airport project and two new airports in Goa and Kannur.

The much-hyped Coconut Industrial

Park at Kuttiady (Kerala) has also been delayed because of land acquisition issues. The 131 acre project was proposed in 2009 and was cleared by the Finance Ministry.

According to the Kuttiady MLA, KK Lathika, permission from landowners has been sought and the paperwork has been completed but the delay is from the side of the Kerala State Industrial Development Corporation (KSIDC), which needs to acquire land for the project.

The 131 acre park will have a common facility center, power substation, water supply points and internal roads in 16 acres; 5 acres of land will be used for setting up production unit for value-added products and the rest of 110 acres will be leased out to private entrepreneurs. The project was meant to promote value-added products from coconut and private companies have also expressed interest but the delay in the project has been a dampener.

Delays in obtaining environmental clearance have stalled many crucial coal production projects. An estimate suggests that nearly 69.6 million tonnes of Coal India Ltd’s output is stuck due to pending forestry and environmental clearances, resulting in several power projects getting delayed in the country.

According to reports, South Eastern Coalfields Ltd has 30 approvals pending, out of which 18 are with the state government and 12 are with the Environment Ministry. As a result, 46.26 million tonnes of coal is not being mined.

The clearance has been hanging fire since two years following the Environment Ministry’s controversial ‘no-go’ classification that had barred mining in heavily-forested areas. However, three major corporate

Chennai Port-Maduravoyal road in Tamil Nadu, Bahrampore-Farakka and Krishnanagar-Bahrampore projects in West Bengal, Cherthalai -Ochira and Thiruvanthapuram (Kerala)/Tamil Nadu border projects in Kerala and Goa/Karnataka border-Panaji in Goa. The road projects are awaiting environmental clearances from the Ministry of Environment and Forests (MoEF).

After coming to power the UPA government had said that it would build 35,000 km of roads in five years, which means building 20 km of roads in a day. The reality is something else though. In 2011-12, on an average only 10.39 km of road was constructed in a single day.

Currently, out of the 226 projects which are under implementation by the National Highways Authority of India (NHAI), 58 projects have been delayed due to multiple reasons including land acquisition.

In Mumbai, many infrastructure projects, including monorail and metro rail projects are facing delays.

According to Maharashtra Chief Minister Prithviraj Chavan, the monorail project will be commissioned by December this year and phase one of the metro rail project will be commissioned by March ’13.

Both projects entail a total investment of `5,156 crore. The delay according to Chavan is because of issues related to illegal land encroachment and delays in getting permission from civic bodies and railways.

The problem is that even projects which don’t face issues of illegal land encroachments have also been delayed. A case in point is the much talked about Bandra-Worli sealink project, which was delayed for several years though it did not involve


houses - Reliance Power, Aditya Birla Group and Essar Power got Group of Ministers’ nod for environmental clearance for two coal blocks linked to critical infrastructure projects.

Delay in capacity expansion at various ports is taking a toll on exporters and importers. The fourth container terminal at Jawaharlal Nehru Port Trust is delayed and facing obstructions. The `6,700 crore project is said to have a capacity of 4.8 million containers a year.

In September ’11, the project was awarded to a consortium led by the Port of Singapore Authority. The consortium is yet to sign a concession agreement with Jawaharlal Nehru authority as it is refusing to pay the required stamp duty of `50 crore. The project cost has increased to `8,000 crore due to the delay.

The South Korean steel giant Posco is facing major roadblocks in completion of its 12-million tonne mega steel project in Odisha. Posco required 4,004 acres of land out of which 3,566 acres were government

and forest land and 438 acres were private land.

The administration has acquired nearly 2,000 acres of land. But Posco requires another 700 acres of land to start its first phase. The project has been delayed because of protests by local villagers over land acquisition.

There are also other issues relating to ore swapping and employment of domiciles.

Following several round of talks, Posco has agreed to three major conditions, which include employment of domiciles in the proposed plant, setting up of downstream industries near the project area and swapping of iron ore within India.

The good news is that the government has planned to take measures to boost infrastructure growth after the record low GDP growth of 5.3% witnessed in the January-March quarter of 2012.

In a meeting on 6th June to review the infrastructure sector, PM Manmohan

Singh announced the setting up of an investment-tracking system which will review projects periodically to ensure that issues are quickly identified and resolved. Public sector projects with an investment of `10 billion ($178 million) or more will be monitored by the National Manufacturing Competitive Council.

The Indian government also plans to spend $1 trillion on the infrastructure sector to support and boost growth. Prime Minister Manmohan Singh said, “The government alone cannot invest this amount. Therefore, importance is being given to public-private partnership. Achieving targets in key infrastructure sectors is the key to success and will inspire confidence about the overall economic growth rate.”

Few people believe that this target is not realistic because one of the main reasons for delays in infrastructure projects is land acquisition, which is a state issue and it would be quite difficult for the Central government to crack the whip even in Congress-ruled stateS.

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oal mining companies in India are going through turbulent times. Even as they continue to battle

issues created by naxalism and delays in environmental clearances, their problems are far from over. In fact, the Coalgate scandal and the new royalty sharing formula are adding

C

taintedFollowing the CAG report on irregularities in allocation of coal

blocks to private players, the sector seems to have taken a beating

salt to injury of the troubled sector.

COALGATE SCANDAL

The Controller and Auditor General (CAG) of India in a report recently pointed fingers at the way coal blocks were awarded. It said that the government did not follow a

transparent policy while selecting beneficiaries. The government also ignored a suggestion that coal blocks be awarded by competitive bidding.

This report is the latest in the string of corruption scandals that have hit the ruling Congress party. The biggest scandal, however, was the 2G scam


year, the top elected official in Karnataka state resigned after being implicated in a mining scandal that a watchdog said involved $400 million.

Three months later, a report claimed that almost 50% of the iron ore exported from western Goa was illegally mined. There are also reports of illegal mining in mineral rich states like Odisha and Jharkhand among others. India is the world’s third-largest coal producer after China and the United States.

ROYALTY SHARING

As per a new bill to be cleared by the parliament, the coal mining companies have to mandatorily shell out more cash for the development of locals in the mining area. Companies like Tata Steel, Sterlite Industries and Steel Authority of India (SAIL), among others, which are involved in coal mining are likely to be included under the ambit of 100% royalty sharing formula. This will take a toll on the bottom line of the companies.

India produces around 530 million tonnes of coal a year. Coal India Ltd (CIL) only accounts for close to 82% of this. Captive miners, largely private sector companies that have been allotted blocks for their specified end-use like steel and power production, contribute a mere 35 million tonnes to annual production.

At present, these companies pay the states around `680 crore a year as royalty. CIL would benefit from the shift from profit to royalty, as the base for calculation of compensation - with the company’s annual net profit of over `14,000 crore - is much higher than the annual royalty of around `6,000 crore it pays to states. The proposal to link compensation to royalty for coal miners could be difficult to implement as coal prices,

unlike prices of minerals like iron ore, are not market-driven and the government continues to wield significant control over pricing. The proposal is, therefore, likely to be opposed by state governments over fears that their earnings from royalty would take a hit.

IMPACT ANALYSIS

Though there have been no confirmation on these numbers yet, there is a probability that more news on the same could be out soon. Coal mining blocks have been allocated to companies across sectors like steel, power and aluminium, among others. These companies belong to big business houses like Tata, Birla, Reliance, GMR as well as GVK.

And if the Coalgate scandal moves in the same way as 2G, then fundamentals of companies involved in coal mining will deteriorate significantly. Investors need to look for companies in power, steel, aluminium and coal sectors and find out the extent of the demand for coal. Even if some companies have less or zero coal demand, if they are found to be involved in this scam, their image will get badly affected and this, in turn, will affect the stock prices of those companies.

As regards royalty payment, it would be a straight forward calculation. Investors need to look at current royalty payments made by the company and calculate it as a percentage of the net profit. The higher the percentage, the more negative impact it will have on the bottom line.

Market participants must, therefore, take all these events into consideration before deciding on the stock they intend to buy or sell as they will have a huge bearing on the stock prices of these companieS.

since it not only resulted in the ouster of several top ministers but also that of bureaucrats and corporate managers. The 2G scam, which runs into rupees worth several lakh crores created a turmoil in Indian politics and also shook the fundamentals of the telecommunication industry.

And while people were trying to forget about the 2G scam, they were hit by the Coalgate scam, which has the potential to threaten companies that deal with coal and also hurt Indian politics. If allegations over irregular allocation of coal blocks to the beneficiaries are proved right, then it would have a cascading impact on coal companies, much like the 2G scam in which telecom companies lost their existing spectrum rights and a new auction policy.

The Indian parliament erupted in hoots and jeers after the draft report by government auditors estimated that the national treasury lost about $210 billion by selling coal fields to private excavation companies at throwaway prices.

As per the CAG report, the primary beneficiaries were about 100 private and state companies that were handed contracts for 155 coal fields between 2004 and 2009 without going through a competitive bidding process.

The report said that $210 billion - five times India’s annual defense budget - was a conservative estimate of loss to the exchequer given that it relied on prices for low-grade rather than medium-grade coal. Some media reports mention that some of the 143 private companies that were allotted 83 coal blocks, with over 17 billion tons of reserves, have sold the blocks.

There has been news of illegal mining going on throughout the country in connivance with government officials and the mining mafia. In August last

he technique of negotiation or bargaining is not limited to products and services alone. It extends to markets as well. Poor market conditions are considered to be the best for

bargain hunters.

The concept of bargain hunting in poor market conditions can be best understood by an example offered by Benjamin Graham, who is widely regarded as the father of value investing.

Graham terms Mr Market as a partner in business, who at any given time is willing to invest or sell. He also calls Mr Market’s behaviour at times manic or irrational, throwing quotes which often do not have any relation to the underlying business.

Mr Market’s mood swings range from extreme enthusiasm to highest pessimism. Sometimes it quotes crazy share prices of a company, while at other times it values companies for peanuts as if the business is going to cease to exist in the next hour or so.

This was evidently visible during the financial meltdown of the year 2008. During this period, the markets crashed the share prices of many well-established and fundamentally strong companies which were forced to trade at historical lows.

Due to the change in sentiments and liquidity in the markets the situation of extreme enthusiasm and pessimism occurs frequently. However, this is how the markets are like. They do not act like the returns provided by fixed income instruments.

Investing in the equity markets comes with lot of fluctuation, which in a way is very good for bargain hunters as it offers them the opportunity to buy good businesses at dirt cheap prices.

CONDUCIVE ENVIRONMENT

A lot of pessimism is prevalent in the markets today, especially in the equities market due to the turmoil in the global markets as well as economies and domestic economic issues like high interest rates, and political instability. However, this is the perfect time for bargain hunters to make good profits from the markets.

Mentioned in this article on bargain hunting in the markets are certain tools and tactics that can help an investor or a bargain hunter to identify certain stocks in the market that are available at dirt cheap prices.

T

HUNTINGFOR

BARGAINS Bargain hunting is a technique to

pick stocks that are available at

prices less than their actual worth



`80 a share with the EPS, what we get is the PE, which works out to 8 times in this case.

Companies with high yield like in the case of the banks offering the highest yield on the deposit will effectively have the lowest price to earnings ratio, which is why low PE stocks are considered to be offering better bargains to investors because they offer high yield.

Historically, it has been proved that low PE stocks tend to give much better returns than companies with high price to earnings.

Having said that, investors should also keep in mind that the company has decent earnings, growth prospects and good return ratios.

TRADING LESS THAN BOOK VALUE

In case of low earnings or absence of earnings in a particular year or period, companies may not look like true bargains on the basis of the PE ratio or any other earnings-based ratio.

Moreover, since the price to earnings ratio is driven mainly by the income statement of a company it may or may not reflect the true value of assets of that particular company.

PE ratio to that extent does not reflect the strength of a balance sheet. It is possible that a stock may not look to be a great buy only on the basis of its PE ratio, but if a stock is trading below the value of its assets there could be some real bargains to buy in the market.

In this matrix, investors can search for bargains where businesses are trading far lower than the value of their assets. In this category, the most reliable and frequently used tool by value investors is the price to book

value ratio or comparison between the share price of the company with the per share book value of the company.

Every company has certain assets like fixed assets, loans and advances, investments, cash receivables and inventory, among others, which are employed in the business to undertake the day to day business activities. These same assets are either funded by borrowed funds or owner’s funds (also known as shareholder’s funds) or could be funded through both.

If we make the sum total of these assets and deduct the debt or borrowed funds what is left is known as shareholders claim on the assets.

So if debt holders’ charge on assets is deducted, then the value that remains can be attributed to the shareholders of the company. Such value which is attributed to the shareholders is known as book value or net worth of the company.

In this backdrop let us assume that a company’s shareholders charge on the assets is `100 or in accounting terms the book value per share is `100 and the market price of the same securities is just `50. There is a mismatch; the market is valuing the company at half the value of the shareholders’ funds in the company.

Typically, the market should at any given time conservatively be willing to pay at least the same amount of money that the shareholders are entitled to get. If it is willing to pay less, then there is definitely a bargain. And lesser the market is willing to pay, the better is the bargain.

Many years of studies have suggested that stocks with a low price to book value or stocks which are trading at prices far lower than the value of the assets, then they tend to do well or outperform the markets. However,

EARNINGS YIELD

Price to earnings ratio is most widely and frequently used by investors to find bargains in the market. However, let us first understand why PE ratio is so important. Take for example a person deposits `100 in a bank and gets `12 as yearly interest, then the yield (the interest earned on the money deposited in the bank) works out to be 12%.

But if another bank offers a 15% yield or `15 as interest on `100 deposit, then the person will surely deposit his money in the other bank, which offers a higher interest considering that the risk profile of both the banks remains the same as he would earn more for the same sum.

This rule applies to the stock markets as well. With proper consideration to risk, companies that offer highest yield should be the most attractive in terms of returns to the shareholders.

The price to earnings ratio helps in identifying the company which is offering the highest yield in the market. Every year a company generates certain amount of profits after deducting all expenses and paying taxes to the government. The leftover profit is what the shareholders of the company are entitled to have.

If the company generates `100 crore profit and there are 10 crore shareholders, effectively every shareholder has made a profit of around `10 per share, which in accounting terms is known as earnings per share or EPS. So if one buys the stock of the same company say at `80 per share from the secondary market, the yield will come close to 12.5% (10/80x100). In terms of price to earnings, if we divide the company’s share price of


investors should take care of the book value reported in the balance sheet of the company.

After the initial filtration, the investor should pay attention to the real book value and not just the accounting book value of the company. The quality of the assets, quality of the earnings, size of intangible assets (if advertising or other expenses such as goodwill is being capitalized) should be assessed before jumping into the bandwagon.

It is also noticed that in most cases companies which do not generate enough return on shareholders’ funds deployed in the business tend to get lesser premium in the market than companies which generate higher returns on the funds of the shareholders, thus trading below or at par with the book value.

TRADING BELOW LIQUID ASSETS

A pure value investor that he was, Benjamin Graham used to find really dirt cheap stocks in the market by using mathematics and certain formulas that he developed.

Graham created the Net Current Asset Value (NCAV) approach to find bargains in the market. The objective of the NCAV formula is to find the minimum value that a company would realize if it is liquidated.

We have already seen calculations of the book value, which is total assets minus total liabilities (borrowed fund and current liabilities). NCAV is an even more stringent way of looking for bargains.

Under this method, it is not the total assets but the business that should be available below the value of the current assets.

So, if a company’s total current assets is `100 crore and total liabilities is `50 crore, then its net current asset value will work out to be `50 crore. However, there is still more to consider in this regard.

Graham did not take the current assets at the face value or what is shown in the balance sheet. To be more conservative, he further discounted receivables and inventories by 0.75% and 0.5%, respectively. The formula of the same will look like this. Net Current Asset Value (NCAV) = cash and short-term investments + (0.75 x accounts receivable) + (0.5 x inventory) - total liabilities/ outstanding shares Benjamin Graham who devised this magic formula said that the investors will benefit significantly if they invest in companies, which are trading at less than 67% of their net current asset value per share.

Further, to prove the effectiveness of Graham’s formula or strategy, a study was undertaken by the State University of New York, which showed that from the period starting 1970 to 1983 the strategy generated on an average annual return of around 29.4%, which is far better than any other strategy.

However, Graham also mentioned that it is possible that all stocks may not generate high returns as assumed under this strategy, which is why he suggested that investors will be better off if they diversify their holding in the stocks.

RIDING THE CYCLE FROM THE BOTTOM

Many masters of value investing look for stocks which have made new lows in terms of share prices. Companies in cyclical industries go through the

pains of a downturn as the industry cycle hits the downturn.

If investors can spot some of these stocks at the early stage when the industry is bottoming out, it could prove to be a very rewarding strategy.

A number of industries are susceptible to factors from the external environment like interest rates, short-term slowdown as well as changes in demand supply dynamics, among others.

At the bottom of the industry cycles, industries and companies will witness bad news and drop in share prices. However, if investors answer questions like whether the problem faced by the industry is short-term or structural in nature one can very well identify certain good bargain stocks trading at historical lows.

Steel, sugar, cement, automobile and construction are some of the industries that through cycles, which is why share prices of a number of companies from these industries fluctuate significantly and move in cycles. However, investors should take care about the timing.

IN A NUTSHELL

Going through formulas that a computer throws is not enough, investors need to have due diligence process in place before going in for any bargain stock.

The investor also needs to find the reason why a stock is available at such a dirt cheap price and if so, why has the market not recognized it and if the market knows more than the bargain hunter.

He must also find out if something is building into the share prices of companies which is more likely to stay and impact the companY.


Domain knowledge and exper tise

apar t from strong loan growth,

improving NIMs and lower operating

expenses places the company ahead

of the competition

IC Housing Finance Ltd (LICHF) is one of the largest housing finance companies in India promoted by LIC. The company launched its maiden Global Depository Receipt (GDR)

issue in 2004. The GDRs are listed on the Luxembourg Stock Exchange. The main objective of the company is to provide long-term finance to individuals for purchase/reconstruction of new/existing flats. We are positive on the company owing to the fundamental improvement in earnings from FY13E onwards benefiting from re-pricing and higher developer loan build up. The company’s net profit is likely to grow at 29.9% CAGR over FY12-14E.

INVESTMENT RATIONALE

HFCs At A Better Position As Compared To Banks

It has been observed that housing finance companies (HFCs) have been consistently gaining market share in the mortgage market as compared to their peer banks over the last five years. According to a report by CRISIL, the market share of HFCs in disbursement growth has

L

RestingOn AStrongFoundation


increased to approximately 51% in FY11 from approximately 36% in FY07. This is a result of better and controlled focus on a single market, which is further enhanced by better customer focus. Moreover, we have seen that as compared to banks, which have been facing stress in their asset quality, HFCs have been able to maintain their asset quality at comfortable levels.

Although there is increasing competition in the mortgage market with many banks offering the same product as compared to HFCs, HFCs are better placed as compared to banks in this business because of their domain knowledge and expertise as compared to banks. Banks have exposure to different sectors and can lend only some portion of loan as retail mortgage whereas HFCs have mortgage loans as their main business. Moreover, HFCs are better placed in Tier-II, Tier-III and Tier-IV cities than most banks.

Stringent Regulations: At Par With Banks

The revised guidelines on the National Housing Bank (NHB) have made it mandatory for HFCs to maintain stricter provisioning norms, thereby strengthening the balance sheet of the companies further. We believe that implementation of the new norms will not have a material impact on these companies’ profitability. In fact, it will further provide a cushion to these companies against the deteriorating macro-economic environment.

NPA RecognitionProvision NormsStandard Assets

Substandard LoansDoubtful AssetsUpto 1 yearOne to three yearsMore than 3 years

At Par With Banks On Almost All Norms

Segment

90 days

0.4% for housing loansTeaser loans 2%15%

25%40%100%

HFCs

90 days

0.4% for Housing loansTeaser loans 2%15%

25%40%100%

Banks

Source: NHB, RBI, Nirmal Bang Research

Source: Company Data, RBI, Nirmal Bang Research

Growth in housing loans have been sluggish over the last few years resulting from high mortgage rates and high pricing levels, especially in Tier-I cities, which have negatively impacted the affordability of consumers. Despite an overall slowdown in the industry, LIC Housing has still been able to grow at a higher rate than the industry and also increase its market share resulting from its strong parentage and proven track record.

Increasing Market Share In The Mortgage Market

LICHF’s market share has consistently witnessed an improvement over the past five years. The company has been able to increase its market share from a mere 5% in FY07 to 10% in FY12, benefiting from the strong distribution network of the company.

The total mortgage market has witnessed a CAGR growth of 15% over FY07-FY12 whereas LIC Housing has seen a CAGR growth of 29% over the same period.

5.5% 5.9%6.7%

8.3%9.3%

10.0%

0%

2%

4%

6%

8%

10%

12%

FY07 FY08 FY09 FY10 FY11 FY12

Market Share

Source: Company Data, RBI, Nirmal Bang Research

The primary reason behind this growth is that the average ticket size of the loan is `15-16 lakh, which is mainly the salaried class and is considered as the affordable segment. Moreover, the demand in these segments has remained fairly insensitive to interest rates as the emotional value related to house outweighs the increase in interest rates.

Overall disbursements across the industry have not witnessed a significant growth in Mumbai and Delhi in the past two-three quarters, whereas the growth has been healthy in the southern markets. LIC Housing has a strong franchise in the South Indian markets like Chennai, Bengaluru, Hyderabad and several other Tier-II and Tier-III cities, which has helped it to report a significant growth in disbursements. The top seven cities, namely, Mumbai, Delhi, Chennai, Bengaluru, Kolkata, Pune and Hyderabad contribute around 58% of the total loan portfolio. Going forward, the management expects the loan book to grow at 20% to 25% for FY13E as against the growth of 23.5% in FY12.

19.6%

24.9%26.2%

37.6%

34.2%

23.5%24.4%

15.6%

11.6% 11.7%18.7% 15.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

FY07 FY08 FY09 FY10 FY11 FY12

LIC Vs Industry Loans Growth

LIC Housing loans - Industry


Increasing Share Of High-yielding Developer Loans

Historically, development loans have been at around 10% of LIC Housing’s loan portfolio. However, post the kickbacks-for-loan scam, which arose in November ’10 wherein some officials faced charges of pushing loans to companies in return for monetary benefits to expand the developer loan base, LIC Housing took a cautious step and strategically reduced its exposure to developer loans. The share of developer loans declined sharply from 10.9% in FY10 to 5% in FY12.

Re-Pricing Of Loans Remains A Major Catalyst

LIC housing had launched three new products in the last two-three years which were:� Fix-O-Floaty (fixed rates for three years and floating thereafter)� Advantage 5 (fixed rates for five years and floating thereafter)� Freedom (call option to shift to fixed rates within one year)

As on 31st Mar ’12, the total teaser loan portfolio of the company stood at nearly `12,000 crore, which is expected to be reprised in FY13E (nearly `9,000 crore) and FY14E (balance nearly `3,000 crore). The re-pricing of the loan book from the fixed (nearly 9%) to floating rate (nearly 11%) will act as a major catalyst for the company to report an improvement in the net interest income.

Resulting from the increasing proportion of high-yielding loans and the re-pricing of loans from fixed to floating rate in FY13E, we expect the company to report a significant improvement in NIMs. The management expects NIMs to be at 2.7% for FY13E from the current levels of 2.4%.

Source: Company Data, Nirmal Bang Research


8.8%

10.9%

8.5%

5.0%

6.5%

9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FY09 FY10 FY11 FY12 FY13E FY14E

Developer Loan % Of Total Loan

Going forward, the management expects to increase the book back to its historical levels given the high yields, which the business generates and the improving conditions in the mortgage market. The management expects to increase the share to approximately 6.5% in FY13E and approximately 9% by FY14E. This increase in the portfolio is expected to lead to an increase in the company’s margins.

Developer loans are high-yielding loans (nearly 15% rate) higher by almost 300-400 bps offered on individual loans (nearly 11%-12%). Moreover, these loans are secured with an asset coverage ratio of approximately 2.5x; higher than individual loans and also help in targeting more and more individual retail loans.

However, we believe that it is more of a risky portfolio as it is a concentrated cash flow for most of the developers and at times of economic downturn it becomes difficult for most developers to service these debts. Despite this, we believe that most HFCs have been able to manage the risk of the business.

A very significant decline in property rates can only have a material impact on developers, which can lead to a default. Moreover, LIC Housing will still have a very low exposure to developer loans as compared to its peers which will not have a significant impact on the asset quality of the company on the whole.

2.9%

2.7%

3.1%

2.4%

2.7%2.7%

1.5%

2.0%

2.5%

3.0%

3.5%

FY09 FY10 FY11 FY12 FY13E FY14E

Net Interest Margins (NIMs)

Diversified Liability Franchise

LIC Housing enjoys a higher credit rating which is driven by strong brand name of its parent company, LIC. It has been consistently reducing its dependence on its parent company for funding and has diversified its liability base which enables it to lower its cost of funds. The borrowing from LIC has reduced significantly from 34% in FY04 to almost 1% in FY12. Moreover, the proportion of NCDs (lower cost as compared to cost of term loans from banks) has been increasing in the company’s borrowing profile (from 24% in FY04 to 58% in FY12).

In addition to this, the recent decline in the base rate by most banks will also aid the company in lowering the cost of funds. LIC Housing will tend to benefit from the


RISKS AND CONCERNS

VALUATIONS

Healthy Asset Quality

Borrowing Profile (FY12)

57.7%31.8%

3.3%

1.0%

6.3%

NCD Banks NHB LIC Others

0.69%

0.47%0.42%

0.55%0.60%

0.12%

0.03%

0.14% 0.12% 0.15%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

FY10 FY11 FY12 FY13E FY14E

Movement Of NPAs

Gross NPA Net NPA

Return Ratios To Improve

23.0%

26.1%

23.5%

25.8%

18.6%

20.7%

21.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Return On Net Worth (RoNW)

1.9%

2.1%2.0%

2.2%

1.6%

1.9%1.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Return On Asset (RoA)


Net Interest IncomeNon-interest IncomeTotal IncomeTotal ExpensesProfit Before ProvProfit Before TaxNet ProfitNet WorthTotal LoansTotal Liabilities And EquityCash And Bank BalInvestmentsHousing LoansTotal Assets

Profitability And Valuation RatiosNII GrowthPAT GrowthNet Interest MarginGross NPANet NPANet Profit MarginAdvances GrowthBorrowing GrowthReturn On AssetsRoNWEPSBVPSAdj BVPSP/EP/BVP/ABV

FinancialsFinancial Snapshot

887187

1074191882911662

33883475840242

2671389

3808140242

1372399

1771216

15551294

9754169

4516353630

4351403

5109053630

1392233

1625235

13891233

9165682

5616365608

2791543

6308065608

1888276

2164294

1869176912916772

6992380908

2441621

7826580908

2308318

2626351

2274214415658084

8551598607

2751702

9579398607

21.30%24.80%

2.70%0.70%0.10%

19.10%37.60%36.70%

2.00%23.50%

13.9071.3070.4019.67

3.843.89

FY10

FY1054.70%47.30%

3.10%0.50%0.00%

20.00%34.20%29.90%

2.20%25.80%

20.5087.8087.5013.36

3.123.13

FY11

FY111.40%

-6.00%2.40%0.40%0.10%

14.70%23.50%24.40%

1.60%18.60%

18.10112.50111.7015.13

2.442.45

FY12

FY1235.70%40.90%

2.70%0.60%0.10%

16.50%24.10%24.50%

1.90%20.70%

25.60134.10133.30

10.712.042.06

FY13E

FY13E22.20%21.20%

2.70%0.60%0.20%

16.40%22.40%22.30%

1.80%21.10%

31.00160.10159.30

8.841.711.72

FY14E

FY14E



profitable growth. Moreover, the company has already proved its worth by reporting an excellent track record of profitability and building up a healthy balance sheet.

Healthy asset quality and prudent provisioning policy makes LIC Housing better placed compared to its peers in the housing financing space. Going forward with improvement in the company’s operating performance, the return ratios are set to improve. We believe that the current valuations of 2.06x FY13E and 1.72x FY14E P/BV are attractivE.

Micro analysis. Mega gains.Trading at Nirmal Bang is based on extensive research and in-depth analysis, where we focus on the smallest of details

and turn them into an advantage for you.

Over the years, the analytical approach coupled with decades of experience has helped us maximize returns for our

investors and thereby inspire con�dence in them.

EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^ | IPOs^ | INSURANCE^ | DP* www.nirmalbang.com

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981


SMS ‘BANG’ to 54646 | Contact at: 022-3926 9404 | e-mail: [email protected]

n the previous fortnight, few companies announced their earnings for the first quarter. While most of them were in

line with market expectations, IT bellwether Infosys announced a negative guideline, which resulted in more than 8% loss in its stock on the day the earnings result was announced. However, Tata Consultancy Services offered hope to the market with a better-than-expected Q1 FY13 result.

Also, the government declared a better-than-expected May Index of Industrial Production (IIP) data of 2.4%, which was driven by 2.5% growth in manufacturing in May due to the base effect. Another important aspect in the May IIP was a mere 0.1% month-on-month growth in consumer non-durables, which is a cause of concern because growth in consumer non-durables reflects the basic consumption demand in the economy. Another negative aspect deduced from IIP numbers is that 10 out of the 22 industry groups showed a year-on-year decline in May.

The monetary policy review to be announced by the Reserve Bank of India at the end of 31st July will be an important event for the markets. The June inflation data may influence the monetary policy.

Talking about markets, the Nifty futures already gained 1.7% in the first half of the July expiry on the back of around 4% increase in the June expiry. The markets had, however, lost around 5% in the May expiry due to weak European cues.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been hovering around the range of

I 1.24-1.12 since the start of the July expiry, suggesting a range-bound scenario for the market, dominated by Options sellers. One can expect the PCR-OI to stabilize at current levels and remain range-bound between 0.95-1.3 in the days to come.

On the Options side, the highest build up for Calls as well as Puts stands at 5,000-5,400 (current market price at 5,240 as on 13th July) for the July series, indicating that the markets will expire between these levels for the July expiry scheduled on 26th July.

An interesting aspect worth noticing in Options these days is the Volatility Index (VIX), which is nearly in the new range of 17-20. This implies that Options traders are not expecting much risk or downside in the markets. Going forward, we expect the VIX to stabilize at current levels and the markets to not breach the level of 5,000 in the coming days.

Technically, the Index recently formed a series of higher tops and bottoms, which is a bullish Dow signal. There is an immediate resistance at the 5,320-5,350 levels on the upside and support resides at the 5,200-5,180 levels. The oscillator situation suggests the presence of a negative divergence pattern.

However, there is insufficient evidence for any top and, we therefore conclude that the advance is not done yet. The Index has also managed to close above the falling trend line drawn from the highs of March ’12, which is a bullish signal.

Currently, the Index is trading above its 100 and 200 day Simple Moving Average. If it sustains above the 5,220 level and the rising window pattern

TECHNICAL OUTLOOK FOR THE FORTNIGHT

that was formed in the recent trading session would confirm the ongoing short-term uptrend.

We maintain a medium-term target of 5,410 and 5,460 levels on the upside and recommend some profit-booking near this zone. The recent rises from the lows of June ’12 in the index has been accompanied by a sharp rise in volumes and breath, which is a bullish signal. Of course, we do need to see the follow through price action in case the rise has to continue further.

The short-term up trend remains intact until the aforementioned support level is breached decisively. The weekly chart has formed a spinning top pattern, which indicates some ranging action in the near term.

The Bank Nifty faces strong resistance around the 10,750 level on the upside where selling pressure is expected. One should maintain a positive bias only on close above this for an upside potential of 10,850 and 11,000 levels. There is an immediate support at 10,520-10,480 levels on the downside.

The cement sector has outperformed the broader index and we maintain a positive bias in ACC, Ambuja and Ultratech for an upside of 10% to 15% from current levels. STRATEGY FOR JULY EXPIRY

Short Strangle On Nifty: It can be initiated by “selling 5,300CE and 5,100PE of July series”. The net premium inflow comes around `45-50, which is also the maximum profit if the Nifty July series expires between 5,100-5,300. The loss remains unlimited beyond the break-even range of 5,350-5,050.


Precious metals, non-ferrous metals and the energy complex in the Indian commodity exchange have witnessed a volatile session since the start of 2012

he Indian commodity market has been hit tremendously by volatility and weakness in the rupee

since the last quarter. In 2011, the rupee depreciated by almost 20%. It depreciated further by 10% in 2012.

Precious metals, non-ferrous metals and the energy complex in the Indian commodity exchange, which mirror the price fluctuations in the

T international exchanges, witnessed a volatile session since the start of the year 2012.

Volatility in currencies and high frequency trading has made life difficult for commodity traders. All commodities are US dollar denominated. And the ongoing strength in the dollar is reducing the appeal for commodities globally. In fact, investment demand, which is

one of the most important phenomenons since the last three-four years, has remained subdued since the start of the year.

BULLIONS

After posting a stellar performance last year gold and silver have disappointed investors, except in countries where currencies have remained weak as compared to US



Indian rupee terms, it moved up by 28.8% and in South African rand, it moved up by 33.8%.

In countries where currencies have remained weak, gold has outperformed. The Chinese yuan started to take a more important role in the international monetary system. It has appreciated consistently since June ’10. In turn, gold rose by a more modest 4.3% in local currency terms during the year.

Gold has justified its status as a safe haven for countries whose currencies have depreciated very much. Gold prices in India have remained stable despite the sharp fall in international gold prices.

Gold Prices In India As Compared To Spot Gold In Dollar

The massive deviation has been caused by the depreciation of over 30% in the Indian rupee in the last one and a half years. On one hand, where prices corrected sharply internationally in 2012, prices rose on the domestic bourses.

Gold imports in value terms in the last 11 years have risen by almost 10 times, causing India’s current account deficit to widen. Custom duty on gold imports was raised twice this year and excise duty on gold was also introduced (which was later waved off), resulting in a massive nation-wide strike by jewellers.

The demand for gold in India, the largest consumer of the yellow metal, is suffering due to slowing growth, volatility in the rupee and a partly weak monsoon.

dollars. It raises a very important question in the minds of investors while investing in gold: which are the currencies that you would use to invest in gold?

US$/OZGBP/OZEUR/OZCHF/OZJPY/OZCAD/OZAUD/OZRUB/OZTRY/OZCNY/OZINR/OZZAR/OZ

Gold Performance In Various Currencies In 2011

1531994.22

1182.971441.74

118974.011564.221511.35

49161.632935.239672.09

81150.6512531.24

Full Year2011 % y-o-y

8.98.9

11.69.53.6

11.18.9

14.434.4

4.328.833.8

Last Price31st Dec ’11

All statistics based on the London PM FIX in US $/oz by the appropriate exchange rate: Annualized volatility based on daily returns. Source: Bloomberg, WGC, LBMA

JewelleryTotal Bar Coin And InvestmentsTotal

India-China Gold Demand Scenario

442.4136.1578.5

2009

657.4348.9

1006.3

2010

567.4366

933.4

2011

48.59156.35

74

187.6103

290.6

Q1'11

15255.6

207.6

Q1'12% Change (y-o-y)

India (tonnes)

-1457

% Change (yoy)

-18.98-46.02-28.56

% Change (y-o-y)Year

Source: Bloomberg

Gold also rose in Japanese yen terms. But it increased only by 3.6% as Japan’s currency was one of the few to strengthen against the US dollar.

In developing markets, gold in Turkish lira moved up by 34.4%. In

1200

1300

1400

1500

1600

1700

1800

1900

18000

20000

22000

24000

26000

28000

30000

32000

31-J

an-1

1

28-F

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31-M

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Indian Gold Vs Spot Gold In US

MCX Gold Spot (Rs.) COMEX Gold Spot ($)

Source: Bloomberg

Source: Bloomberg

40424446485052545658

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USD/INR Spot

India’s gold imports have fallen sharply even in the second quarter of 2012. The fall in imports will be as high as 25% to 30% in Q2, 2012. Scrap sales is likely to remain high due to high gold prices in the country and slowdown in the economy. The Indian demand may shrink to 800 tonnes in 2012 as compared to 933 tonnes in 2011. In Q1, 2012, we witnessed a steep fall of 28% in the demand for gold. And most of the loss in demand was compensated by strong Chinese demand.

Under performance of stock markets, regulation and correction in property markets have also led to good investment demand for gold in China. There is a huge room for Chinese central bank to increase gold reserves with its foreign exchange reserves. It holds gold which is less than 2% of its reserve. This should move up in the years to come. Overall, due to a stable currency and low gold prices in China, we don’t see a major fall in the demand for gold and good support will be witnessed in physical demand if prices come down by $1,500/oz- $1,450/oz. In the short-term, we expect prices


of gold as well as silver to remain under pressure.

BASE METALS

Prices of base metals have corrected sharply on the international bourses since the last two quarters mainly on account of the slowdown in China. We have seen a 20% to 25% correction in prices of most of the base metals.

Nickel remained a laggard amongst all base metals where prices have dropped from $22,000/tonne to as much as $16,000/tonne making it the worst performer in the base metals complex mainly on account of weak demand of stainless steel in mainland and in Europe.

Nickel market was negative since the last two years. But this year we have a surplus in the nickel market due to the rampant surge in production.

Copper prices plummeted from $8,800/tonne to $7,250/tonne due to weak import numbers from China, surging production of copper and weak demand. In China since the last quarter, inflation has started moderating due to which interest rates have been cut.

But the fact is these cuts won’t be enough to revive the demand. As slowdown in China is a prolonged problem and just by easing monetary policies the demand can’t be revived, we are not expecting any major rally in the prices of base metals. Due to some improvement in Europe, rallies should be sold in metals as demand remains weak. The outlook remains weak for the next quarter.

ENERGIES

Crude oil prices recently made a high of $88/barrel witnessing a brisk upward movement of 12%. Earlier

this month we witnessed aggressive selling pressure in crude oil on weak global cues and poor fundamentals. However, we witnessed some gains on short covering following the steep fall in price and major support by renewed tensions between Iran and the west.

Five months ago, the EU declared it would impose an embargo on Iranian oil exports, effective 1st Jul ’12. Recently, Iran’s National Security and Foreign Policy Committee drafted a bill calling for Iran to stop oil tankers from shipping crude through the Strait of Hormuz to countries that support sanctions against it.

Also, the rate cut by the central banks of developed economies and liquidity infusion by BOE had lifted sentiments temporarily, which offset the gloomy manufacturing data from China, the United States and Europe.

On the supply side, OPEC is producing 6% more oil than the formal quota of 30 mbpd agreed at the group’s last meeting. Also, Non-OPEC nations like Russia and Canada have pledged to increase their oil production by 6,00,000 bpd, approximately reaching the levels of 53 mbpd in 2012 from last years level of 52.6 mbpd.

International Energy Agency (IEA) also reported that the global oil demand in 2012 would be lower due to the weaker economic outlook for developed economies. Lower demand and higher production would leave the oil market over-supplied for the coming months. We don’t expect crude oil to move up above $88-$90/barrel and on the downside again it can test $78/barrel.

AGRI COMMODITIES

Soybean prices have seen a sharp rise in both domestic and international

markets, largely driven by anomalies in weather and tight supply scenario. Despite good soybean crop of 105 lakh tonnes in 2011-12, we are left with only 20 lakh tonnes of soybean to support the coming six months.

The weather condition in the prevailing season has not been very conducive so far due to the delay in the Indian monsoon. Robust export demand for Indian soy meal led to improved crushing in the domestic markets. Indian oilmeal exports rose to 3,05,335 tonnes in the month of June from 2,50,335 tonnes a year earlier. Soy meal exports, which shared the bulk of sales, rose to 1,80,987 tonnes in June, the third month of this fiscal year from 1,17,600 tonnes a year ago.

On the international front, the US has been tormented by extreme heat conditions, which has damaged the corn and soybean crop. The current heat wave hitting the US soybeans following small South American soy crop this year may mean that the global soybean, soy oil and soy meal supplies will be insufficient to cover the demand in the coming days.

United States, the largest soybean exporter has been expected to take over an even larger global soybean supply role in the coming months after the world supplies took a hit, due to the drought in Latin America. The USDA slashed its condition rating to 45% good to excellent, compared with 53% a week ago.

The focus would now largely remain on weather conditions in India and the US. Any further disruptions would mean tightness in world soybean supply and this would drive prices further higher in the coming months. We recommend a buying strategy in soybean august contract on dips to `4,100/quintal - `4,200/quintal for a target of `4,500/quintaL.

Now, Commodity TradingIs No More A Puzzle.

Commodity trading can be confusing especially if one is inexperienced and lacks the

necessary skills to trade successfully. At Nirmal Bang, our team of seasoned analysts with

years of experience and in-depth knowledge can help you spot the underlying clues and

create the investment strategies that best suit your commodity trading requirements.

w w w.nirmalbang.com

CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010R E G D. O F F I C E : S onawala Bui ld ing, 25 Bank Street , For t , Mumbai - 400 001. Tel : 022 - 39267500 / 7501; Fax : 022 - 39267510BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981


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nvestors rejoice when their funds give them superior returns but they become tense when equity markets fall and

they start losing money. Trading gurus across the world have said: “Exit when the markets are high and invest when the markets are low.” But in reality it is very difficult to time and predict the equity markets.

So what should investors do when they want to “sell high” and “buy low”? Investors have the option of entering into the equity markets through mutual funds. There are few asset allocation funds which they can consider for the same.

I ASSET ALLOCATION FUNDS

Asset allocation funds are open-ended funds, which seek to maximize investment opportunities arising out of the ups and downs in the markets. These funds rebalance their portfolios between equity and debt based on market conditions, indicated by the

P/E (Price to Earnings) ratio.

These funds switch between equity and debt. They even take cash calls depending on market conditions. Imagine that the markets are highly over valued and are trading at P/E multiples of 20; in such a situation asset allocation funds lower their equity exposure. And say after a period of 8 to 10 months P/E multiples are in the range of 12 to 14, then these funds will hike their equity exposure from 80% to 100%.

These funds aim to switch aggressively between equity and debt and are opportunistic. Index P/E

Asset Allocation FundSize: FREE

ONE SIZE FITS ALL

Asset allocation fund allows spreading of fund holdings across a variety

of asset classes to help smoothen the ups and downs of the market



FT India Dynamic PE Ratio FoF is the oldest fund in the category. It was launched in 2003. Since then, it has delivered returns of nearly 18% and has given positive returns for one year, three year as well as five year period. In the last one year, the fund has managed to give returns of 2.58%, while the BSE Sensex was down by nearly 7%.

Although SBI Magnum NRI Inv FlexiAsset has given negative returns of 1.66% in the last one year, it has in fact given returns of 13% since it was launched in 2004.

These funds usually give minimal returns during a bull rally. So in 2007 when the Nifty gave returns of over 54%, SBI Magnum NRI Inv FlexiAsset underperformed and gave return of only 35%. But in 2011 when the Nifty was down by 25%, this fund managed to give negative returns of 13%, thus indicating that it offers better choice during falling markets.

PROS & CONS

Asset allocation funds are ideal for times like the one we are in now. During volatility they give better returns then other funds and many a times even outperform benchmarks and provide a cushion against a fall in the markets.

Asset allocation funds are designed in such a manner that they have automatic triggers which can even limit the risks associated with actively managing funds on portfolio allocation. Such funds are ideal for investors who seek consistent returns without taking undue market risks. They do not provide any huge appreciation when the markets are witnessing a bull run. But they can certainly limit the downfall risk in volatile markets.

There are also chances that the returns

may take a hit when fund managers do not stick to the mandate given to them and take some aggressive calls.

Moreover, many schemes with less than 65% exposure to equity, are considered as debt schemes. And when the exposure in equity falls below 65%, it can add to the tax. While long-term capital gains from equity funds are not taxable, gains from debt funds are added to your income and taxed.

CONCLUSION

Well-managed asset allocation funds with a long track record can reduce the pain of timing the markets. There are many investors who redeem their money when the markets are down and again invest when they surge.

Like other equity funds, investors need to have a long-term horizon of three to five years for this fund. They must invest regularly. The idea behind this is diversification and professional fund management.

With multi-asset funds such as debt, ETF, thematic or sectoral, investors can make the most of the diverse asset classes. Depending on the positioning of the fund, each of the assets within the fund would perform from time to time. The main advantage of investing in a dynamic asset allocation product is that it does the function of asset allocation by itself. However, specific requirements of a customer cannot be answered by such funds as it purely depends upon the dynamics of the equity markets.

But if one does not understand the risks attached to it, then he/she can invest in a good balanced or debt fund which are closer to their goals. A dynamic asset allocation fund can be looked at with a long-term view if investors cannot get a customized financial plan for themselveS.

levels are a good indicator of valuation and are used by many asset allocation funds to balance portfolios.

Some of the asset allocation funds are FT India Dynamic PE Ratio FoF, ING OptiMix Asset Allocator, Pramerica Dynamic, Principal Smart Equity and SBI Magnum NRI Inv FlexiAsset. Investors can consider these funds if they want them in their portfolios.

Now, take the case of Principal Smart Equity Fund. This is an open-ended equity scheme and a P/E based fund, which dynamically changes its asset allocation between equities and debt/ money market instruments based on the weighted average price-earnings ratio (P/E ratio) of the S&P CNX Nifty Index (Nifty). The scheme decides on allocation of funds into equity assets based on equity market Price to Earnings Ratio (P/E Ratio) levels. When the markets become expensive in terms of a set ‘P/E Ratio’; the scheme reduces its allocation to equities and moves assets into debt and/or money market instruments and vice versa.

Franklin Templeton Dynamic PE Ratio FoF on the other hand is a fund with a unique in-built buy-sell discipline based on market conditions. Rebalancing is done on a monthly basis. Equity component is invested in Franklin India Bluechip Fund, a large cap equity fund, while the debt component is invested in Templeton India Income Fund.

DO SUCH STRATEGIES WORK?

If we look at the performance of dynamic asset allocation funds, then we find that they have not disappointed investors whenever the markets have been sideways. Also they have been around for almost a decade now. Hence, they have a solid history that investors can look at to take informed decisions.


� You Need A Huge Corpus To Make Money In The Stock Markets

In fact stock market is the only place where one can invest with as low as `1, by buying a single stock trading at a price of `1. And the same stock can become `10, `100 or even more if the market forces drive it up greatly.

In fact, the most successful investors of all time have started with meagre or paltry sums in the stock market and held on to their shares with a long-term horizon and within a span of 10 to 15 years they have become millionaires. Where else can you get such astronomical returns with such modest investment sums?

Invest small sums as and when possible in the markets and over a period of time your stock portfolio will start growing in number and price. Shares in the portfolio will also increase due to corporate actions like bonuses, splits, demergers, etc, not to mention extra income in the form of dividend payouts.

� Stop Losses Invariably Get Hit. So Don’t Keep Them

Many traders feel someone is constantly monitoring their stop loss positions and every time they keep a stop loss, it gets hit. The fact is no one has that much time or resources to monitor your every trade. If your stop loss gets hit, it is because you made an error in judgement in taking a call on the direction of your trade.

Many stocks in the market in the derivative segment have no circuit filters on them, that is, they can rise and fall to any extent. In case the stock you have bought suddenly crashes due to some negative news flow, you could lose almost 70% to 80% or even more of your corpus within seconds. You could become bankrupt in a day. A stop loss prevents

huge losses on individual trades when you go wrong and, hence, you retain your corpus for long and also sustain in the markets much longer. Trading without stop losses is like jumping into rough seas without a life jacket.

� Diversify Into A Variety Of Stocks To Get Maximum Returns

While it is true that one should not put all their eggs in one basket, it is also true that if one puts the eggs in many baskets, he/she may not be able to keep track of the stocks. Similarly, if an investor divides his corpus among several stocks, he will not be in a position to monitor the individual movements of each stock in detail and can miss out on opportunities of profit booking in some cases or limiting his losses in others.

Another negative would be that if few stocks in the portfolio are making profits, these profits may be offset by the losses in other stocks in the portfolio and you may never be able to make a handsome sum. Find out few good companies among large -cap, mid-cap and small-cap stocks with strong fundamentals, good dividend-paying record and have a proper mix of high, medium and low risk stocks in your portfolio in tune with your risk-taking capacity and long-term goals. Try not to hold more than 8 to 10 stocks at a time.

� Derivatives Are A Road To Disaster

Many old timers still have a morbid fear of flying but statistics have shown that flying is still the safest form of transport. Fear stems from ignorance and it is this ignorance regarding the working of the derivatives market that has given rise to this myth that derivatives are a road to disaster. In fact, derivatives (futures & options) are the best tools to hedge against losses in equities.

he English dictionary has many different meanings for the word ‘MYTH’ but the easily comprehensible

and the most appropriate meaning is ‘a widely held, but false belief’. Myth is something imaginary and not real. But over the years due to constant reinforcement of such beliefs, these myths get ingrained in the minds of the people and they seem real to them.

A number of myths pertaining to the stock markets have taken root in the minds of traders and investors, which prove to be a real hurdle or barrier in successful investing.

In this article we shall try and understand a few of these stock market myths and try and dispel your misconceptions regarding the same.

MYTHS

� The Direction Of The Index Governs All Stock Movements

Many people invest in the markets merely by watching the Index levels. A stock Index is just a barometer of the stock markets and not representative of each and every stock in the market. Out of the thousands of listed stocks, the Index comprises of a select few stocks, which have high market capitalization and high liquidity with each stock having its own weightage in the Index. It is just a comprehensive measure of the market trends and the general stock market price movement.

Many individual stocks outside the Index do not follow the trend or the direction of the Index. Each has their individual news flows, fundamentals, demand-supply mismatches, which makes their movements independent of the Index. Hence, do not invest in stocks based only on the Index. Invest in each stock based on their fundamentals and valuations.

T


For instance, if you have bought shares of a company, then you can buy a corresponding Put option of the same stock to protect against the loss in case the share price starts to fall. Derivatives also offer you great leverage. Even a small investor can never dream of investing `2 lakh to `3 lakh in the stock or the Index all at once. By using derivatives he can do so by just bringing in a fraction of that sum as margin money.

Word of caution: One should gain a thorough knowledge of the working of the derivatives market before investing. Keep strict stop losses; understand margin requirements like initial and mark-to-market margins and do not take on more risks than you can handle. By keeping these tips in mind, you can ensure that your derivative ride can lead to success rather than disaster. � Buy Low, Sell High

Most investors are always on the lookout for bargain stocks or stocks trading at low valuations. They feel that since these stocks are available at such rock bottom prices there is no room for them to go down any further and, hence, the only way for them is up. But remember that the markets are smarter than you can ever imagine.

Most of the times these stocks are available at such cheap rates for a reason. The markets know the internals of the stock and, hence, have punished it due to some intrinsic fundamental weakness, looming threats and bleak future outlook. These stocks may remain in the low range for a long time or can go down further to become worthless if the fundamentals go from bad to worse. Whereas stocks trading at high valuations have many positive factors going for them and are on the investment radar of retail investors

and institutions alike. So these stocks have a greater potential of generating higher returns in future. Remember nobody can time the markets or catch the proverbial bottom, so forget ‘Buy Low and Sell high’.

� More Trades = More Profits

It is not how much you eat, but what you eat that is important for a healthy diet. Similarly, your success in the stock market depends on your timing and your correct analysis of the stock and prediction of the direction of the stock and not on the quantity of trade. ‘Probability’ states that even after 10 successive loss-making trades, your probability of making a loss on your 11th trade still remains 50:50.

In fact, excessive trading can sometimes prove costly as your gains from a few trades can be wiped out by corresponding losses in other trades, not to mention the added overhead expenses associated with each trade. Do not swing at every pitch. Instead be like a spider which waits patiently for the prey to come into its web and strike at the right moment. Sometimes not trading and taking a break can be the best thing you can do.

� What Goes Up, Must Come Down And Vice Versa

Most retail investors never get a “piece of the action.” If the markets have gone up a couple of hundred points, most retail investors curse their luck saying that their window of opportunity has come and gone and there is no point in investing in the market after such a strong move. They pacify themselves by saying, “What goes up must come down”, and, hence, we will invest in the markets when it falls again. But alas, the markets do not fall for days, weeks, months on end and that couple of hundred point rally has now risen to a 1,000 or 1,500 point rally.

Contrary to what most believe, the market does not move in a cyclical fashion. It is random and news and information-driven. So, it is fruitless to try and wait for your dream price to come. If you feel that the valuations are right and future prospects look good, go ahead and invest right away.

� You Can Earn Money In The Markets Without Any Efforts

This statement is false in any field of life. There are no shortcuts to success and stock markets are no different. One might get lucky a couple of times but for consistent gains and a sustained career in the stock markets, he/she has to give time and effort in gaining knowledge.

Read good books and business newspapers and magazines, watch business news channels, listen to analysts and experts, do a thorough fundamental analysis of a company by going through their balance sheet and profit and loss accounts, past history, promoters, etc. Basically you have to give as much time to your stock investments as you would to any other business venture and your hard work will surely pay off.

� One Can Become A Millionaire Or A Pauper Overnight

If it were really so, you would only have millionaires or paupers roaming the street as in today’s world almost everybody is connected to the stock markets in some way or the other. The markets don’t go flying or crashing overnight to unbelievable levels.

Also, in the worst-case scenario you only stand to lose that amount, which you have invested and, hence, it is advisable to invest only that sum which you can afford to lose without losing sleep over it. Also, the gains would be only in proportion to the capital investeD.


Beyond MarketVisits Jaipur

Beyond Market, an investor education camp organized by Nirmal Bang in association with ET Now was held at ITC Rajputana Sheraton in Jaipur on 23rd June.

The equity camp was held with the aim to bridge the information gap between experts as well as novice traders and investors alike, thus enabling them to take informed investment decisions.

A group of eminent speakers comprising Mehraboon Irani, Principal and Head, Private Client Group at Nirmal Bang, Sashi Krishnan, CIO at Birla Sun Life Co Ltd and Gul Teckchandani, Investment Advisor addressed the audience.

ET Now’s Niraj Shah anchored the event.

Mehraboon Irani, the first speaker of the day spoke about the current economic and market scenario and the factors affecting the same. He first explained the ingredients of a slowdown and a spate of negatives and then stated that growth has been at its lowest since 2003, highlighting the weak economic fundamentals of the country. Moving forward, he said in spite of all the negatives, he was optimistic about the markets in the near-term.

Irani said, “India has a time window and the government will have to act and take immediate measures to shore up the confidence in India.” He also gave the estimated Sensex EPS for the year 2012 and 2013 along with the estimates for both the years for Nifty and Sensex.

He also gave a sample list of large-cap and mid-cap fundamentally sound companies with good management and business, earnings visibility, decent cash-flow and relatively cleaner balance sheets.

According to Irani, the large-cap stocks that look good are HDFC Bank, CRISIL, IndusInd Bank, ICRA from the banking sector, Colgate, Dabur India, ITC from the FMCG sector, Sun Pharma from the pharmaceutical sector, Asian Paints, Castrol from the consumption sector and TCS from the IT sector.

Similarly, the mid-cap stocks which can be considered by market partici-pants according to Irani are DCB, ING VYSYA Bank, J&K Bank from the banking sector, VST Industries, GSK Consumer, Godfrey Phillips from the FMCG sector, Wyeth, Pfizer, Abbott from the pharmaceutical sector, Akzo Nobel, TTK Prestige from the consumption sector and NIIT Technologies, Hexaware from the IT sector.

He gave certain dos and don’ts for the investors, which would help them in trading in the stock markets. He advised investors against predicting the indices and told them to avoid companies where shares are pledged or corporate governance issues persist. He also asked investors to be patient when buying stocks. “Investors should invest in fundamentally sound scrips and be disciplined while buying quality scrips that enjoy high liquidity,” said Irani.

Shashi Krishnan took over the discussion and concentrated his talk on ‘how an investor should make allocations’ and ‘what is value investing’.

Mehraboon J IraniPrincipal and Head - Private Client Group (PCG) at Nirmal Bang Securities Pvt Ltd

Mehraboon J Irani is the Principal and Head of the Private Client Group at Nirmal Bang Securities Pvt Ltd. Previously, he was associated with FCH Centrum Wealth Managers Ltd. He has over 20 years experience in capital markets. At Nirmal Bang, he works on increasing brand visibility, improving client base, retaining and improving business with the existing client base as well as providing active advisory services. His previous stints include FCH Centrum Wealth Managers Ltd, Darashaw & Company Ltd and Afternoon Despatch and Courier. He holds a masters degree in Financial Management from Jamnalal Bajaj Institute of Management Studies, Mumbai.

With guidance from industry experts, market participants can now take informed decisions


Speaking about value investing he said, “An investor needs to follow seven simple points - write down your investment plan, diversify, have a long-term focus, invest regularly as the earlier you start, the better, know what you are doing and do not base your investments on what others are saying or doing, understand your plan to know why you are in a particu-lar asset class and lastly follow your plan.”

“Asset allocation is the key to determining how your portfolio will grow,” he reiterated and added that age and risk allocation are two important aspects that will determine which asset class an investor will get into.

According to Krishnan, life insurance is a must for one’s financial plan. Investors can also look at SIPs and STPs as investment options.

Krishnan gave four key considerations for asset allocation: asset to be considered for investment, weightage of the assets in the portfolio, when and how there will be a change in the weightage of the assets of the portfolio and what specific securities should be purchased for the portfo-lio. He also shared asset allocation strategies with the investors and said that these strategies work in all kinds of markets.

Krishnan emphasized on the importance of value investing and said, “The way to create wealth is through value investing.” He advised inves-tors to identify the right opportunity and stay invested for a long period of time. But it requires a lot of disciple and self-control.

“It is not important to time the markets as the right time to invest is when you have money,” emphasized Krishnan.

Gul Tekchandani, the final speaker of the day said, “Look at what is happening in the country, look at opportunities, create a portfolio that has proper asset allocation, don’t follow the crowd, have patience, learn to take conscious decisions and finally respect money.”

Giving an account of the recent rupee dollar news, he said, “Investor wealth is getting destroyed due to rupee depreciation.” He advised the audience not to invest in stocks based on market speculation.

He said that only patient people should invest in stock markets, as only in the long-term can people actually reap benefits. Talking about deriva-tives he said, “Derivatives are nuclear weapons and people should not invest in them.”

On a lighter note, he said that stock market is the only business where the government is not able to put an MRP till date. His talk was filled with lots of examples which a common man could easily connect with.

Like others, Tekchandani too laid emphasis on proper asset allocation for increasing the wealth, adding that he was positive on HUL and GSK Healthcare. He finally advised investors to buy when the markets are low and sell when the markets are high and do it at regular intervals.

The event ended with a round of questions and answers from the enthusi-astic audience.

Sashi KrishnaChief Investment Officer atBirla Sun Life Insurance

Sashi Krishnan is the Chief Investment Officer (CIO) of Birla Sun Life Insurance. He has a rich experience of 25 years in the Mutual Fund and Life Insurance industry. Sashi has done his BE (Hons) in Chemical Engineering and MSc (Hons) in Economics from BITS, Pilani. He also has a Diploma in Management from IGNOU with a specialization in Finance. In addition to this, he has also done CAIIB from the Indian Institute of Bankers. Prior to joining BSLI, Sashi was associated with Bajaj Allianz Life Insurance Company, DBS Bank, DBS Cholamandalam Asset Management Ltd and Unit Trust of India.

Gul Teckchandani Investment Advisor

Gul Tekchandani is an investment advisor and currently manages various funds and portfolios. A Chartered Accountant and a lawyer, he has over two decades of experience in the Indian equity markets. His views and comments on the stock markets, macro economic scenarios and other varied topics are sought by the media often.

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