Corporate Finance

Technical check on a couple of stocks

2009-12-12T20:38:00.000+05:30

Watch the chart pattern of Grasim Industries closely. The stock that began a head and shoulder pattern from may 09 finally broke its neckline at 2700 and corrected all the way upto 2100 in mid October, whereby it has found intermediate support to enter into a bear flag which is currently under progress. We expect the stock to stay range bound between 2400-2500 through the month of December until it gives a breakout below 2400 on strong volumes which would confirm a bearish continuation pattern. We would be closely watching this counter to initiate appropriate trading moves as and when the pattern plays itself out. For aggressive traders, one may short the stock even at current levels with a stop loss at 2600 for a target of 1800.Traders may book partial profits at 2100 which would be 50% of the targeted decline.

Fig 2 given below is the chart of nagarjuna construction which is presently looking weak and might present an interesting shorting opportunity in the near term. The stock has made a partial rise on its third attempt to scale the resistance trend line and with overhead supply preventing the stock from breaking through, it had to retrace to levels of 150 as on Friday’s closing. The stock clearly is headed down and might give a decisive breakout from its wedge formation if it closes below 145 which acts as the trendline support level. Traders may short the stock placing a stop loss at 158 for a first target of 145 and then 120 in the medium term. Stochastic indicators like relative strength index, price volume trend, moving average crossover, accumulation distribution line are looking weak. The stock has also closed below its lower Bollinger band at 157. Trade well.

Historical Replacement of Sensex Scrips

2009-11-12T04:56:00.000+05:30

Only four companies that were excluded from Sensex at various points in time have been able to make a comeback namely Hero honda, Larsen and Toubro, Tata power and Mahindra & Mahindra. No wonder these have created so much wealth for their stakeholders

Opto circuits - An inorganic compounder

2009-11-10T20:35:00.003+05:30

Opto Circuits (India) Ltd. is engaged in the development, manufacture, distribution and marketing of medical equipment and devices. The Company also provides ancillary and complementary services, such as after-sales services for its patient monitoring devices. In addition, the Company provides information technology consulting, global positioning systems and electronic design automation services in India. The Company's product range includes Pulse Oximeters, Pulse Oximeter Sensors, Fluid warmers, Cholesterol monitors and Stents. Its healthcare products include multiparameter monitors, digital thermometer and cholesterol monitors. Its opto electronics products include infrared emitters, infrared detectors, and photo sensor, detector and emitter assemblies. The services offered by the Company includes healthcare equipment, information technology and bankcard technology, strategic electronics and electronic design automation. In April 2008, the Company acquired Criticare Systems Inc. The company follows a policy of organic and inorganic growth to deliver value to its stajkeholders. Opto operates globally with six subsidiaries acquired over the last couple of years turning out to be EPS accretive.

Rewarding shareholders on a regular basis:

The company has an impressive history of rewarding shareholders through regular bonus issues albeit diluting the equity base by atleast 10x over the last 5 years. The promoters have also been increasing their stake in the company by infusing funds at regular intervals to fund Opto's inorganic growth ambitions. The active interest promoters have displayed over the years by regularly investing into the business coupled with the increasing equity base in the form of bonus issues shows their confidence in managing and creating stakeholder value and also the management's commitment to seeing opto gain traction and market share in the $200 billion medical devices market.

Steady financial performance
Opto has reported robust growth over the last 4 years in excess of 60% in revenue terms and 55% (CAGR) growth in net profit terms duly aided by profitable international acquisitions. These acquitions in the medical device market were funded through a mix of internal accruals, follow on public offer and preferential issue to promoters. Debt requirements have increased over the years largely to fund working capital constraints as the company receivable days are quite high at 6m and its international operations justify sizeable inventory holding throughout the year.
The debt protection ratios are pretty stable with interest coverage ratio in excess of 4x and debt/EBITA at less than 1x. Given the short term nature of borrowings, they are not expected to pose any threat to the financial profile of the company given the free cash flows the business generates on a continuos basis. Moreover the recent QIP issue is expected to clean up debt on the balance sheet resulting in opto becoming debt free by end of this fiscal. The domestic medical devices market (estimated $3 billion) is extremely fragmented and intensely competitive with the presence of both established and unorganised players(more than 700 players) vying with each other for the potential healthcare opportunity in India. Realising the pricing pressure that this scenario will have on Opto's financial profile and the huge external opportunity for medical equipments in the global mkt in terms of sheer market size, the company decided to focus on exports and today derives close to 95% of its income from geographies like US, Europe and Africa. The company has set up marketing and distribution offices across 55 countries and its prudent strategy to acquire medical device companies in the respective geographies of foray has only helped Opto establish strong relationships with hospitals, nodal healthcare agencies and manage costs better. Opto's management will redirect its focus on the Indian market only after certain regulatory hassles are eased out by the government for the sector. The company has been pressing the government to grant infrastructure status for the industry and unify the industry under a single regulator as against the multiple regulatory system at the centre and state level that's prevalent now. India's healthcare spend as a % of GDP and budgetary allocations also need marked improvement for Opto to withstand competition domestically. The company's export oriented focus has resulted in stable margins both at the Operating and PAT level of 35% and 25% respectively aided by

Valuation

We expect Opto circuits to report FY 10 EPS of 14.4x and FY 11 EPS of 17x (assuming no bonus issue or dilution) on the existing equity base of Rs.182.9 million. The CMP of Rs.211 discounts FY10 EPS by 14.5x and FY11 EPS by 12.4x indicating fair valuation at current levels. We expect the stock to be a reasonable compounder in the long run. We recommend a hold on the stock.

Real estate truth

2009-10-27T16:08:00.004+05:30

All citizens of India..pls take a look at this excel spreadsheet.. Its something none of us can afford to ignore. The sheet shows the progress made by our Indian banks (both public and private sector) in competing with each other to lend to real estate developers. The trends in real estate developer lending has seen robust growth whereas the amount lent to housing loan borrowers has shown a sizeable decline year on year. All the data has been collected from RBI's website..What does this data tell us?

E:\real estate shocker.mht

1. Real estate developers with poor fundamentals are financing their
working capital requirements through bank funding whereas the
needy section of our population (which is u and me)that needs
affordable housing is being declined bank loans.

2. A company like HDIL and a few other real estate companies have
increased their top management remuneration by 200% yoy in a
recessionary period like 2008-09 despite poor operating and
financial performance. Why do these companies need bank funding?
They get to have the cake and eat it too.

Remember it is your money that goes into the bank as a deposit that get lent to real estate developers. This explains the reason why real estate prices will always remain high in India. When these developers, through political nexus or some other means obtain easy loans from banks, there would be no need for them to bring down prices and make homes affordable. The needy segment and the large masses living in slums will never get housing loans to buy their dream of owning a piece of real estate.

Given this background, I would request every bank deposit account holder to enquire with your branch manager as to what is their exposure to real estate loans. We have the right to question them, since its our money they are lending out happily. Only when awareness amongst the public at large increases, will a malpractice of this magnitude end, to ensure proper allocation of funds borrowed from us by banks to the needy sections of the economy.

Else India will remain a slumdog economy:(

Contrarian Investing : Contrary to normal thought

2009-09-05T14:41:00.002+05:30

Contrarian Investing, an offshoot of value investing concept has hardly failed anyone in recent history. The stocks we are going to discuss have been the biggest outperformers in the last one and half years and all of them have been contrarian investing calls. What is contrarian investing? It is about buying businesses with sound fundamentals when it reaches a price far below its worth on account of panic selling or carnage in the market or in that particular stock counter. Investors rarely act in a rational manner, engulfed in greed and emotions most of the time. In a bull market, they fail to protect their profits and in a bear market, they fail to buy fundamentally strong businesses at low valuations. Contrarian investing is about "detachment" from the herd mentality and thinking out of the box to grab a Rs.1000 currency note by just paying Rs.100. Lets see a few examples. Take Satyam computers now acquired by mahindra and renamed "Mahindra Satyam". The stock, soon after the scandal broke out, fell to never before seen junk levels of Rs.6 before rebounding to Rs.120 now all in a matter of 9 months. The value creation and compounding has been mindboggling for a 9 m tenure. Its been a multibagger generating 20 times wealth from its lows. I missed buying it and i regret it to this day. There was no guarantee when the stock fell to Rs.6 that the business would survive but i should have also known that they had 50000employees whose lives were at stake plus India's reputation as an IT destination. The country had its neck on the line and could not have afforded a catostrophe in its sunrise sector. And hey at Rs.6, my downside risk was minimal, the stock could atmost go to zero- we dont deal with integers in the stock market. So I missed the lifetime opportunity and so did many others of my ilk.

There are so many other "good" companies in the Indian market which suffered decimation at the hands of a few punters due to some bad news related to the sector or company specific negative news flow. It is at these vital moments that as investors we need to sit back for a minute and evaluate these considerations:

1. Why is the stock getting whacked out of shape? How bad is the news for the
company, what is the impact on revenues and the bottomline ?
2. What is the valuation now and how cheap does the stock look compared to its
historic valuations. Compare the PE (price earnings ratio over say 10 years) and
see how close are the valuations to the historic lows. Is the market overreacting
to bad news as was the case in Wockhardt, United Spirits, Glenmark, Orchid
pharmaceuticals etc
3. Finally when u find a stock getting decimated, just answer this one important
question. Will the business survive and the company remain a going concern. This
is the most important query the investor will have to rationalise and once he
finds the answer to be "Yes", u should just go out, take a position in the stock
and wait for the markets to reward you. Was a united spirits (UB group)going
to fail as it was saddled with huge debt?(were people gonna stop drinking- never-
there was an answer). Was Satyam going to fail ? Not a single client of theirs
had thrown the towel in even after the accounting scandal broke out. Was Glenmark
or a ranbaxy gonna go bust? they were producing vital drugs and medicines for the
world market. Will Kingfisher or Jet airways go to pieces? These are business
class airlines and people are not going to stop flying.Was Unitech going to pop
up? They have been in the real estate field for 30 years and have executed World
class projects in the NCR region. Their execution skills have been remarkable.
The debt that they had piled up had become a serious problem resulting in the
stock falling to Rs.25 last year when their yet to be launched telecom business
alone was worth Rs.15 per share. You were getting the core real estate business
for almost free at Rs.10. That was grossly absurd and many meatheads like me
missed buying it to only see the stock reach 105 yeterday. A mere regulatory
hassle or one source of revenue disappearing is not going to affect a diverse
business stream except maybe in the short run, which is when, the markets do
react irrationally giving investors the perfect opportunity to cash in on the
price advantage. Its in a crisis time when opportunity beholds itself with the
risk reward ratio perfectly in favour of the "intelligent" contrarian
investor.Remember, the markets are a voting machine in the short run but a
weighing machine in the long run.

Always remember that wherever the core business of the company is still running
strong at full steam, generating sizeable cash flows, that company shall come out
of a balance sheet or debt crisis pretty easily through various deleveraging
options. Both "timing the market" and "time in the market" matter a lot in
investing. I have learnt my lessons, have you?

Direct taxes :Interesting case laws

2009-06-23T01:34:00.021+05:30

For Sec 41 of income tax act and its deeming provisions to apply, there must be a deduction of expenditure, loss or a trading liability in a previous year. The deduction for the loss, expenditure or trading liability should have been duly allowed by the assessing authorities. In the year where there is any recovery of such deduction in the form of recovery of loss or expenditure or where there is a remission of trading liability, the same shall be brought to tax as deemed profits u/s 41.

Treatment of expenses in relation to issue of bonus shares:

When Bonus shares are issued, they are just capitalisation of reserves and do not involve fresh issue of capital or dilution of equity base. They do not create any enduring benefit for the assessee. Therefore under the given cirucmstances, there is no way that expenses related to issue of bonus shares can be treated as capital expenditure. They are revenue expenses deductible from business income

Treatment of expenses incurred on behalf of sister concerns

The same will be allowed as business expenditure if proved to the satisfaction of the Assessing officer that the sister concerns are vital business interests of the assessee and incidental to its operations.

Additional grounds of appeal can be raised even at the tribunal stage even if not raised before the first appellate authority provided there are reasonable grounds for raising the appeal at a later stage and the intitial omission was not wilful with an intent to deceive.

Scientific research expenditure incurred need not be related to the assessee's business for availing the deduction u/s 35.

Amount paid to retiring partner of a firm out of accumulated profits will be considered distribution of accumulated capital of the firm and Sec 45(4) shall come into force as this transaction will be treated as a transfer u/s 2(47). Though it is intended to assume control over the firm, the payment is capital in nature

Holding company receives assets on voluntary liquidation of the 100% subsidiary , the transaction will not be treated as transfer by virtue of Sec 47 which deals with transactions not regarded as transfer. Sec 47 specifically provides that Where there is a transfer of a capital asset from 100% subsidiary to holding and holding company is an indian company, the transaction shall not be liable to tax.

Where a judgement for enhanced compensation has been appealed against by the IT authorities, the same shall not accrue or be taxed in the hands of the assessee until the finality of judgement in the high court.

Mere extension of an old building will not be construed as construction of a new house for purposes of claiming exemption u/s 54F

Distribution of capital asset on dissolution of a firm to ex partners to repay the debts owed to them in the form of capital contributed by them in the past will not be covered under the mischief rule of interpreting 45(4). In the above case, yes there is distribution of capital asset on dissolution but when the same is made to ex partners, the same shall not be considered transfer that would attract capital gains.

Even where a firm is dissolved and assets are distributed and thereby taken over by a partner for his own business, the transaction will be regarded a transfer and capital gains will be attracted in the hands of the firm u/s 45(4)

where a person is a partner in a firm as a karta in representative capacity of the HUF and where his wife is a partner in the firm, he cannot be considered to be holding substantial interest in the firm based on his representative capacity and therefore salary paid to his wife will not be clubbed in his hands.

Income is accumulated in a trust on behalf of the beneficiary who is a minor and will accrue to him only upon attaining majority age..therefore until then income does not accrue to the minor. The same shall not be clubbed as it is not ready to use by minor.

What is manufacturing is a moot question u/s 80IB,,A new identifiable product must emerge from the same to render a process as manufacture

For purposes of Sec 80P, godowns and warehouses form part of cold storage and such incomes from cold storage would be exempt.

The powers to transfer cases are contained under sec 127 of the IT act. The DGCC or commissioner will have the power to transfer cases from one assessing officer to another. The assessee will be given the opportunity to be heard but cannot demand that a particular officer or a particular area be the jurisdiction for assessment. The authority effecting the transfer will go ahead with the same if it is to his satisfaction that the area where cases are being transferred has some business connection with the assessee.

As far as Sec 147 reassessment proceedings are concerned, the same can be initiated only when the assessing authority has enough reason to believe and not mere reason to suspect that income has escaped assessment. The books of accounts of the previous year were found to be defective and best judgement assessment was carried out but the same cannot be a reason for assuming that income would have escaped assessment in the previous years. There should be material evidence in posession of the authority to prove that income has escaped assessment for a particular year

If the assessee has failed to claim a particular deduction in the original return, he may claim the same by filing a revised return within the stipulated time period. A question of law can also be raised in the presence of the ITAT provided it has an impact on the income tax liability of the assessee. This was a landmark judgement where for the first time a question of law was raised in front of the apellate tribunal instead of the courts in goetze India vs CIT

Where the assessee had made certain notings in his private diary and the same was not fully disclosed in the books of account, in respect of a sale transaction of a land, such diary if seized by IT authorities will tantamount to the difference being treated as undisclosed income liable to tax. The income shall be treated as income escaping assessment and notice shall be issued u/s148 as there is sufficient material in posession and reason to believe income has escaped assessment.

Where a method of accounting has been followed regularly by the assessee year on year consistently and the same has been accepted by the tribunal, the latter cannot disallow deductions by taking a contrary stand in a fresh assessment year

Failure to furnish audit report within prescribed time as required by sec 44AB will result in penalty proceedings being initiated by AO u/s 271B. The assessee will be given an opportunity of being heard and if his reply is not convincing penal provisions will have effect. But if AO does not initiate action against the assessee then the order can be considered prejudicial to revenue and Sec 263 revisionary powers of the commissioner shall have effect.

Where penalty has been levied under Sec 271 C for not deducting tax at source, the same cannot be levied again for non payment and non filing of return as where no tax has been deducted, the question of payment and filing of TDS returns do not arise. Its a matter of substance over form. Penalty can be levied only once in respect of a particular offence. There can be no levy of penalty for an offence arising as a consequence to the offence for which penalty has already been levied.

Before the assessing officer embarks on a search mission u/s 132, if the Assessee discloses his income he can escape levy of penalty for concealment

Once a revised return has been accepted by the assessing officer or the department, the same cannot be acted upon for levy of penalty. A revised return is filed to rectify a defect in the original return and hence the same cannot be proceeded against with penal proceedings post filing of the same.

Sec 194 H does not apply to stamp vendors whereby stamp papers are sold at a discount to such vendors by the treasury. These stamp vendors are not considered agents of the treasury and no tax shall be deductible at source. These are just buyers and they are not rendering any service for them to charge commission. They are merely buying and selling and thats not service

For sec 194C to apply whats relevant is a contract for work and not a contract for sale. A contract for sale will not attract TDS provisions.

Sec 195 provisions shall apply to any payment in the nature or which carries the character of income

U/s 206C, TDS on liour price will be deducted inclusive of excise duty and relevant taxes as purchase price includes all of that

All the justification u need to invest

2009-06-07T15:37:00.001+05:30

So does this mean that now is the time to get back into the market? Is the worst now over for investors or are we simply experiencing a bear market rally? No one really knows, and in reality we will only ever know for sure with the benefit of hindsight.

The reason I highlight this recent market strength is to point out an interesting irony that often acts to paralyze otherwise sensible investors. A peculiar facet of investor psychology is that there is often a significant disparity between what we think we will do in a given situation, and what we actually end up doing.

Back in March when the market was at a five year low, people were avoiding making purchases and quoting the maxim that you should never buy into a falling market. Most investors recognized that shares were cheap, but were fearful that losses would continue. Many investors said that they would only start to buy when things started to improve, and a new up-trend was established.

However when things did actually start to turn, fear and skepticism meant that many investors saw this as nothing more than a brief reprieve from the dominant downward trend. As the rally continued, the more it seemed inevitable that the market would soon turn, if for no other reason than profit taking.

Now in early June, following three months of amazing gains, most investors are still reluctant to enter the market. People are saying that the next leg down is just around the corner, and that the recent gains are unsustainable with stocks heavily over-bought. Now people are saying that they will buy on the next pull back.

Regardless of where the market actually goes from here, you can see that there is an obvious disconnect between expected behavior and actual behavior. The tragedy is that most novice investors, especially those that have been burnt, will only be tempted back into the markets after prolonged and significant gains are observed. That is, after the majority of the recovery has occurred. Of course, this also means that these investors will be buying closer to the top of the market, when there is greater downside risk.

Attempting to exactly time the bottom of the market is a difficult and distracting task and is not essential to long term success. If you believe that the market will be higher when you plan on selling, then thats all the justification you need to make a purchase. When it comes to investing it is not the journey that matters, but rather the destination.

Make the markets work for you

Investing after golden monday

2009-05-21T20:57:00.010+05:30

The election verdict in India was totally unexpected. yes the exit polls were predicting a slender lead for UPA. But none expected them to get anywhere within striking distance of a majority. This was the ultimate gamechanger in market history, long after the verdict of 1991 where the P.V.Narasimha Rao govt won absolute majority and intitiated the first generation reforms under the able guidance of Mr.Manmohan Singh through the New Industrial Policy. The times that we are living in are so gloomy that this sort of a positive news has changed market sentiment overnight and can be judged to a large extent as putting us on the right path to get out of the bear market far earlier than expected. There is almost conviction amongst market participants that the lows of Oct 2008 will not be revisited even under highly stressful or catastrophic global events. The markets reacted with such high euphoria that we opened gap up on Monday morning with the sensex rising more than 2000 points and market operations halted for the rest of the day due to circuit filters getting breached. The velocity of this rally has taken the entire investing world by surprise with its speed and tearing momentum. The markets crossed 9000 on 23rd March 2009 breaking out of a channel formation and it was expected that the same would be a bullish reversal. Most of the auto, banking and interest rate sensitive stocks broke out of their respective patterns around this time, but none of us prognosticators expected the market to break above the 200 day moving average of 11000. The markets too faced a strong resistance at these levels and struggled throughout April consolidating around the moving average levels. I guess the fact that the market broke out from 9000 levels was the first opportunity for long only investors to get into the market and for the naysayers one more chance went abegging once the moving average levels were surpassed towards April end. Now where do we stand..Most of us have missed an entire 50% ride from the lows to 15000 given the pessimism (justified to an extent) and skepticism with which we viewed the surge and dismissed the same as a mere bear market rally. Yes, this might well still remain a bear market rally disguised as a new bull market. The rally was the result of extreme pessimism and disbelief amongst investors. The more and more analysts kept predicting doomsday scenarios predicting a 3 year bear market with further lows at 6000, investors were filled with negativity and their eyes could not see the opportunity that was presenting itself with stocks quoting at unbelievably cheap prices far lower than replacement costs or even cash value. Examples i can think of are Sesa Goa, Neyveli lignite, opto circuits etc. As investors saw markets rising from 8000 to 9000 and then 11000, they were just hoping for a correction to buy on dips and markets refused them the chance to do the same. The veering trend we witnessed from the lows of the satyam saga just kept pushing the market to consistently higher levels and then the masterstroke in the form of UPA poll verdict. Now investors are smarting from the lost quarter. Mutual funds that were sitting on huge cash and thumbsucking all these months are facing difficult queries from investors about their underperformance. This rally which initially started of from 8000 as a liquidity fuelled rally from anglo saxon FII's was a reversal of risk aversion to a partial extent given the positive greenshoots and stimulus packages from various governments of the world in what was seen as a coordinated effort to restore the financial world and prevent a systemic crisis that might result in a debt deflation for the main economy. Throughout 2008 and early 2009, money was flowing into US treasury bonds for safety and reflected the risk aversion displayed by market participants. With stimulus packages being doled out dime a dozen and banks/financial institutions awash with liquidity, money had to chase profitable performance. Parking all the money in US bonds was only going to yield sub optimal returns. With Obama coming to power in the US and the new treasury secretary Geithner's Public private investment plan to recapitalise banks exuding confidence coupled with G20 promising coordinated action to restore financial stability, risk aversion had begun to scale down and money has started flowing into equities globally. Considering the fact that emerging markets are considered riskier, the indices have outperformed the SnP over the last few months.

However all is not lost for the value investors. They need to take a step back and look at what has happened over the last week or so in a clear and lucid manner.They should ask themselves tough questions like "What was not looking cheap at 9000, how is it looking cheap at 14000" before putting their money to work. We are already trading at more than 16 times FY 10 EPS which by no means is cheap. We must not follow the herd mentality and be branded as pioneers of the "greater fool theory" and end up buying the junk at high prices. What we saw from 3600 to 4500 was irrational exhuberance and lets allow some time for rationality to set in. Markets wont gallop in a tearing hurry from here on. They will give us opportunities time and again. Mr.Market is not a one way street. The market is not going to race away to 21000 from here and will take its pause, consolidate, yo-yo for some time and then come down before resuming its bullish ways. Remember the global recession is not over by any means and there's still some distance to travel before we wre completely out of the woods. Even from the domestic viewpoint, the fundamentals of the economy have not become buoyant all of a sudden. The problems on the export front have not disappeared. Having said that this rally of golden monday and tuesday has indeed created a disequilibrium in the market as explained in the theory of reflexivity by george soros. He evangelises the concept that just like how fundamentals can affect markets, market movement can also affect fundamentals which is largely acceptable and true. Its only the formation of a stable government at the centre without the leftist interference that has spurred sentiment favourably. There are expectations of reforms in various sectors of the economy and with political stability in place, business confidence is also set to rise. With FII's and hedge funds looking out for profitable avenues to park their money, they have zeroed in on India for the time being in the hope that many positive changes can happen here in quick time in an otherwise gloomy global setup.

Elliot wave chartists have also predicted that we have almost turned the corner as far as bear markets are concerned. We have already completed the five waves of a bear market from 21206 to 7697 and we are in the process of completing the balance 3 waves out of the total 8 waves of a bear market. We are in the last wave C of the bear market and that in my opinion has ended when the market came within kissing distance of 15000. So if you are an investor who believes in elliot wave theories, the next time we witness a solid fall to lower levels should be an opportunity to buy as the next rally we might witness on the upside might be sowing the seeds of a new multi year bull market which will take us to newer highs on the nifty and sensex over a period of time. Having said that, the probability of we tetsing the lows from here on is next to impossible. We will not fall below 9000 even under the worst global circumstances. I can say that with reasonable conviction now. The present pull back in the sensex over the last couple of days might continue until we reach 4000 on the nifty. Thats the support level where one can expect some more buying to happen. It would be prudent for investors to allocate 30-35% of their funds when the index scales back to 4000 on the nifty. The biggest advantage of having a pro reforms government is that business sentiment gets a huge fillip in such a short span of time. Banks start lending, IIP goes up, Capital flows reenter the country, FDI and private equity deals start happening again. To put it in a nutshell, the growth prospects of the economy appear positive and many global equity analysts will upgrade India and accord a premium valuation to frontline stocks as markets always factor/discount the future well in advance. The decoupling theories have already started doing the rounds in investor circles. The intelligent verdict of the indian populace to vote for a stable pro reform government has been the biggest greenshoot our economy has received so far.The key sensitivity or risk to buying Indian stocks can only be an abnormal slackening in the pace of reforms which might end up disappointing the markets at large. Also the other point investors should keep in mind is the fact that its the same beaten down stocks that are moving up again like the same real estate and commodity stocks, which some theorists point out is a continuation of the bear market.

The Legend Lives on : By Dr.S.Krishnaswamy

2009-05-14T04:23:00.002+05:30

A tribute to the greatest actor and one of the great Tamilians that we all know of:

Sivaji Ganesan's voice and diction not only changed the course of dialogue delivery in Tamil films and plays, but also had a deep impact in the manner in which the language is spoken by narrators on Radio and Television.

ALTHOUGH WE are constantly aware that we are all mere mortals, we are unable to reconcile with the mortality of some people. ``Sivaji'' Ganesan is one such - an immortal in our minds.

``Long live Bharathan....'' blessed Rajaji, after the film ``Sampoorna Ramayanam'' was screened for him. Sivaji Ganesan had performed the role of Bharatan. Those brief words of Rajaji, who rarely watched films, were unconsciously pregnant with identical ideas of film historians and researchers on Tamil Cinema. ``In the desert of Tamil films, an actor by name Sivaji Ganesan is an oasis'', I had said, in my article on Tamil films for an American arts magazine in the 1970s. Earlier, Erik Barnouw and I, in the first edition of our book ``Indian Film'' (1963), had commented, ``Seldom has substantial talent been used more recklessly or profitably''. A world-class actor remained a regional star, essentially because the ethos of Tamil Cinema was never in the wavelength of world cinema - celebrated as the Seventh Art. But even a diehard enthusiast of realism in films, had to sit up and watch Sivaji. That one hand gesture of Bharatan, meaning ``lets go'', in ``Sampoorna Ramayanam'' is not merely etched in my memory, but has been adapted, and re-enacted by a hundred film actors, and even classical dancers on stage.

It was often worth spending the nearly three hours watching immature story lines and inept directorial handling, to experience those sparks of true genius of an inimitable actor - Sivaji. His performance was stylised - drawing from the immeasurable depth of India's racial memory of many millennia, from artistes of ancient Tamil and Sanskrit Theatre. This was often erroneously described or even criticised as ``over- acting''. Well, if your theme is melodrama, your performance has to match it. But Sivaji Ganesan's range and immense versatility, did not confine him to this stylised performance alone. He could challenge any actor of the realistic school, when the need, the story and character demanded it. His career's best performance (in my opinion) as V. O. Chidamabaram Pillai in ``Kappalottiya Thamizhan'', puts him on a pedestal among the all-time- greats of world cinema, as an actor. The biographical, which was well researched, gave him the scope to re-create the ambience, maintaining the integrity of character - the realistic human side of a great patriot of the Freedom Struggle.

In contrast however, many fans remember him for his melodramatic portrayal of Kattabomman. Although made by the same creative team which was responsible for the suave, artistic and authentic ``Kappalottiya Thamizhan'', ``Veerapandiya Kattabomman'' was historically far from accurate. It was more like a costume drama or a mythological. Sivaji's performance was in tune with that treatment. Even today, nearly four decades after the release of the film, when enthusiastic parents bring their children for audition to perform in our TV serials, the boys invariably deliver Sivaji's dialogue from ``Veerapandiya Kattabomman'' to demonstrate their histrionics. Sivaji Ganesan's voice and Tamil diction not only changed the course of dialogue delivery in Tamil films and plays, but also had a deep impact in the manner in which Tamil is spoken by narrators on Radio and Television.

Unique among the film styles of the world, song sequences in our films constitute an inheritance from ancient Indian theatre. There was indeed, no one to beat Sivaji in ``rendering'' the songs. Never for a moment would you feel that he was lip-wagging for the playback singer, since his gestures and mannerisms were emotive manifestations of consummate skill, artistry and flair, unlikely to be matched even by original singers.

Apart from the infrequent courtesy calls, I have had the privilege of talking in-depth to ``Nadigar Thilakam'' - as his fans reverentially called him - three times. First was my hour- long interview for the first edition of ``Indian Film'', in 1962; the second in the 1970s for a Bombay-based film magazine and the third for an American Academic journal in the 1980s. He has sometimes been described as one constantly wearing an actor's mask - that he conversed as though he was delivering a dialogue. On the contrary, at least some parts of my interactions with him revealed a simple, transparent personality. For instance, soon after his return from his first trip abroad (to America as an invited guest of that Government), I asked him ``How was America?'' He first said, ``You have studied there. What am I going to tell you about America?''

``I mean your own reactions - how did you enjoy the visit?'' I asked.

With hardly a moment of hesitation there was a sincere answer. ``First I was struck with wonder. Then I was uncomfortable and felt embarrassed. Gradually, I felt very happy'', and then he expanded, ``The first impression of wonder was with the sights which were beyond what I had imagined. I was then uncomfortable because, I felt I was just another face in the crowd. Having got used to the attention of my people back in Tamil Nadu, it was a strange embarrassment to walk in crowded streets without anyone taking a second look at me. Gradually, I felt it meant at the same time, a rare liberty to be myself. And I enjoyed that''. It was candid, childlike and unpretentious.

In another session, I asked him ``Do you feel that you are not being used to your fullest potential, because of the limitations of Tamil cinema?''

``I can put it this way. I want to function as a fountain pen. My ambience expects me to perform as a pencil. Sometimes this results in my writing as a ball-point pen'' he described, in graphic terms.

In 1986, I was addressing The Washington Institute for Values in the US Capital, on the subject ``Culture As Political Phenomena''. In the small group of high profile audience, a senator, surprisingly well-informed about India, asked, ``Why is your great actor Sivaji Ganesan not politically successful like your M.G. Ramachandran?''.

I quoted from the narration of my biographical TV documentary on MGR. My narration says, ``The MGR Phenomenon was an amalgam of fact and fiction, dream and reality. The only archetype character he performed in all his films was of a hero who combined in himself the strength of a Hercules, the modernity of a James Bond and the love and compassion of a Jesus Christ''. The political value of this ingenious image is unparalleled in the history of media.

On the contrary, Sivaji Ganesan was the last word in versatility, performing any role of any shade - often that of a tragic hero, the self-pitying brother, the negative womaniser of ``Thirumbipaar'', the treacherous foreign spy of ``Andha Naal''.

He performed these different roles as a true artiste, interpreting every shade of character with ingenuity, involvement and ``finesse''. There was no fusion of an off-screen image and an on-screen image, to create a political mascot. Hence Sivaji Ganesan's attempt to build a political brand-equity failed. It was certainly a price worth paying - for he will be remembered as one of the greatest actors of modern India.

In my ``MGR Phenomenon'' I had said, ``Although MGR was an actor by accident, he was a mature politician by deliberate choice''. It will be equally true to say, ``Although Sivaji Ganesan stumbled into politics, he was a born actor par excellence - a thespian of whom India will be eternally proud''.

Vazhga Engal Nadigar Thilagam

Some thoughts on accounting

2009-05-09T03:01:00.002+05:30

There have always been interesting areas in accounting where i have questioned the assumptions. A few of them are listed below:

1. When we make purchases on credit, we take advantage of something known as
the "credit period". The creditor however induces us with a discount to pay
earlier. People take advantage of such discounts based on each one's own cash
flow situation. The amount payable to creditors are usually shown as "Accounts
payable" under the liabilities side of the balance sheet. So assuming people dont
avail the discount granted to them, should not this discount be accounted for as
interest as the same has been foregone by the customer.

2. The next query that comes to my mind is on Enterprise value computation. When we
include debt, we only include the book value of debt that is present on the
balance sheet. However we never include fixed committments for the future (im not
talking about contingent liabilities here). A contract with a managing director
for say 10 yrs is a future committment and is a debt in effect and the present
value of the same should be included in the balance sheet debt component which no
accounting rules or standards unfortunately provide for. However valuation
analysts need to keep this in mind. A recent example can be quoted from IPL
whereby corporates have acquired players for 10 year contracts. The franchise as
such represents a future debt committment and will be factored in while valuing
the company.

3. A recent amendment to US GAAP and other international accounting standards
brought a change in the treatment of research and development expenditure. The
standard provided for capitalisation of R&D that was previously being expensed.
The question that i have is how will this treatment be applicable to pharma and
exploration companies in the oil and gas space. These are sectors shrouded with
uncertainity be it new drug discovery or new oil field/ gas dscovery are
concerned. An expenditure has to be capitalised only if an asset comes into being
that gives the company an enduring benefit over a longer time frame. So if R&D is
incurred on a new drug discovery that ultimately doesnt see the light of the
day, how can accountants capitalise this expenditure.

Investors waiting for a correction

2009-05-05T05:11:00.002+05:30

I agree that people want a correction, they want to invest in a correction, and the market is not giving that opportunity. This happens when liquidity, momentum is all there. All of us need to be on one side. The consensus today is that there will be a correction and investors will invest in a correction, but that’s exactly the reason why you are not seeing a correction. Once all of us get convinced of a rally, that will be the time the market will give in.

There are two camps here. One which believes a correction is expected and we will get a chance to invest. As long as they are on the sidelines, the markets will continue to move up. The moment everyone is on one side you will see the markets taking another turn.

Warren buffet's investment strategy

2009-05-04T18:51:00.003+05:30

The legendary investor warren buffet has a few investment philosophies in life which have been time tested and have held him in good stead during difficult periods. The strategy and principles that he has adopted for decades are the following:

1. He considers investing in shares as good as investing in a part of the business
of a company
2. He relies on the discounted cash flow method to arrive at the intinsic value of a
company and once he identifies value which is at a significant premium to the
prevailing market price, he goes ahead and buys that stock without any regard
whatsoever to market conditions. He is a typical long term player in the markets.
3. He will only invest in companies that have good pricing power, significant
economic moat and competitive positioning in the market place. He typically
prefers companies with strong brands.
4. He will not invest in companies that have high debt equity ratio and high capital
committments. Howvever buffet prefers companies with products that have reflation
potential.
5. He prefers companies that have a strong management that aims at generating higher
return on invested capital.
6. He would shy away from investing in companies that keep diluting their equity
base. Using additional funds to generate higher returns doesnt impress buffet.
7. Buffet has a huge war chest of funds that hes accumulated over the years from
berkshire's insurance business. Because of the size of funds involved, he
commands special concessions for his investment. The recent example being Goldman
Sachs where buffet subsribed to the preferred stock of the company with a 10%
fixed dividend and share warrants that can be subscribed at a price thats
significantly lower to the current market price.
8. Buffet follows the simple adage of buying when others are selling and vice versa.

Estimating discount rates under DCF exercise

2009-05-02T19:46:00.001+05:30

The estimation of a discount rate while trying to arrive at the intrinsic value of an entity is a tricky affair. Wrong estimation of discount rates can result in sub optimal and misleading valuations that may disrupt informed investment decisions.

Instead of using complex formulas and equations to arrive at discount rates, lay investors can use simple arithmetics and a clear understanding of EIC (Economy-Industry- Company) picture to arrive at the appropriate cost of capital. Investors may take into account the following factors in estimating discount rates namely:

1. The risk free rate as indicated by Treasury bills issued by RBI. These are
typical government bonds whereby payment of interest and repayment of capital are
near certainity and thereby carry little or neggligible risk.

2. To this risk free rate, we add risk premium based on the level of industry risk,
political risk, business risk, financial risk and other exclusive/selective risk
factors surrounding the company under valuation exercise.

3. Companies of smaller size have higher share of risk compared to large sized
companies that have much more diversified business streams.

4. Companies in cyclical industries like steel, sugar or cement have higher risk
attached to them when compared to companies in defensive segments with stable
cash flows like FMCG or healthcare. Therefore cyclical companies will have higher
discount factor.

5. Other factors u may consider while incorporating discount rates are management
quality, corporate governance, Accounting quality etc

For every factor that u feel necessitates a higher risk portion, u should appropriately increase the discount rate.

Just an another day in paradise

2009-05-02T17:54:00.001+05:30

She calls out to the man on the street
sir, can you help me?
Its cold and Ive nowhere to sleep,
Is there somewhere you can tell me?

He walks on, doesnt look back
He pretends he cant hear her
Starts to whistle as he crosses the street
Seems embarrassed to be there

Oh think twice, its another day for
You and me in paradise
Oh think twice, its just another day for you,
You and me in paradise

She calls out to the man on the street
He can see shes been crying
Shes got blisters on the soles of her feet
Cant walk but shes trying

Oh think twice...

Oh lord, is there nothing more anybody can do
Oh lord, there must be something you can say

You can tell from the lines on her face
You can see that shes been there
Probably been moved on from every place
cos she didnt fit in there

Oh think twice...

Valparai Vattaparai - By Anushual as Usual

2009-04-13T04:54:00.007+05:30

August has always been a month where ive always explored the tug of wander-lust – in this case, more specifically the call of the wild. Somehow I always felt traveling during the heart of monsoon season in south-west peninsular India was to be avoided at all costs.

Im happy to say that this was a risk worth taking.What started as a trip for 3 friends turned out to be an adventure of sorts with family!

Ironically, I chose – let me put it this way – I HAD my choice of way as far as location was concerned. Since I was quite fascinated with the as-yet unspoilt beauty of Valparai so lovingly captured by the Sun TV neenga keta padal forays). One must understand that to see such a place, it’s the journey that counts & not the destination.

But we didn’t really start our trip from this picturesque little hamlet…

‘Viewing gallery’ proudly proclaimed the hand-painted sign just outside the arrivals terminal at Coimbatore airport. With a wry grin I acknowledged the truth of the ‘South Indian Stare Syndrome’ – henceforth referred to as SISS.The SISS is a disease found in members of the male species of the said race. The SISS syndrome is not within the scope of this write-up – neither it is localized to any particular geography as the name suggests – many odes have been written about it. Some I know even keep count of it!

We started off our Coimbatore chapter with Marudhamalai – I agreed to visit ‘Murugan only’ temples by the way. Why I like him is again beyond the scope of this chapter. But then I never feel the need to justify my strong likes – or dislikes - to anyone.
A nicely maintained temple – over-run by hawkers & tin-pot commercialisation as is any relatively famous temple in India.

We then set off for Isha Yoga centre – I can see that those familiar with my personality are already raising their eyebrows in disbelief. But I must say the scenic setting of the place was breath-taking. We did get a jolt of fright when we saw some extremely life-like metal snakes pouting their hoods at us from the ceiling.
I will gloss over this bit as there are only a few images that stand out..that of wet women of assorted sizes & shapes converging together like an army of bees on a single flower (the lingam). And same goes for the men. And the sight of a woman going into trance while jerking and contracting rhythmically...while we watched her in part-fear, part-fascination, but mostly suppressed laughter.
We set off for Valparai the next morning with 2 stopovers. One at the Aliyar dam, where after a lot of huffing & puffing we reached the summit and could take some beautiful pictures of the coconut, paddy field & sugar-cane checker-board field town of Pollachi – now of course on the world map on a/c of SRK’s presence – & mine to a lesser extent!

Just before entering the Ghat section one can also visit Monkey falls – I think the place draws its name from its simian inhabitants. We didn’t linger too long there as an abundance of wet and unfit men in the bare minimum of clothing is more than anyone can take. And by the way, sunglasses are not meant to conceal your identity – they draw attention. Now you know why anyone who is anyone sports an over-size pair.

40 hair pin bends – 40 hair pin bends..oft-parroted phrase by Raja many times in the course of planning this trip - & it was as good as it promised. We were lucky enough to spot the elusive Nilgiri Tahr – the beast was very camera-savvy and very nonchalant about the cameras aimed at it as it continued to lunch with a fellow Tahr.Certain celebrities would do well to take a leaf from its sure-footed book. A bird’s eye view of the valley & several pictures later, we continued our ascent.

As we climbed higher we could feel the distinct drop in the temperature and the nip in the air. And the air! An indescribable fragrance of pine, moist leaves and eucalyptus – a balm for city-bruised lungs. The only thing that disappointed me here was the basic bordering on primitive infrastructure. The hotel supposedly no 2 in the town, made you wonder ‘if this is silver medal, what would gold be like!?’
I got to understand the concept of ‘running hot water’ in an altogether different construct! it was the feet that were doing the running ferrying it all over the place..but that also had its part to play in us embarking on a totally different route map vis-à-vis the one planned.

As for the food from the ‘cheapest & best’ ? well whoever thought of the word ‘mess’ couldn’t have been more delicately sarcastic if they tried. It was a MESS. But then Green hills came to a rescue! But here is where we question ourselves on the delicate balance between civilization & over-commercialisation.For the record I will still say I am happy I visited this place while its still in its infancy.
Come next morning and we set off for Athirampally – a place where I think the journey assumes a significance out all proportion - that is laid to rest only by the magnificence of the destination.

Again a stop-over at Sholayar dam & the scenery duly noted we hit the road again.
‘90 kms’ reads the first (& possibly only!) sign-board to Chalakudi.Barely were we through the border-checkpost (and how do they draw state-lines in forest areas anyway) than the forest extended its leafy fingers around us almost immediately. I have always been a nature lover (except for stray dogs and rats) and an avid follower of all the animal channels and so I was totally entranced at first by the beauty of the route.My 7th std geography came back to me as I classified it as an ‘evergreen forest’ while Raja on the other hand was filled with morbid thoughts and insisted on calling it a ‘Jurassic park’.
More particularly, the orchids growing on the barks of trees, the delicate fuzz of moss on tree-trunks, the bird-calls were a treat. So much a treat that the relative isolation in which we were traveling was very slowly evident to all of us – and we secretly feared it.

Fear was writ large in the face of bikers, in the face of people in vehicles who generously gave us way, in the way I unconsciously rolled up my windows, in the way Vetri’s eyes kept sliding to the left and right – casual but alert for the slightest movement Since here was a place where the lie of the land dictated the route. A route as yet unknown to him – skilled though he was, although he had taken the tamer, longer way around in previous journeys. Imagination becomes the scariest predator in such a journey when an overhanging thick vine can look like a snake, an extra large black cow like a bison & a large, fat grey rock exactly like the rump of a resting elephant. And the worse part about fear is seeing it mirrored on the faces of others – or knowing that their brains are also working on the same lines as your over-heated one.

For all that we even stopped to take pictures of the valley where the mist was rapidly being dissipated by the morning sun. But the sense of urgency in everyone’s actions got communicated to me through some invisible telegraph and we hurriedly got back into the car as the first, lazy drops of rain began to hit the already-pock-marked road.

Oh the road! For those people who complain about navigating Mumbai’s pot-holes or ‘craters’ as some remark, I would say navigating them in a concrete jungle is better than a real, live jungle where you are the intruder and the sound of silence is deafening. At some places, where the forest canopy eased and we were able to see a clearing with a long, wide lake, I relaxed a bit only to stiffen at the thought that the clearing might not be man-made. And our fears were proved right when we saw piles of elephant dung decorating the road edge. Seeing it is one thing, hearing a numerical narration was too much for my frayed nerves and I snapped to relieve some of my tension.

Finally after 3 hours on the knife-edge of tension, we visibly sighed when the journeys end was imminent. Although I have always felt that the only animal to attack without provocation is man (or woman) – im glad we didn’t have any encounter to prove me wrong.

Once you enter the place, there is a crudely painted sign which says ‘Full view of falls’ – note the word ‘view’ again….you can enjoy the placid waters, take a long soak in them & follow it up with a short trek to the bottom. Getting down is a treacherous path, it can turn into a slippery mud-slide if not careful. Finally we reached the base and were awed by the fury of the falls. Funny how a gentle gurgling river can turn into a raging monster, all thanks to gravity and by way of being suspended a few odd metres above level ground. It might not be as wide or as famous as Niagara, but its beauty was enhanced 10-fold by the dangers we passed through in reaching such a place. We clambered onto the rocks and felt the spray lash us like rain, I fall short of prose to describe the exhilaration we felt then, since it had to be experienced.

We then took the longer route to our last stop Palani…somewhere I think I must have dozed off as well, since I woke up when I felt the car slowing down at the check-post and with a click & a snap Vetri released the catch of his seat belt – all signs of entering Tam land. From then on it was a smooth run..although that winch gave me some anxious moments, because all said and done, gravity is a pretty powerful force to be working against! Another thing that amuses me is people cry out from the roof-tops at milk adulteration but when the white stuff is diluted to the point of watery tastelessness following the same principle when poured over the idol of a young boy who strikes a pose like a super-model – one hand negligently jutting out from one hip.oh no, then its called ‘abhishekam’!

We took the stairs down as I felt it’s the least I could do for my favourite and I came away with some souvenirs & lots of memories of the temple & trip in general. Maybe it was divine forces in HIS name that protected us, starting with Kartik travels, Marudhamalai, Palani & Vetri.Could that be a coincidence? You decide…

Market outlook for Monday

2009-04-12T23:07:00.002+05:30

The markets may continue their positive tone for monday provided the 200 day moving average is violated on the upside. The 200DMA stands at 10913 and beyond that we can expect the markets to continue their upward journey to 11600 despite the markets appearing overbought.

Tomorrow's picks

IRB infra ..above 105 the stock can touch 120
Cautious approach to Reliance infra advised

Greed and fear analysis of a typical Indian investor

2009-04-12T02:56:00.004+05:30

Sensex at 12000: Ah! I should buy!

Sensex at 16500: Wait and watch

Sensex at 14500: The price is falling, I will wait.

Sensex at 18000: Uff!, I missed the rally.

Sensex at 20000: I can’t wait. All my friends have already bought. Buy!

Sensex at 21000: Wow, what a great pick!

Sensex at 14000: No problem, fundamentals are very strong. Let me average at this price.

Sensex at 12000: I am a long term investor, nothing to worry.

Sensex at 10000: There is something wrong. Should I sell and enter at lower price? What is the government and SEBI doing about small investors like me?

Sensex at 9000: I can not wait, sell!

Sensex at 8000: Thank God. I got out in time. I will never buy stocks again.

Sensex at 9800: Fundamentals are bad. There is no justification in the rise. I will stay away.

Sensex at 9200: I told you. It will fall further.

Sensex at 14000: It seems the economy is doing very well. Should I buy?

Sensex at 20000: Bought

Sensex at 12800: Ohh christ..they sold me all the junk at higher levels.

whats he gonna do

2009-04-11T05:29:00.002+05:30

Assume that Mr.X has won Rs.1 crore in KBC.. what should he do with the money

A. Invest the entire amount in old economy stocks because they are back in favour
B. Invest the entire amount in Equity index fund as the index is at the lower end of the trading range
C. Invest the entire amount in liquid funds until a proper financial plan is devised
D. Invest the same in real estate stocks as they have been beaten out of shape and appear attractive at low levels.

Your answers to the same are awaited:)

Larsen and Toubro at the cusp of danger

2009-04-07T02:30:00.001+05:30

im also worried..it will have a negative impact on LnT if it emerges as the winner..I hope Lnt exits satyam after pushing up the bid price to 100 levels if possible..The average cost comes to around 80 for larsen. so anything above 80 if they can offload their holdings, it will be great for the company and will ensure that the counter moves forward sharply from here.

The only reason iam worried for Lnt is they have already invested 650 crore in satyam. Now add to this a bid price of even Rs.80 will entail 2700 crore of additional outflow to acquire 51% majority stake in the company. The story doesnt end here. Satyam is bankrupt basically with no significant assets on the balance sheets to match up to their possible liabilities. A careful analysis of their Profit and loss account shows that the company would need anywhere between 1000-1200 crore to run its operations every quarter be it payment of employee salaries or administration and selling expenses. So the potential acquirer will have to foot this burden also going forward. The restatement of accounts to know the real status of satyam may take a lot of time as close to seven years have to be restated. For a company of satyam's size and magnitude it would take anywhere between 6-8 months to complete this process as a typical statutory audit of an MNC will take atleast 2 months to review the prev year financial statements and audit the current year financials. So we are looking at somewhere beyond october for giving the final shape to the satyam saga whereby the actual truth shall emerge. Therefore until October we are typically looking at two quarters whereby the acquirer might have to support the company which again means an outflow close to 2400 crore. (assuming 2 quarters * 1200 ).
Assuming Larsen does buy out satyam we are looking at a total outflow of 5750 ( Initial investment 650 + Acquisition cost 2700 + Administration cost 2400 )

Almost 60% of larsen's networth of 9555 crore as per latest audited balance sheet goes into Satyam's rehabilitation. Is it worth the exercise at all. How will larsen supports its core businesses if such huge chunks of money go into satyam

Therefore its pretty clear, Larsen will not, cannot and should not buy out satyam. If it does take the risk of acquiring satyam, it puts its existing businesses under immense peril and danger

Larsen's participation in the bidding process should merely be restricted to pushing up the bid price if the open auction route is taken.

Maybe the market is also beginning to realise that Larsen might not ultimately buy out satyam and that maybe explains the recent upmove we are seeing in the counter that continues to be constrained by the satyam saga which hangs like an albatross around its neck

I would conclude by saying it may even be worthwhile for larsen to sell or offload satyam's shares in the open market even at a marginal loss in case the share price does not breach Rs.80 (which is LnT's average cost of acquiring satyam shares). Whatever be the case satyam cannot be a strategic fit for larsen and toubro given the current circumstances. The long term costs of this acquisition will outweigh the benefits. Accepting a mistake and rectifying the same is much more prudent than repeating it by throwing good money behind bad

King of good times

2009-04-06T01:01:00.000+05:30

From a valuations standpoint yes the stock is cheap..Noone knows when it can come up...it needs a trigger say in the form of FDI being allowed in airlines or a stake sale by mallya to plough in funds into the company

the company presently requires capital to wipe out its losses and if crude oil remains or stabilises at lower levels, these two can act as good triggers in the medium term

and one more important point in favour of KFA is that if u take its absolute market cap, its available at just 800 crore for a populous market like india. If u take US as an example for comparison or benchmarking, one will find that even a bankrupt company like United airlines commands a market cap of 4000 crore.

So that shows the valuation difference and the opportunity that lies therein for indian investors

One way of making money is buying whats unpopular and this stock perfectly fits the bill

MTNL Analysis

2009-04-05T22:31:00.002+05:30

Assuming the bottom for this stock is around 50 levels, The trigger going forward for this stock seems to be the merger with BSNL once the new govt comes into power..The ultimate eventuality has to be the merger of these two companiesto beat competition as both are bleeding from the loss of market share. As can be seen already, MTNL is already showing degrowth in its bottomline. Being a navratna, the govt will not allow it to become loss making.

Secondly the real estate and tower business may be demerged into separate companies to bring in cash into MTNL as the management is very clear that they do want to maintain their debt free status.So even if MERGER WITH bsnl takes time due to employee union issues, This demerger is definitely going to happen

MTNL also holds significant stake in ITI ltd and there are plans to sell some stake in that loss making company to alcatel lucent. That may be a near term trigger for the stock

Ultimately u cant have this company restricted to just mumbai and delhi in the long run , it will have to scale up to sustain its growth and profitability or else competition will end up squeezing it. The govt has two options, allow it to merge with BSNL or vice versa and create a telecom behemoth or atleats allow MTNL to expand its international operations even further. Right now MTNL has a presence in Mauritius.

Even on pure liquidation value with net current assets close to 4000 crore (leaving out its investment, real estate and other fixed assets), MTNL`s value comes to Rs.63.

Strategies for the govt are :

Delist MTNL, merge wit BSNL and list it again

Reverse merger of BSNL with MTNL and follow on IPO. The valuations will be totally at a different level for this combined entity(one can only imagine) and MTNL shareholders will already be at an advantage as they would get additional shares in the merged company before the IPO.

If none of the above happens, the govt may atleast allow MTNL to demerge its real estate and tower business whilst the same allowing the company to expand internationally

The company already has reserves close to 11000 crore and as long as it keeps adding to its reserve every year and as long as dividends are maintained at 40% or so, the investors should not worry abt this stock given the attractive dividend yield

Maybe if one has a 5 yr outlook and immense patience, u may definitely be sitting on a goldmine

Is this a new bull market rally

2009-04-03T13:07:00.001+05:30

i dont think so because of the following reasons

1. Bull markets have never started with a V shaped recovery in the history of equity markets so far. This rally is typically V shaped and has taken everyone by surprise by the speed of its recovery

2. Bull markets will start only after long periods of consolidation and the evidence we have is only of one higher bottom at 8100 levels which cannot be substantive evidence to conclude that the bear market is over

3.Bear markets typically take 18 m to get over and by that coincides with election time this year..so this sounds scary to me

4.This rally has come up at a time when everyone was pessimistic that markets wil fall further..so there is every chance that this rally might continue to convince people that we are out of the bear market..for eg if it goes to 11500 levels im sure every man on the street will start saying its a bull market and maybe thats the time we will have another sharp correction to confirm that we are still in a bear market
4. Problems in the US are just not over..the global rally now is just based on pure sentiment that geithner`s plan is going to work wonders for the banking sector but the hard truth is we still have huge losses hidden in banks and even the regulators donot know the size of losses in the system..So this throwing of good money over bad money has never ever worked in the history of credit markets. we may still have a couple of institutions that might collapse later in the year..so the bear market is very much on and i still believe the lows are not in place and we may go below 7000 levels

Even our domestic story is not looking so sanguine..all the data we get in feb n march are pre election govt spending and capital spending by corporates at the year end for depreciation purchases..we need to see how the data pans out in the next quarter as the entire govt machinery will stop working for the next 4 m until the new govt stabilises..there will be no policy action or reforms until then at this crucial juncture

yes i will change my opinion if by the time of the next vicious correction that we have, if we make a higher bottom above 8100 and reverse sharply, that will make me think over my analysis. Bear markets end in revulsion and not in denial..we havent seen a capitulation of sorts in certain sectors because the last time in october when markets looked close to capitulation, segments like banking and cap goods were still at higher valuations

so im still with the bears at this moment

India's stimulus package

2009-03-11T06:02:00.002+05:30

Here's an interesting comparison between the various stimulus packages announced all across the globe..lets see where India stands

USA $700 billion to begin with
UK {250 billion
Germany $700 billion
France $ 50 billion
Russia $20 billion
China close to $600 billion
Japan 447 billion yen
Brazil $64 billion

and our Jai ho "India" wants to emerge out of the crisis with just $4 billion of stimulus. With our growth rates slowing down drastically and within close reach or striking distance of the hindu growth rate of 3% which our father and grandfathers enjoyed, are we doing enough to stimulate the economy. Domestic story also thrives on business confidence which is abysmally low at the moment. The stock markets are below the 2006 lows and have always been a barometer of economic confidence. They still seem to be desperately waiting for global signals to decide on trend and direction. China despite having a huge current account surplus clearly knows or has atleast come to terms with reality that its exports have been badly hit and also the fact that its banking system might be in a total mess. Look at the stimulus package they have announced to stimulate domestic demand alone to the tune of 20% of GDP. By that yardstick India should have gone for a stimulus worth $200 billion but then given our huge fiscal deficit and forex reserves a shade above $300 billion we clearly have constraints. Usage of atleast 20% of forex reserves can be contemplated upon. If we lose this opportunity to put the economy on fast track mode, we might miss out on the bandwagon effect of a global recovery.

Financial Crisis explained

2009-03-04T03:00:00.001+05:30

As Gordon Gekko puts it in the movie "Wall Street" - "Greed is the Mothers milk that will keep the malfunctioning corporation of USA alive". This was 1987 and exactly 20 yrs down the line capitalists have proved why greed isnt good all the time. There was immense greed to make money, whatever be the means, amongst all factions of the capitalist set up right from companies to investment bankers to shareholders. Corporate governance and shareholder activism to question what is right and wrong went badly amiss. The primary cause for the subprime crisis to have manifested itself as a global systemic disease leading to the collapse of economies, countries and banking behemoths world over was because of a simple instrument designed to hedge risks in the 19th century commonly known as "Derivatives". These instruments derive their value from another instrument that they are intended to represent. For example : Crude Oil futures derive their value from the prices of crude oil. This proved to be a blessing to commodity traders and businessmen who could protect themselves from the vagaries of price fluctuations for physical commodities like Oil, Gold, Metals etc If X had to import 500 barrels of Oil from dubai, on the date of entering into a transaction with his dubai supplier he would also buy oil futures of equal value to hedge his price risk on Oil. So lets assume when on the date of transaction where he agrees to import oil (3 months later), oil prices in the real/spot market are at $50 per barrel. So he would pass an accounting entry for $25000 (500*50) in his books as oil purchases. Simultaneously he buys oil futures for the same 500 barrels from the derivatives market at $50 for a 3m future delivery. Now 3 m down the line, lets say a barrel of crude oil quotes at $ 55, what would X do and how does he benefit by having entered into two transactions 3 m earlier. This is how it works : X will pay $55 per barrel to the dubai supplier thereby having an outgo of $27500 (in place of $25000 for which the transaction was booked ) . In effect he would suffer a loss of $2500 die to oil price increase. But this loss gets nullified with the help of the derivative contract he has entered in the oil futures market. Since oil quotes at $55, in the futures market X would make a gain of $ 2500 by selling the futures contract . This is how derivatives had helped in the past by mitigating and hedging risk effectively. Enter the financial shenanigans of Wall street who spot an opportunity in derivatives and extrapolate the same process to the currency markets first and later on to the entire financial universe. Derivatives as hedging instruments would work only when they have a physical asset backing them and that too only when the structure of a transaction is designed as a two way hedging tool (especially in financial markets) i.e a transaction in the spot market complimented by an opposing transaction in the futures market..For eg.. X buys 1000 shares of Reliance at Rs.1200 per share and simultaneously sells Reliance futures contracts in the derivatives market for equal value to protect his cash position. So even if Reliance share prices fall, he doesnt not lose money net net because of the profits he makes in the futures market. Given this background, Wall street brokers and investment banks saw immense lending by commercial banks and financial institutions in the housing market. These banks were guided by the policy of "housing for all" and the aspiration of the common man to "own a house". Alan greenspan, the then fed governor lowered interest rates to an all time low from 2001 onwards to fund the iraq and afghan wars of USA. This led to huge increase in money supply as government borrowing also stepped up pulp priming the economy. Fed's printing machine at Fort Knox worked overtime printing the US dollar(ofcourse with the face of george wahsington inscribed on it) and banks with excess money had to lend given the burgeoning demand from the american public buttressed by lower interest rates and tax rebates for home owners. Banks gleefully began to lend to every tom, dick and harry and increased their balance sheet size to abysmal levels. There was no regard whatsoever as to what was the borrower's ability to repay. All bankers believed in the theory that real estate prices had only way to go..that is Up. Land and property prices were expected to appreciate continuosly into the future. As legendary investor benjamin graham's old adage goes " History repeats itself but Wall street people learn nothing and forget everything" . Everyone forgot what happened in 1997 to South East Asia and Japan's lost decade of 1990-2000. They were all real estate bubbles fuelled by excessive credit that ruined these economies for years and decades to come. So a significant segment of the US population almost to the tune of 7% were subprime borrowers. These were borrowers with no income or proper credit standing as already explained above who became owners of house properties (imagine a day when slums wont exist in india..will it ever happen?? It happened in US because of the benevolence displayed by Bush n Co). Now what did these people do to meet their EMI obligations since every dollar borrowed has to be repaid. The banks again helped them here. These innocent souls did not realise what they were getting into. As housing prices kept hitting the roof, banks told them they could borrow even more using their houses again as secondary collateral. So came in the concept of refinance..With this arrangement they could borrow more to repay their existing interest and principal committments. It became a vicious circle based on a simple one way bet on housing prices appreciating continuosly. Enter the Wall street brokers, they too wanted to make money from this superb real estate financing juggernaut. They had the weapon and ammunition which normal banks did not have. They had super achievers and Ivy league grads in their workforce to boost their reputation. The weapon and ammunition these lads brought in on the garb of financial innovation and obscure statistical models were the same derivatives reinvented in a different format. A wall street position was such a coveted job for many and was until last year the essential "American dream" for every sophomore. How did this turn out to be a pipe dream? How did these derivatives become weapons of mass destruction? Read on Wall street guys got in touch with all the banks across USA and Europe and explained their business model as to how banks need not wait to recover the money from their borrowers, rather they could use these derivatives modelled through them to get immediate realisation of the loans granted. The methodology given to them by our friendly wall street people for a hefty commission was called "Asset Backed Securitisation". The loans granted by banks were secured by house property as a physical asset. These loans which were receivables / debtors in the bank balance sheets could be shifted out of the balance sheet by converting them into a Special purpose vehicle. So all these advances or loans granted were taken out of the balance sheet and converted into AAA rated bonds which would be issued to investors worldwide. The basic premise or assumption was that subprime borrowers would never default because housing prices will keep increasing in the future. Even if they do, their properties could be repossessed and disposed off at high prices and thereby loans could be recovered. The possibilities of default were considered negligible and this was the achilles heel of this whole mechanism. This was how the investment banks pooled all the receivables of various banks in US and UK and converted them into bonds which were sold to investors worldwide in US,UK, China, Japan to name a few. These investors typically comprised of investment banks, financial institutions, pension funds, government agencies, high networth individuals etc. As housing prices never seemed to be falling or depreciating, these investors lured by high returns from these bonds or derivative instruments( known by different jargons like ABS- Asset backed securities or CDO- collateralised debt obligations) started investing huge sums of money. Investments banks were buoyed by the fee based commission they were earning from this business of securitisation and started inventing newer financial models to make money. All these investors forgot the simple fact that what they were investing into was a derivative instrument whose value was dependant on the performance of the asset pools or in other words continuos repayments from the original subprime borrowers. Another aspect which made these investors blindly invest in these instruments were their reliance on the AAA ratings issued by global credit rating agencies like S&P and Moody. Even rating agencies known for their sophisticated risk assessment models failed in their role and duty as watchdogs. All investors who had faith in ratings ended up becoming slumdogs. As sub prime borrowers kept making their interest payments, these payments were used by banks in turn to meet the interest committments on bonds issued to investors globally. All these models were working fine as long as housing prices were stable. The banking regulators failed to predict the magnitude of crisis that would engulf them in the event of property prices collapsing in the US. They failed to lift the smokescreen and see that subprime borrowers were meeting their loan committments only through refinancing of their properties and not out of their monthly incomes (which in either case was negligible or non existent). Turn to 2006-07, America was hugely saddled with debt. Leverage was enormously high. Banks balance sheets were leveraged 30-40 times their networth/equity. A large portion of the debts picked up by banks were amounts owed to investors abroad on these subprime bonds that they had issued. US being a largely consumer oriented economy and being the worlds largest consumer ran a huge fiscal deficit. Countries like China, Japan and India were funding US consumption. Savings was just 0.9% of their GDP(Gross Domestic Product). Private sector Debt to GDP had balooned to 300%.The total debt US owed reached $50 trillion for a country whose GDP was $13 trillion. US debt exceeded the world GDP. The last time the debt balooned beyond 150% in US was prior to the great depression of 1929 and we all know the dangerous consequences of the same. A similar story was scripted again by relentless credit creation and fiscal profligacy arising out of greed. When government borrows at such a large scale, there would be obvious pressure on interest rates to start rising. Greenspan was forced to cut down the excessive money supply in the economy which was fuelling inflation to record levels. FED began to raise interest rates in the economy. The trouble started for subprime borrowers. The days of low interest rates were over and monetary policy action had swung in to curb excessive spending and provide for fiscal consolidation. A few set of borrowers started to default on their loan obligations towards end of 2006 and these banks promptly repossessed their houses, disposed them at the prevailing high prices and repaid the bonds too . What goes up can come down. As the mess started getting bigger in 2007 with more loan defaults, greater number of houses were repossessed (otherwised called foreclosures) and resulted in a huge supply of houses waiting to be sold at bankruptcy courts all over US. Subprime borrowers went to the streets with all their posessions. With interest rates at such a high, obviously there would be few takers for housing loans as consumers would postpone their decisions to purchase a house. This led to the massive collapse in the housing market due to over supply and lack of demand. The supply glut meant housing prices began their downward spiral into a bottomless pit. Existing subprime borrowers became ineligible for further loans as banks refused to refinance them due to falling property prices. Consequent to the drop in market values of property, banks also started demanding additional collateral from subprime borrowers on the loans issued to them. With no means to make even a semblance of repayment they had no other option but to foreclose and surrender their houses. As 7-8% of the population got their act together to foreclose one can envisage the magnitude of the crisis that had befallen the richest country on earth. Almost $1 trillion, the size of Indian GDP was swallowed by subprime borrowers alone and it meant wiping out 7-8% of the US GDP. Add to this the credit creation process of global investment banks through the securitisation process of issuing bonds and other derivatives. The derivatives market world over reached a size of a mammoth $600 trillion by 2007 (12 times World GDP) through excessive credit creation. Moreover add to this another innovative instrument invented by wall street pundits called the "Credit default swaps" (CDS). These instruments offered protection from default on any loan or advance made for the cost of a hefty premium called protection fee. Most banks and insurers had purchased these Credit default swaps from investment banks like Lehman Brothers, Bear Sterns and Citigroup etc. In the event of a default on their receivables, these investment banks would take over those receivables from these banks who had lent in the first place. Investment banks were having a free ride on the premium income for more than 7-8 years as instances of defaults were quite low when the US economy was in an upswing. As the saying goes, the chickens had finally come home to roost and these CDS instruments became an albatross around the neck of investment banks. The world economy was caught in a systemic crisis with the fall in property prices refusing to die down. Banks had to write off their receivables and loans which meant wiping out their net worth to a large extent especially in case of banks which had huge debt- equity ratios. They could not meet their committments to holders of these subprime bonds/derivative instruments and started defaulting on the same. They approached these investment banks for help seeking to redeem the CDS instruments they were holding. But these investment banks had a similar story to tell. With housing crisis having a brutal impact on financial markets, the stock markets too went into a tailspin. Investment banks were sitting on huge portfolio losses on their stock market operations. IPO's had dried up completely and the debt market was caught in a state of shock. They could hardly underwrite any deals in such a situation and this impaired their operations and profitability severely. Add to this the situation where apart from underwriting several securitisation deals for hefty commissions, these firms had also invested billions in them. Many firms like lehman and bear sterns reported dismal numbers towards the end of 2007 and needed emergency capital from US federal reserve to survive. As newsflow from the financial world kept getting worse day by day, there was a severe crisis of confidence in the global financial markets. The cost of protection for credit default swaps swelled indicating high probabilities of defaults and this resulted in the widening of credit spreads for even AAA rated instruments ( AAA rating is the highest rating of safety and security of a debt instrument as to its timely repayment of debt obligations). The difference between interest rates of a AAA instrument and US treasury bond ( which is considered risk free as it comes from the government) widened to as much as 17-18%. Major rating agencies like S&P and moody's started downgrading the ratings of major financial institutions and investment banks. Quarter after Quarter into 2008, the write off's continued all across the financial world. US FED now run by Ben bernanke cut interest rates to levels below 1% to stimulate the economy and kick up inter bank lending to restore confidence in the system. They also opened up separate windows of credit to shore up the capital and equity base of major banks in the US. But these steps were just not enough when the size of the mess was so unprecedented. On one hand banks found their assets to be worth nothing as all the amount lent vapourized into thin air but the liabilities and debts kept inreasing due to the nature of contracts and excessive leverage they had assumed on their balance sheets. Each banking company had an asset liability mismatch of gargantuan proportions. Many of the bank's chieftains were in self denial mode for months altogether promising stakeholders that they are positive about recovering from the hole they had fallen into. Most of these banks were also not willing to take help from FED which meant government interference and control. Beggars cant be chosers in this world and fine words butter no parsnips. Little did they know that the black swan event was around the corner. Saddled with toxic assets, debt obligations rising by the day and revenue streams literally closed out and capital not forthcoming from friendly quarters, Bear Sterns decided to file for bankruptcy followed within 6 m by lehman brothers. These 150 year old institutions had a major role to play in the world financial markets. Majority of trades and transactions in the US capital makets happened through them being counterparties to various classes of investors. A lot of investor/institutional/hedge fund money was locked up with them and these were no more recoverable. These events sent the credit markets into deep freeze mode. Inter bank lending completely stopped due to deep mistrust about the financial position of each other. There was immense hoarding of cash and risk aversion was at its peak. In times of crisis, there is always hectic deleveraging and money always goes to US treasury bonds which is considered a safe haven. Its pretty ironical that money went back to the same place where the crisis had originated, but the dollar being the world's reserve currency this was very much on the cards. All sorts of financial assets that were considered risky faced a severe unwinding. Equity markets globally suffered the most. All roads led to the US treasury. Emerging markets like India also faced the brunt with the indices falling more than 68% from its peak. India has seen investor wealth erosion of more than Rs.40 trillion over the last one year due to an external event we were not even responsible for in the first place. But thats the price one pays for the adverse effects of globalisation. As i write this article, the effects of this financial crisis of the 21st century has engulfed the real world big time. The sins committed by wall street have affected main street too. The crisis has spread into the real economy sending the world into recession with massive layoffs and job losses across industries and sectors. The lack of credit and working capital for running the day to day operations of businessmen across the globe has had a massive impact on industry dynamics. With banks not doing their primary activity of lending, investments have slowed down in the real economy. The manufacturing sector is facing a huge demand destruction and order book cancellation . Slowdown in industrial demand has also led to a massive sell off in the commodities market with most of them quoting at multi year lows. Lay offs and downsizing have become oft recited terms with unemployment expected to reach 10% in US alone. Bush followed by Obama now have been doling out stimulus packages dime a dozen to kickstart the credit markets and revive the economy. But things still seem to be stagnant and confidence is yet to be restored in the financial markets. The S&P and Dow index have broken 12 year lows and these are indications of worse things to come. More banks might even fail. US seems to be doing the same mistake that Japan did in early 90's. The world faces the risk of going into prolonged recession followed by deflation for many years unless some important measures like the following are taken at the earliest : 1. The size of this crisis is so huge that no one is certain as to the magnitude of losses sufferred by banks and financial institutions. Therefore to restore confidence all banks need to be nationalised in the US and Europe with a blanket guarantee on all deposits by the respective governments to prevent bank runs from happening. This will restart lending activities from conservative banks like JP morgan which has not got itself into the subprime mess to a large extent. Banks from China may also be willing to lend once they regain confidence in US banks. 2. The carnage and deadlock in the housing markets needs to be stopped. The objective should be more of keeping people in their homes rather than putting people into new homes. Therefore foreclosures must be stopped which would mean the government would have to waive all the borrowings and liabilties of homeowners/subprime borrowers who do not have the ability to pay up. 3. Toxic assets arising out of derivatives which are still finding a place in bank balance sheets must be taken over by the government at a fair valuation. Right now there are even proposals to create a bad bank which will take over all the toxic assets from US banks and help them clean up their balance sheets. Once housing market improves, these assets can be offloaded as government bonds at reasonable prices 4. Inject liquidity into deserving banks to shore up their capital base and reduce their leverage ratios to reasonable levels. The government gets a stake in all these banks as its hardearned taxpayers money that goes into revitalising these broken and busted institutions. No more instances of privatising profits and socialising losses if capitalism has to survive. 5. A new world financial order is required on the lines of the Bretton Wood Conference of 1944. Basel II norms for banks must be made much more stringent with regulators insisting on high capital adequacy norms and regulatory oversight. Reforming the role of IMF (which was sleeping at the wheel along with financial regulators) to preempt and prevent a future financial crises is also a need of the hour. Warning signals and risk monitoring systems must be set in place for preventing asset bubbles and intense speculation in financial markets. 6. Rating agencies also have to take equal share of the blame and be made accountable for being lackadaisical in their approach towards rating highly leveraged institutions. Their mandate is to foresee an impending risk and express an opinion on the same to ward off investors at the right time. God knows how AAA ratings were issued to institutions that were leveraged 30-40 times over their equity base. An overhaul of the entire ratings process may be timely. Amidst all this global gloom and doom scenario, India has been relatively insulated to a limited extent from the financial crisis. No doubt, capital flow has dried up and our exports have been hit badly, but the latter constitutes only 20% of our GDP. Our growth story emanates from within and despite a slowdown we will continue to chug along at 5% growth rates for the next couple of years, given that our internals continue to remain strong. RBI is sitting on huge forex reserves and our external debt situation is also reasonable at 25% of GDP. We have been inflation coming down to sub 5% with fall in global commodity prices and interest rates will also follow suit soon. Once deposit rates start falling we will see the benefit of lower interest rates percolating down to the economy. At present India has also caught cold due to relentless sneezing by US. It is under these circumstances that the government of a country needs to be proactive. The banking system is safe and sound and we have no problems with capital adequacy. This gives enough license for the government to start spending on infrastructure projects all across the country. This is a once in a lifetime opportunity and with commodity prices at such low levels, the cost of execution of projects will also end up on the lower side. Since our fiscal deficit is already at high levels of 10-11% of GDP, we must use our forex reserves to fund major projects. Government spending as a counter cyclical measure always restores confidence and equilibrium in the economy and foreign funds will automatically flow in to the country restoring our double digit growth rates in a few years time. Political will, vision and thought leadership is the need of the hour if India has to be another China. As for the financial crisis which continues to have ramifications globally, it may take years for US and Europe to come out of disarray. The G20 and other forums of the world must join together to ensure that deflation is avoided at all costs. This definitely is not the last financial crisis of the world. We have had many in the past and we will continue to have many in future. But whats important is how strong the world emerges from each of them and what are the learnings that we take forward into the next generation. History does repeat itself!!

Indian Government's first private sector bail out

2009-01-10T14:54:00.002+05:30

Yes, we are talking about Satyam Computers Ltd. In all probability to protect the interest of 50000 employees of the IT behemoth, the government may have to resort to the populist measure of bailing out the company by infusing liquidity to fulfill its working capital needs. Since L&T and LIC are stakeholders in the company and now with GOI deciding to place nominee directors on board, there is every possibility of an initial bail out from GOI and later on some merger arrangements with L&T infotech or a consortium of interested IT companies. Interesting events can unfold in the days ahead. The only issue bothering white knights now is the concealed liability on satyam's books as well as the legal claims that might be bestowed upon the company post this largest corporate fraud in Indian history.

Raju survives the tiger, offers his shareholders as food instead

2009-01-10T02:26:00.002+05:30

Just what exactly is the financial/accounting manipulation of Mr Ramalinga Raju?

Going by his confessional statement to the Board of Satyam Computer, what he has done over the years appears to be rather simple manipulation of revenues and earnings to show a superior performance than what was actually the case.

For this, he resorted to the time-tested practice of raising fictitious bills for services that were never rendered. Such bills will have to either reflect as outstanding dues from customers, which will add up to sundry debtors on the balance sheet.

Or, it has to be shown as realised, in which case, the cash or bank balance should increase correspondingly.

From his statement, it appears that he’s done both, inflate receivables and cash.

For instance, in the September quarter, Satyam inflated revenues by Rs 588 crore all of which went straight to the bottomline. Thus, operating profits were artificially boosted from the actual Rs 61 crore to Rs 649 crore.

About Rs 490 crore of this artificially inflated Rs 588 crore was added to receivables as conceded by Mr Raju himself.

The remaining Rs 98 crore appears to be a part of the Rs 5,040-crore cash hole in the balance sheet.

What beats understanding though is how Mr Raju managed to show a cash/bank balance of Rs 5,361 crore when all Satyam had was Rs 321 crore as of September 30, 2008.

Auditors generally insist on certification by banks of the balances held by them in the company’s account.

Did the auditors fail to do that? Did Mr Raju produce forged certificates? Or did he just manage to find funds for just one day to deposit into the account to get a certificate?

Besides the above, Satyam also showed interest earnings of Rs 376 crore that was fictitious. This is also a common strategy designed to boost earnings performance.

Finally, Mr Raju says he infused funds of Rs 1,230 crore into Satyam which is not reflected in its books as dues to him. In effect, Satyam has understated its liability.

Now, the interesting thing is that all these numbers related only to the second quarter ended September 30.

Mr Raju has said in his statement that he has been doing this for “several years”. So what is the extent of overstatement over the years then? That is the unknown part of the fraud.

The word "Satyam" loses its meaning

2009-01-09T21:07:00.001+05:30

satyam fraud isnt suprising..They have been carrying non existent cash balances for several quarters under the head "cash in current account". Just that this whole fudging up process never got noticed by any stakeholder. No enterprise would hold up cash in current account that doesnt even yield any interest income. PWC did not exercise discriminative intellect during its audit process and has plainly relied upon the bankers confirmation of balances..Its not that satyam business was not profitable. No clients have come forward so far to complain about their operational expertise or execution/delivery capabilities. Its just that a portion of the top management has colluded with Raju to siphon funds off balance sheet to group companies which resulted in inflated figures being carried in the books for a long time. The hawala mechanism has worked overtime in this whole scam. What's puzzling is the laxity of PWC as an audit firm in the whole process of auditing satyam's books. Did they simply rely on management assertions without looking deeper into the financial statements for material mistatements?.A cursory glance at the cash flow statements of the company over the past few years would have given them enough room for doubts over the state of affairs. Whichever way u look at it now, PWC has an albatross hanging around its neck which its gonna find very difficult to shed off.

How "Satyam" (Truth) got reversed through Maytas

2009-01-08T02:34:00.004+05:30

Satyam's net worth is only 1600 crore adjusting for the inflated profits and the resultant book value works to Rs.25 per share. But whats more appalling is that Satyam was making only 3% at the operating margins level. So this raises a pertinent question as to whether thats the water mark level for the industry as a whole..are all the acounts of IT cos fudged to show or prop up numbers. Is this a real cash cow or a sunrise sector as ballyhooed by the industry experts...have we been buying into a sham story for such a long time? Only time will tell the real saga. But markets can be trusted on their actions, they never lie and it wasnt a coincidence that infosys closed in the green yesterday inspite of the sensex tanking 759 points. Thats a thought worth pondering upon

Stay above 8467

2008-12-21T04:46:00.002+05:30

Having gone through my charts once again, i can say with reasonable assurance that the bottom of 7697 will not be violated again. We are not yet out of the woods as far as the bear market is concerned but we are sowing the seeds for the next bull market to emerge by next year. The next bottom that we are going to make has to be above 8467 for this theory to hold good that the bear market phase is indeed coming to a close.Im waiting to observe any market corrections that might happen from here on to see if this sacrosanct level gets violated or whether the sensex would be able to hold its chin above the water. We might even consolidate between 8500-10000 for many months in the wake of negative news that might continue to make its way into the markets but the sensex must display resilience to stay above 8467 for long term funds to start buying india again.

Targets reviewed for Sensex

2008-12-21T04:23:00.002+05:30

As mentioned in my article in October, the sensex successfully and pretty swiftly breached the 8000 mark and reversed from 7697 to its present level of 10100. A near 30% rally has already come and gone within 2 months. So purely on technical basis where do we stand now?? The sensex has been struggling to close above 10123 for the last two trading sessions. A cursory glance of the futures and options market lends conviction to the thesis that this current bear market rally is not sustainable and its only a matter of time before profits get booked on this wonderful bout of short covering that we have witnessed this december. Throughout the last trading week we have witnessed short covering on rate sensitive stocks with lower volumes and decreasing open interest, which is a clear indicator of fresh long positions not being added at current levels. Investors would be well advised to stay away now if they have missed the 30% rally so far. The markets will give u some more opportunities during their next rendezvous with the bottom in place.

Is the SEBI getting populist??

2008-10-15T11:29:00.003+05:30

Yes..it does seem so given the almost complete U turn on P notes restrictions just issued an year ago by the erstwhile renaissance man of SEBi Mr.Damodaran. The restrictions were placed in the first place to improve transparency and disclosure norms of FII's, hedge funds and other Overseas institutions wanting to participate in the Indian stock markets. This aim was to prevent re routing of black money/illegal money into India from the so called tax havens, improve tax compliance and to keep a tab on the nature and veracity of the "hot money" flowing in from across the shores. The KYC norms imposed were a blessing in disguise and comforted the regulatory agencies of the country over the fact that terrorist money would henceforth find it difficult to penetrate Indian markets. Though these P note restrictions, when imposed at a time in Oct 07 when equities were close to their peak, were considered draconian (on par with capital controls)by market men, it was a well thought out measure with long term positives for our markets. The aim of the then SEBI chief was to protect the lay retail investor from violent gyrations in the stock market on account of sudden outflows of hot money for reasons best left to the P note holder's conscience.

One year down the line, we are in Oct 08 and those restrictions are no more valid. The whole world has changed in a span of 12 months. Bulls have become violent bears resulting in wealth destruction across the world. Banks have collapsed, the financial system is in systemic crisis.Fund flows into emerging markets have dried out completely given the global liquidty crunch and risk aversion. Outflows to the tune of $12 billion have eloped with the FII's from the Indian shores in a span of 8-9 months. The dollar is reverting back to the US. No more carry trades, currency swaps or exotic derivatives. Deleveraging is the new universal mantra for fund managers.

Given this background, Indian markets have collapsed close to 50% and are back at 2005 valuations. With elections looming large, the politicians and market men alike needed a scapegoat. SEBI became their whipping boy. Though every man worth his salt knew the true reasons for this market collapse driven by the credit crisis, excessive valuations and leverage, no soothsayer foresaw the magnitude of this fall. Obviously the intensity of this fall has not spared anyone's portfolio. Therefore, a conjectured and concocted logic started doing the rounds that it was SEBI's P note measures implemented last year that led to a fall of this magnitude for an economy growing at 8%p.a. The restrictions required sub accounts of FII's to stop issuing fresh P notes and provided for existing P note transactions to be winded up within a timeframe of 18 months. Most FII's were long India in 2007 and therefore gave room to assumptions in certain sections of the market that these series of outflows witnessed now is on account of P note unwinding. This concocted logic maybe true but funds always flee during times of crisis with or without capital controls. All the emerging markets have fallen 40-50% along with India, therefore this logic doesnt hold good. Ironically its been the US that has outperformed other global markets even on the downside. The place that has been the foundation of greed has done well to limit its losses compared to emerging markets. Just goes to show how dependant emerging markets are on foreign fund flows. Clearly the dollar is going back to the US.

SEBI has failed to display regulatory forbearance. It has panicked and played to the gallery sacrificing the long term interests of investors. This act of SEBI is akin to a trader cutting down his positions on account of margin calls. SEBI too has become a momentum player

Should Indian investors buy US homes

2008-10-07T01:52:00.000+05:30

RBI has relaxed provisions relating to investments abroad by resident individuals under the liberalized remittance scheme. The scheme provides for investments abroad in capital assets like stocks and real estate by Indians upto a limit of $2,00,000 per annum.

There has been a growing demand among Indian HNI’s (High Net Worth individuals) to make investments in overseas markets like US and the UK to take advantage of the low property prices prevailing there consequent to the subprime credit crisis. With prices getting depressed to the levels of $1500 –2000 for properties in certain areas of US, on the face of it, it does sound like an attractive bargain hunting investment opportunity for our fellow investors. But we need to consider the following aspects carefully before making use of the relaxed RBI provisions to buy properties abroad:
Ø Whether the investor is buying the property abroad with the intention to emigrate to a foreign country in future or just purely as a profitable investment opportunity to benefit from price appreciation in the short to medium term. If price appreciation/capital gains is the sole objective of the investor, it makes better sense to invest in our domestic real estate sector as prices have corrected significantly over the last one-year. There is more pain left in the US post the credit crisis and real estate prices can remain depressed for a long periods as the US economy goes through periods of recession. Relatively, India has been fairly insulated from the global crisis and the domestic real estate sector may offer better scope for return in the medium term.

Ø The costs of maintenance of properties abroad, the distance barrier that reduces the scope for frequent surveillance/monitoring of the property by the investor, the local laws and regulations governing property acquisitions by non residents are factors to be considered by the investor before embarking on a decision to buy a property abroad.

Ø Currency risk and tax incidence are important decision making drivers. It would be a good decision to invest abroad when the rupee is appreciating against the dollar. However given the bleak future outlook for dollar as a currency, realizations in rupee from sale of the property abroad might be significantly lower due to continuous dollar depreciation. India has a double taxation avoidance agreement with the US and any taxes paid on foreign property can be claimed as a deduction under Indian tax laws.
Considering all the above factors, it makes better sense to wait for domestic real estate prices to bottom out and make fresh investments in property, as the entire exercise of investing in a foreign property might not be worth the trouble. Those families who want to emigrate or those who have children working or studying in the US (which indeed is a sizeable community) may consider buying these properties abroad as prices have become more affordable now

Interesting analysis on the sensex

2008-10-07T00:41:00.006+05:30

Please have a look at the table below with details of the sensex performance right from the year 1991. Last evening's closing has been taken for 2008 data temporarily. We have already knocked down 41% from 2007's close.

Year Sensex YoY return
1991 1909
1992 2615 37.01
1993 3346 27.94
1994 3927 17.36
1995 3110 -20.79
1996 3085 -0.81
1997 3659 18.60
1998 3055 -16.50
1999 5006 63.83
2000 3972 -20.65
2001 3263 -17.86
2002 3377 3.51
2003 5839 72.89
2004 6603 13.08
2005 9398 42.33
2006 13787 46.70
2007 20287 47.15
2008 11802 -41.83

If we compute the CAGR for the sensex from 1991 to 2007 spanning 17 years we get a return of 14.91% explained as {(20286.99/1908.85)^(1/17)-1}. We have seen extraordinary/ astronomical returns in certain years namely 1999, 2003 and 2005-07 in the band of 40-70%. This year having slipped into a bear market we need to adjust for the excesses on the downside and fall in line with the CAGR of 14.91% p.a. To maintain this CAGR going ahead into 2009 we need to make a bottom of 8069 or fall 60% from the highs.

Though the above is purely a quantitative analysis based on historical data, Elliot wave theory has already shown us an indicative target close to 9000 for the 4th corrective wave on the sensex and 8096 doesnt seem to be far off. We are at 11800 already and another 25% fall in the bellwether stocks like RIL and LnT will easily take us there. There seems to be excesses still left in capital goods stocks which have not yet witnessed the capitulation seen in metals and real estate counters. Once the poison gets out of the system we can form a nice base for the reemergence of the bull market or the fifth supercycle wave as the elliot wave theorists call it.

But for that to start we need a time wise correction. The value wise correction seems to be happening but time wise we need to travel a bit more. We are nine months into this correction and we have broken important support levels along the downside taking cues from global markets and concentrated FII selling across the cap curve.

Therefore reaching out to these bottoms of 8000-9000 may not happen so soon. We might have violent retracements, sharp rallies that give u a 20-25% pullback in a short span of time. But these pull backs will be short lived lasting for a week or two before we head back to lower lows once again. The confidence in the system, despite belief in long term story of India, has been severely dented at the moment. The patience of the retail investor is slowly fizzling out like a dim candlelight with each passing day, as he wipes his forehead with his already wet handkerchief seeing the sensex drop in hundreds and thousands, watching stock prices collapse under the force of gravity. Every recovery aimed by the indices is being met with selling as highly leveraged investors try to make an exit from their bleeding positions. Three to four pull back attempts from the lows of 3800 were attempted by the nifty, but each time we have seen the index making a lower top which indicates structural weakness and provides evidence of the deeper lows staring at the bottom, which is what has happened today with the index breaking down to a new low of 3581 and the sensex decisively collapsing to levels below Rakesh Jhunjhunwala's psychological "12000". He would, going by his own words, still be drinking like a fish, eating like a pig and smoking out his costly cigars without major worries as he has invested in the market right from levels of 3000 on the sensex. So even at the worst bottom of 8-9K he would still be making 3 times his cost.

Therefore friends, we are headed towards making decisive lows that might happen over a period of time but until then trades will keep happening in a range bound manner. Dont get fooled by smart V shaped recoveries and bet all your money . Typical bear markets end in a saucer bottom formation which means timely consolidation around the support levels before a strong rally emerges.Regular investors should be wise enough to catch the bottom of this range to buy and exit at the top of this range for short term gains. It requires regular tracking of the markets and considerable effort/knowledge. For those who believe in the India story, this is the time to invest and cherrypick with a 3-5 year view, as in the short term you might still see your portfolio heading down 10-15% even from these attractive levels. A new bull market will start only when there is extreme pessismism around, low volumes,analysts on TV predicting total gloom and doom issuing ridiculous targets for the sensex on the downside etc etc From now on, watch out for your neighbours, relatives and people u meet in your day to day life, the ones who were gung ho about new highs for the sensex at 21K.Even my autorickshaw guy was giving me a target of 5000 for reliance 10 months ago. People felt that the bull market was permanent and eternal, an easy gambling paradise to double one's networth in days n weeks, without realising that investing is a tough business. Now is the time to start engaging them in a conversation about the markets. If they disappear from your sight, then thats the time to start investing heavily. Guess we are heading closer to those exciting moments, the so called "once in a lifetime" investing opportunity which intelligent investors capitalise upon to make a lifetime bargain.

The only risk to my estimate of 8-9K on the sensex is the "patience risk" as i would term it whereby long term investors and the domestic institutions in India say "Hey look, we are not selling the India story so easily for an economy growing at 7-8%. We are holding on come what may". This resilience will throw all market theories out of the window and a few months down the line we may be left ruing the fact that we kept our purse strings zipped and tight at these levels.

Markets are indeed supreme!!

Sensex to tank below 9000

2008-09-30T02:26:00.001+05:30

Long term investors would be well advised to sit on the sidelines until sensex breaches 9000.Below 9000 its an excellent opportunity to ride the long term story of India

Hank Henry Paulson at his best

2008-09-27T10:44:00.001+05:30

Hank Paulson’s vacillating statements ever since the financial crisis broke out

Treasury secretary Paulson has significantly altered the way he talks about the financial crisis as the year has progressed. These vacillating statements have cost him a lot of credibility amongst lawmakers in the US who are now refusing to approve the bail out package of $700 billion, what has now come to be termed as the “Paulson Plan”

Lets have a look at some of the statements made by the treasury secretary in the last one year:

Dec 2007: The Magic here is that investors and servicers are coming together to ensure that we don’t have a market failure

Feb 27,2008: I don’t think the American taxpayer needs to step in with more taxpayer dollars. We are so far away from a situation that calls for a bailout

May 6,2008: There is no doubt things feel better today than they were in March (post Bear sterns bailout), the worst is likely to be behind us.

July 2, 2008: To address the perception that some institutions are too big to fail, we must improve tools at our disposal for facilitating the orderly failure of a complex financial institution.

July 20, 2008: America’s banking systems are safe. We are a strong and sound banking system. Our regulators are on top of it. This is a very manageable situation.

Sept 18, 2008: If we don’t pass this $700 billion bailout package, then heaven help us all (his statement at the congress)

Four banks vie for lehman india's assets

2008-09-25T16:59:00.003+05:30

Lehman India's assets are valued at Rs.3300 crore and could be taken over by SBI, Barclays, Standard Chartered and BNP paribas. Out of these 3300 crore assets, 700-800crore alone comprise of structured products and capital protection plans.

RBI's reflex action on Lehman

2008-09-25T16:44:00.003+05:30

Last week stood out for global knee-jerk regulatory responses to the turmoil in the financial markets. Regulators worldwide introduced measures to outlaw short selling of securities

The United Kingdom’s Financial Services Authority (‘FSA’) announced a four-month ban on short selling in securities of UK-based financial institutions by declaring that any increase in a short position or creation of a new short position in any UK bank or UK insurer, or their parent companies would amount to “market abuse”.

The United States’ Securities Exchange Commission (‘SEC’)announced tougher measures to punish “naked” short sales until October 1. Unlike the FSA, the SEC has not banned short-selling. It has only tightened enforcement against “naked” short sales.

A “naked” short sale is a sale by a person without being covered by an earlier purchase position, or an earlier holding, or a prior borrowing of the stock being sold. All other short sales are termed “covered” short sales and not universally prohibited.

Most jurisdictions treat short sellers on a footing unequal with “long” players. Different jurisdictions have imposed varying levels of prohibitions and regulations in relation to short selling. Many jurisdictions have banned naked short sales while others have introduced measures such as the “uptick rule” (permitting short sales only when the price is rising) or limits on the quantum of aggregate short sale position in any stock (as a percentage of the share capital), or price limits (linking the price in a short sale to the previously traded price).

Under fear of exposure of Australian banks to Wall Street banks that are now in the doldrums, the Australian Securities Exchange has imposed a complete ban on naked short sales until further orders. France, Portugal and Ireland too are reported to have taken similar measures against short-selling.

In December last year, the Securities and Exchange Board of India (‘SEBI’) and the Reserve Bank of India (‘RBI’) had announced their intent to bring in institutional involvement in short-selling by permitting foreign institutional investors and local institutions to sell short. A stock lending and borrowing mechanism was introduced this year to enable covered short selling, but it did not lead to major volumes due to universal opposition to the mandatory seven-day tenure for borrowing stock witin which positions have to be covered, preventing a longer term call on specific stocks in the cash segment.

India too has had a long history of regulating short sales. Each of the newly elected coalition central governments in the recent past has been vindictive with falling stock prices that would follow government formation. Ministers have summoned bankers to threaten them with action, and enforcement agencies have been unleashed on select players (Shankar Sharma of First Global is a prime example). The Indian corporate sector is perceived by market players to be the strongest lobby against short-selling.

Last week, it was not SEBI, but the RBI that contributed to India’s share of knee-jerk regulatory action. In a measure that sent panic signals across India’s money markets, and brought back memories of capital controls, the RBI took the unprecedented step of suspending the operations of Lehman Brothers’ Indian subsidiaries, citing the bankruptcy of the foreign parent.

Lehman Brothers Capital Pvt. Ltd was prohibited from contracting further liability from any “institution in India or outside” and from “making any foreign currency remittance”. Lehman Brothers Fixed Income Securities Pvt. Ltd. was prohibited from making any remittance to its overseas affiliates (including payment of dividend).

While many nationalists felt proud of the RBI for its timely alertness, it may prove to be a bad precedent. How much money could actually have been sent out by the Indian entities, and how such remittance could risk the Indian market system remained undisclosed. The RBI action would lead to an expectation that the central bank could take such measures each time a foreign parent of an Indian subsidiary goes bust.

The signal to the market was one of a panic-stricken RBI, so desperate, that it had to pre-empt outflow at any cost. The market speculated that the undisclosed exposure of the Indian market system to the local Lehman entities could be so huge that the RBI had to strive to protect every dollar from flowing out of India.

Such indistinct case-specific suspension of the law would only lead to foreign investors perceiving a regulatory risk to their investments in India. In times of financial stress their investments could get blocked without any grievance redressal mechanism in place.

Future of Financial systems

2008-09-25T16:34:00.003+05:30

Global financial markets literally rode on a roller-coaster last week, first dropping sharply in response to news about the Lehman Brothers bankruptcy filing and then recovering just as sharply as the US government bailed AIG out and several central banks announced their willingness to pump in large amounts of liquidity to provide markets with a lifeline. At the end of the week, if one were to just go by stock market index values around the world, it might seem like nothing had happened.

However, many people would agree with the view that the events of the week represent a major discontinuity in global finance. The structures and operating boundaries of all the players in the game today, private and public, will be examined and re-examined. Whether this will result in a broadbased co-ordinated set of reforms is too early to assess. At the end of the process, the conclusion might well be that radical solutions that address today's problems actually exacerbate other risks. These are issues to think seriously about over the coming weeks and months. Meanwhile, the immediate concern is with the survival of the existing system. Is it now in irreversible decline or showing signs of resilience?

The “irreversible” decline view undoubtedly has several adherents and events over the next few days may well prove them right. But, let's examine the arguments in support of the “resilience” view. Two sets of factors need to be taken into consideration. One of them is structural, reflecting a long-term trend. The other is cyclical, providing an opportunity for the kind of policy response that we saw last week without provoking fears of a broader macroeconomic fall-out.

The structural trend that has been in evidence over the past few years and whose impact is likely to continue is the globalisation of financial exposures. Emerging economies, as a group, have clearly been significant contributors to global growth over the past decade. However, their increasing openness to international capital has provided greater opportunities to global investors to tap into the returns that the growth offers (as well as expose themselves to the risks).

Diversification as a way to mitigate risks is the first rule of portfolio management. The ability to diversify portfolios globally has provided financial institutions with access to a range of asset classes whose price movements are less and less correlated with each other. For example, investments in China and India, whose returns are predominantly generated from domestic markets, are likely to be able to resist the pressures that investments whose returns are more closely linked to the US and other vulnerable markets are facing.

The cyclical opportunity stems from lower oil prices. Even as recently as a few weeks ago, with prices hovering around the $150/barrel mark, the willingness of central banks to infuse even small doses of liquidity to shore up asset prices would have been in doubt. As much priority that central banks may give to the integrity of their financial systems, managing inflation still remains their primary responsibility and the trade-off between the two was acute in the first half of the year.

That the US Federal Reserve went against the grain in January, sharply lowering rates, highlighted the seriousness of the financial problem. However, given the macroeconomic risks of easing interest rates too early in the cycle, there was clearly an argument to be made in favour of more selective, targeted solutions focused on vulnerable institutions, despite the obvious moral hazard arguments against such solutions. The practical consideration of saving the situation first and worrying about the nuances later will almost always prevail.

However, as the inflationary threat recedes, particularly in countries that had fully passed on the oil price increases to domestic consumers, central banks can shift from targeted bail-outs to more traditional approaches, lowering interest rates and cash reserve requirements to stimulate economic activity as well as asset prices. Virtually all major central banks should be entering this phase over the next few months if the oil price situation remains favourable. Of course, another shock to the system could well materialise, completely disrupting current calculations, but barring that, macroeconomic conditions are becoming increasingly supportive of the “resilience” view.

What implications do these events have for emerging economies? Obviously, the benefits of globalisation from the viewpoint of global investors do look like risks as far as the destination countries are concerned. As we saw, the exchange rate is usually the first casualty of sudden and large portfolio movements. The difference between the Asian crisis of 1997 and today is the huge foreign exchange buffer that emerging economies have built up to protect themselves against just such an eventuality. For the time being, they generally appear to have withstood the shock. Their currencies have depreciated sharply but no panic has set in about their ability to meet all obligations, even in the worst case.

In a sense, their ability to weather this shock vindicates their decision to “buy” insurance in the form of huge reserves, paying the price in terms of domestic monetary and financial distortions. But, as is becoming evident from the debate in India, it is always tempting to justify slow movement on reforms by arguing that a more liberal domestic environment would have made the domestic financial system even more vulnerable to the global turbulence. The reforms agenda should not be held hostage to the current crisis; rather, further reforms should be seen as an opportunity to find a more efficient and sustainable balance between growth, returns and risk.

The one thing that this crisis has brought to the fore is that both mature and emerging economies now face essentially the same set of questions about the future of their financial systems. How are intermediation and investment activities to be structured? How is risk to be measured and provided for? What systemic roles should the government play? And, how best can governments and regulators in increasingly integrated markets co-ordinate to ensure that effective safety nets are in place and shocks can be contained? The answers to these will chart out the future of global and domestic financial systems, however they emerge from the current catastrophe.

Mortgage crisis spigot - The FED's fiscal profligacy

2008-09-15T01:11:00.002+05:30

The massive bailouts of Fannie Mae and Freddie Mac show unfortunate trends once again in the U.S. corporate world: failed executives get rewarded while trusting shareholders get bupkis.

Freddie Mac’s CEO Richard Syron could get nearly $15 million, according to news accounts. Over at Fannie Mae, CEO Daniel Mudd could receive an exit package worth $9.2 million, including stocks he already holds.

Big rewards, indeed, for executives who helped cause one of the biggest federal bailouts in history. Sloppy accounting and overstating the firms’ capital on hand precipitated the Sept. 7 bailout plan. In it, the hybrid groups will be under federal conservatorship with the power of the U.S. taxpayer to back them up.

The plan, led by Treasury Secretary Henry Paulson, has generally been hailed as a needed measure to buck up confidence in the U.S. financial system and prevent further deterioration in the mortgage securities business. Fannie and Freddie were deemed too big to fail. The bailout is also intended to reassure all-important foreign borrowers that their loans will somehow be secured.

What about shareholders? So sorry, out of luck. The takeover pretty much erased the value of their holdings

Lessons from ICICI…

2008-09-15T00:31:00.000+05:30

After a 33-year stint at ICICI Bank, Ms. Kalpana Morparia who is now the CEO of JP Morgan India is not letting her learning at ICICI Bank go waste. Having been at the helm of affairs of India’s largest and fastest growing private sector bank, Ms Morparia knows the tricks of the trade and is practicing all caution in her new role. While most foreign banks are targeting large-scale retail expansion, JPMorgan has no immediate plans to chase retail customers. The financial firm will get into retail banking only when credit bureaus are in place. Credit bureaus collate the credit history of individual borrowers and share them with commercial banks. In case of any default, a borrower gets blacklisted and finds it difficult to access fresh loans. Thus having witnessed some retail bad loans pile up at ICICI Bank, Ms Morparia certainly knows better this time

Poi Solla Porom: Situational comedy with a message

2008-09-13T03:15:00.002+05:30

Youngsters rule the roost in this movie and it’s such a refreshing change to feel the freshness and earnest desire of the crew to bring out a quality product to the theatres.

Positives:
ü Novel title introduction, Tight screenplay, Intelligent direction, Seamless
editing, excellent scenario building and rib tickling second half

ü A sort of comeback for yesteryear actor Mouli..What an amazing sense of
comic timing this legend has got.. ..Where was he all these days?? The
Mouli – Nazar combo strikes gold for Poi Solla Porom

ü Finally a plum role for Karthik Kumar.... Something that was long due for
this deserving actor..nice transformation of the character from a nonchalant
son to finally taking up the onus and responsibility to turn the tables on
Nasser. The “poi” game really starts here, with a host of other characters,
just post the interval and takes off on jet speed.

ü Wonderful, apt, able and excellent supporting cast, the movie allows us to
discover a new set of talent for tamil cinema, actress Piya looks cute as
Karthik’s love interest though she can improve upon her lip sync going
forward, Omar as Karthik’s brother and Big FM Balaji as Mouli’s secretary
deserve a special mention..They are the ones we need to support and keep a
watch on

ü Message that gets driven down: Beware of real estate sharks and land grabbers

ü Good background score, situational songs, no item numbers or dream sequences

Negatives:

1. The first half can be pruned by about 10 minutes to maintain the tempo of
the movie

2. How much ever I tried to wear the hat of a critic, I couldn’t find anything
more than Point 1 above… You just can’t find fault with this movie guys…
just let your hair down and have fun.:):)

This movie is sure to bring a smile on your face while u leave the cinema hall.
When we audience can ensure the success of distasteful movies like “kuruvi”, “vaathu”. “Kozhi” etc etc at the box office, why not support and root for clean, good, light hearted cinema.

Go watch PSP with your family and don’t forget to pass on the word:)

Musings on Dasavatharam

2008-07-26T03:23:00.003+05:30

Firstly i have to admit, after sivaji ganesan if there's been one actor who has satisfied my appetite for intellectual cinema, its always been our padmashree Kamalhasan. Cinema has always had its huge influence on the life of every tamilian right from the 1960's. If family values, cultural bonding and a liking for the language as such got instilled through sivaji's movies, cinema as a profession found its respect amongst the population through Kamal. The cravings of the masses have always been satisfied by MGR and later rajni and now Vijay to some extent. Its not a distinction im trying to forcefeed here by dividing the population into mass and class. I for one, believe its the same group of people who wear different hats while watching a rajni or a kamal's movie. We watch rajni for the pure fun element, to get some kick ass feel, whereas when we are out to watch a kamal's movie, we prepare ourselves ..dont we??..we build up expectations ..there is an urge to keep ur mind active and rolling to understand what the great actor might have on offer each time. We expect him to take cinema to the next level each time. We keep prodding him, egging him and encouraging him inspite of his repeated "commercial" failures right from "Hey Ram" in 2000, so much so that a new breed of audience has emerged now, whom i would like to term as "Kamal Hascists". They support anything and everything that Kamal has on offer.Yes i was heartsick after watching "Alavandhan".I was in a state of comatose reeling from the movie's impact and also at the fact that i had to spend 300 bucks (black ticket) out of my meagre articleship stipend of Rs.500 those days to catch a 22 crore profligate no hoper of a movie. I had felt kamal's career would go belly up after that movie. It was such a magnum disaster that i never wanted to call myself a kamal fan after that. But the actor known to bounce back frequently, rose like a phoenix from the ashes with "Virumandi". I remember watching this movie in 2004 without any expectations and i was dumbstruck by his performance. I was back in awe and my faith n hope in my idol was temporarily restored but only to be destroyed by this new cock a hoop, self aggrandizing misadventure called "Dasavatharam".

What a "sothappal" movie it was for a budget of its scale and size.All this helium hype ends in a damb squib post the first 15 -20 minutes into the movie. Its too late for you to realise that its a cleverly aimed marketing ploy of the producers to sell a product thats "below par" in every aspect of film making. They have roped in the crowds and who knows, they might have already had their payback in full. Yes, the producers will continue to say "Remember this is a Tamil film. There’s only so much that can be done with the limited technology we have, with the limited money we have. Just think how hard this hero born amidst us has toiled, how hard he’s trying to take us places we’ve never been before." But isn’t this line of thinking a great disservice to the audience as well as Kamal, the writer-actor who refuses to be limited by the narrow confines of Tamil cinema and measures himself against global standards. When celebrities like Jackie chan are invited for the audio release of the movie with all the accompanying hype and hoopla, the least any film goer would expect from Kamal is that the movie atleast matches up to the Chinese films of his revered and venerable international peer. Watch the recent effort of Jackie Chan in "The Forbidden Kingdom"..U can throw ur hat out and say that the Chinese are moving in the right direction since the "Crouching tiger" days, improving budgets and the quality of film making. When Aascar Ravi, the producer of Dasa shares such a great relationship with Jackie Chan (For those unaware, Aascar Films distributes all Jackie Chan movies in India), he could have atleast roped in in the CG guys who work on Jackie's special effects. God knows why he dint do it. They would have definitely made Dasa much more watchable.Yes Kamal still deserves credit for taking special effects to the next level in tamil cinema but by Hollywood standards, Dasa would still be considered a B grade effort as far as CG goes.

The whole premise on which the movie's script has been built is based on "Chaos Theory" whereby one event leads to the other and there's a clear cause and effect relationship for every event that unfolds right from the 12th century priest to the last tsunami scene. This was such a wonderful script and a lifetime opportunity for Kamal to have created a canvass of sorts. He got his thinking right but the execution sadly leaves a lot to be desired. If we take the individual characters or avatars, Kamal scores heavily as Rangarajan nambi, the priest and Vincent Poovaragan, the dalit crusader. This is the only movie where u have Kamal in almost every scene and thats a record by itself for any form of cinema. He stays right there, getting overexposed at times, sometimes funny, sometimes irritating and thought provoking in sequences that are few and far between in this megalomania of sorts. If only Kamal had decided to just stick to the Poovaragan character and had made a movie on his crusade for social reforms, i guess we would have had another classic on the likes of Anbe sivam that would get archived in the annals of tamil cinema. Kamal as Vincent Poovaragan got me involved for a change in an otherwise boring fancy dress competition. His dialect, the make up and everything about the character had some unique appeal to it. Sadly the script doesnt offer enough fodder for this role.

Balram naidu as the RAW officer was just not funny contrary to what most have opined after watching the movie. Kamal has clearly tried to imitate the yesteryear actor Baliah and somehow watching him do it was an irritable experience, similar to the one i had while watching his "Indiran Chandiran" in the late 80's. His interrogation of kaifullah (kamal again as an Afghan Muslim) as to whether he belongs to Alqaeeda or Lashkar e Toiba was so cliched and ridiculous. Kamal as a dialogue writer has failed miserably except for the Dalit character. The dialogues are just not in sync with a story of this kind. The Japanese Zen exponent retaliating to Christian Fletcher's fussilade in the climax fight sequence was taking it to the heights of imbicilty, where fletcher fires a salvo saying "Remember Hiroshima" to which the Zen kamal remarks "Remember Pearl harbor". I squirmed in my seat at this so called "punch" dialogue. Was this the actor i used to idolise, Was he the one who gave us Moondram pirai,Rajaparvai,Sathya, Apoorva Sagotharargal, Mahanadi, Kuruthipunal, Michael Madana kama rajan or even Anbe sivam recently. My thoughts revisiting all these old classics had already started rolling even before this movie ended.

Asin, the less said the better. It was a-sin to even watch her in this movie. He job was to ensure that the movie remains a mediocre effort. She must have managed to push people out of the theatre through her incessant calls to "perumal". Wish the Flecther character had shot her down in the beginning itself along with Mallika Sherawat. For the first time i felt pained to see Asin perform so badly.

Avatar Singh is another comedy character. he gets shot in the throat and "voila" his cancer gets cured. Man... that gun shot was his straight ticket to heaven. Kamal as govinda, the main protagonist in the movie around whom the other 9 characters revolve jumps from high rise buildings in the US, does a free fall from flyovers in Chennai and its suburbs, catches a speeding train that too with Asin and her perumal "barbie doll", escapes unhurt each time. The point is if Kamal wants us to suspend our disbelief, sorry, that can never happen in a movie of this kind. Kamal cant be a rajni just as Rajni cant be a kamal. The action sequences also were an eyesore beyond a point. When a chase of that magnitude from US to India is happening, shouldnt that be shot in a riveting manner?? Not for a moment was i in the edge of the seat, awestruck by the action that unfolded. Kamal has still not learnt his lessons in full from his "Alavandhan" exercise. That's the only conclusion i can arrive at, after watching this "dud" of a movie called Dasavatharam.
We all realise the pain and the efforts he has undertaken to slip into each of these 10 characters with all the prosthetic make up surrounding his body. But at the end of it all, was it just worth the effort???

Kamal..we want u back..back as the actor of the 80's and early 90's..ur experimentations are laudable but they invariably end up getting executed shoddily...Ur career graph has seen an undeniable decline ever since 2000 and there's very little time left..Maybe the ego maniac in you will never allow u to work with the current crop of talented directors in tamil cinema like Bala, Ameer or Cheran who may still be able to make good use of the vast unutilised potential that lies beneath ur visage. Even Sivaji required a "Mudhal Maridhai" in 1985 from Bharathiraja to realise that he had a completele different dimension to his acting skills. So come out of ur self created closet..we need the actor in you..not the director anymore.

A panoramic view of eight centuries of crisis

2008-06-27T23:15:00.004+05:30

Those wanting a detailed insight into the history of financial crises of the world spanning a period of eight centuries may refer this interesting well written paper

http://www.nber.org/papers/w13882.pdf

It covers the crisis of 14th century in England to the latest subprime financial crisis

Interesting Themes in 2008

2008-06-27T22:59:00.002+05:30

Certain events of 2008 have fascinated me. Iam exploring all these events or "themes" (as i would like to call them) in detail. I have listed some of them below:

1. The Fall of the US dollar
2. The compounding of the subprime crisis
3. The 60,000 crore write off by the Indian govt on farm loans
4. The printing of paper currencies and excessive inventory at Fort Knox
5. The collapse of Bear Sterns
6. Inflation reaching an all time high in India
7. The forecast for crude oil at $200 per barrel
8. Financial decoupling turning out to be a myth
9. Conspiracy theory of Gold adopted by Central banks of the world
10.Various valuation theories in equity markets shown the door
11.Iam witness to a classical bear market for the first time in my life after a
grade appropriate understanding of stock markets.
12.How difficult it is to be "Ben bernanke" as the central banker of the world

U may feel free to add points that u consider to be "significant drivers" for 2008 in the financial markets.

A tribute to Field Marshal Sam Manekshaw

2008-06-27T22:47:00.002+05:30

I am adding a few quotes of this legendary hero, one will continue to inspire billions of Indians for generations to come.

His Quotes:

Discipline is the code of conduct of decent living.

What is moral courage? It is the ability to distinguish right from wrong and having so distinguished it, be prepared to say so, irrespective of the views held by your superiors or subordinates and of consequence to yourself.

Any one who says he knows no fear, is either lying, or is a Gurkha!

To those of my commanders, who took an inordinately long time to come to a decision -I coined a Manekshawism “If you have to be a bloody fool, be one quickly.”

Officers, you have kept up the great tradition of the Indian Army... [pause] of having beautiful wives.

There are two things no honourable man should forget: His wife's birthday and the first name of the women around him

New Age in Fertilizers

2008-06-12T17:43:00.004+05:30

World over, the issue of global warming has assumed paramount importance. Environmentalists are at loggerheads with industrialists, traffic cops are gunning at soot emitting vehicles, developed nations are in a war of words with developing and underdeveloped countries on the issue of global warming and its ill effects on the world ecosystem.

The increased concern and awareness on global warming has led to adoption of bio fuels as a viable alternative to the burgeoning energy demands of the world. With crude oil at $137 per barrel, bio fuels are slowly emerging as a viable alternative. Bio fuels emit 75% less CO2(Carbon Dioxide) when compared with the fuel variants of crude oil. As a result, the increased demand for bio fuels has over the last few years led to agricultural land being diverted towards ethanol and other bio fuels production. These bio fuels can be produced from corn. So farmers have shifted their harvesting activities from producing foodgrains to producing corn. Corn production requires increased usage of fertilisers and has led to the upshot in fertiliser prices internationally. The resultant fall in supply of foodgrains has resulted in the recent food crisis engulfing the globe with demand spiking unabated in a disproportionate manner. Food prices have hit the roof and have spearheaded the inflationery scenario prevailing all over. The global fall in foodgrain production has brought back renewed focus into agriculture. We all know that land is not a cultivable asset. We cant create more land. Therefore with its limited availability, what can be done is to increase the productivity of land, which in turn requires balanced usage of fertilisers.

In all this melee, the ones laughing all the way to the bank are the corn farmers and global companies engaged in fertiliser business. The price of corn has moved up from $3.05 per bushel to $4.28 per bushel in the space of 12 months, so have the prices of fertilisers like Urea, phosphates, DAP and MOP which have trebled in the last one year. When prices of fertilisers go up, the positive sentiment will also be echoed by fertiliser stocks listed in the capital markets. Even though, Indian fertiliser industry is still highly regulated, fertiliser stocks listed on the NSE and BSE have given returns ranging from anywhere between 60-120% in the last one year from May 2007 to May 2008 whereas the Sensex has yielded only 12%. Some standing examples are Tata chemicals, Chambal fertilisers and GNFC.

Lets analyse the reasons for investor interest in these fertiliser stocks and the issues plaguing the industry in general:

The Indian fertiliser industry has been the government's holy cow for times immemorial. It has suffered from a controlled regime with archaic regulations plaguing its growth and development. Agriculture is expected to grow in India @4% p.a and therefore fertiliser industry can also be expected to grow at a similar rate in the country. The demand -supply dynamics prevailing internationally for fertilisers will not be applicable to India due to the fact that fertiliser as a segment has not yet been decontrolled. Its still subject to government fiat and pricing. Therefore there is no proper price discovery for fertiliser products in the country. The domestic farmers are protected from the vagaries of international fertiliser prices,which to the government is more important than the bleeding fertiliser manufacturers who are forced to sell at below cost,at MRP (Max retail prices) fixed by the the former.The MRP for different categories of fertilisers are determined through a complex formula under the NEW pricing Scheme (NPS)that works proportionately to import parity pricing but ultimately forces fertiliser manufacturers to sell their produce at below cost price. As we all know vote bank politics holds sway over reforms in our democracy. The difference or underrecoveries as they are called is compensated in the form of bonds by the GOI.

Urea, DAP and MOP come under the controlled regime of the government whereas potash and phosphatic fertilisers were decontrolled a few years ago. Due to the government's subsidy schemes for Urea, farmers began deploying it excessively for their crops without regard to the soil texture leading to depletion in quality. The right targetting of subsidies and delivering the same on nutrient based needs would have gone a long way in improving agricultural output in the country. Successive governments have clearly missed the bus here.

There has virtually been no capacity addition in fertiliser production for the last fifteen years due to the unfavourable policies of the government. Export of fertilisers is also banned by the government, inspite of which we face a supply shortage which is assiduosly met through imports by government agencies like STC and FCI.The internal demand for fertilisers has pushed up the global demand and the concomitant rise in international fertiliser prices.

Major industrial players as well as existing corporates in this sector are shying away from fresh investments due to the following reasons:

1. Archaic fertiliser policies of the government
2. Non availability of feedstock for urea and phosphaic inputs
3. Cost plus pricing with huge underrecoveries for fertiliser producers resulting in
losses and thereby lack of investor attention
4. Uncertainity on receipt of government subsidy and lack of adequate compensation
through cash. Almost a significant portion of the government subsidy is granted
through bonds which are not highly liquid and have to be liquidated at a discount
to meet under-recoveries.

So after perusing through all the above points, the immediate question popping up in the reader's mind would be "How is it that the fertiliser stocks are outperforming the Sensex despite the above concerns??" Read further for your answers:

The government's fertiliser subsidy burden has risen from Rs.11,000 crore in 2003-2004 to an estimated Rs.90,000 crore as per the latest figures available. With its fiscal targets going awry, food crisis deepening and food inflation going out of control, the government has finally decided to wake up from its long slumber and has started looking at framing a new fertiliser policy by next month. Even if this gets tabled in the parliament soon, i dont think we would have concrete reforms happening in this sector until elections get over. As a first step to attract investments, this sector has been placed under priority list. The non availability of gas as a feedstock has been hampering the growth of this sector for a long time. However with gas expecting to flow from the KG basin by mid 2009, this problem gets addressed. Moreover, the government has asked all fertiliser plants to convert to gas based plants from existing naphtha based plants to reduce the cost of feedstock and make fertilisers more affordable to one and all. The advantage is that gas is cheaper than naptha by over 2.5 times.

Some of the appealing schemes proposed under the policy are :
1. Change in investment policies for Urea and phosphates, capital subsidy and fiscal
benefits for capacity expansion
2. Revival of sick public sector units engaged in fertiliser production
3. Decontrol of Urea and correcting the nutrient imbalance
4. Subsidy targetting through cash on a monthly basis instead of bonds wherever
required.

The most important issue of "pricing" has however not been touched upon so far. Most of the industry players are asking for an "import parity pricing" until domestic production comes on steam. However the sector as such being a sensitive one for any government, pricing aspects will continue to be controlled to protect the interests of farmers. The government will atmost tinker around with the pricing to the extent of reducing its subsidy burden to manageable levels.

Notwithstanding the above negativities, the fertiliser stocks are fancied upon and will continue to be fancied by investors for one or more of the following reasons:

1. Most fertiliser companies have over the years derisked their business model by
venturing into the chemicals business. Most companies derive only 50% of their
revenues from fertilisers now and the balance from chemicals. Internationally,
prices of soda ash have skyrocketed and firmed up, boosting the bottomline of
these companies.

2. Supply of gas from KG basin by 2009 which will ease out supply concerns.

3. The promising future that beholds agriculture and its allied sectors like
fertilisers

4. Stable cash flows from fertilisers and chemicals, attractive dividend yield even
if the rise in international fertiliser prices have not benefited Indian
companies .

5. Share prices have also run up based on expectations from the government on the
new fertiliser policy and the attractive schemes and measures that it may contain
to attract private investments into this sector.

6. Growth Rates in this industry are expected to outperform growth rates in
agriculture. The fact that even bio fuels would require usage of fertilisers has
almost lead to demand rising by 10% p.a globally.

All in all, fertile times ahead in the horizon for both industry players and investors.

Should our forex reserves be utilised for infrastructure developement

2008-06-08T07:55:00.002+05:30

There have been so many vociferations from various classes of the intelligentsia over the last two to three years on utilisation of our burgeoning forex reserves for infrastructure development. Plans were also mooted to set up a government subsidiary with capital drawn from forex reserves to support infrastructure projects in India and abroad. But is it a rationale act to utilise our forex reserves for internal needs. Why is it that the government and RBI are hesitating to do the same. As on date the forex reserves stand at $316.17 billion which is more than 30% of our GDP Lets delve into the thought process of the Central banker Y.V.Reddy who remains non committal on this issue and as to what are the possible concerns he might have on releasing the forex reserves for national development :

1. Forex reserves can arise in three different ways either through FDI(Foreign Direct Investment) or FII (Foreign Institutional Investments) or RBI's currency market operations.FDI inflows are the more sustainable, permanent form of money flows which actually result in development and growth, enhancing the economic prowess of the country. Therefore inflows in the form of FDI are always encouraged by countries world over. FII inflows also known as "portfolio" flows, on the other hand, are perceived to be "hot" money whose main objective is to take advantage of arbitrage opportunities in different markets for short to medium term gains. These inflows are temporal in nature and shall be the first outflows from any country given a global/domestic crisis scenario. We have historical evidence from the 1997 east asian crisis and collapse of south east asian economies to the latest sub prime crisis that has sent stock markets across the globe into a tailspin.The experience with FII flows have never been stable in the past for any country across the globe as they are always directed towards lucrative/ speculative investment opportunities with a profit motive. The third aspect of building our forex reserves has been through the currency market operations of the RBI by purchasing dollars to keep the exchange rate pegged to the world’s largest reserve currency. Over the years the dollar has considerably declined in tune with the slowdown in the US economy and as a result currencies across the world have been appreciating against the greenback. But however since 70% of global trade is priced in dollar, RBI has been buying dollars form the open market to keep the exchange rate steady and stable to protect its exporters from the vagaries of rupee appreciation.

2. Indian economy has been growing at 7-8% p.a over the last 4-5 years and this had attracted investor attention world over. Our FDI as well as FII flows have increased over the last 4 years with our FII inflows touching $15 billion in Fiscal 2007 buttressed by commendable corporate earnings and positive economic outlook. Despite all this, the two major factors hurting the economy are fiscal deficit and trade deficit. India imports more than it exports. We don’t have a trade surplus on the current account. Our balance of payments position is negative and is expected to rise this year with spiking oil prices. India’s energy and power requirements are huge and rising by the day. Domestic capacities in the oil and gas sector are yet to fully come on steam. We are facing a crisis in agriculture with slowdown in foodgrain production. We are not self sufficient in major essential commodities. All these requirements are being met through imports. The export basket of India also needs to undergo a change in its product mix to cater to the competitive global markets. The economic growth of India has been led by the domestic consumption story. But for this growth to be sustainable its not enough if we keep consuming. We need to produce and produce innovative, value adding products for global consumption. We need to become self sufficient to rely less on imports, produce more with judicious usage of our natural resources and export the surplus for global consumption. This is the most effective way to create a trade surplus. Unlike a Singapore or a China, our forex reserves, whatever be the size, have not been created out of trade surplus. That is also one of the reasons why we have been unable to create a sovereign fund on the lines of China’s sovereign fund managed by Blackstone and Temasek of Singapore. These countries with the help of these sovereign funds have been picking up stakes in developmental projects across Africa to increase their global footprint. Both China and Singapore know that the next phase of growth will emanate from Africa. India has been missing out on this story inspite of sizeable forex reserves to the tune of 30% of our GDP for the simple fact that

a. We need to maintain adequate cushion to meet our import bills of which oil
imports form a significant component, especially in the wake of rising oil prices
b. Our external debt is pegged at 17% of GDP, which also needs to be covered for
through forex reserves
c. FII inflows might reverse any moment given the unstable global environment.
d. None of us want a repeat of the 1991 crisis when he had to pledge our gold to
meet our balance of payments deficit.

At the moment though, RBI has been supporting India Inc’s M&A deals by providing enough foreign exchange to make acquisitions abroad and pursue their ever-increasing shopping list abroad. But to provide foreign exchange to meet internal needs of the country would be possible only when we have a trade surplus and deficits get wiped out completely. The portion of forex reserves that get created out of our trade surplus can alone be utilized for infrastructure development.

The Crude Oil Paradox

2008-06-07T19:52:00.002+05:30

As far as my knowledge of economics goes, whenever prices of a commodity goes up, the demand for that commodity start falling over a period of time. But unfortunately this economic theory doesnt seem to apply for crude oil. So does that mean all of us should retake lessons in economics. Nope, not at all. If we delve deeper into this burning crude oil problem, one would come to realise that its the faulty policies of the governments across the globe that has resulted in fuelling energy prices over the years. If we take our country as a standing example, all of us have been shielded from the impact of crude oil rise from $35 to $133 per barrel over the past 4 years. Though some amount of speculative positions have definitely found their way into boosting oil prices to the present level, the story doesnt end there. If we analyse the real reasons for the oil shock, we would come to terms with the fact that demand has been rising unabated irrespective of oil price hikes, almost to the level of becoming inelastic. In India, the consumption of diesel is more than that of petrol. Most BPL category citizens and low income groups cannot afford a LPG cylinder till date. Public welfare and social responsibility does demand that the government of a country protect its citizens from the vagaries of global economic shocks.So its pretty obvious that the entire burden cannot be passed on to consumers. Therefore the government has been following the hackneyed policy of not raising fuel prices in tune with import parity pricing of crude and subsidizing the population at large only to result in literal bankruptcy of oil marketing companies.The oil bonds that the government issues as compensation to OMC's for their underrecoveries is only a strain on the fiscal deficit of this economy and is a cost on our resources as well as a burden that is passed on to our future generation. In light of this scenario why is it that petrol prices are still subsidized? Only when petrol prices are raised to reflect international realities, will demand for oil slow down. People would either stop travelling by cars or would resort to car pool system. More and more people will start using public transport systems that run on diesel/CNG. Similar is the case with LPG. Since it is consumed by the relatively creamy layer of the population, their prices should also be increased to the maximum extent possible. The luxurious will either ways continue to pay whatever is the price. So why subsidize them. The effect of these decisions would mean CNG usage would increase in a big way given the fact that its a relatively less polluting, low cost option. Public transport systems will also get efficient with more n more people commuting through it. The teething infrastructure problems can then be handled with ease.When demand for oil from a large country like India slows down, we shall see the downward spiral in oil prices happening almost as an immediate aftermath.

But given the fact that ours is a totally warped democracy with the lack of political will to take major decisions that would be beneficial to the society in the long run, these proposals are fit to lie in my closet for the time being. See you with my next article on this subject when Oil is at $ 200 per barrel.

Avon Weighing Systems: Have you seen an IPO at face value so far??

2008-06-07T19:42:00.003+05:30

Trust me guys, Iam not dreaming. Come June 9Th, Avon Weighing systems which assembles and sells weighing instruments in India is hitting the capital markets with its IPO priced at Rs.10 per share. The company, incorporated in 1999, is the authorised dealer of industrial electronic and digital weighing scale products of "A&D" and "Tanita" (Japan) in India. The company assembles these products after importing spare parts from these companies abroad, customising them to individual customer requirements. The company is also the authorised dealer of Excell Precision Co. Ltd., Taiwan and Ningbo Benui Electric Co. Ltd., China. A&D company is the world's third largest manufacturer of weighing machines.

The company is now venturing into manufacturing of weighing systems to address the competitive scenario and tap into the emerging opportunities in the 1000 crore market. The manufacturing would be done with the technical support of Tanita. The weighing balances distributed by the company are used in industries where precision weighing is critical eg: Gems, jewellery, pharmaceuticals, retail, healthcare, posts & couriers, oil, airports, iron and steel etc.The funds raised through the IPO will part-finance the company’s Rs 17.30 crore expenditure plan for 1. A manufacturing facility at Baddi (Himachal Pradesh) 2. Four showrooms for display and sale of its weighing systems 3. Purchase of additional office premises in Mumbai. The project is proposed to be funded through promoters’ contribution of Rs 4.36 crore, internal accruals of Rs 0.50 crore and a term loan of Rs 2.60 crore in addition to the IPO funding of Rs 9.83 crore. The fact that promoters are also making a contribution to the funding plans alone gives a lot of assurance to the issue. It also shows the confidence the promoters have in the sustainability of the business going forward, considering the fact that the company is a small scale industry (SSI) unit.

The size of the electronic weighing systems industry in India is around Rs.1000 crore and is growing at 25-30% p.a.
The biggest positive from this IPO is that it’s coming out with an IPO at a price of Rs.10 sans any premium. Retail investors can bid for a minimum of 500 shares and in multiples of 500 thereof upto a maximum of 10000 equity shares. The company plans to list its shares on the Bombay Stock Exchange (BSE). The IPO has been rated "Grade 2" by CARE indicating "below average fundamentals". Though this appears a negative from the IPO standpoint, there have been cases in the past where even a company with a moderate business profile can command superior valuations if the pricing is right and it is here where this IPO is right up your alley. Lets examine the pros and cons of this issue:

Strengths:

1. Good track record of the promoters in trading operations, excellent long
standing relationships with A&D and Tanita Corp., growing usage of digital
and electronic weighing machines compared to mechanical weighing
machines used earlier. Even a small transformation or conversion of retail
and trade establishments from mechanical to electronic weighing machines
presents a huge opportunity. Also the preference for precision and accuracy
in weights and measures will convert a significant population into potential
customers.

2. Backward integration into manufacturing will strengthen the weak margins
and lend better pricing power. The company is commencing its
manufacturing operations by November 2008 and this should ensure a
robust growth in topline going forward as well as reflect an improvement in
the PAT margins to 7-8% from the present 4%.

3. The manufacturing plant to be set up at Baddi, Himachal Pradesh is exempt
from taxes and duties. The fiscal incentives will definitely shore up the
margins of the company going forward.

4. Usage of properly serviced second hand dies for manufacturing will result in
saving on capital expenditure going forward.

5. Innovative products, better technology through internally developed
software, industry specific solutions and customised service have made the
company a preferred supplier to a number of its customers.

6. Avon has witnessed impressive growth in its topline and bottomline at a
CAGR of 43.5% and 64% respectively over the last five years. The company
has had a decent track record of paying dividends in the range of 12.5-
13.5% every year. Assuming the trend would continue, one can safely
conclude that this stock would have an excellent dividend yield given the fact
that the issue is priced at par value.

7. Legislations are being passed now by various state governments by banning the usage of
mechanical balances. Karnataka for example has already passed one such legislation.

8. Long standing relationships with companies like Novartis, Lupin, Sudarshan Chemicals lends
earnings visibility.

9. Any rupee appreciation against currencies like YEN and YUAN should result
in handsome gains for the company due to its import policy of spare parts
and raw materials.

Weakness :

1. No prior experience of promoters in the manufacture of electronic weighing
machines. The company has only been trading and distributing weighing
machines so far.

2. Excessive dependence on A&D and Tanita for business continuity. Inherent
business risk lies in highly concentrated business profile and
termination/discontinuation of dealership agreements. Also for the
manufacturing activities to commence, technical support from Tanita is
required for which no formal agreement has been entered into. The
agreement will be entered subject to inspection of the Baddi plant by
Tanita authorities. In case the agreement does not materialize, the company
plans to install an assembly plant at the proposed site.

3. Inadequate geographical reach

4. Limited investment ability of promoters

5. Significant competition from players like Essae- teraoka, Avery India, Sansui,
Phoenix, Atco, Contech and the presence of the unorganised market have
hampered the possibility of a wider geographical reach for the company.
Avery India is the only listed player that has been in existence in the
industry for more than two decades but has witnessed moderate sales growth
compared to Avon. But Avery has its own manufacturing facility in place.

6. The company has reported negative cash flows in the last three years due to
working capital constraints. The company faces a strained working capital
situation due to delay in receivables from government agencies. Government
agencies typically take 90-120 days to settle their dues. The interest burden
is expected to go up in the near to medium term.

Notes on financials:

1. With the commencement of manufacturing operations by Nov.2008, the growth momentum
is expected to continue with overall improvement in margins

2. The company has reported better earnings growth when compared to Avery India. The
margins are lower than Avery India as the former is already into manufacturing activities
that can lead to better economies of scale compared to trading activity alone.

3. At the fixed IPO price of Rs10, Avon commands a better market cap to sales ratio as well as
PEG (Price earning growth) when compared with Avery India, indicating scope for sizeable
listing gains.

4. The Enterprise value per share is also at a significant premium to the issue price

All in all, Avon India can be described as a SSI with a moderate business profile and decent financial strength with ability to deliver stable returns going forward.

Valuation:

The IPO price of Rs.10 discounts FY 08 fully diluted EPS of 1.12 by 8.92x, which is lower than the PE of Avery India, the only comparable listed peer.

The IPO is being recommended to investors for the following reasons:

·The scope for downside is very limited. The pricing of the IPO at par value discounts all the negatives associated with the company

·The company is financially sound with average fundamentals. The impressive dividend yield at the IPO price will alone attract investors to this counter.

· The weighing machines industry is growing at 25-30%p.a and players in the industry should command better valuations going forward.

· Avery India had an open offer from its promoters last year at a price of Rs.80 which indicates the sort of valuations companies in this industry should likely command.

·The market cap to sales ratio is significantly lower compared to Avery India. So valuations for Avon with better earnings growth should definitely catch up over the medium term.

·Assuming that the market conditions will stabilize by the time listing of this issue happens, investors can be reasonably sure that the scrip will get listed with a decent 30-40% premium above issue price.

It is indeed commendable that sanity has prevailed in pricing this issue. The merchant bankers have definitely left something on the table for investors. The proof of the pudding is in the eating. This “weighing balance” definitely tilts in your favour.

Anti money laundering laws strengthened

2008-06-07T08:07:00.002+05:30

The cabinet approved the amendment to the Prevention of Money Laundering Act recently to include even credit cards, casinos, money transfer service providers like Western Union under the purview of the act. It was being noticed that "dirty money" related to crimes were being routed through these channels. So far in the past, only banks and financial institutions were required to report on suspicious transactions to the RBI. These loopholes are getting plugged now as an audit trail can be established by the regulatory authorities now to monitor transactions happening through these channels too.

Laws against Cartelisation

2008-06-06T20:01:00.000+05:30

At present, issues concerning “cartelisation” are handled by the MRTP Commission. The MRTP Act is clearly misplaced in a growing economy like India and is anti-reform. Though the Competition Act has been enforced in 2002, to replace the draconian MRTP Act, it is non-functional to a large extent.

In a free market economy like ours, stemming the price rise through Governmental fiat is not the way forward. Having said that, to prove the existence of cartelisation and misconduct at marketplace, any government would need evidence, especially in the case of commodities, where demand exceeds supply.

It is, therefore, of utmost importance to fully empower the Competition Commission set up by the Competition Act 2002 to conduct an economic analysis of pricing patterns, market structure, business practices and consumer behaviour in the industries/sectors alleged to be involved in the practice of cartelisation

Markets may fall below 14000 post results season

2008-04-25T20:19:00.002+05:30

The results season will be nearing its end next week with some more important companies due to announce their results in the coming week. So far results have largely been in line with market expectations with no major outperformance from any sector. Corporate earnings have grown in the range of 15% -20% with very few companies churning out a disappointing outlook going forward. Given the stunted growth of the economy with tight fiscal/monetary conditions and the pain from subprime crisis not yet having receded, equities as an asset class will have a muted performance for the rest of 2008. Domestically too, we have our own derivatives exposure which is hurting corporates and banks alike. ICAI has actually helped the investing community by making it mandatory for companies to disclose their derivative exposures well in advance of the stipulated 2011 deadline. However there may be a number of cases where these provisions may not be accounted for in the respective quarterly results as marked to market losses. Companies have the option of disclosing such exposures in their notes to accounts. The problem here for investors is that they will not be able to access the notes to accounts of companies until six months from now. So there will be some clarity emerging on derivatives only in second quarter of FY 09. Already SBI has come out with its estimate of its total client exposure to derivatives at Rs.672 crore. This is quite a large amount for a single bank and considering that a number of small and medium companies have taken speculative trades in these currency swaps, the small and midcap listed universe would be an interesting space to watch out for as to the impact of these MTM losses on their bottomline. A classic recent example is eastern silk industries, a fundamentally strong fabric company that has been reporting decent numbers in the past growing at 25% p.a. The entire bottomline has been wiped out this quarter due to MTM losses on currency derivatives. The market was merciless on this stock which collapsed 30% from its existing lows in the last couple of days. We can expect the impact of MTM losses to subside if the dollar strengthens or rebounds against other currencies.

Its also shocking to see that a company like BHEL has fallen 30% from its highs post its Q4 results. A company with such a huge revenue visibility for over 5-6 yrs, its order book at 80000 crore, with an expected addition of 40000 crore this year alone, getting knocked down inspite of posting a decent 17% growth YoY shows the lack of patience and persistence among the investing diaspora. A stock cannot get kncoked of 25-30% when fundamentals are intact with no slowdown in order book growth. The company does face margin pressure and has postponed the booking of some earnings to the next quarter. Fund managers are acting like day traders looking for the slightest negative news in listed corporates. They are sitting on a cash pile of 20000 crore. Certain mutual funds are even cashed out to the extent of 10%. The point here is when one has invested 90% of his funds at higher levels and seen the markets crash by 30%, whats the point in sitting on the balance 10%. FII flows will follow domestic institutions. These FII's who have taken out close to $5 billion from Indian markets since Jan 2008 will not return until domestic institutions bring sanity back to the markets.
As for the market levels, at the moment we have moved beyond 5100 and managed to close above that level. But this being the first day of the new series, position build up generally tends to happen. Therefore we should not read too much into these rallies. How we proceed from here is very important. The 200 day moving average stands at 5031 and we have bottomed out below these levels thrice so far only to stage intermediate relief rallies. The next level to watch out for will be 5393. Given the lack of major positive triggers from corporates and with growth expected to moderate to 7% in the wake of global and domestic factors, we may fall to lower levels again. Everytime we have had bear markets in the past, we have fallen more than 50% from the previous highs. This time around, we have not yet seen the sensex slipping below 12K and unless global events worsen badly leading to a greater risk aversion, we can strongly believe that we are not in a bear market. The above factors will have to be watched closely. I personally believe that the bull market is set to resume in Q3 2009.

Impact of Oil at 115

2008-04-23T09:14:00.002+05:30

Oil prices have zoomed to $115 per barrel as per the latest reading. Asian economies are still protected from high oil prices by the respective governments through subsidies. Now a $200 per barrel becoming a possible reality, asian economies need to have a rethink on their continued stance of subsidising the common man at large by shielding him through low prices of consumable oil derivatives. As we all know, petrol and diesel are subsidised at large to prevent the pass through of high crude oil prices to the common man. We also have distribution of other derivatives of oil through the PDS (Public distribution system) at minimum support prices. All the effects of these subsidies take a hit on the balance sheets of governments. The fiscal deficits which are understated in most countries excluding off balance sheet items like subsidies will only rise further with oil at $200 per barrel and a policy such as this will only result in interest rates and bond yields rising further in the long run. The need of the hour is to conserve energy, reduce demand for oil and its derivatives, announce huge fiscal incentives for harnessing non renewable sources of energy and fuelling the consumption of the same. For eg : How about setting up a solar grid network similar to a telecom tower to supply power to each area of major cities? how about adopting ethanol and biofuels for transportation instead of relying on petrol, diesel or natural gas. Hydel power is an area yet to see major investments from corporates. These are opportunities for the modern world to reduce its long term dependance on oil as a source of energy. No doubt, it requires proactive measures with long gestation periods to adopt non conventional and renewable sources of energy but considering the perennial benefits that we would leave for our next gen., its worth the effort. The world would no longer have to put up with the black commodity in triple digits.

Subprime Tsunami

2008-04-18T16:08:00.004+05:30

The mortgage securities market in US is at 50% of its GDP at $6.5 trillion. The financial stability of Bear Sterns was invariably linked to repayment of loans that it had underwritten. Just a few days prior to the collapse of the investment bank , Carlyle Capital (PE), one of the oldest private equity funds the world had known, went bust after its mortage losses wiped out its entire equity. Carlyle capital was leveraged to the extent of 32 times its book value. Though Carlyle had not taken any exposure to subprime assets and was holding only AAA rated mortgage bonds of Freddie Mac and Fannie Mae, many hedge funds had sold these bonds on the fear of a credit crisis prevailing in these two government guaranteed institutions resulting in excess supply of these bonds in the market. As a consequence, excess supply resulted in bonds prices falling and margins calls getting triggered for more collateral from Carlyle. The fact that most of the lenders of Carlyle were investment banks like Bear Sterns who dint want to extend any lenity was an indication of the problems they themselves faced internally.
Subprime mortgages were sold to homeless borrowers with lax credit standards on the pretext that they could refinance their homes to pay up later. But what was not explained to them was the interest rate clause would be reset every two years. As long as the interest rates were low, there was huge demand for housing and there was a construction boom that was witnessed all across the US which eventually resulted in excess supply of real estate. The situation was almost surreal with houses getting refinanced for a second mortgage just to fund consumption in the US. A consumption boom was also necessary to finance the US war in Afghanistan and Iraq. Government agencies operated in full swing bringing out ads to fuel consumption in US. As inflation spiralled out of control and interest rates began to spike up, these loan reste clauses came into effect. The subprime borrowers began to default unable to meet their liabilities. Most of these subprime borrowers had no source of income whatsover or had falsified the records while submitting the loan applications. Once they started to default, there were only two options, either to sell the house and meet the committment or subject the property to foreclosure. But with property rates having fallen under high interest rates and excess supply of real estate, they could neither refinance their house nor dispose them at falling prices. Most subprime borrowers have foreclosed their accounts by surrendering the plot resulting in the mortgage companies being left with houses whose value/collateral was way below the Loan value. The subprime contagion had begun and had a chain reaction throughout the economy. Today, the monster has resulted in losses close to $ 1 trillion in the US economy, almost the size of the Indian economy.The losses faced by mortgage companies resulted in many of them filing for bankruptcy and all the bonds securitised by them in the form of pass through certificates after a due diligence rating from the S&P's and Moody's of the World were reduced to nullity in terms of value. This resulted in huge write off's in the balance sheet of hedge funds and investment banks who had to mark to market assets held by them.
Similar was the case with Bear Sterns, the second largest underwriter of mortgage bonds in the US. The exposure to exotic derivatives at Bear sterns was almost the size of the US economy at $13 trillion. As has been proved over the last one year, these derivatives have indeed become weapons of mass destruction. The collateralised debt obligations and its liabilities on Credit defualt swaps underwritten had led to the collpase of two hedge funds owned by it. Post Carlyle's collapse and the FED's surprise interest rate cut by 75 basis points, credit spreads began to widen, there was panic among the market participants that there are more skeletons waiting in the closet. Rumours started doing the rounds that Bear Sterns was in trouble. Bear Sterns also handled the largest volume of trading transactions on the bourses and hence had huge deposits of collaterals and margin money from clients. These clients started withdrawing cash from the company and the latter was put into a liquidity crisis. Margin calls coudnt be met on mortgage bonds and CDO's. The firm sold its holdings in equities all across global markets held through its investing arm BSMA triggering off a fire sale of equities in most EM's. Bear Sterns was set for bankruptcy before the FED stepped in and aided JP morgan Chase to buyout Bear Sterns at $2 per share. The share price had collapsed from a high of 170$ before the subprime crisis broke out to $30 when the crisis was as its peak, almost wiping out the lifetime savings of its employee base who had put their hard earned money into Bear Sterns equity.

2008-04-16T03:06:00.000+05:30

Oil prices surged to a record high above $112 last week. The current crude prices are nearly 10 times the levels less than a decade ago. Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. The impact of crude oil prices on growth in developing countries is thought to be significantly higher, because energy-intensive manufacturing generally accounts for a larger share of their GDP.

Since 2002, major oil producing countries have been investing in exploration and development. Furthermore, planned gross capacity additions from new projects in non-OPEC countries (including non-conventional sources) would add to supply.Oil-consuming countries have also started diversifying their fuel-mix by switching to alternative sources of energy like natural gas and renewables. The interplay of these forces can drive down the prices of crude oil from the current levels.

On the demand side, while consumption in the past has been driven by OECD countries, particularly the US, much of the current incremental demand is coming from emerging economies, particularly China and India, which contributed more than 40 per cent of the incremental global consumption during 2000-06. Global oil demand is expected to increase to 100 million barrels per day (mbpd) by 2015 as against 85.7 mbpd currently.While oil demand is projected to increase significantly, supply may struggle to keep pace. The production from the existing fields is declining by 4 per cent per annum which means that new capacity needs to be added every year just to offset the decline in existing production.

The depreciation of the US dollar and the worsening US economy are also held as major culprits for the price rise. The falling dollar coupled with the declining stock and credit markets also increases traders' interest in commodities such as oil,which further fuels price rise.Speculative investment by major hedge funds also seems to play a key role on oil price volatility.They are not liquidating their positions until clarity emerges on the dollar front.

While, one cannot rule out the possibility of the volatile crude prices from receding somewhat in the near future, driven maybe by a dip in global demand as a result of sustained economic downturn in the US, what does appear is that over the last few years, the equilibrium price of oil has shifted upwards and the volatility has increased significantly, leaving prices vulnerable to fluctuations even due to the slightest disruption in supplies (like the recent one of a cracked pipeline at Tennessee which cut supplies of more than 1 million barrels a day to the US) or changes in demand.

Random notes on subprime

2008-04-03T18:00:00.001+05:30

The sub-prime mortgage crisis is the major financial crisis of the new millennium whose origin is in the United States (US) housing market. Subsequently, this spread to Europe and some other parts of the world. The gradual softening of international interest rates during the last few years, coupled with relatively easy liquidity conditions across the world, provided for increased risk appetite of investors leading to expansion in the sub-prime market. The word ‘sub-prime’ refers to borrowers (who are not rated as ‘prime’) and who do not have a sound track record of repayment of loans. The risks inherent in sub-prime loans were sliced into different components
and packaged into a host of securities, referred to as asset-backed securities and collateralised debt obligations (CDOs). Credit rating agencies had assigned risk ranks (e.g. AAA, BBB) to them to facilitate marketability. Because of the complex nature of such new products, intermediaries such as hedge funds, pension funds and banks, who held them in their portfolio or through SPVs, were not fully aware of the risks involved. When interest rates rose leading to defaults in the housing sector, the value of the underlying loans declined along with the price of these products. Institutions were saddled with illiquid and value-eroded instruments, leading to liquidity crunch; the crisis in the credit market subsequently spread to the money market as well. The policy response in the US and the Euro area has been to address the issue of enhancing liquidity as well as to restore the faith in the financial system. The sub-prime crisis has also impacted the emerging economies, depending on their exposure to the sub-prime and the related assets.
India has remained relatively insulated from this crisis. The banks and financial institutions in India do not have marked exposure to the sub-prime and related assets in matured markets. Further, India’s gradual approach to the financial sector reforms process, with the building of appropriate safe-guards to ensure stability, has played a positive role in keeping India immune from such shocks.

RBI helps mitigate subprime

2008-03-31T17:42:00.001+05:30

The private sector banking stocks have taken a beating post rumours of sub prime exposure of Indian banks. The issue came to the forefront in the parliament where it was announced that ICICI bank had suffered marked to market losses on credit derivatives.The stock has fallen 40-50% from its all time high and the negative outlook on banking stocks continues to persist among investors and analysts alike. However the situation cannot worsen from here on given the stringent norms RBI had in place for overseas portfolio investments by Indian corporates. RBI's regulatory forbearance in the banking and financial services sector through a cautioned liberalisation process and a calibrated removal of capital controls has really paid rich dividends for the Indian economy in the wake of the ongoing sub prime crisis globally. RBI's stringent norms on issuing fresh licences to open banking branches abroad and its norms on capital controls exercised through the FEMA act has insulated India from the subprime contagion. The mint street giant deserves all the praise from the Indian public at large for its persistence in what were until recently, in the wake of globalisation, termed "retrogade policies" by various economists. Their cat calls have collapsed along with various investment banks and hedge funds in the aftermath of the global credit crisis. Kudos to RBI for its appreciable act of monetary management.

Inflation heats up the economy

2008-03-31T17:39:00.002+05:30

The wholesale price index rose 6.68% in the week ended 15 March 2008, surging from the previous week's rise of 5.92%. The rate is highest since 27 January 2007, when inflation was 6.69%.The week-on-week rise in inflation was seen across all major heads of the WPI with primary articles seeing the maximum rise of 233 basis points.Inflation in primary articles have gone up by 376 basis points within a span of just six weeks. Inflation in the fuel group has spiked by 100 basis points in just a week's time taking cues from the global surge in crude oil prices. Inflation in manufactured products has also surged to its 49 week high of 6.27% in the week ended 15th March 2008 and has moved up by 206 basis points in the first two weeks of March.The headline inflation crossed the tolerance level of five per cent set by the RBI for 2007-08 in the week ended 23 February 2008 itself. It is now within striking distance of 7%.

Based on the above data one can decipher the following :
1. There is a need to augment production and productivity in wheat,rice, edible oil and pulses as the rise in prices of these imported products has been a major driver of inflation in India.The country would be able to insulate itself from rise in global commodity prices only if it becomes self sufficient in the respective commodities.

2. Rise in commodities prices and inflation have become global worries. The price rise in commodities is putting pressure on inflation and thereby curbing growth.For growth to happen in India, we need lower interest rates but with the RBI having a hawkish monetary stance and with the government clear in its agenda on curbing inflation even at the cost of growth, it is highly unlikely that interest rates will come down in the near future.

3. Indian voters are known to be merciless when punishing governments unable to deliver on the price front and things are only going to worsen as the Budget and Sixth pay commission recommendations will result in increased disposable income in the hands of the consumer, which may result in higher inflationery pressures.

4. Lower interest rates are necessary to spur investment activities in the country and at current levels,there is a definite slow down in production and capacity addition plans of Corporate India.The IIP date has also not been encouraging.These supply side pressures are also contributing to rise in manufacturing inflation.Though imported inflation has been a major driver as reflected in the surge in prices of primary articles and fuel prices, domestic factors like high interest rates that have been ruling in the economy over the past one year have also resulted in significant supply side pressures along with demand slowdown.

In this scenario, the best bet for the government would be to reduce tariffs further, better supply-demand management, spur investment activities aimed at self sufficiency, cut back on wasteful spending and refrain from fuelling inflationary expectations.

Titagarh Wagons IPO : Dependant on Railways

2008-03-24T13:40:00.008+05:30

Titagarh Wagons is a reputed private sector wagon manufacturer. The company is primarily engaged in the manufacture of railway wagons, bailey bridges, heavy earth moving and mining equipment, steel and iron castings. Railway wagons constitute 89% of the order book of the company and therefore the revenues of this company are historically dependant on one segment i.e: manufacturing of rail wagons. Wagon manufacturing business contributes to 79% of the total income of the company. Wagon manufacturing and demand is a need based activity that arises based on traffic volume and replacement of wagons. The company plans to use the IPO proceeds for expansion and modernisation.There are plans to enter into other segments of wagon manufacture, such as EMU and passenger coach manufacture.

Strengths :
* Strong Investment pipeline of Indian Railways to the tune of Rs.375 billion, demand estimated at 20000 wagons for FY 2008-09. Carrying capacity of railways to increase 40% over the next four years which would mean additionla investment in rail tracks and wagons.
* Plans to upgrade to stainless steel coaches from 2010-11 an opportunity for private wagon players
*PPP investments to the tune of Rs.1,00,000 crore in freight corridors, terminals,logistics and infrastructure in the coming fiscal in railways will propel demand for wagons. Dedicated freight corridors coming up in the different parts of the country will entail the need for high capacity and high payload special purpose wagons to handle bulk cargo. The company with its value added services is well positioned to capitalise on these opportunities.
*Wagon leasing scheme implementation by railways will ensure replacement demand for wagon manufacturers
*Total Order book stands at Rs.753 crore which is 2.65x FY 07 sales and indicates good visibility of earnings going forward.
*The company has just begun exporting wagons to Africa.Its still in the process of exploring relationships with customers in foreign markets. This may emerge as a potential revenue stream going forward.
*The special projects division (which concentrates on value added services to railways and supplying defence equipments as well as nuclear power plant equipments )and the heavy engineering division, though forming miniscule portion of revenues as on date have scope to add to the topline and are steadily pursuing orders from DRDO and Nuclear Power Corporation.
*Realisation per wagon has been improving over the last few years with the reduced dependance on railways albeit the company sells to Indian railways at a significant discount compared to private sector customers.Even adjusting for the free raw materials supplied by Indian railways, there exists a huge subsidy incurred by the company on its sales to Indian railways given the highly competitive bidding prices for wagons. The realisation from private players cross subsidises the margin losses on sales to railways.

Weakness:
*Dependant on a single segment namely wagons and also on Indian Railways policies.
* Competition is significant in the industry with the presence of players like Texmaco, BESCO, Hindustan Engineering, Bharat Bhari Udyog Nigam. With the Railway Ministry deciding to approach international companies for wagon design, the possibilities of competition intensifying in the wagon manufacturing segment is quite high.
*Significant Pricing pressure with resultant negative impact on margins buttressed by increase in raw material costs and inability to pass on the same to Railways, the latter being a monopoly player in India.
*Acquisition of Cimco Birla, a loss making wagon manufacturer, though the same auguments the capacity, operational and financial turnaround seem unlikely at the moment. The same factors apply to the acquisition of the loss making heavy engineering division of Hyderbad Industries.
*Indian Railways have a budgeted investment of Rs.750 billion to ramp up their own infrastructure and are also setting up a new wagon manufacturing plant in Kerala
* Change in Indian Railways procurement policy of wagons to favour the public sector undertakings can adversely affect the financials of the company. The company is not the exclusive supplier of wagons to Indian railways. Therefore supply to Indian railways shall vary from year to year.
*As far as orders procured from Indian railways are concerned, the terms and conditions of the order include free supply of raw materials of high value like wheel sets and bearings. This cushion is not available to the company in case of private customers and the company will be exposed to vagaries in the movement of raw material prices to the specified extent. The cost of wheel sets have risen exponentially over the last few years and constitute 30-35% of the selling price of a wagon. The item as a raw material is also in short supply globally and as a result has a profound impact on the operating margins of the company.The impact of raw material prices on the bottomline of the company assumes significance in the wake of the company placing greater emphasis on orders from private players. The share of Indian railways in the revenue of the company has shown a steady decline over the years.
* Production delays in the past on account of delayed procurement of raw materials like wheel sets have resulted in the company paying liquidated damages to both Railways and private customers to the tune of Rs.2.5 crore.
* Titagarh Steels, one of the group companies is also manufacturing certain wagon related components produced by this company resulting in conflict of interest and may result in loss of orders and revenue in future.

Financials :

*Sales of the company have grown at a CAGR of 43% over the last five years and profits have grown at a CAGR of 51% over the same period.

* Raw Material costs constitute 70-75% of the total revenues of the company. The company has maintained its operating margins at 18% over the last couple of years and PAT margins at 9% over the same period. Margins have shown significant improvement from 2005 after the company started assembling wheelsets at its own plant in Uttarpara. The company has also been aided by free supply of raw materials from specific customers including Indian railways.

*Operating margins and PAT margins are higher than its immediate peer company Texmaco but the latter has a much higher market share and a better track record and a much diversified business model. Texmaco is setting up Asia Pacific's biggest wagon hub in West bengal and commands 30% market share in the wagon manufacturer's segment vis a vis Titagarh Wagons at 18%. The order book for Texmaco also stands higher at 2000 crore at more than 3x FY 07 sales.

Valuation :

Titagarh Wagons discounts its trailing 4 quarter FY07 earnings at 38x at the lower end and 43x at the upper end of the price band of Rs.540-610. If we annualise the half yearly earnings for the six month ended Sept 2007, the PE works out to 24x and 27x forward EPS of Rs.22 for FY 2008.

The only listed peer company being Texmaco is trading at 24x FY 08 earnings after the steep correction in the stock markets. Based on the current volatile market conditions, the pricing appears to be stiff and investors would have been more comfortable with a 20% reduction in the price band to leave something in the form of listing gains on the table. Therefore it is advisable to apply for this IPO at the lower end of the price band. Investors would need to moderate their expectations of major listing gains from this counter, however, stocks like these with good fundamentals and earnings visibility are a definite long term hold.

New Initiatives in Railway Budget 2008-09 that shall affect the Wagon Industry
1. Setting up of dedicated freight corridors and privatising the same to container operators shall increase the demand for wagons from private players
2.All coaches of Rajdhani, Shatabdi and Suburban rail coaches to be made from stainless steel. This initiative shall benefit wagon manufacturing companies that upgrade to meet this requirement.
3.Railways has set a target of 20000 new wagons, 250 diesel and 200 electric locomotives to be manufactured internally/ sourced from private manufactureres
4.Wagon leasing scheme to be operative from 2008. This will ensure continued demand for wagons
5.Railway capex plan for Rs 375 billion for wagon procurement, Rs.750 billion for improving internal infrastructure holds a lot of promise for private manufacturers
6.PPP model to be pursued aggressively by railways and out of the total planned investment of railways to the tune of Rs.2,50,000 crore, 40% of the same is to be harnesssed through PPP model and throws up new opportunties for wagon and locomotive manufacturers.
7. Plans to set up a new wagon manufacturing unit in Kerala is a negative for private wagon manufacturers as it indicates the increasing emphasis of railways on internal manufacturing of wagons and locomotives.

Will IPL be a huge success?

2008-03-24T01:19:00.003+05:30

IPL (The Indian Premier League) - the term that has become synonymous with wealth and valuations. The total value of the league is pegged at $2 billion (Rs.8000 crore) and come April this event assumes significance marquee value among advertisers, broadcasting companies and viewers alike. Definitely the format has been well thought out by its showman Lalit Modi and definitely the hype and hoopla surrounding it will find its right answers with the show at the various cricket stadiums by the game's elite. The success of the format is assured with the presence of the best players from different teams of the world albeit a few unwilling to participate in the first format citing their own reasons. Even the valuations, Iam sure, will increase manifold by the end of the first saga of the league with more sponsors and celebrities pitching in for the various zonal teams based on their performances in the league. Individual players will find fresh contracts getting signed under different endorsements and its all money sloshing around everywhere. But for all this to continue into the future, sustaining spectator interest is the biggest objective in the hands of the BCCI. Yes, agreed, with the likes of Sachin tendulkar, Ricky Ponting, Mathew hayden, Andrew Symonds, Dhoni, Yuvraj, Bret Lee and the array of stars ready to play, pulling in the crowd should be a walk in the park for the authorities. But with a player ratio of 7 Indians:4 foreigners , the Indianness in any team is lost. Now with 4 foreign players of star value and 2-3 Indian players of respectability, there's more than enough for the spectators to chew but the passion and the fervour that you associate with a spectator watching a match that India plays will definitely be missed. Crowds will come on weekends to watch good entertainment but these crowds will only get to see balls getting thumped around the dusty grounds of our country. There will be no nail biters, humdingers, people who generally flock to the stadium with intense passion to watch even a test match would prefer to watch these fast food matches on Tv. Without a complete Indian XI, will the crowds of the respective zones/cities be able to identify with the foreign players as one amongst their own is a big question in the minds of sports analysts. Branding and cutting edge marketing would definitely try it's best to address such issues.
All said and done, as far as the stock markets are concerned, one will soon find these teams jostling for space among the "A" category stocks by listing themselves on the exchanges. For eg. If Chennai Super Kings does extraordinarily well and clinches the title for the first tournament, Iam sure Indian Cements, the franchise that owns Chennai would not think twice before spinning of this team into a separate corporate subsidiary and getting it listed on the bourses. Each player of Super Kings would be given shares in the company just like ESOP's and that will be a great incentive for players to do well in future to improve the valuations.
The same kind of format can also be explored for Cinema in the case of big budget movie releases of SRK or a Rajnikanth. There should be a futures market for movie tickets of cinemas to be released at a future date. Just like an option, the ticket prices can be traded on based on developments at each and every stage of movie making. Contracts can be designed to begin from the date of movie launch until its release or say a week after its release. A positive verdict at the box office can push premiums up even further. This can also be thought of as a financially innovative product by the cine industry as it also leads to financial deepening and better price discovery for producers and distributors. These kind of exotic products are much better than the other form of exotic derivatives like CDO's (collateralised debt obligations) and CDS (Credit Default Swaps) which have only led to financial disaster world over.
Have i set anyone thinking???

Markets may fall further from current levels

2008-03-14T01:11:00.009+05:30

Today March 14th 2008
Nifty closes at 4623.6
Sensex shaves off close to 770 points to close at 15357 points
India being a high beta market, any major fall in global indices gets magnified and exacerbated to a larger extent in our country. As they say when it rains, It pours, thats the exact description for the manner in which we are falling down like nine pins into a bottomless pit each day. All the stories of India having been decoupled from global cues have been thrown out of the window, all the more supported by the domestic institutions and sovereign wealth funds who are sitting on huge piles of cash and are unwilling to invest at current levels even if they see value and enough margin of safety(MOS) to their investments.

The fortunes for the week ahead look pretty bleak. Every relief rally that has happened ever since the lows of Jan 22nd have been pure short covering rather than any new buying emerging in the markets. Even as i stare at the F&O data for today fresh short positions have been initiated on the Nifty and the bellweather stock Reliance Industries which only indicate a further fall tommorrow whatever be the global cues. Even thought the Nasdaq and DOW seem to be hovering around a slightly positive territory at the moment, we can expect profit booking to emerge at every high on the Nifty. The technical trading levels for tomorrow are expected to be rangebound between 4690-4801 on the upside and 4527-4402 on the downside. The nifty needs to convincingly close above 4812 for a intermediary bullish trend to emerge on the cards.

An analysis of the present situation is provided below:
1. Markets are in a state of confusion over the earnings momentum going forward and are taking cognisance of the fact that there may be downgrades in a few sectors. Growth may slowdown in cement, banking, commodities and real estate. In case of the cement sector, incremental supply to the tune of 60 million tonnes is coming in as against an incremental demand of 35-40 million tonnes in 2009. This would definitely result in fall in pricing power for cement companies. The demand supply gap would get narrowed down completely by 2009. As for the real estate sector, though there has been tremendous supply of real estate over the past few years demand has toned down due to rising interest rates. We have already observed prices in the NCR (national capital region) fall by 15-20%. Banking stocks especially the PSU banks are a great buy at current levels provided we have enough clarity on the loan waiver scheme and the reimbursement of the same to the banks in the form of oil bonds. The positive side of this loan waiver is that the banks are cleansed of all their past NPA's in one go. However, whether this step by the finance minister will result in more defaults from multiple sectors is something only the future will decide. But all said and done at a price to book value of 1.1-1.3x banking scrips do look attractive. Steel as such is getting into a bearish mode with disappointing resultsfrom Corus. If we strip the consolidated results into standalone factions one would find that the numbers from Corus have been a clear thumbs down and if that’s the tone set going forward, it will definitely have a rub off effect on all other steel counters.

2. Global cues with crude oil touching $110 per barrel, over the top commodity prices and the collapse of Carlyle group due to losses in the fixed income market are not at all comforting signs.

3. The exposure of Indian corporates to the credit derivatives market, foreign currency and commodity hedging are still unclear and the cracks are beginning to show up with ICICI and L&T being the first casualties to these exotic derivatives.

4. Neither the Railway Budget nor the "Aam aadmi" Budget of PC had anything much for the corporate world to cheer about. Markets like reforms and there was no mention of it in the budget. When the economic survey document promised so much on privatisation/divestment and deregulation, not an iota of the same was discussed in the budget leaving us all exasperated enough to remind us that the latter shall always remain a non event as far as our country goes. On the contrary the Short term capital gains tax on share trading was hiked to 15% to bring it in line with DDT (Dividend Distribution tax). The objective of the same, though welcome, being investors should develop discipline and hold on to their investments for the longer term, the timing of the levy has been vicious that too when the markets are at an all time low. Some thought process could have gone into the same to bring about this provision after a level of sanity had returned to the markets. As a result of this provision, we expect more sell offs from HNI and other short term traders prior to March 31st as the provision comes into effect from April 1st onwards. The provisions on STT being now directly allowed as a deduction against income rather than against the tax liability as a rebate is also a negative for the markets as it forces the arbitrage players out of the market and will reduce volumes in the momentum counters.

5. IIP (Index of Industrial production) numbers have been dismal at 5.3% as against anestimated 7.7%. This clearly points to a Q3 slowdown if the IIP nos have to be believed. The poor show on the manufacturing and capital goods front has put immense pressure on the markets. Investors are being scared away from pumping fresh money into the markets.

6. GDP estimates are also getting lowered down to 7%. Though the structural growth story continues in India, it has been hampered by cyclical pressures and with both the government and RBI focussing on giving top priority to inflation management rather than maintaining or improving growth, its difficult indeed to achieve a 10% growth as aimed by this UPA government.

7. Though most of the capital goods companies have maintained a positive stance on theirorder book position, their capex plans will definitely get affected going forward with credit spreads having widened all across the globe. Debt doesn’t come cheap anymore and this will hamper most of the expansion plans of Indian companies. Even M&A deals may get affected what with most PE firms and investment bankers having burnt their fingers in the subprime crisis. Loan syndication is a difficult task henceforth. The primary market in India too has not been supportive with the dismal response to two heavyweight IPO's like Emaar MGF and Wockhardt hospitals forcing them to withdraw their offers.

8. The impact cost of trading has become so high that even a small short position created by an FII triggers or accentuates a bigger fall in the markets. The trading is so lacklustre at the moment that dealers are busy enjoying their favourite past time during trading hours. I for one saw my broker watching a Rajnikanth movie on Sun TV today....Can anyone imagine such a scenario prior to Jan 21st. The situation is pathetic to say the least.

As far as the markets are concerned with all the negatives crowding around, the only saviour can be a good show on the advance tax numbers by Corporate India that would be released next week, a little bit of help from FED in cutting interest rates further and a stellar outperformance in Q3 results from the core sectors which however seems highly unlikely.

Most of us belong to the "sunrise" investing generation which has not seen long periods of market volatility or a bearish phase of the likes of 1992-2002. Having seen a continuos secular bull run from 2002 to 2007 , we lack the patience and conviction that a rakesh jhunjhunwala or a ramesh damani posessed to emerge out as "Dhandho investors".

Rupee appreciation to stop here!!

2008-03-14T01:04:00.003+05:30

1. Broadly because the exports and services sector have already been hit badly by the onslaught of rupee appreciating close to 12-13% year on year.
2.This year is an election year with the polls looming large prior to Nov 2008 and the government cannot afford to have interest rates at high levels which might alienate middle and lower class vote banks
3. Inspite of the Interest Rate Differentials between US And India we havent seen significant inflows from FII's even after a number of fed rate cuts
4. Yen has started to appreciate against Dollar and all other major currencies of the globe and this is going to result in major Yen carry trade unwinding which will only put pressure on the rupee to decline

India's parallel economy is at 40% of its GDP

2008-02-27T22:24:00.005+05:30

Take that!! all you economists and analysts, who keep debating over endless hours on prime time television as to what the finance minister might deliver this friday. "Black money" the other proxy term for "parallel economy" is at its rampant best over the last few years. We have allowed the menace to multiply to such levels that today it forms more than 40% of our GDP and the FM still keeps talking about teething woes on the fiscal deficit front and the need to widen the tax net further to maintain bouyancy in the government coffers. Money can be differentiated as either 'black' or 'white' based on whether the incidence of taxation falls on it. Money is said to have been acquired through legal channels or is termed 'white' once its within the ambit of taxation. Having said that black money isnt illegal per se. A sizeable section of the population acquires money through hard work, moral and legitimate means and consequently conceals a portion of the same. Even if we take the case of agriculture, it will do good to term the entire money sloshing around there as 'black' as the sector as such falls outside the tax net. We have cases of the wealthiest of farmers in India forming a core group of the proud 10 million HNI's (High Net Worth Individuals) in our country. But what the FM should worry about is money acquired and concealed through illegitimate means and those currencies that flush around the suitcases, bedrooms and bathrooms of the elite including that of his own political kinsmen, who in my opinion are the biggest repository of black money and who refuse to be reined in by any judicial or regulatory force or authority. These political babus are the most intransigent group in our country who sniff out all loopholes available to evade the tax net, take advantage of the porous capital controls in the financial system, engage in perennial round tripping of money and explore other alternative routes to ensure that their capital appreciation and incomes go tax free. Ours is a country where the Income tax department serves a notice every day to the honest tax payer asking him to pay more, uses its workforce to locate mistakes in salary returns on paltry or meagre surcharge computations and acts so diligently in recovering money from the middle class Indian. Successive FM's have been rest assured that direct tax revenues will remain bouyant on account of the tax recoveries from the rising middle class (the eternal suspect of the Ayakar Bhavan). Every loophole in taxation ambiguties affecting the common man gets plugged through TDS, VAT or an FBT. What about the FM's own fraternity? We still have a Laloo Prasad Yadav leading a king-size life wit his comrades, cattles and their fodder; We still have a Mayawati declaring her unaccounted wealth as gifts from her BSP cadres and getting them exempted from the tax authorities themselves through their imprimatur orders; We still have an Amma (As im from chennai i will call her 'Amma') who has been exonerated from all the disproportionate wealth that she has amassed over two decades; We still have a Rahul Gandhi who derives illegal income through drug lords from Latin American countries; but its always film stars and real estate magnates who make news when it comes to tax authorities. They are an easy target to make up for the deficits of the IT department but where are these double standards taking us going forward. Equality before law is a constitutional neccesity but that seems to be a term unheard of in our economy.All the debates on our economy and the budget talks or even listening to the budget seems futile and worthless when the proponents of the parallel economy are sitting right under the nose of our finance minister.

The 'Budget Mania' seems to have caught on to most of my friends. An almost non event has become a festival of sorts due to the media hype and hoopla among the avergae masses. As many have been asking me about my "wishlist " to Mr. Chidambaram...here it goes...
Dear Mr. PC
Iam not gonna request you to keep your word on maintaining the growth momentum of this economy or give the much needed thrust on reforms front or focus on social infrastructure, agriculture etc etc...There must have been a half a billion who must have already told u all this with enough economic jargons interspersed between the lines. I have a unique request. Its a far more economical and largely profitable way to wipe out the entire fiscal deficit of our nation in one stroke. Unearthing of black money should start at the top of the pecking order and those sitting at the fountain head are your own colleagues in the parliament (572 of them if my numbers are right). Iam given to understand that the budget session, i mean the time when u would be presenting your final budget prior to the election year to the nation, has historically witnessed full attendance by both houses of the parliament. Therefore if an Income Tax raid can be arranged at all the houses of these 572 elite chosen ones of your wonderful 'Ivy league'(which may include ur residence at Haddows Road too), that would prove to be a wonderful icing on the cake in your chequered political and business career. U can leave your esteemed chair after presenting the budget filled with a pompous gait and a satisfaction at having done the biggest political class act that would benefit the common man and the country at large. You would kill two birds with one stone by adding a humongous amount to the government's currency chest as well as wiping out the fiscal deficit in toto, a major negative that has harmed our economic image globally over the years. So honourable finance minister, kindly ponder over this citizen's wish list, maybe over a cup of "black coffee" if i may suggest so. May god give you the political will to carry out this "dream reform". You have one chance to create history now!!!

Why hasn't the stock market responded to a Fed rate cut

2008-01-31T14:24:00.001+05:30

The markets are continuing their downslide from the recent top of 5383 to sub 5100 levels. in the intermittent time US Fed has cut its rates twice by 75 and 50 basis points respectively. The Fed discount rate has reduced to 3% overall. The move by Fed is largely seen as an act to prevent US from falling into recession and to boost consumer spending across the board. This magnitude of cuts would have usually been seen as a double delight for emerging markets given the excess liquidity flows that would flow into these geographies. However post sub prime mess with increasing defaults by consumers/borrowers, foreclosures and bankruptcy claims of various hedge funds and write offs by investment banks on Asset backed securities, the crisis situation has become an albatross around the neck of the US economy. The unanticipated 75 basis points cut announced last week instead of bringing cheers has taken the world by surprise and struck a cautionary note . Analysts across the globe have started forecasting a large and looming crisis for global markets that would result from a recession in the US economy. FII's all across the emerging markets who have made stellar returns over the last 4-5 years of Bull run have started booking profits even on their long term investments. They are only offsetting the losses made from the sub prime fiasco that was orchestrated by them. In this kind of scenario, money isnt flowing into countries like India and China as most investors prefer to sit on cash. As we all know, liquidity is the mother's milk for all bull markets and in its absence, bears definitely have an upper hand atleast for the moment.
As a note of caution for the FED, they would be prudent enough to know that it was bad credit under the Greenspan regime conjugated with unscrupulous lending practices to consumers with lax credit standards, that led to this collapse. Now by cutting the lending rates, more bad money is going to flow into and out of the US economy. As more bad money flows behind existing bad money, problems only get compounded. Wouldnt it have been more prudent to take the hit, take the losses, suffer write offs, get into recession,face the problems and after having weeded out the excesses in the economy, a prudent call to revive the economy should have been deliberated upon.

Impact of Fed rate cuts:
* Every time the fed rate is cut, the dollar is going to crash even further and as a result crude oil
will shoot up to unprecedented levels. As CLSA has pointed out crude oil at $200 doesnt seem
far away if Fed keeps cutting rates frequently.
* Gold prices, already at life time highs, will inch up even further from current levels as
whenever the OPEC countries feel rich and smell of surplus money, the same flows into gold.
* For Emerging markets like India that were trading at reasonable valuation 4 months ago at
15000-16000 valuations (Nifty 4600 approx), it was the first Fed rate cut by 50 basis points
in October'07 that led to the flow of "hot and speculative" money into India which propelled
the Sensex to the overstreched zone of 21000. Its this excess money that has flown out of the
market within a couple of days on Black Monday and Terrible Tuesday of Jan 21 and 22. Fine
the excesses have been removed or washed away from the bourses but not before sucking
out a lot of blood on Dalal street. Investor's wealth estimated at 7,00,000 crore have been
completely wiped out and traders with positions in 'F n O' (Futures and Options) are still
smarting from their losses. It will take atleast six months or more than a considerable amount
of time for them to recover and get back to their trading terminals. Its more of an emotional
shock rather than monetary losses. Over the past two weeks, the stress levels of traders have
heightened to unexampled levels, so much so that a famous lake in Gujarat has been sealed for
two months to prevent investor suicides.

Its indeed quite understandable as to how difficult it is to be a Fed governor. But Ben Bernanke is purely playing to the gallery at the moment without realising the impact of his actions on the global financial stability.

Financial Services looks attractive

2008-01-28T21:03:00.002+05:30

Yes financial services, the sector on which most analysts are extremely bullish on going forward. The reason being, the next trillion dollar opportunity for the Indian economy lies over the next five years from 2008-2012. It was only last year that our GDP crossed $1 billion and with the latter growing at 8.5% p.a on an average, we are the second fastest growing economy in the world only behind China which has been consistently growing at 10% p.a over the last decade albeit the veracity of their claims.

Mumbai is all set to become an International Financial centre (IFC) by 2015 going by the promise held out by Percy Mistry's vision document to make Mumbai an IFC. Once the proposal does come into effect, the amount of financial transactions that would be handled out of India would be inconceivable. The benefits of Mumbai becoming an IFC would also flow in the form on secondary outsourcing and back end work to other ancillary cities like Pune, Chennai, Hyderabad and Bangalore where a lot of talent pool is already available in abundance.

The scope for financial intermediation in our country is pretty high with the huge investible resources waiting to be ploughed in to the market and the demographic dividend expected to last atleast for the next few decades. The savings rate in India is less than 32 % of our GDP, out of which the household savings rate is below 16%. The Housing Mortgage to GDP ratio is also below 6%. These two are enough indicators that go a long way to prove the tremendous scope that exists for financial intermediation in our country.

A large and sizeable pool of financial planners have emerged in our country to address the needs of the" asset and wealth management" industry. India is beginning to produce crorepatis and millionares by the passing of each day. We are transforming oursleves from a tag of " knowledge creators" to "wealth creators" for the world at large. We have reached/seen such a metamorphic rise in the evolvement of corporate India that the French president today is making "humble requests" to the CII to address unemployment problems in France. With so many HNIs (High Net Worth Individuals) taking the world by storm, the wealth accumulated by them needs to be managed and managed well with profitability being the sole objective.

Mutual funds have seen their assets under management (AUM) swell by over 637000 crore as at Dec 07. This indicates the confidence of the average retail investor in the growth prospects of our Indian economy. Every month we find 4 to 5 new fund offers raking in the coffers on a regular basis. Now government has relaxed provisions for PPF and pension funds of public sector undertakings by allowing them to invest in the stock markets lured by the attractiveness of returns therein.

Infrastructure in our country is still facing huge bottlenecks in our country and is crying out for immediate reforms. As we all know, things cant happen overnight. The gestation period to solve problems in infrastructure requires foresight and political will. Given the constraints in coalition politics, even a government with all the requisite potential and wherewithal will obviously flatter to deceive as the UPA has done so far. But still, I for one firmly believe and reiterate that in a democracy like India, problems will find its own solutions and infrastructure is one such element which will address itself. Now coming back to the point of financial intermediation, herein lies a huge opportunity in infrastructure with the amount of investments expected to be flighted in both through FDI and FII routes not to forget our domestic PPP's (public private partnerships). Every sort of an Investment will find its source to either debt or equity. These can only be the two major means to raise resources and that requires financial intermediation.

The opportunities that lie ahead in the form of capital account convertibility and opening up of the banking and insurance sectors will be deliberated upon separately by the author at an appropriate time

Till then to conclude ...our financial services sector looks robust in the medium to long term even without any seminal signs of second generation reforms taking off.

Marketing Research : Inspired to write a few lines on the subject cos of the "ONE"

2008-01-28T14:18:00.002+05:30

Marketing research is a systematic and objective research for analysis of information that would be useful to address any given problem in marketing. Iam not an expert in this field but here's what i have gathered from well known scholars and connoiseurs of "marketing research"

It involves the following:
* Identifying the target population/ market segment for a particular product
* Identification of customer choices and keeping a tab on their changing tastes and fashions
* Identifying "White spaces and opportunities" in any market and advising clients on product
segmentation
* Assessing the need for new or improved versions of a product based on customer feedback
* Benchmarking a product against competitors and advising on strategy to counter competition
* Identification of appropriate pricing points for a product in different market segments across
geographical diversities and location of sale/ distribution outlets for a company

and much more....(the list is exhaustive) (Maybe AC nielsen or IMRB experts can add on more to this list)

This function of "Marketing research" can be condensed to mean providing the right information, at the right time, to the right person and thereby becomes a vital cog in the decision making process of any top management. Its a highly useful tool that's designed based on scientific sampling methods to elicit rational responses/solutions to specific problems of marketing.

P.S : I never knew that so much information can be condensed and conveyed through bar diagrams, pie charts and tables until i saw their reports ...guys keep up the good work!!

The problem of food deficit and poverty

2008-01-28T11:20:00.001+05:30

The need of the hour in developing India is to eradicate extreme hunger and poverty. We need a coherent policy framework in achieving that end. In our country more than 65% of the population relies on agriculture as their only source of livelihood and with the sector as such registering below 4pc growth rates, its pretty discursive that this is the section of the population that is in crying need of poverty alleviation measures. The most important measure in reducing poverty would be to alleviate the hunger and food requirements of the BLP (Below the Line of Poverty) category.

The present scenario as outlined below does raise a lot of concern for policy makers all across the globe:

*Rapid urbanisation in the developing world and the resultant impact on food markets
*Deterioration of natural resources all across the globe due to industrial demand
*Ineffective farm produce and lack of superior technology to generate high yielding crops
*Imbalanced subsidy regime in developed world vis a vis developing and under
developed nations (i would avoid calling any underdeveloped nation as a third world country
simply because if they are "poor" today its because of the exploitation by the colonial powers
that were occupying them in the past)
* Threats to global peace and security, political imbalance in various countries which exacerbate
poverty concerns
* Rapid demand for food with rise in population is placing a huge strain on environmental
resources

Food security has become a formidable, perennial challenge for the global economy. Food security is all about producing more than enough quantity of food for every human being and addressing the needs of the undernourished populace of the world. It also needs to make use of well developed information systems today to pinpoint the exact location where there is a supply deficit of food and mobilise rapid transport systems to move food quickly to these areas.

The lesson to date is that no sustainable poverty alleviation program will be successful unless it implants itself with efforst to improve rural livelihoods which would mean boosting their income resources. Economic growth originating in agriculture will have a strong impact on poverty and hunger eradication. Increasing employment and productivity in agriculture will stimulate demand for non agricultural goods and as a corollary, the demand for agro based goods should stem up from the non agro based population. Investment in poverty alleviation and hunger reduction is seen as a welfare measure but however it is this investment which generates superior economic returns going forward.

Technological Access
Improved technology, especially for small-scale farmers, hastenes poverty reduction
through increased crop yields and higher incomes. His access to technology has been hampered by gaps in infrastructure, seed and input markets and very often by his inability to fund these inputs. A great deal needs to be done to alleviate small farmers’ constraints to technology access and profitable use. Technologies that build on and complement local knowledge tend to be particularly effective in meeting the needs of poor farmers in marginal environments. Cheap and effective supply of low cost credit by the banking sector with flexible repayment norms and subsidy support from government agencies are the means to the end in this regard. Vigilance mechanisms should be strengthened by policy makers to ensure that the flow of credit/public investments in this sector finds its way to right end user i.e the poor farmer, through appropriate channels leaving no scope for peculation by middlemen and unscrupulous agents.

Importance of Trade

Trade offers opportunities for the poor and food insecure by acting as a catalyst for
change and by promoting conditions in which the food insecure are able to raise their
incomes and live longer, healthier, and more productive lives.

Opening national agricultural markets to international competition – especially from
subsidized competitors, before basic market institutions and infrastructure are in place
can undermine the agricultural sector with long term negative consequences for poverty
and food security. To minimize the adverse effects and to take better advantage of emerging opportunities, such as those arising from agriculture diversification to bioenergy and other non-food products, governments need to understand better how trade policy fits into the national strategy to promote poverty reduction and food security. Expanding the benefits of trade for the
poor requires a range of other factors, including market infrastructure, institutions and
domestic policy reforms.

Public and Private Investment

Public investment in infrastructure, agricultural research, education and extension is
essential in stimulating private investment in agriculture. But actual public expenditures for agriculture and rural development in the developing world do not reflect the importance of the sector to their national economies and the livelihood of their populations. In fact, government expenditures on agriculture come closest to matching the economic importance of the sector in those countries where hunger is least prevalent.FDI or FII inflows into any country also ignore this vital sector given the cyclical pattern of the industry as well as the longer payback period. Private investment will always follow public expenditure in rural infrastructure and the respective governments have to take the seed intiatives.

Marketing Intiatives:

The expanding urban markets is a major challenge for agriculture and food marketing systems in the years to come. Rapidly rising urban food demand, accompanied by trends towards diet diversification, induces an increasingly commercial orientation of production systems, while inefficiencies in the marketing and transport infrastructure will either provide incentives for the location of production in semi-urban areas or encourage lower cost imports.

Urbanisation increases the scope for economies of scale in food marketing and
distribution, while reductions in transactions costs increase the size of the market for
distributors and retailers. The result is not only an impressive increase in the volume of food
marketing handled by supermarkets, but also substantial organisational and institutional
changes throughout the food marketing chain. Now as a result of the retail revolution, inetermediaries and middlemen have been eliminated as a whole and the farmers have begun benefiting from good realisations for their crops. Improvements in the supply chain effected by these retailers through cold storage mechanisms would enrich the quality and productivity of agri products.

Various governments across the globe must take the required initiatives and retain continuos focus on promoting the agriculture sector and tweaking its growth rates through coherent policy measures with the joint efforts and assistance from international institutions like WHO, UN and financial powerhouses like World bank, ADB and IMF. This can go a long way in preserving the world's ecosystem, its biodiversity and would ultimately promote the twin objectives of poverty alleviation and effective environmental governance.

Dont panic after the fall

2008-01-27T15:07:00.000+05:30

The investors are in a state of shock with the way the market is behaving. The last few days have been quite rough for the market with huge amount of volatility. What has happened to the Indian market yesterday and today clearly shows that there is some major concern for the stock market not only for India but also for the global markets. Remember, panic selling is taking place throughout the world with most of the global indices deep in the red.

Now let us take the basic fundamental issue of the Indian stock market. Is it the end of the Bull Run for the Indian market? The answer is clearly No. We don’t see any major change in the fundamental story of the Indian economy. There could be one percentage point decline in the growth of Indian GDP numbers, but otherwise India would continue to be the second fastest growing economy in the world after China. The correction only indicates that the market is not willing to pay 21 times P/E multiple for the Indian stocks. Looking at the FY09 earnings projections, the market is trading at a forward P/E of 14 times. This is a very compelling reason for someone to buy into the Indian stock market. I am not saying that the market would surge in a hurry but senses are bound to prevail after this storm blows over and the dust settles down. In fact, those sitting on cash must buy now as this is a god sent opportunity to invest in the market. The only thing to keep in mind is that the selection of stock has to be really good. Some of the momentum counters not backed by fundamentals have taken a huge beating and I doubt that they would surge in the next round of the rally. The reason is very simple: when front line stocks are available at attractive valuations why would someone buy second rung companies? In fact, mid-cap as well as small-cap stocks would take their own sweet time to bounce back. I would suggest sticking to ‘A’ group companies where many of the stocks have taken a beating just because of the bad sentiment rather than due to any fundamental reason. My best picks in these tumultuous times are Reliance Industries Rs 2330 L&T at Rs 3530 and Bharat Bijlee at Rs 2750.

So what should be the strategy in a market like this? There would be some pain in the market for some more time. We had seen some excesses during the bull run, similarly we would see some excesses in the bear run too. The art of making money in this market is not to panic but to do exactly the opposite of what the people are doing. Buy when everyone else is selling and you would make a great killing in the next 12 months.

Second, don’t invest with a short-term horizon. Keep a long-term outlook for the scrip you have bought as there is a possibility that the good scrip you have bought may fall further for a short while.

Third, never chase the stock in this market. It does not make sense chasing stocks.

Fourth, don’t borrow to invest in the stock market. In fact, if you have already borrowed, slowly reduce your leveraged position.

Fifth, cut your losses in the junk and small-cap stocks where there were no fundamental reasons for them to surge. It’s better to lose 50-75 per cent than to lose 100 per cent as many of these stocks may not remain liquid in this kind of market.

Sixth, never panic in this market. There is no need to change your perception about the stock market. It’s there to survive and one would make good profits provided you have the patience. Don’t watch TV channels and don’t listen to the so-called experts. This would unnecessarily create panic resulting in huge losses. Just stay put. Hold your blue chip stocks as sense would return to the market sooner rather than later.

I am optimistic that equity would do well provided you have the patience and the courage to put money for the long-term. So don’t panic. Now is the time to act sensibly and hold your blue chips to fetch good returns for you. Just reduce your expectations in terms of returns and you would have the last laugh.

Why is gold considered to be the best hedge against inflation

2008-01-26T22:06:00.001+05:30

Gold is especially attractive in times of economic and political crisis. As the most widely accepted global currency, gold is viewed as a source of stability in times of currency inflation, stock market uncertainty and political conflict. When the US $ collapses we find gold value shooting up manifold. This is simply because crude oil is traded in $ per barrel and when dollar value falls, the price of crude oil shoots up as a concomitant effect. With crude oil prices rising and the OPEC group getting richer by the day, the automatic channelisation of the surplus profits finds its way to gold as a safe investment destination.

Gold prices have the advantage of independence from correlation with stock market prices and gold investments can help offset the risks of a portfolio heavy in stocks and bonds. Gold hedges against the possibility of interest rates moving against one’s bond investments and protects against the devaluation of one’s primary currency.

Gold is now at around USD 900 per ounce. It was trading at USD 37 in 1971. Gold then shot up to USD 850 in 1980, collapsed all the way to USD 260 in 1999, and has only now crossed the previous peak of USD 850 that it established 27 years ago.

Because many of the central banks of the world have lost sight of what they are supposed to do.
As a student of economics, we were taught that the role of a central bank was to ensure that it maintained the value of the paper currency issued. It did this by ensuring that every time it printed paper, it had a fixed ratio of gold lying in its vaults( Also known in economic parlance as gold standard). But, over the past few decades - and increasingly over the past few years - the central banks have shifted to a "fiat" currency system whereby they have been printing more paper and not worrying about the gold they have as a reserve for their paper currencies. And paper currencies are, in the end, paper. History has shown us that governments have fallen and paper currencies have died with them. Gold has been a currency - a medium of exchange - for centuries. No paper currency has existed for that long. Not the US Dollar. Not the Sterling Pound. Not the Indian Rupee. As governments have printed larger amounts of paper currencies, these currencies have lost value against real assets like property, or for that matter even a samosa. The danger with fiat currency is that nations may lose discretion and print too much currency or allow too much credit, devaluing the currency and causing inflation. Gold serves as a bulwark against a dropping dollar and other fiat currencies in part because it can’t be produced at will.

Even as global demand has increased, gold mining efforts have actually decreased production because of a decreasing supply of easily accessible reserves. Limitations in the global supply of gold ensure its precious nature.

In 1980, it probably cost you Rs 1 to buy one samosa. Today, it costs you Rs 10. Has the samosa become 10 times larger over the past 27 years? Not at all. The fact is that Indian rupee has lost value over the past 27 years, so the samosa wallah wants more of your rupee to sell you the same samosa. He wants 10 times the rupees for that same samosa. Or look at the price of your house. In 1980, it cost Rs 200 to buy one square foot of property in Cuffe Parade, Bombay. Today, it costs Rs. 40,000 per square foot. That is an increase of 200 times! Money, obviously, buys less these days. Paper money has lost value. This is what is called "inflation".

Now look at gold. It was USD 850 briefly in 1980 - when samosa was available at Rs. 1 and land in Bombay at Rs 200. Today it is at USD 900. Interesting, isn't it? The one currency that governments cannot print at will and which has, across civilisations, been a "store of value" - a hedge against inflation in the language of economics - has not really seen any increase in price over the past 27 years.

If the price of gold was to move in line with the price of samosas, gold should be trading at USD 9,000 per ounce or over Rs 1 lakh for every 10 grammes. But gold can be bought for around Rs. 11,000 for every 10 grammes today. If gold was to have moved along with the price of Bombay property, gold should be trading at Rs. 20 lakhs for every 10 grammes.

That may sound absurd. But sometimes the most attractive investment opportunities are those that sound absurd. Like Infosys at its IPO in 1992 or Zee at its IPO in 1993. You could have multiplied your money by over 1,000 times in each of them.

Don't get me wrong - not every absurd idea is a good investment.And not every investment will increase in value by 10 times let alone by 1,000 times. But, sometimes, simple logic and harsh facts should allow us to make simple investment decisions. Do I expect the price of a samosa to fall to Rs. 1 ? Do I expect the price of Bombay property to fall to Rs. 200 per square foot? Or do I expect gold to start climbing and get closer to the equivalent price of a samosa and the price of Bombay property?

Inflation and uncertainty require insurance. Gold is an insurance against absurd government policies - worldwide. I own gold. Do invest more in gold but mainly through ETF's (Exchange Traded Funds) as they dont have the drawbacks of investing in physical gold like making charges and impurity charges which reduces the quantum of gold u get to purchase with ur investible funds. Also if we compare the movement of gold prices over the last 27 years, one factor that clearly comes out is that gold prices are clearly bearish during the first half of the year and they pick up steam over the second half (from june onwards)..therefore the best phase to buy gold would be the current first half from Jan- June 2008. The crash in gold prices have already commenced. Place your bulk orders now on NSE through Benchmark Gold ETF that is traded on the NSE just like any other scrip. Buy on a staggered basis until june and hold ur investments for the long term.

Its such a blessed feeling to have an index launched in my name

2008-01-26T01:48:00.001+05:30

Dow Jones Indexes has tied up with Dharma Investments, a leading private investment firm pioneering the development of faith-based investment, to launch the Dow Jones Dharma Index.

The new indexes will measure the performance of companies selected according to the value systems and principles of Dharmic religions, especially Hinduism and Buddhism. The objective
is to provide the investment community with the most comprehensive benchmarks that comply with these principles. The Dow Jones Dharma Indexes are the first faith-based indexes created to measure faith-compliant equities. Previously Dow Jones Indexes had pioneered this space by launching the Dow Jones Islamic Market Indexes in 1999, which today has become one of the leading Islamic market indexes worldwide.

The Dow Jones Dharma Index series includes the Dow Jones Dharma Global Index, as well as four country indexes for the US, Britain, Japan and India. Bringing our religious values onto the global stage offers sustainable solutions to the problems confronting the world today. The principle of dharma contains precepts relevant to good conduct and the implicit requirement of mindfulness about the sources of wealth - and thereby responsible investing.

The Dow Jones Dharma Index plans to screen the company on a combination of environmental, social, governance and traditional sin sector filters. If one has to be included in the listings, the company must pass a set of industry, environmental, corporate governance and qualitative screens for Dharmic compliance.

Dharma Investments has clarified that environmental screens would include company's impact or policies with respect to emissions, climate change and carbon footprint analysis, oil and chemical spills and waste management and recycling.

Companies from sectors where the nature of their business activities and operations have been termed unacceptable are excluded form the index. An illustrative list of prohibited sectors like Brewers, casinos and gaming, pharmaceuticals, tobacco, alcohol, adult entertainment, animal testing and genetic modification of agricultural products will never form part of the index

So all in all I feel elated to have become one of the "Dogs of the Dow"

The NFO vs IPO debate

2008-01-25T01:10:00.001+05:30

Last week while going out for my regular late evening walks, i came across two gullible investors who were discussing the events of the stock market for the past week that had gone by. I was very happy at the first instance to know the levels of interest the markets have created even among bystanders or the lay man on the streets of India. Investing being my favourite topic, as usual i eavesdropped into their tete- a-tete. The word " Reliance" and the prospects of that stock being a multibagger figured frequently in their conversation. One of them (an old man must be atleast 65 plus..we can safely call him a senior citizen..he runs a cyber cafe at the street corner) was issuing his own target for Reliance Industries to reach 5000 by this March end. The thought bubbles that ran in my mind at that moment are reproduced below "Yes ...old man..Reliance will touch 5000 by March end, only and only if crude oil prices were to touch $ 200 per barrel by that time"...i continued to listen to them...Then the old man fires the next sweetener by talking about how NFO's and IPO's are a quick way to make a buck or two.

For the uninitiated an NFO is known as a "New Fund Offerring" of any mutual fund that wishes to raise money from the public at large and deploy it into various asset classes like equities, debt and money market instruments. An IPO is an "Initial Public Offerring" made by companies to raise money for the first time from the public at large through capital market channels to fund their expansion and diversification plans.

Now there is a huge difference between an NFO and an IPO. While an IPO may result in quick profits for an investor provided the valuation of the company coming out with a public issue is right and its fundamentals are strong enough for the company to attract a hefty premium in the stock market, the same cannot be said about an NFO. NFO's take time to invest or deploy their money into the market. They dont take investment decisions in a haste. Sometimes there can be a significant lag effect from the time of collecting the funds to its investment in the market. Its ultimately the asset management company's call and the fund managers prerogative as to when he wants to utilise the funds collected. However in case of an IPO, clear provisions have been demarcated by SEBI which require companies to get listed on the bourses within 18 days from the close of the offer.

Also another wrong notion of the old man was that investing in an NFO that is offerred at a par value of Rs. 10 is better than investing in a Mutual Fund scheme with an NAV of Rs.50. This view is totally absurd as any scheme of a mutual fund will command a higher NAV only because of its superior Investment dynamics and its fund manager's track record. At the end of the day the movement in NAV is determined by the performance of the investments of the scheme.

An existing scheme will atleast have a performance record or a report card to show unlike a NFO which if not managed well will have its NAV dropping below its face value.

Therefore before selecting a particular scheme of a mutual fund these basic test checks will help a long way in ensuring the safety of your hard earned money :

1. Study the Offer document end to end and page to page
2. Compare the performance of various other schemes of the mutual fund and benchmark the
same with the returns of the index (Sensex or Nifty).
3. Study the fund managers track record, previous schemes managed and how each of them
have fared in the past.
4. Identify your time horizon and investing temparament
5. Identify the focus areas or sectors that the fund is bullish on

Lastly, think long term and be long term greedy!!!

Investment Philosophy

2007-12-23T19:59:00.000+05:30

It's a bitterly cold day. You have lost all feeling in your nose. Your ears are hurting. You hunch your shoulders together to bury your head under the raised lapels of your greatcoat. You turn a corner and you see a frozen pond. Can you risk taking a short cut across? Or would it be safer to walk to the bridge half a mile down the road? You notice a man on the other side of the pond. He gingerly steps on to it. It holds the weight of one foot. He carefully places the other foot on the ice. A young woman behind follows his lead. As you watch, some children arrive with skates, and more adults follow them. Soon, the whole village is having a party on the ice. Each person has given the next person the confidence to join the party. The more people clambering on to the ice, the safer it feels. It's logical, isn't it? Or is it? Something makes you stop. You turn around. You walk away. Behind you, you bear the crack and the first scream.

Yes, you could say it is a dark vision, but it does the opposite of what most sunglasses do. Instead of increasing obscurity, it introduces clarity. As an increasing number of heavy bodies add themselves to the ice, human nature makes them feel the safety factor is increasing. But the clear-thinking observer realizes that their added weight means that the opposite is true. Each fresh body on the ice makes it more - not less - likely that the ice will crack. The global investment business today is a business in exactly the same way as the street market in Camden Town or Bangkok is. It is manned by salespeople who all have products they want you to buy. They make sure that what they sell is attractive. They tell you uplifting stories of how buyers of their services have generated wealth for themselves. They attract you to the ice ...

This is what has happened in the international financial markets right from the days of great depression to the 1987 crisis in US (Black Monday) to the 1997 East Asian Crisis to the latest subprime meltdown…the gullible investors who have followed the greater fool theory in the right earnest in the greed for short term money.

The lesson and the moral.. be greedy but be long term greedy!!!

Raja's Rare Rumble Regarding Rama Sethu, Religion. ra ra ra..Wow I too came up with a contrived alliteration!!!

2007-09-30T00:59:00.001+05:30

Readers of this blog might have doubts as to why a site dedicated to corporate finance should now focus its thoughts on "religion"...Well I think this is the most opportune time when we need to have a sneak peek into our religious faiths, especially at a point in time when the basic fundamentals and the foundation of the majority community of this country (can we still call ourselves the majority..im not sure) is being put to a litmus test by the so called intelligentsia who consider it their patrimony to question anything associated with "hinduism". On top of the anti hindu pecking order is our grand old man MK who has asked the most ludicrous questions of this century "Which college did Lord Rama go and study engineering..does he have a degree certificate..Can the Sangh Parivar and other Hindu organisations show a copy of Lord rama's degree certificate".. Well lets now pay him back by flipping the same question at him. During 96-2001 (the previous tenure of the DMK government..most readers would be aware that in Tamilnadu its always an alternating game for power between the DMK and ADMK..we have no choice u see!!!), a lot of bridges, subways and flyovers were constructed at all inappropriate places in Chennai. Now wont i sound featherbrained if i ask MK "Thatha ..Thatha..Which college did u study engineering...Did u graduate at IIT Madras or Anna University as u have constructed so many unwanted flyovers within the city...Where did u gain all this engineering prowess??". Mankind has evolved at its own steady pace and each stage of evolution has had its own scientific and technological advancements at that given point in time. Therefore, when Lord Rama had existed he must have had his own group of architects and technocrats who had the requisite skills to construct Rama Sethu. Mere logical reasoning on how our temples all across the country would have been built ages ago with tremendous designs and eye catching splendor that cant even be replicated by the L&T engineers of today stands testimony enough to prove that Rama Sethu could have also been man made or to rather summate, build under the guidance and supervision of Lord Rama.

The interests of our religion are quite safe in the hands of the Lord in spite of the several attacks that are being made on it from both within and without. But as adherents to a particular religion, we must atleast perform the basic functions and practices that our faith entrusts and endows upon us. A religion can thrive only if it regulates the activities of its followers by channelising their free will into fruitful, productive activities. It is here that our scriptures have a major role to play. There is absolutely no need to find fault with our scriptures or seek to alter them. We keep searching for evidence on certain beliefs and customs and in the absence of such corroborating evidence we are only too happy to dismiss them as myths or embellishment of glorified faith. For eg: If a stranger standing by the road directs you, at ur request, to a house you are searching for, do u ask him for evidence or proof that he's right in his directions. Dont u place implicit reliance on him and proceed as directed by him. Its only when u reach the wrong house that you start finding fault with that person. Similarly we should have faith in the proclamations of our ancient sages (the guru parampara) and firmly believe that their dictates are leading us in the right direction. In today's materialistic world, none of us(me included) follow any of the rigours prescribed by the vedas and other scriptures. So speaking for myself, atleast i can definitely say that i dont have any right to question or blame the scriptures for the writings enshrined therein unless and until i reach a point when i feel misled or wronged having followed the vedas and its teachings. Guess thats never gonna happen!!

BRITANNIA RESEARCH REPORT

2007-09-26T00:24:00.000+05:30

BRITANNIA INDUSTRIES: A FAST FOOTED FMCG: Healthy investment to better your wealth….

Britannia Industries (Britannia) is one of the leading producers of biscuits and other bakery products in India. The company’s major brands in biscuits include Tiger, Good Day, Mari Gold, 50-50, Treat, Milk Bikis and Nutrichoice Sugar Out. Each of these power brands are estimated to be valued at around 250-300 crore constituting around 92% of the topline of the company for the year ended FY 07. The company is the market leader in the biscuits segment with a market share of 40% followed by the Parle group at 33% in value terms. Surya Food Agro, ITC and the vast league of unorganized players make up the rest of the market.

Group Ownership Pattern:France’s leading cookies and dairy products firm “Group Danone” and India’s Wadia group (with interests in textiles, aviation and agro processing) control a majority stake in Britannia Ltd. through a holding company Associated Biscuits International Ltd. (ABI) which owns 51% stake in Britannia. Group Danone and the Wadia’s hold equal stakes in ABI. Relations between the two stakeholders have turned sour over the recent months, the details of which are discussed separately in this article. The way this ownership tussle pans out can have a telling impact on the valuations of Britannia Ltd and assumes paramount significance to investors and traders alike. LIC, HDFC, and HSBC mutual funds have also been accumulating positions in Britannia over the last few quarters.

Business Profile:
The primary business segment of the company is bakery, which consists of Biscuits, cakes, bread and rusk. Overall sales of the company has grown at a brisk pace of 20% and above in the last one year due to greater buoyancy in the biscuit market reflected from growing consumerism in India and increased market penetration efforts by the company into rural areas. The company has identified each brand as a profit center and the role of these brands are clearly delineated. The company has also been working on new variants, product innovations and in line with its strategy a slew of new launches have been made to widen the product profile in a highly competitive business environment. The company has been rated the No.1 most trusted food brand in India as per a recent survey conducted across all metros (Source: AC Nielsen ORG – Marg) and has a tremendous brand recall among the general public at large. The company is the market leader in all biscuit categories except the glucose segment where Parle has its nose slightly ahead. All the categories and brands of Britannia are growing at double-digit rate. The key to unlock business potential and opportunities in this industry lies in keeping a tab on the changing consumer tastes and preferences and addressing multiple taste preferences of various sections of consumers. Food business being a fickle category, adequate branding and advertising for all its products, pioneering efforts to migrate consumption patterns from unbranded to branded products, addressing nutritional, health and wellness issues and establishing an emotional connect with the customer is of utmost necessity to stay ahead of competition and take a larger share of the consumer’s wallet.

Business Risk Profile:
Britannia until FY 2006 can be best described as a sleeping giant of the packaged food segment. The company had lost its sales growth momentum from FY 02-06 and its operating margins had almost halved during this period due to the unprecedented rise in input commodity prices, under investment in core brands and weak product innovation. The company did not embark on major capacity expansion plans during this period inspite of robust internal accruals. The company had to take on competition from aggressive players like ITC (Sunfeast) and Surya Agro (Priya Gold), which resulted in pricing pressures across product categories, and led to substantial erosion in its market share coupled with a downward spiral in it’s profitability margins. The company was also affected by frequent changes in the top management and high attrition levels among the top level executives leading to a lack of clarity on policy matters. But ever since 2005 when Ms.Vinita Bali took over the reins, the company has been clawing back to retain its pre-eminent position in the market through a spate of multiple launches under the six umbrella brands, various brand restructuring initiatives and improved sales promotion and distribution efforts in rural areas.

The company has launched new packaging formats with reduced weights at attractive price points. The company has also effected marginal price hikes in certain power brands which have shown robust sales growth on a sequential basis QoQ (quarter on quarter). The government in its recent budget has also reduced the excise duty on biscuits from 8% to Nil on products where the MRP (Maximum retail price) is less than Rs.50 per kg. The company has also commissioned its manufacturing plants at Uttranchal towards the end of 2005 and this being a tax free facility will definitely have a positive impact on the margins of the entity over the medium to long term horizon. However a rationalization of the VAT structure for the biscuits industry may be required as the sector pays a higher rate of 12.5% compared to other food segments. The cumulative tax incidence for the industry including the import duties on wheat and fats works out to 25% and a decrease in VAT rates can go a long way in reducing prices and increasing consumption trends among the rural masses and low income groups of our country.

During the current financial year, the company has embarked on an Rs.100 crore expansion plan to develop new products for the rural markets where the penetration levels are pretty low. This should trigger the earnings growth rate at a faster clip going forward. Capex plans have been steady over the last few years.

Increased and intense competition both at the national and regional level has stimulated the biscuits market growth. Most of the organized industry players are bunching up their capacities following it up with an aggressive pricing and sales promotion policy thereby depressing the industry margins overall. Managing profitable growth in such a scenario will be contingent upon continuous brand investment, improving supply chain efficiencies and effective cost management.

Financial Risk profile:

The company has a fairly strong financial profile characterized by its leadership in the biscuits business, substantially free cash flows, high liquidity cushion and comfortable debt protection ratios. Sales growth and profit growth has witnessed lumpiness over a five-year period (FY 02-07) with the topline growing at a moderate CAGR of 11.3% and bottomline at a meagre 3%. But the financial metrics have shown a remarkable improvement since FY 06-07 as a result of the restructuring of the business model with sales showing a robust increment of 28% YoY and margins indicating a recovery from the fourth quarter. Margins have sustained the rising trend well into the June Quarter (Q1’08).

Over the years, the major dampener for the financials of the company has been high input costs of edible oil, sugar, Wheat flour and baking fuel. However the fall in headline inflation in primary products and the global meltdown in sugar prices due to supply glut augurs well for the company. The recent rise in crude oil prices is a major concern that can have a spill over effect on the price of baking fuels and logistics costs. The prices of these input commodities are forecasted to be stable and firm for the rest of the year. The company also has also resorted to hedging in the commodities market to mitigate the impact of spikes in input prices to protect its margins.

Export revenues for the company form a very minuscule portion of the total turnover at less than 10% for FY07 albeit growing at more than 50% in the last couple of years. The interest expressed by Kraft foods Inc of the US to pick up Group Danone’s stake in the company assumes high significance. If the deal materializes, the company can ramp up its exports and set foot into the global arena leveraging on Kraft foods multiple distribution networks all across UK and US.

Britannia has huge surplus cash reserves that are currently invested in Mutual funds and marketable securities and can be drawn upon for pursuing inorganic growth opportunities. The company has also been buying back shares from open market until 2005 using its idle cash and has been doling out liberal dividends at 150% over the last three years. However the dividend yield has much scope to improve going forward. The balance sheet of the company is lowly geared with a modest short-term debt and zero long-term debt.

Dispute with Group Danone:
As discussed above, Group Danone and Wadia’s together hold controlling stake in Britannia through a holding company Associated Biscuit International (ABI). The dispute between the two stakeholders arose over the alleged misuse of “Tiger” Brand By Danone in several countries. Group Danone has registered the tiger brand as its own brand in several countries without obtaining the consent of the Britannia board. The standoff has now resulted in Britannia initiating legal action against Group Danone and demanding compensation to the tune of 15 crore. In certain circles, this act is also being seen as a form of takeover defence to prevent Danone from selling its stake in Britannia to Kraft Foods albeit the Wadia’s have the first right of refusal on Danone’s stake sale in Britannia.

Share Performance: The stalemate between the two stakeholders over solving their differences has been a major constraint on the growth prospects of the company and is also one of the main reasons for the underperformance of the scrip on the bourses. The scrip has moved up by 22% ever since the market crash witnessed in May –June 06 as compared to the BSE sensex up move by more than 80%. The scrip has clearly been a laggard on the bourses despite strong fundamentals

Recent developments and implications for Britannia
The management of Group Danone has made a policy decision to exit its global biscuit and cereals business to focus on its core business of dairy products and beverages. Group Danone is in exclusive talks with American Kraft Foods Inc, the worlds largest cookie maker, to sell its global biscuits business though the deal doesn’t include the company’s stake in Britannia. But the management of the company has recently made its intentions clear to exit Britannia too and is waiting for the no objection certificate from Wadias for selling its stake to Kraft foods Inc. Danone wants to set up its dairy products and beverages business in India separately and unlocking its investment in Britannia will provide the necessary funds for setting up its shop in India.
This complex situation throws up interesting scenarios for traders and Investors. Lets have an insight into the various possible scenarios:
Scenario 1:
Danone selling its stake to Wadias:
This event, if it materializes will prove to be favourable to the Wadias who are negotiating with Danone for a possible acquisition of their 25.5% stake at a discount to the current market valuations. This will give the Wadias a majority control over Britannia.
Scenario 2:
Danone and Wadia both selling their stake in Britannai to Kraft Foods Inc:
This scenario though a possibility in the long term seems highly unlikely at the moment. American Kraft Foods Inc has expressed its interest to pick up Danone’s stake in Britannia. The advantage to Kraft Foods Inc will lie in tapping the huge consumption market and reaping the benefits of the country’s diverse demographic profile. Wadias have however remained tight lipped on selling their stake to Kraft foods Inc. They would not prefer to exit a cash rich company and lose out on the long-term growth story that this sector offers.
Scenario 3:
Three-way agreement between Kraft foods, Danone and Britannia
A three-way workable agreement between the Wadias, Danone and Kraft may not only mean an end to litigation but could also add synergy and firepower to Britannia’s portfolio of brands. Kraft’s arsenal boasts of brands such as Toblerone (chocolates), Tang (fresh drink concentrate), Fresh (beverage) and Oreo, the world’s largest selling cookie brand. For Danone, such an agreement along with annulment of the Wadia joint venture could mean freedom to enter the dairy and beverages business in the country independently, which it is keen on. This scenario seems a highly likely possibility in the next few months, as Danone does not prefer to sell its stake to the Wadias at a discount to the fair value for Britannia.

Valuation:
Now coming to the most important aspect that has high implications for shareholders and investors - At what price will Danone possibly exit Britannia?As discussed above already, Group Danone is in exclusive talks with Kraft Foods Inc to sell its global biscuits business (excluding its stake in Britannia). The global biscuits business of Danone has generated sales of 2.2 Billion euros last year and the business has been valued by Kraft foods at 5.3 billion euros. The offer price is almost 2.4 times the annual sales generated last year. The valuation has been arrived at taking into account the fact that the European markets where Group Danone has a major presence are growing at less than 3%. With the Indian biscuits market registering double-digit growth rates and with Britannia outperforming the market by growing at 28% last year, the valuation multiple should be much higher than 2.4 times. Even on a conservative estimate applying the proxy valuation to Britannia, the valuation per share comes to Rs.2200.

But since the Indian market has high growth rates, Danone will demand a much higher valuation than the enterprise value arrived above. Britannia’s high Cash EPS and cash reserves also pushes up its valuation parameters. In all the three scenarios discussed above there has to be a compulsory open offer by the purchaser (whether Kraft foods or Wadia group) at a much higher rate than the price paid for acquisition of Danone’s stake as per SEBI guidelines. This is to protect the interest of minority shareholders in Britannia, as it would help them unlock their investments at fair valuations.
Whichever way the control flows, Britannia would do well to have a single promoter or two friendly promoters who can concentrate their efforts in growing the business and capitalizing on the opportunities in the food processing industry rather than engage in mud slinging matches and long drawn legal battles with one another to the detriment of the hapless investor.
Britannia is expected to post an EPS of 72 for the year ended FY 08. The share price is currently trading at 1470 which discounts its forward EPS by a PE of 20 times. The share price looks attractive at current levels given the fact that most FMCG players are trading at much higher valuations and Britannia is on a fast track growth trajectory. Also adding pepper to the undervalued story is the possibility of the changes in ownership and shareholding pattern that can throw up many positive surprises in the near term.

Last but not the least, as the old adage goes “One must buy when everyone is selling and sell when everyone is buying.” Biscuits are a small part of people’s lives and Britannia is one such brand that has found its way into every Indian household over the past few decades. So what’s stopping u from allocating a small portion for this scrip in your portfolio? Take a calculated bet on this stock at current levels and wait for these interesting developments to pan out in a positive manner.

Safe Harbor Statement: This report should not be construed as a recommendation to invest in the scrip/company discussed above. Investments are subject to market risk. Informed judgment and discretion of the individual investor is of utmost importance while taking positions in any stock.

Is Education a service or an industry

2007-09-05T02:43:00.000+05:30

Education sector should be declared an “Industry” and should be opened up to attract venture capital funding with the government providing the right sops and benefits. At the current rate of budgetary allocations being made by the government which can best be termed a “pittance” the country will never be able to make the grade of a developed nation. Nobody in India bothers about the utilization of funds collected in the form of “education cess” by the government. There has been no transparency or disclosure as to how the funds have been utilized for providing higher education. Last year alone as per the budgetary documents, funds to the tune of Rs.8000 crore have been collected as “higher and secondary” education cess. Only the finance minister can answer the question as to what has been done with the corpus accumulated so far to improve the quality of education within the country.

With India already facing a talent crunch with more and more graduates produced by the current system being increasingly found unemployable in the IT &ITES sector, the time has arisen to conduct a reality check. We face the risk of a downturn in the outsourcing space as no amount of tub-thumping or projecting our country as a low cost destination will help if the quality of work rendered takes a backseat. China and South East Asian economies are not far behind to replace us in the services industry, which has contributed to 67% of the GDP growth and has been the backbone of our economy in recent times.

The reason why the skill levels of graduates churned out by our education system are below par is due to of the lack of adequate investment in infrastructure by our educational institutions. Though the private institutions have been doing their bit to ramp up their infrastructure by creating a huge corpus of funds supported by high fee structures and capitation fees, the government has been subsidizing the cost of education with a service motto and is under a social obligation to do so. But the flipside of this policy is that most government colleges have dilapidated infrastructure and poor faculty due to lack of adequate funding support.

The solution to this conundrum lies in the government continuing to support primary education in the country through subsidies and low fee structures whilst opening up higher education to private players and venture capitalists who shall all the more be eager and naturally disposed to provide adequate funding to these institutions given the demographic dividend that our country has in store. The government can decide on policy matters and frame the necessary regulations in this regard. For the higher portals of learning like IIT’s, IIM’s and various government supported institutions like Anna University, they must be given a free hand to approach the capital markets for funding support. Given the tremendous goodwill and popularity enjoyed by these institutions, they would no longer need to depend on the government for annual grants. Already a number of educational institutions have been getting themselves graded by rating agencies under “Maritime Grading” policy of the government. This grading which acts a quality certification for the institution can be an added advantage to secure access to funds from various investors both within the country and abroad.
Moves like these can unlock significant capital for the government that can be more gainfully employed to strengthen elementary education within the country and bring more tiny tots under the wings of education. The government must also speedup the implementation of technology driven education, infrastructure support and teachers training programs across all primary and secondary schools with the help of
educational software companies like Educomp Solutions and Everonn systems.

To sum up, education is the most potent force for radical thinking and social change and must be made more effective using better infrastructure and technology. Vision 2020 may not seem a distant dream if the government carries out educational reforms in a phased manner.

Can Television Advertisements get sensible ?? Are the Ad makers listening

2007-08-27T02:03:00.000+05:30

Consumerism in India is being taken for granted. Ad makers and companies have the belief that anything and everything they manufacture and distribute can be sold. TV Ads are mostly being used as a medium to create awareness of the product existence. Ads no more communicate the value of a brand to its target audience. We are being subject to meaningless ads that we are forced to view painstakingly amidst our favourite television programmes. Today i was watching an ad on AVT premium tea..there was no mention about the product or its quality..its lineaments or how it satisfies the sense buds of an individual consuming tea. The couple buy a few sachets of the product just lured by the prospects of finding a gold coin in the satchet, a sales promotion offer the company has recently brought out. We all know that AVT is not a big brand in India. Many people up north dont even know the existence of such a company.

In such a scenario shouldnt the company focus on building its brand value rather than resorting to cheap sales gimmicks like these to fool the already gullible indian consumer. "Once u build a brand, u do not need ads"..The visionary JRD Tata's oft repeated talisman to corporate india..almost everyone seems to have forgotten this proverb.
The average indian consumer of today, to me, resembles an "Onyx dustbin" (this garbage collector is very famous in chennai) that gracefully accepts all that is thrown into it.

However there are a few rays of hope in the advertising field ..lets take the Bank of India ad..it has such a simple format but conveys such a huge meaning on customer service to the audience. AD managers like these are the crème de la crème of this industry, who should continue to be the bellweathers who can act as the change or catalyst in making ads more sensible and appealing to the target audience/ultimate customers of corporate India.

In the author's humble opinion, even marketing research agencies like AC nielsen can play a major role in reforming the institutional AD space given the fully integrated operation of the research agency. They have the pulse of the audience as well as consumers and keep a continuos tab on the changing tastes and fashions of consumerism in India.

Corporate India spends thousands of crore on selling and distribution expenses of which Media Ads form a significant proportion. In an era where Indian companies are doling out billions, making major large outbound deals in the M&A space at the click of a mouse through numerous power point presentations(PPT's sounds better), they cant even buy themselves a good script locally to promote their business models.

Listing Price for Motilal Oswal

2007-08-20T20:58:00.000+05:30

The company is fundamentally strong and its fortunes are linked to the performance of the stock markets and continuation of the bullish phase of corporate india earnings. Probable listing price would be in the range of 900-950 in a supportive market condition. Investors can follow a simple strategy of comparing the peer performance of India infoline to profit from this stock

My article in hindu business line...it fetched me a book on "Information technology"

2007-08-20T20:55:00.000+05:30

check out my article in Business line on "Investors biggest challenge in stock markets in six yrs" at the link below
http://www.thehindubusinessline.com/mentor/2007/08/20/stories/2007082050151200.htm

Clinical trials

2007-08-20T02:38:00.000+05:30

Clinical trials by biotech companies are the next catalyst for growth of the pharma sector in India. With margins from generic drugs getting lower by the day, the pharma sector is all set to become an outcast as far as the stock markets are concerned. Only those companies which do high end CRAMS work (Contract research and manufacturing) will survive the profitability conundrum. Under these circumstances, clinical study, research and trials in the bio pharma and life sciences space has come as a blessing in disguise for Indian companies which are nowscaling up rapidly to meet the outsourcing demand. Yes outsourcing of clinical trials is here to stay in India. IT companies have become so synonymous and addicted with the term "outsourcing" that they too are jumping into the fray. Companies like Infosys, IGATE global have opened up separate verticals in clinical research to work in areas of bioservices and bio informatics. India with its vast demographic profile in terms of its population provides a large pool of samples for clinical trials apart from the low cost advantage. Clinical trials can fetch anywhere between Rs.10 lakh to Rs.25 lakh per volunteer tested depending on the nature of the product tested on human body. Research and development costs for clinical trials alone cost 70% of the total cost of bringing a product to the market. With most pharma companies both within India and outside facing pricing pressures, the emphasis will be on cost management and control which is facilitated by outsourcing to low cost destinations with the requisite talent pool and resources.

Biocon and many other MNC pharma companies have already started outsourcing work to niche small bio pharma companies to undertake clinical research and study. Biocon derives 10% of its total revenue from clinical research work being a fully integrated bio technology player.

The potential for clinical trials are huge in segments like cardiovascular therapy, nutritional therapy, anti cholestrol, diabetes and cancer therapy etc. Niche small players in bio pharma/ bio services/ bio informatics space should focus on client retention, timely delivery and better turnaround time for clinical studies, widening the product and services profile, effective cost management to offset negatives like lack of earnings visibility in this space, thereby attracting investor attention in future. Atleast one or two interesting players are expected to emerge in the next decade or so on the Indian bourses in the biotechnology space apart from biocon. Celestial Labs is one such stock with an interesting story which gives it the potential to come on top. We will have to wait for the story to pan out positively.

The SIVAJI - MATRIX compilation

2007-07-28T09:28:00.000+05:30

Check this one out http://ishare.rediff.com/filevideo.php?trans_id=1&id=15459

Simply ISsssshtyleeeeeeeeeeee!!!!!