Technical check on a couple of stocks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.