The Complete Magazine for Indian Investors
Sept 2010, ` 25
Investment Monitor www.rrfinance.com www.rrfcl.com
This issue consists of 56 pages.
Rising Private Equity Investments in India
Inside Stories 9 Market Commentary 12 Cover Story 42 Mutual Fund Articles
With Stock Market Monitor
48 Insurance Schemes 52 Investor Education
CONTENTS | SEPTEMBER 2010 Head Office : 47 MM Road, Rani Jhansi Marg, Jhandewalan, New Delhi -110055, Tel : 011-23636363/62,Fax : 011-23636746 Ahmedabad Office : 401 , Abhijit-1 , Opp. Bhuj Mercantile Bank, Mithakhali 6 Road, Navrangpura, Ahmedabad : 380009, Tel : 079-26467260, 079-26404241, 09327037108 Bangalore Office : S-111, Manipal Centre, 47 Deckinson Road, Bangalore-560042, Tel:080-09343795727,9448267617,080-25581513 09341940796,0943795727, 30945047 Chennai Office : 3rd Floor, Precision Plaza, New # 397, Teynampet, Anna Salai, Chennai - 600 018, Tel : 044 - 42077370, 42077371, 09382330263, 09382330261 Chandigarh Office : SCO 222-223, Ground Floor, Sector 34-A, Opp. State Library, Chandigarh, Tel :0172-2624896, 2624796, 4620067, 3240150, 9316135518 Dehradun Office : 56 first floor, Rajpur Road, Opp. Madhuban Dehradun, Uttranchal- 248001, Tel : 0135-3258181, 09368141585, 09837069717 Jaipur Office : 7, Katewa Bhawan, Opp. Ganpati Plaza , M.I. Road, Jaipur -302001, Tel : 0141-3235456, 5113317, 9314639805 Kolkata Office : 704, Krishna Building, 224 AJC Bose Road, Kolkata-700017, Tel : 033-22802963, 30974687, 09339730866, 9339234900, Fax : 22802964 Lucknow Office : G-32, Shriram Tower, 13-A, Ashok Marg, Lucknow-226001, Tel : 0522-2286518, 2286110, 9335914247, 93505520417 Fax : 2286110 Mumbai Office : 133A, Mittal Towers, A Wing, 13th Floor, Nariman Point, Mumbai 400021, Tel : 9324804084, 9324804086 Vadodara Office : 222, Siddharth Complex, 2nd floor, RC Dutt Road, Alkapuri, Vadodara - 390007, Tel : 09327037108, 9377355576 Delhi Associate division : Connaught Place : N-24, Connaught Place, New Delhi-110001, Tel :011 41523306, 41523229, 9350316008 Faridabad Office : 55, 1st Floor, Near Flyover, Neelam Chowk, NIT , Faridabad -121001, Tel : 95129-2427367, 2427361, 9350316009 Ghaziabad Office : 114, Satyam Complex, Raj Nagar D C, Raj Nagar, Ghaziabad 201002, Tel : 9312940453, 9312056336 Janakpuri Office : 111, Jyotishikar, 8 Distt. Centre, Janakpuri, New Delhi-110018, Tel :011-25617654, 09310684750 Noida Office : P-5, UGF, Ocean Plaza, Sector-18, Noida-201301, Tel : 95120-4336992, 2513989, 9312940493 Pitampura Office : Shop No. 24, FD Market, Nr. Madhuban Chowk, Pitampura, Delhi-110034,Tel : 011-273114419, 9312940490 Preet Vihar Office :106 Pankaj Chambers, Preet Vihar Community Centre, Delhi-110092, Tel : 42421238-39, 9312940456 Rajendra Place :118, Gagandeep Building , Rajendra Place, New Delhi-110008, Tel : 011-41538956, 41537856, 9350316011 ITO Office :105, Pratap Bhawan, Bahdur Shah Zafar Marg, New Delhi-110001, Tel : 011-41509018, 42512404 Vasant Kunj Office :105, Anchal Plaza, Nelson Mandela Road, Vasant Kunj, New Delhi-110070, Tel : 26891262, 26134767, 9312940454 V.P. Research Gurmeet katar firstname.lastname@example.org Research Team Pradhan email@example.com Satyendra firstname.lastname@example.org Ravi Kumar Mittal email@example.com Shishir Sharma firstname.lastname@example.org Arun Rana email@example.com Ginni Kaur firstname.lastname@example.org Designed by Prasant Nath email@example.com Media Marketing Exec. Aseem Srivastava firstname.lastname@example.org Published by Raghunandan Prasad on behalf of RR Information & Investment Research (P) Ltd.,412-422, Indraprakash Building,21, Barakhamba Road, New Delhi-110001 Printed at : Ratna Offset, C-101, D.D.A Complex,Okhla Indl. Area, Phase-I, New Delhi 110 020.Tel : 41811683, 26816047 This publication is for informational purposes only and contains information, opinion, material obtained from reliable sources and efforts have been made to avoid errors and omissions and is not to be construed as an advice or an offer to act on views expressed therein or an offer to buy and/or sell any securities or related financial instruments and the publisher shall not be responsible and/or liable to anyone for any direct or consequential use of the contents thereof. The reproduction of the contents of this magazine in any form or by any means without prior written permission of the publisher is prohibited.All advertisements appearing in this publication are at the sole risk & responsibility of the advertiser.All disputes shall be subject to the exclusive jurisdiction of Delhi courts only.
Volume: XI Issue :(9) September , 2010 Editor: Rajat Prasad Deputy Editor: Gurmeet Katar
Investment Monitor INSIDE STORIES Editor’s Desk...................................................3 News Bytes......................................................4 Review & Analysis........................................6 Global Outlook.............................................10 Indian Economy............................................11 Industry Analysis.........................................18 Stock Market Monitor.................................20 Equity Stock Ideas.......................................32 Equity Technical Analysis.........................34 Commodity Fundamentals........................36 Commodity Technicals...............................38 Currency Fundamentals............................40 Currency Technicals...................................41 Retail Debt...................................................46 Astro Market ...............................................54 Query Time .................................................55 Mail Box........................................................56
Investment Monitor 1
EDITOR’S DESK Indian stocks are near its fresh 2-1/2-year highs and their risk appetite is largely depends upon the global performance. The Indian market is among the most expensive markets in the world due to investors believing that India will deliver a decade of sustained 8-9% GDP growth. Abundant global liquidity has ensured that inflows into Indian stocks rise whenever investors globally are in risk taking mode. FIIs have pumped in a net Rs 59142 crore in calendar 2010 so far. The resilience of India’s economy in the face of global recession, the continuing high demand of its domestic market and a predicted future growth in the region of eight percent per annum are guarantees that the country will have a place on the radar of international Private Equity firms and their institutional investors for the foreseeable future.
As the market is at its near term high and there is absence for any further trigger, I advice a cautious approach towards investing in equities. Those who want to invest to save their tax liability, may opt for infrastructure bonds issued by IFCI as they provide an additional benefit of tax saving under section 80CCF.
Talking about US, I think there is no bubble going on in the US economy at this point of time. Though, credit is tight, housing prices are falling, equity markets aren’t strong, sure there may be some small pockets, but the overarching concern here is not bubbles. As they have huge debt problems and when wages and prices go down, it makes them harder repay, it makes the whole deeper. Looking at Asia, I just don’t see that there is any way for the Asian currencies not to go up against the dollar. Asia is strong; India is doing downright well; China is growing strongly even though it’s consolidating a bit. Back home, the headline inflation eased in July 2010, fuelling expectations that the central bank may lessen the scale and pace of increase in interest rates. The RBI will undertake a mid-quarter monetary policy review on 16 September 2010 and we expect RBI is likely to raise rates by about 25 basis points to cool excessive demand. It could also narrow the corridor between the rate at which it lends to banks and borrows from them. On the macro front, the government will unveil data on GDP growth for Q1 June 2010 on Tuesday, 31 August 2010. The economy expanded an annual 8.6% in Q4 March 2010.
Investment Monitor 3
Vedanta to buy 51% in Cairn India for $8-8.5 bn
ndia-focused Vedanta Resources will buy a 51% controlling stake in Cairn India for $8 billion to $8.5 billion. Vedanta Resources is in talks with Cairn Energy, which has a 62.4% stake in Cairn India, to buy a stake in the unit, both companies confirmed on Thursday without giving details. The source said the deal is expected to be announced on Monday. Cairn Energy and Vedanta declined comment. Such a deal by Vedanta, controlled by chairman Anil Agarwal, would be the diversified miner’s first move into oil and gas. Analysts had said funding for the deal was likely to be a key issue. Vedanta’s confirmation of talks could incite interest from other bidders.A huge oil find in Rajasthan helped propel Cairn Energy from a small company to a major oil producer and led it to spin off the Indian operations in January 2007.
Bharti Airtel to buy Telecom Seychelles for Rs288cr
ontinuing its acquisition spree in the international market, Bharti Airtel will acquire 100% stake in Telecom Seychelles for $62 million (about Rs288 crore). The acquisition comes on heels of Bharti acquiring Zain Telecom’s Africa assets for $10.7 billion, for which the deal was closed in June.The board of directors has approved the acquisition deal today morning. With taking Telecom Seychelles into its fold, Bharti Airtel will expand its African footprint to 16 countries and its overall presence to 19 nations. They are delighted at the addition of Seychelles to our Africa portfolio. Telecom Seychelles has world-class operations that include state-of-the art 3G services. These operations will benefit further by leveraging the efficiencies of scale of our African operations.
SBI Q1 profit up 25%; shares jump:
BI declared its 1QFY11 results. Interest income grew by 6% YoY during the quarter. This was aided by a strong growth of 21% YoY growth in advances. Low cost deposits growth supported net margin improvement from 2.3% in 1QFY10 to 3.2% in 1QFY11. This was because the bank managed to garner some large corporate salary accounts including that of the Indian Military and technology major IBM
Tata Motors operating profits increased by 563%
ata Motors India’s largest commercial vehicle manufacturer came out with its 1QFY11 results during the week. The company’s consolidated topline grew by 64% YoY on account of higher demand and better realization. Operating profits increased by 563% YoY. This was on the back of fall in raw material costs, staff costs and other expenditure (all as a percentage of sales). Consolidated net profit for the quarter stood at Rs 19.8 bn as against a loss of Rs 3.2 bn in the same quarter the previous year.
4 Investment Monitor Sept 2010
Lack of govt guarantee to push up cost of Air India’s $1.6 bn loan
ir India may have to pay more to borrow $1.6 billion (Rs7,456 crore) and start the whole process of fund-raising anew because the government is not willing to stump up a full sovereign guarantee as well as pledge aircraft as collateral for the loans, said a civil aviation ministry official and an executive at the national carrier familiar with the situation.The airline, which needs the money to fund aircraft purchases, has received attractive offers from financial institutions, but the cost of borrowing will increase if either of the two conditions placed by the potential creditors isn’t met, said the two persons, who spoke on condition of anonymity.
Tata Global Beverages plans restructuring
ata Global Beverages, formerly Tata Tea Ltd, is considering restructuring the company’s operations at various levels and aiming to launch a new nutrition-based beverage, top officials said on Monday. “We are looking at merging like businesses. Whenever we believe there is scale and size that warrant a merger, we would indeed take it forward,” Ratan N Tata, who is also the chairman of Tata Group, said on the sidelines of the company’s annual shareholders’ meeting. The company is looking to develop a new beverage based on nutrition and wellness, he said, but did not elaborate.Earlier in his address to shareholders, Tata said that the company is aiming for revenues of $5 billion in the next 5 years, from the present $1.5 billion.
Maruti mulls limiting exports to focus on domestic market
he country’s largest carmaker Maruti Suzuki India is thinking of limiting exports to 15% of its total output in order to concentrate on meeting domestic requirements and take on increasing competition. Maruti Suzuki as a company should perhaps deliberately not attempt to export a large part of its production, but keep its exports at about 15% of output.In fact, during the April-July period this fiscal, the company’s car exports stood at 50,558 units out of a total of 3,35,394 units produced, which is about 15% of the total output. For the whole fiscal 2009-10, MSI exported a total of 1.48 lakh units. The company will concentrate more on the domestic market. To keep our market share, not only should we adequately increase manufacturing capacity, but also remain very aware of the changing customer tastes and demands and be flexible in making quick adjustments, MSI currently has two plants, at Gurgaon and Manesar, which have a combined capacity of 10 lakh units annually. For the first time since it started selling cars, the company saw its market share drop below 50% this fiscal. According to the Society of Indian Automobile Manufacturers (SIAM), the market leader sold 2,82,488 cars during the April-July period, representing a 47.68% share in the overall 5,92,405 units market.
Reliance MF launches Small Cap Fund
eliance Mutual Fund has launched Reliance Small Cap Fund, an open-ended equity scheme. The investment objective of the sacheme is to generate long term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies and the secondary bjective is to generate consistent returns by investing in debt and money market securities.
NAVs advance sharply as markets rally
quity diverified NAVs ended strong with advance:decline ratio of 257:1 as the markets rallied sharply, led by buying in technology, private financial, metal, FMCG, PSU oil & gas and healthcare companies’ shares. All sectoral funds advanced. Short term debt funds also ended higher while long term debt funds closed lower; their advance:decline ratio stood at 62:38 & 23:56, respectively.
ICICI Prudential MF declares dividend in 2 funds
CICI Prudential Mutual Fund has declared a dividend 10% (i.e. Rs 1.00 per unit on face value of Rs 10/-) in ICICI Prudential Dynamic Plan and ICICI Prudential Growth Plan. The record date for dividends has been fixed as August 20, 2010. All investors registered under the dividend option of the above schemes as on record date, will receive this dividend. ICICI Prudential Dynamic Plan is an open-ended Equity Fund. The investment objective of the scheme is to generate capital appreciation by actively investing in equity and equity related securities and for defensive consideration in debt / money market instruments. ICICI Prudential Growth Plan is an open-ended equity fund with an investment objective of the scheme is to generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related securities.
NTPC, GAIL, Pidilite Ind top buys: HDFC Asset Mgmt
DFC Asset Management Fund increased its exposure to utilities, oil & gas and information technology space, while slashed its coverage to automotive, engineering & capital goods and media & entertainment sector.NTPC, GAIL India and Pidilite Industries were the top buys of the fund, while Exide Industries, Rural Electrification and Jagran Prakashan were the top sells. In the oil & gas sector, the fund purchased GAIL India, BPCL and ONGC. But, it sold Reliance Industries, Indraprastha Gas and Petronet LNG. In information technology space, the fund bought Infosys Technologies, TCS and Wipro. It exited from Infinite Computer Solutions India. In engineering & capital goods space, the fund sold Punj Lloyd, Thermax and AIA Engineering, while it bought L&T in the space. In media & entertainment space, the fund sold Zee Entertainment and Jagran Prakashan.
ICICI Prudential MF Makes Alteration In Liquity Facility
CICI Prudential Mutual Fund has made partial modification in the features of Liquity Facility. The fund house has approved that the investors can transfer a specified amount from pre-selected source schemes
Revision Of Exit Load Structure Under Reliance Quant Plus Fund
eliance Mutual Fund has decided to revise the exit load structure under retail and institutional plan of Reliance Quant Plus Fund, an open-ended equity scheme. The change will be effective from August 16, 2010.Accordingly, the revised exit load charge will be 1% of the applicable NAV if redeemed or switched out on or before completion of 1 year from the date of allotment of units. There shall be no exit load after completion of 1 year from the date of allotment of units. The change in exit load shall be applicable on a prospective basis to all the transactions including Systematic Investment Plan and Systematic Transfer Plan where registrations / enrolments have been done on or after effective date.
Kotak MF Declares Dividend Under Kotak Quarterly Interval Plan Series 3
otak Mutual Fund has announced dividend under Kotak Quarterly Interval Plan Series 3 on the face value of Rs 10 per unit. The quantum of dividend will be entire appreciation in Net Asset Value of dividend as on record date. The record date for dividend has been fixed as August 17, 2010. The scheme recorded NAV of Rs 10.0987 per unit as on August 10, 2010.The investment objective of the scheme is to generate returns though investments in debt and money market instruments with a view to significantly reduce the interest rate risk.
Birla Sun Life MF declares dividend under two schemes
irla Sun Life Mutual Fund has declared a dividend under the dividend option of Birla Sun Life MNC Fund and Birla Sun Life India Opportunities Fund. The quantum of dividend will be 52.50% (Rs 5.25 per unit) and 12.50% (Rs 1.25 per unit) on the face value of Rs 10 per unit respectively. The record date for dividends has been fixed as August 27, 2010. All investors registered under the dividend option of the above schemes as on record date, will receive this dividend. The NAV under the dividend plan of the schemes as on August 25, 2010 was Rs 86.32 and Rs 86.32 respectively.
Escort MF Announces Dividend for its Income and Opportunities Fund
scort Mutual Fund has announced the declaration of dividend for Escort Income Fund (Dividend, Growth and Bonus Plan) and Escort Opportunities Fund (Dividend and Growth Plan). The record date for dividend has been fixed as 02 September 2010.The quantum of dividend will be Rs 0.070 per unit under the Escort Income Fund and upto Rs 0.0981 per unit under the Escort Opportunities Fund on a face value of Rs 10 per unit.
Investment Monitor 5
Review & Analysis
Re v i e w &
BEST PERFORMERS IN THE MONTH Company Name
WORST PERFORMERS IN THE MONTH Company Name
A' GROUP Videocon Industries
RECENTLY ANNOUNCED SPLITS Company Name
Old Face Value
New Face Value
REI Agro Ltd.
Jay Shree Tea
Cummins India Lt
Suzlon Energy Ltd.
Bhushan Steel Ltd. Jet Airways
Edelweiss Capital Lt
Splash Media & I
Magma Fincorp Ltd.
Jindal Poly Films
Redington (India) Lt
Aster Silicates Ltd.
Omkar Overseas L
Rasoya Proteins Capman Financial
RECENTLY ANNOUNCED BONUS Company Name
Surana Telecom & P
Saregama India Ltd.
Dujodwala Produc Confidence Petrleum
Resurgere Mines Mi
S' GROUP Triveni Glass L.
Trend Electronics Lt
Farmax India L
Shree Krishna Pa
J K Agri Genetics Compucom Softwr
HBL PowerSystems Lt
SKS Logistics Ltd.
Zenith Birla (India)
Sri Nachammai Co
Ankur Drugs & Ph
Jumbo Bags Limit
S I Paper Mills
RECENTLY ANNOUNCED RIGHTS Company Name
Rohit Ferro Tec.
St Bk of Mysore
6 Investment Monitor Sept 2010
FII/MF ACTIVITY Month (till Aug 26, 2010) Equity (Rs. Cr)
Debt (Rs. Cr)
Mutual Fund Activity
Review & Analysis
INDICES PERFORMANCE (27/06/10 TO 27/07/10)
DIVIDENDS (27/07/2010 to 27/08/2010)
BSE CD INDEX
BSE FMCG INDEX
BSE IT INDEX
BSE Oil & Gas
BSE PSU INDEX
BSE TECk INDEX
S&P CNX NIFTY
S&P CNX DEFTY
S&P CNX 500
CNX NIFTY JR
Nifty Midcap 50
S&P 500 NASDAQ 100 USA
Honda Siel Power
JK Tyre & Indust
Larsen & Toubro
Paris (CAC 40)
ASIA Hang Seng Index
Frankfurt (DAX 30)
WORLD MARKET INDICES PERFORMANCE Index
Selan Expl. Tech
Investment Monitor 7
Prime Economic Indicators
Prime Economic Indicators Gold Mumbai ( Rs.) 19, 000
Forex Reserve (Rs. Cr) 1, 320, 000
1, 315, 884
1, 310, 000
18, 600 1, 300, 000
18, 400 18, 200
1, 290, 000
18, 000 17, 800
1, 280, 000
1, 276, 454
1, 270, 000
1, 260, 000
17, 200 1, 250, 000
17, 000 27t h J ul y
J ul y
27t h A ug
Brent Crude (Rs/Barrel)
Ruppe Vs Dollar 46. 79
3, 540 3, 510
10Yr G-Sec (%)
Call Rate (%)
7.00% 8. 08%
3.00% 7. 70%
7. 50% 27th July
WPI InďŹ‚ation (%) 10.71%
18,040 18,020 17,998
17,940 27th July
8 Investment Monitor Sept 2010
Market at 30 months High
inally the benchmark Nifty has hit the 5500 mark for the first time since February 5, 2008, after a long consolidation for five weeks. It was trading at new 30-month high. Buying in healthcare, select financials and infrastructure companies’ shares helped the index. The index crossed another milestone of 5,500 and added more than 125 points.
Looking ahead, Global markets are once again reeling under the scare of a double dip recession. Home sales in the US are at multi year lows and jobless claims have hardly reduced. The tremors are being felt in the Indian capital markets as well. There are strong chances that should a capitulation happen in developed markets; their Indian counterparts too may come under severe pressure.
Adrian Mowat of JPMorgan, who has been overweight on the country for the last nine months says the growth dynamics here are far superior to other economies. He feels the Indian markets will continue to move higher and possibly touch new highs. “We see an upward revision of India’s macro numbers which would lead to an earnings revision.”
In the midst of all this, some words from one of the most conservative central banks in the world are reassuring to say the least. It clearly dismisses the risk of a potential economic shock for India anytime in the near future. Thus investors looking at long term wealth creation from Indian stocks need to do little beyond reading the RBI’s latest annual report.
Despite lackluster movement of the indices globally, India has been holding up, and this trend, is expected to continue given good liquidity. In fact it has been a possibility of the Sensex rallying to 21,000 by the end of this year.
Better fiscal situation and good monsoons are high on the RBI’s rationale for higher growth prospects. But that said, the RBI, typical to its nature, has not sidelined the disclaimers either. They come in the form of high inflation and volatile capital flows. These, the RBI feels, pose meaningful risks to the economy. We can certainly trust the central bank to take care of these issues. Thus, investors looking for attractive long term bets in Indian stocks need to make the most of every opportune correction.
Foreign institutional investors (FIIs) continue to mop up Indian stocks. As per the latest data from the Securities & Exchange Board of India (Sebi), FIIs bought shares worth a net Rs 903.30 crore during the period when nifty crossed 5500 level. There was an outflow of Rs 15 crore from the category ‘primary market & others’, which was a result of gross purchases Rs 26 crore and gross sales Rs 41 crore. FII inflow in August 2010 totaled Rs 11581.40 crore (till 24 August 2010). FIIs had bought equities worth Rs 17,657.60 crore in July 2010. FII inflow in the calendar year 2010 totaled Rs 59275.80 crore (till 24 August 2010).There is a total of 1,732 foreign funds registered with the Securities & Exchange Board of India (Sebi). Earnings of various heavyweight companies like SBI, Tata motors, HDFC Bank, TCS, ITC led the market a green signal with good sales and profit margins. They all have soared to a 10%-15% level upside which actually took the market to 5500. Economic data, like inflation has also ticked to single digit to 9.97% which gives a little bit of relief. IIP data has disappointed for July to 7.1% from 11.4% (yoy), which shows some caution to manufacturing sector as data is not satisfactory. Anyways after so many disappointments from global market cues, if we see our market then it is 6% upside from the downward level compared to other markets like US, European market which is 15% down which is a decoupling effect. There can be a correction in near term.
Meanwhile, Finally the Direct Tax Code is going to be implemented as the structure has been prepared and the bill is going to pass on 30th Aug; MAT which has been prevailing at 18% is now being raised to 20 % to be imposed on “book profits” rather on “gross value of assets”. This is a dampener to DTC code. Corporate tax has been revised to 30% which is now 33%; ultimately a decline of 3 % in corporate tax and a MAT increase of 2 % leave no change as such. It mostly affect IT stocks and Banking Stocks. Apart from that the basic income has been increased to 2 lacs from 1.6 lacs bracket on which the tax will be levied. If we see broadly the revised DTC is a old wine under a new win bottle. In the commodity space, crude climbed higher to hover around the USD 73 mark, rebounding from a 11-week low and five days of losses as the market shrugged off government data showing acrossthe-board rises in crude oil and product inventories. The bond market may continue to remain bearish ahead of the auction tomorrow on expectation of tight liquidity and higher inflation. The 10-year yield is seen between 8.05-8.10%.
Investment Monitor 9
Concerns Remain Weak
entral bankers from around the world will assess a darkening economic outlook at their annual U.S. mountain retreat with discussion of printing yet more money to spur growth on the agenda. Federal Reserve Chairman Ben Bernanke is likely to signal his views about the uncertain prospects for the world’s biggest economy but probably won’t offer many clues on whether the U.S. central bank will pump more cash to keep the recovery going. Fears the U.S. economy was at risk of a new downturn were heightened by new economic data that showed in July single-family home sales slumped to the their slowest pace on record and factory orders fell by the most in 1-1/2 years. Other top central bankers will arrive at the Jackson Hole, Wyoming, resort with their own concerns. European Central Bank President Jean-Claude Trichet faces his own challenge of a two-tier recovery. While the euro zone economy as a whole has strengthened thanks to strong German growth, the ECB looks set to keep providing banks with unlimited funds at a fixed rate to help banks and governments in Europe’s troubled periphery. At this juncture, the potential dampening effect on growth of recent financial stress is highly uncertain. So far, there is little evidence of negative spillovers to real activity at a global level. Hence, the projections below incorporate a modest negative effect on growth in the euro area. The euro area projections also hinge on the use, as needed, of the new European Stabilization Mechanism (aimed at preserving financial stability) and, more important, on successful implementation of well-coordinated policies to rebuild confidence in the banking system. As a result, financial market conditions in the euro area are assumed to stabilize and improve gradually. The additional fiscal consolidation triggered by the financial turmoil (of about ½ percent of GDP) is projected to detract from euro area growth in 2011 (about ¼ percentage point relative to the April 2010 WEO), whereas the negative impact of tighter financing conditions will be countered by the positive effects of euro depreciation. Overall, output in advanced economies is now expected to expand by 2½ percent in 2010, a small upward revision of ¼ percentage point, due mostly to stronger-than-expected growth during the first quarter, especially in advanced economies in Asia. Indeed, on a Q4over-Q4 basis, the forecast is broadly unchanged at 2¼ percent, implying lower growth during the second half of 2010 on account of the financial turbulence. For 2011, growth in advanced economies remains broadly unchanged from the April 2010 WEO, at 2½ percent. Somewhat stronger projected growth in the United States (owing to gathering momentum in private demand) is offset by slightly weaker projected growth in the euro area (due to the turbulence). Overall, the WEO forecast continues to be consistent with a modest recovery in advanced economies, albeit with substantial differentiation among them. Challenging the recovery in these economies are high levels of public debt, unemployment, and in some cases, constrained bank lending.
10 Investment Monitor Sept 2010
Bank of England and Bank of Japan officials will come to the Teton mountains likely to talk about how they might have to push more money into their economies to stimulate growth, a last resort when benchmark interest rates approach zero. Bank of Japan Governor Masaaki Shirakawa was due to leave Tokyo for the Jackson Hole meeting, making it less likely the Bank of Japan would hold an emergency meeting in the next few days to ease monetary policy. The likely mood of concern among the central bankers heading for the wilds of Wyoming contrasts with the optimism of a year ago, when debate at Jackson Hole focussed on ways to wean economies off emergency support as they emerged from recession. The discussions give the world’s top central bankers a chance to thrash out the major challenges of the moment as well as hike on trails in the scenic national park. Past roundups have come at economic turning points: the start of the credit crisis in 2007, the days before Lehman Brothers collapsed in 2008 and before the start of the recovery in 2009. Chicago Federal Reserve Bank President Charles Evans said on Tuesday that the risks of a double-dip U.S. recession have risen in the last six months. While he added he did not think that was the most likely scenario, he said high unemployment and a fractured housing sector would make the recovery a fragile one. Asia’s strong recovery from the global financial crisis continued in the first half of 2010, despite renewed tension in global financial markets. First-quarter GDP outturns were generally stronger than anticipated at the time of the April 2010 WEO, and high-frequency indicators suggest that economic activity remained brisk during the second quarter.Economic activity in the region has been sustained by continued buoyancy in exports and strong private domestic demand. As envisaged in the April 2010 WEO, exports are being boosted by the global and domestic inventory cycles and by the recovery of final demand in advanced economies. Private domestic demand maintained its 2009 momentum across the region, despite less stimulative policy conditions and increased volatility in capital inflows and equity valuations after the euro area financial turbulence. In particular, private fixed investment has strengthened on the back of higher capacity utilization and the still relatively low cost of capital.
Inflation pressures are expected to remain subdued in advanced economies. The still-low levels of capacity utilization and wellanchored inflation expectations should contain inflation pressures in advanced economies. In contrast, in emerging and developing economies, inflation is expected to edge up to 6¼ percent in 2010. Downside risks have risen sharply. In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk. This could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in relative exchange rates.
India to surpass China growth by 2015
y 2012, India and China will likely achieve similar growth rates of closer to 9 per cent and from 2013-15 India will start outpacing China’s GDP growth notably, according to global investment firm Morgan Stanley. It expects India’s per-capita income to reach China’s 2009 levels of US $ 3,750 over the next 10-11 years.India’s GDP growth is now inching closer to China’s. Over the past three years, India has been narrowing the gap with China in terms of GDP growth. In 2010, we estimate India’s GDP growth at 8.5 per cent and China’s at 10 per cent. Morgan Stanley’s Chief Economist for China, Qing Wang, said that China’s growth will move towards a more sustainable rate of 8 per cent by 2015, following the remarkable 10 per cent average over the past 30 years. We believe India’s growth will accelerate to a sustainable 9-10 per cent by 2013-15, after an average of 7.3 per cent over the past 10 years. In other words, over the next 10 years, we expect India’s growth to outpace China’s. We expect India’s per-capita income to reach China’s 2009 levels of US$ 3,750 over the next 10-11 years. We believe India will see further rise in investments to GDP, particularly infrastructure, and China will see a gradual rise in consumption GDP. Over the next 20-25 years, we expect India to remain the highest growth economy among large countries. India could have the advantage of maintaining its high-growth phase for a longer period than East Asia did as UN data shows that India’s age dependency will continue to decline until 2040, it said. UN projections show that India will be the only large country which will still have favorable demographics after 2010. Japan, Europe, and the US (in that order) will have a significant rise in their ageing populations. So, while in the past 20 years, China has benefited ahead of India from a faster fall (improvement) in age-dependency ratio, over the next 20-25 years India will have this advantage.Considering strong fundamentals, our long range forecast suggests that India will sustain an average annual growth rate of 6.4% to 2030.” India will take the lead not because of its growth rate is likely to attain double-digit level but China’s growth rate will moderate with development of its economy. However, for the current financial year, Indian economy would grow at 6.8% only. But, this is not comparable with figure of 7.2% projected by the government as EIU has adopted a different methodology to calculate the rate. Our projection is based on expenditure in economy and is not on factor cost as done by the Indian government. The growth rate will pick up to 7.7% in 2010-11 and 8% in 2011-12. “Continued domestic consumption, spurred by rising income and a growing middle class, will be primary drivers behind India’s growth. At the same time, high savings and investments will help India achieve the higher growth rate.
Inflow of investments through foreign institutional investors (FIIs) will touch $75 billion by 2014, which is currently hovering at around $36 billion. EIU felt that the biggest hurdle to achieve higher growth is the high inflation and infrastructural bottleneck. As the inflation has already risen close to 10% in February, the monetary pressure is likely to increase.Indian economy is young and will continue to grow corporate India will continue to grow in the current decade. The young CEOs and executives must help to take India to the next level.The minister’s confidence also stems from the fact that Foreign Direct Investment inflows — key to growth — have been increasing rapidly, although they slowed during 200809 at the height of the financial crisis. India will become a part of the United Nations Security Council in this decade and there was a urgent need to make India a secure place so that the country’s economic growth remained unblocked.India’s inflation cooled to a six- month low in August. India inflation rate comes to single digit after such a long time which eases some pressure to Indian food prices which touches to its peek high. Its is being forecasted that the inflation could correct to 6 % in December, 2010 which means that Indian economy will be on a normal inflation rate; whereas if we compare china’s inflation rate at this position its 3.30% v/s 9.97% inflation rate ( India Inflation rate). So at this point of time China is much ahead which we cannot think over. Similarly infrastructure wise China has a much well developed infrastructure. Some of the important factors that have created a stark difference between the economies of the two countries are manpower and labor development, water management, health care facilities and services, communication, civic amenities and so on. All these aspects are well developed in China which has put a positive impact in its economy to make it one of the best in the world. Although India has become much developed than before, it is still plagued by problems such as poverty, unemployment, lack of civic amenities and so on. In fact unlike India, China is still investing in huge amounts towards manpower development and strengthening of infrastructure, and that’s the question that if China is investing so much then how India can touch China?? But if we check the investment growth rate then India is expanding in a much faster rate than anyone.
India GDP Rate (2003-2010) GDP Real Growth Rate
China GDP Rate (2003-2010) GDP Real Growth Rate
Investment Monitor 11
Rising Private Equity Investments in India
The private equity environment in India has fundamentally changed post the credit crunch. Deal volume, size of investments and fund raising which had been severely impacted has started improving. India continues to be the favored as the investment destination in the emerging market due to its high growth potential. A growing number of private equity investors are set to return to the market in 2010, but challenges and risk of investments remain high. Private equity firms may need to focus on compliance and corporate governance in their portfolio companies and act as a catalyst of change. They may also have to develop the operational skills needed to help improve the performance of their portfolio companies.
12 Investment Monitor Sept 2010
Cover Story Factors that are boosting the inflow of PE funds – besides the prospects in different sectors – are the sharp drop in stock market indices that have consequently resulted in a significant fall in stock offerings, the spurt in interest rates that are making borrowings dearer, and tough Reserve Bank of India (RBI) norms relating to external commercial borrowings and foreign currency convertible bonds. PE funds, once convinced about the soundness of a business organisation, its plans and revenue streams, are patient and willing to wait for a reasonable period for returns; unlike other investors they are not obsessed with quarterly performance reports and are also not easily unnerved by downturns in a business cycle. Not surprisingly, most of the PE funds’ inflow into India has been in sectors that generally have a relatively long gestation period.
Private equity (PE) deal activity in India continued its momentum in the April-June quarter of 2010 from the prior quarter, though the total deal value was lower. In the second quarter of cal¬endar year 2010, India saw 57 PE deals at $1.5 billion. This is the second highest quarterly performance in the previous seven quarters. Although total PE deal size in 2Q2010 was 30 per cent lower compared with the prior quarter, it was 70 per cent higher compared with the average quarterly aggregate PE deals in 2009, says an Ernst & Young.
Private equity firms have invested over $5 billion in Indian companies so far this year, more than what entire 2009 saw. The PE companies, however, have also sold off shares worth about $2.5 billion yet. As many as 220 companies saw PE investment pouring in during the first seven months of 2010, or between January to July, while PE firms made an exit from 73 other companies. According to data compiled by deal space research firm VCCEdge, the first seven months of 2010 have seen private equity deals valued at $5.1 billion, as compared to $4.3 billion in entire 2009. PE firms generally exit from their investment through buyback of shares by promoters, open market transactions, merger and acquisitions and public offers. During the month of July 2010 alone, the PE investment in India rose by nearly 190 per cent on year-on-year basis to $776 million. The number of deals also rose from 16 in July 2009 to 25 last month. The average deal value doubled to $26 million last month, from $13 million in July 2009. Financials, consumer discretionary and utilities, were the most targetted sectors during the month, VCCEdge said in its monthly report on PE deals.
Segment-wise Private Equity Investments For the Year 2010 Particulars
Both 1Q2010 and 2Q2010 registered deals worth over $1 billion after a subdued 2009, during which no quarter crossed the $1 billion mark. Also, the aggregate deal value for the first six months of 2010 ($3.5 billion) is now almost equivalent to that of the whole of 2009 ($3.54 billion).
As on March 31, 2010 (Rs. in Crore)
As on June 30, 2010 (Rs. in Crore)
Sectors of Economy
*excludes Rs.8116 crore of FVCI investments through VCFs
*includes Rs.8535 crore of FVCI investments through VCFs
Investment Monitor 13
Cover Story The largest deal for the month was $179 million investment in IDFC by Actis and investment arm of Malaysian sovereign wealth fund Khazanah. This was followed by $110 million investment by Xander Real Estate Partners in Panchshil Realty, which is developing seven hotels in India under the American brand of Marriott. A $64 million investment in Rei Agro by Blackstone and other PE firms and $59 million investment in Monnet Power by Blackstone also figured among the top five. At the same time, there were 11 exits worth $169 million in July 2010. These included WDC Ventures’ $39.6 million exit from Wadhwa Group SPV, Citi Venture’s $29.4 million sale from JBF Industries and Istithmar’s $25.3 million sellout of SpiceJet shares. In total, there have been 77 exits by PE firms so far. While there were 32 exits worth $824 million in the first quarter of 2010, another 30 exits worth $1.46 billion were seen in the second quarter. However, there were only 38 exits in the first two quarters of 2009.
2005, when the country attracted about $2 billion in such funding. A year later, India saw $7 billion in PE funds infusion, though China was the top market with $13 billion in investments. But in 2007, India overtook China, getting over $10 billion in PE funding, as against $8.3 billion by China. India continues to maintain the lead even in 2008. Hong Kong-based Asian Venture Capital Journal (AVCJ) notes that India attracted $6.8 billion in private equity investments during the first six months of the year, a 3.2 per cent increase over the first-half of 2007; China saw PE fund inflows of $5.8 billion, a three per cent expansion.
In the previous three years, infrastructure has continued to attract significant PE investments, accounting for 28 per cent of total PE deal value in 2Q2010. In terms of deal volume, technology has maintained its growth trend and has garnered a large number of PE deals in 2Q2010. The education and health care sectors have improved significantly by deal volume, with five and four deals, respectively, in the same quarter. Domestic PE houses we re also active in raising India-focused funds. Over 15 domestic PE houses either announced or raised funds worth $3 billion in the April-June quarter. While global uncertainty remains, PE activity in India is expected to be higher in 2010 than in 2009, says the report. India is growing at a GDP rate of 7.2 percent and as the economy grows there are huge opportunities in the infrastructure ventures the most popular investments targets. The strength of domestic demand within India has insulated the country from the worst effects of the international financial crisis. The characteristics of the Indian market have been well documented. As the economy grows the middle class is expanding and getting richer. Wealth is trickling down through society and spreading out from the cities to poorer rural regions. Thus, there exists a rapidly expanding domestic market. Meanwhile, many Indian companies have ambitions to become global players. PE funds from around the globe are being lured by the enormous opportunities that are on offer in many sectors of the Indian economy. Several domestic business groups and banks are also floating PE funds, hoping to capitalize on the huge requirements for finance from rapidly expanding sectors of the economy. Factors that are boosting the inflow of PE funds – besides the prospects in different sectors – are the sharp drop in stock market indices that have consequently resulted in a significant fall in stock offerings, the spurt in interest rates that are making borrowings dearer, and tough Reserve Bank of India (RBI) norms relating to external commercial borrowings and foreign currency convertible bonds.
Global PE firms were actively involved in seven of the top ten PE deals in 2Q2010, a continuing trend seen in the previous two quarters. The average PE deal size for 2Q10 was $31 million, a fall of 16 per cent compared with the previous quarter, but an increase of 11 per cent compared with the year-ago period. Small-sized PE deals (about $10 million) continue to dominate PE activity, accounting for 45 per cent of the total deal volumes for 2Q2010. The number of large- and mid-sized PE deals in 2Q2010 almost equaled that in 1Q2010 Globally, real estate PE funds raised about $50 billion last year. The sub-prime mortgage crisis in the US and the sharp fall in property prices in many developed countries are forcing them to look towards countries like India and China. The PE business took off in India in
14 Investment Monitor Sept 2010
PE funds, once convinced about the soundness of a business organisation, its plans and revenue streams, are patient and willing to wait for a reasonable period for returns; unlike other investors they are not obsessed with quarterly performance reports and are also not easily unnerved by downturns in a business cycle. Not surprisingly, most of the PE funds’ inflow into India has been in sectors that generally have a relatively long gestation period. The real estate and infrastructure sectors accounted for 50 per cent of the total $10 billion PE inflows into the country in 2007. The telecommunications sector attracted $2.1 billion in PE funding. Globally, real estate PE funds raised about $50 billion last year. The sub-prime mortgage crisis in the US and the sharp fall in property prices in many developed countries are forcing them to look towards countries like India and China. The PE business took off in India in 2005, when
Cover Story the country attracted about $2 billion in such funding. A year later, India saw $7 billion in PE funds infusion, though China was the top market with $13 billion in investments. But in 2007, India overtook China, getting over $10 billion in PE funding, as against $8.3 billion by China. India continues to maintain the lead even in 2008. Hong Kong-based Asian Venture Capital Journal (AVCJ) notes that India attracted $6.8 billion in private equity investments during the first six months of the year, a 3.2 per cent increase over the first-half of 2007; China saw PE fund inflows of $5.8 billion, a three per cent expansion. Interestingly, the deals are also getting bigger. While in 2006 there were less than a dozen deals of over $100 million into India, last year saw nearly 50 big ticket deals valued at $100 million and above. In fact, the financial crisis rocking America offers new opportunities for private equity funds and sovereign wealth funds (SWFs) to invest in India. Demand for funds, especially from sectors like infrastructure, real estate and construction, will continue to grow, and PE funds and SWFs are expected to meet much of the requirements. Foreign institutional investors (FIIs) have also been making record purchases of debt instruments in India, especially after the recent events in the US.
The growth-stage infrastructure ventures are the most popular investment targets for General and Limited Partners alike, as India’s infrastructure is not yet ready to support the boom in the national economy. The power sector tells a similar story with supply presently failing to fully keep up with demand. As a consequence, huge growth potential exists in derivative industries such as construction and engineering, steel and cement. The rise of the Indian middle class has also created a sustained boom in the consumer goods, auto and retail sectors. Unsurprisingly, the domestic consumer goods sector remains attractive to both General and Limited Partners. Retail in particular has been a hotbed of investment activity. However, while we have seen a lot of store openings, finding the right model has not always been easy. Consequently the returns from retail investments have been mixed. Interest in IT and telecoms also remains strong, particularly among Limited Partners from outside India. Local General Partners familiar with the Indian market tend to favor education above IT, while their international peers see more opportunities in healthcare. This appears to highlight the different perspective of local and overseas GPs. One international fund manager we spoke to – who preferred to remain unnamed – pointed out that while heathcare was a growth area, there was a great deal of price pressure and real estate costs were high. This may have deterred local GPs who instead saw opportunities in the gap between supply and demand in the education sector. Some sectors have not fared quite so well. Media in particular has been hard hit by the global recession, resulting in a drop in advertising revenues. Hoping to cash in on infrastructure development in the country, large private equity firms are making a beeline for the sector. The road sector, especially, has been increasingly attracting the attention of private equity players, as infrastructure in general and roads in particular feature on the government’s immediate execution agenda. The 11th Plan has set a $500-billion target for infrastructure spending and this is expected to increase to $1 trillion in the 12th Plan. Norwest Venture Partners and The Xander Group Inc last week invested about Rs 400 crore in Sadbhav infrastructure, an EPC player in the infrastructure sector involved in the development
of highways and road projects.Nandi Infrastructure Corridor Enterprises (NICE), which is developing the 164-km toll way between Bangalore and Mysore, is currently in talks with PE players to raise around $100 million. In a recent deal, private equity major Actis in April 2010 formed a $200 million joint venture with Tata Realty & Infrastructure to develop roads and highways. India Venture Advisors in May 2010 also invested Rs 50 crore in C&C Constructions, a player in roads and highways. “The two themes that are dominating the PE space are infrastructure and consumer spending. Last year, there were no big ticket deals in the PE space due to subdued environment. There were hardly seven deals of $100 million in size. However, this year, we are witnessing an appetite for big ticket deals and till June so far have already seen deals in the range of $100–$400 million in the infrastructure space
Opportunities for international funds
The old licensing system, which rigidly controlled ownership of companies within sectors, has now been largely abandoned. The subsequent freeing up of the economy has led to a surge in entrepreneurial activity. This in turn has created demand for capital coupled with the expertise that can help ambitious companies grow. Private Equity firms provide much of this capital and expertise, and international firms are particularly well placed to provide both as they are seen as a gateway to both the international financial markets and a range of potentially valuable business contacts, ranging from suppliers and customers to potential Partners. Drawing on their experience working with fast-growth businesses elsewhere in the world, international firms are also viewed as being able to provide help and advice on strategic issues. However, there is a caveat here. Indian business culture differs from that of the US and Europe. A deal acceptable to a business owner in London, California or Paris won’t necessarily be acceptable in India. Global funds recruiting international expertise should also prepare to work closely with Partners in India or else set up an office staffed (at least in part) by professionals with experience of the domestic market. Reflecting recovery in investor appetite, private equity (PE) firms have already pumped in $67 billion globally in the first half of this year, just about $14 billion less than they invested in entire 2009.. PE investments, which were at their peak in 2008, with an aggregate commitment of whopping $248 billion, fell to $81.6 billion in the full year of 2009. However, the first six months of 2010 have seen private equity deals valued at $67 billion on account of the increased investor confidence, after last year’s dip in fund raising due to economic downturn, the report said. “H1 2010 has shown signs of a healthier fund raising environment, with funds exceeding their target capital commitments. It said telecom, media and communications, consumer product and consumer services accounted for the major chunk of money invested by PE firms up to June this year. The largest deal for the first half of 2010 was $4.5 billion investment in British firm Tomkins plc by CCP Investment Board and Onex Corporation. The next was $1.4 billion investment in Avolon by Cinven, CVC Capital Partners and Oak Hill Capital Partners, while TPG poured $1.3 billion in American Tire Distributors. Interestingly, the maximum deals that happened during the period were of smaller size. PE transactions of less than $500 million accounted for 60 per cent of the total capital invested, while deals between $500 million-$1.5 billion contributed to 24 per cent of the total investment. Private equity investments were predominant in US with North America accounting for more than half (52 per cent) of the total. Just about 31 per cent of the funds came from Europe while 17 per cent are based in Asia and rest of world. The report sug-
Investment Monitor 15
Cover Story gested that although majority of the funds are planning to maintain or increase their private equity investments over the next 12 month, they are still reluctant to put in mega bucks. The survey of Preqin was based on 500 buyout firms, taking into account their investment strategies, recent deals, fund details and so on.
held family businesses, with minority private equity investors having less scope to hire and fire.”Today Bain is expecting the past “quiet influence” of private equity investors to become more muscular, according to their India Private Equity Report 2010. The rationale behind the potential of private equity growth in India is unchanged. There is a growing Indian consumer class. Indian skills have developed strongly in technology and services, and opportunities arise in a wide sectoral spread including healthcare, telecoms, engineering and pharmaceuticals. What has changed is the quantum, and the rising profile of investments and divestments by the likes of KKR, Temasek, WL Ross & Co and others. Likewise, investment has tilted heavily towards infrastructure and power, as India strives to give its fast boil economy a backbone. Bain expects a remarkable bounce back this year. Pre-financial crisis 2007 venture capital and private equity flows marked a high water mark of $19bn. Last year, the tide swept out leaving little more than $4bn. New investments will originate from the US where investors seek to participate in India and China’s high growth profiles. Average deal size among private equity investments this year is already between $50m and $200m, up from an average of $21m last year. Valuations of Indian companies are flying high. A hotter deal climate will mean higher acquisition costs and pressure to extract higher returns. The days of “quiet influence” may be about to be over.
The credit crunch
The financial crisis is causing many business owners to reconsider Private Equity. There is a continued need for growth capital and with credit less available than it was, private investment offers a means to fill the gap.
As business culture changes, some owners choose to sell to a third party rather than pass on their business to family members.
The need for scale
Businesses are coming together to achieve scale in the market and capital is required to finance these deals.
Conglomerates are selling non-core units, which provide deal opportunities for Private Equity firms.
Even in the space of four years, forecasts for India’s private equity markets look horribly out of date. Back in 2006, Bain & Company predicted that India’s private equity market would reach $7bn this year. Today, the US consultant is predicting $17bn. Regulatory restraints on accessing foreign capital and tightly controlled family businesses once appeared to limit private equity to small growth capital investment. The big transformational deals buyouts of the US and other more developed markets were only a distant prospect. That is changing.”Bet on the right people,” Bain has historically advised its clients. “India’s economy is largely being built by closely
16 Investment Monitor Sept 2010
The resilience of India’s economy in the face of global recession, the continuing high demand of its domestic market and a predicted future growth in the region of eight percent per annum are guarantees that the country will have a place on the radar of international Private Equity firms and their institutional investors for the foreseeable future. However, these are uncertain times. The global financial crisis and the consequent downturn have clearly affected investor confidence. The money that once flooded into Private Equity funds worldwide is now in short supply and investors have become more risk averse. In the current climate, India – with its buoyant economy – remains an attractive destination for cash, but for many Private Equity firms and their investors it is also something of an unknown quantity. The challenge facing those who are looking at the country (and its Private Equity market) from the comfort of an office in, say, North America or Europe is to understand both the opportunities and the risks. Those international funds already operating in India are addressing the opportunities and risks on a day-today basis. They have witnessed the explosion in investment up until 2008 and coped with the fallout from the global financial crisis. There is general agreement that Indian companies will continue to generate healthy returns for Private Equity investors. Indeed, a Private Equity model based on a fast-growth economy may be more attractive to investors than the leveraged buyout model that was prevalent in Western countries prior to the financial crisis. In the West, buyout funds have been all about financial gearing to produce returns but in emerging markets the model is based on growth in the economy. This has stood investors in good stead.
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Banking Sector led the Market to a great level Q1FY’11 Earnings Review Another impressive performance:
Banking sector has once again registered another impressive performance in terms of core earnings on the back of higher loan growth, strong fee income growth, decline in cost of deposits, steady margins and abating concerns on asset quality following the strong economic revival. Broadly, state owned banks once again outperformed its private peers in terms of overall performance during the quarter.
Strong NII growth but moderate growth in earnings:
More than 20% credit growth led by state owned banks and over 100 basis points decline in cost of deposits, saw banking sector report one of the best quarterly growth in Net Interest Income (NII). State owned banks outperformed their counterparts in the private sector with NII growth of 52% on YoY basis, while that of Private Banks have grown at a moderate rate of 27%. However higher provisions and lower treasury gains in public sector banks restricted growth in the net profit to 28%, while that of private banks grew by 29% YoY.
Sharp improvement in margins:
Margins have declined by a 10–30 basis points on sequential basis due to full impact of CRR hike and higher costs of savings deposits, however on YoY basis, margins have sharply improved. In 1QFY10, margins had suffered due to excess liquidity in the balance sheet and lower pricing power. Banks that have a higher proportion of CASA deposits witnessed a deeper fall in NIMs QoQ. However, as interest rates on wholesale deposits in the system start rising in coming quarters, banks having high CASA deposits will be better placed to improve their NIMs.
Sector expected to do well:
We remain positive on the sector from a medium to long term perspective on the back of pick up in credit growth coupled with prudent lending and strong balance sheets. Based on the quarterly performances of respective banks, we have picked two banks each from the state owned banks and from the private sector universe. Andhra Bank and J&K Bank is our top picks among state owned banks. Federal Bank and Yes Bank is our top picks among private banks.
Growth in deposit remains muted:
The deposit growth has not kept the pace with the credit growth as it decelerated further to 15% during the June quarter, the lowest since March 05. We expect banks to hike their deposit rates by 100 – 125 bps over the next 6 – 9 months to attract deposit flow into the system and to meet the rising credit demand. CASA deposit mobilization will continue to show strong traction as payment of interest on daily average basis has made savings deposits more attractive.
Higher credit deposit would reflect in higher margin:
Higher credit offtake during Q1FY11 led to CD ratio of 73.4% compared to 72.2% in March 2010 and 70.8% as on 1st Jan 2010.
Adoption of Base rate system augurs well:
The central bank has mandated banks to shift away from the benchmark prime lending rate (BPLR) to base rate (BR) from 1 July 2010, to bring in more transparency in interest rates. Historically, over two-thirds of bank lending is to blue chip corporate at below BPLR rates. The BR is a blessing in disguise for banks, as they will not have to lend below BR to top notch companies. Most banks have announced their base rates in the range of 78%, in line with expectations.
Going forward, banking sector is getting ready to face new regulations of base rate system and targets to report higher NIM on account of repricing advances, improving CASA along with good growth in credit. Improvement in credit off take and favourable market conditions would provide the necessary impetus to the fee income. The recent pickup seen in the home loan and auto loan segment augurs well for the banks to garner processing fees apart from other nonfund based fee income sources.
Up tick in credit to continue:
Banking Sector in Perspective
We expect the gradual recovery in loan growth to continue on the back of improved business confidence, which will lead to higher capex and investment related loan growth. If the European sovereign crisis lingers on or worsens, then risk capital will shrink globally, and force Corporate India to look to Indian banks for their funding needs. Moreover, revival in the Indian economy with stepup in infrastructure and corporate growth can comfortably drive up the credit growth at a CAGR of ~22% in FY 201012E. Stable NIM and high loan growth should lead to strong NII growth for most banks.
Sharp pickup in credit growth:
Lending rate to rise:
The credit growth has picked up considerably in Q1FY11 led by sudden increase in demand for funds from telecom companies (3G and BWA auctions) and continuity in credit demand from retail segment. Loan growth improved to 22% in June 2010 from 17% YoY in March 2010 and 14% YoY in Dec. 2009. Bank credit grew by 17% in FY2009-10 and in the recent monetary policy review, RBI has projected growth in nonfood bank credit to surge 20% in 2010-11.
18 Investment Monitor Sept 2010
Going forward, as credit demand is expected to sustain at least above the 20% level, banks have already started to raise their lending rates. The RBI has also announced an increase in repo and reverse repo rates in its recent monetary policy meet, given its focus on controlling inflation, in the backdrop of strong IIP numbers, adding to upward pressure on interest rates. However we believe that this will not act as a hindrance to credit growth on the back of the
Industry Analysis continued recovery in the investment cycle and increasing demand for working capital loans due to surging inflation.
Deposit rates to rise:
Bank of Baroda have reported sharp jump in advances, while among the private banks Yes Bank, HDFC Bank and Axis Bank declared strong growth in advances.
Deposit growth has plummeted to multi year lows on account of higher than expected fund demand for 3G/BWA and advance tax outflow, which has forced banks to become net borrowers from RBI. Continuing tightness in short term liquidity would put upward pressure on deposit costs. We expect banks to hike their deposit rates by 100 – 125 bps over the next 6 – 9 months to attract deposit flow into the system. Banks having high CASA proportion would stand to benefit from this move.
Slower growth in deposits leading to improvement in CD Ratio:
Fresh slippages to slow down:
Exceptional net interest income growth:
The trend of slippage from the restructured loan book is likely to slowdown with the improving economy as it is expected that corporate are performing well, which will lead to fewer defaults. The worst seems to be over for the restructured loan books of the banking system.
Gradual monetary tightening to continue:
On the back of increasing inflationary concerns and strengthening economic recovery, we expect the RBI to take corrective policy action in order to bring policy rates to the level consistent with the evolving growth and inflation scenario, while taking care not to disrupt the recovery. So far in 2010, RBI has increased the CRR and repo rate by 100 bps each and reverse repo rate by 125 bps. We expect RBI to continue with its normalization efforts, and increase repo and reverse repo rate further in the rest of the current fiscal by another 75 to 100 bps.
Inflation likely to cool down:
Global economic growth in general and European Union in particular remains vulnerable, while the recovery in the US economy is gradual. Also, Chinese economic growth is slowing down due to monetary measures aimed at cooling off the economy. All these factors should contain inflation of industrial commodities. Likewise, good monsoon in India as predicted by Indian Metrological Department can lead to further deceleration in food price inflation. India will also get the high base effect benefit in the second half, which together should well be able to bring down WPI based inflation to about 5%, being RBIs target.
Quarterly snapshot Outstanding performance:
Banking sector has once again registered another impressive performance in terms of core earnings on the back of higher loan growth, strong fee income growth, decline in cost of deposits, steady margins and abating concerns on asset quality following the strong economic revival. Profits of public banks grew moderately due to surge in provisions while private banks slashed provisions to boost profits. Broadly, the overall performance of stateowned banks was above expectations whereas private banks performed in line.
Sharp growth in credit:
The credit growth has picked up considerably in the last quarter led by sharp increase in demand for funds from telecom companies. PSBs have yet succeeded in outperforming their private peers in terms of credit disbursal. On YoY basis, credit growth of state owned banks increased by 23% while that of private players increased by 20%. Among the Public banks Corporation Bank, Indian Bank and
The deposit growth has not kept the pace with the credit growth as it increased by 16% incase of public sector banks and by 18% incase of private sector banks. As a result of which Credit Deposit (CD) Ratio of public sector universe has improved by 459 basis points to 77.7% while that of private sector banks has improved by 169 basis points to 81.3%.
More than 20% credit growth led by stateowned banks, and over 100 basis points decline in cost of deposits, saw banking sector report one of the best quarterly growths in Net Interest Income (NII). State owned banks outperformed their counterparts in the private sector with NII growth of 52% on YoY basis, while that of Private Banks have grown at a moderate rate of 27%. Among the PSBs Oriental Bank, Syndicate Bank and Andhra Bank has reported strong NII growth while among the private players Karnataka Bank, IndusInd Bank and Yes Bank has registered excellent growth. ICICI bank was the only bank which posted a flat growth in NII on the back of its lower loan book and steady margins.
Margins decline sequentially, but improved sharply YoY:
Although on sequential basis, margins have declined by 10–30 basis points due to full impact of CRR hike and higher costs of savings deposits, however on YoY basis, margins have sharply improved. In 1QFY10, margins had suffered due to excess liquidity in the balance sheet and lower pricing power. Banks that have a higher proportion of CASA deposits witnessed a deeper fall in NIMs sequentially. However, as interest rates on wholesale deposits in the system start rising in coming quarters, these banks with higher CASA deposits will be better placed to improve their NIMs.
Strong core operating performance but higher provisions:
Core operating performance improved YoY, as NIM expanded and loan growth picked up. Due to strong operating profitability, banks in general have made higher NPA provisions. Going forward, PSU banks like Bank of Maharashtra, IOB, UCO Bank, Vijaya Bank and Private bank like Karnataka Bank will have to step up loan loss provisioning with a view to meet RBI guidelines of 70% coverage by September 2010. SBI has received a one year extension, while ICICI Bank has got a sixmonth extension to achieve the 70% provision coverage.
Moderate growth in earnings due to lower treasury and higher provisions:
Net profit of government banks grew by 28% while that of private banks grew by 29% YoY. Unlike Q1FY11, the corresponding quarter had seen strong treasury earnings and lower provisions. Although the operating performance of Public banks were far better than the private banks, higher provisions and lower treasury gains in public banks restricted growth in the Net Profit. Among the Public banks Canara Bank, Oriental Bank, Union Bank and Corporation Bank have reported robust growth in Net Profit in the quarter under review. While among the private banks DCB, Yes Bank and IndusInd Bank declared strong growth.
Investment Monitor 19
Stock Market Monitor
STOCK MARKET MONITOR In Stock Market Monitor we have covered over 1200 companies appropriately classified into various sectors (109 in numbers). Each sector is given an unique code. The data aims to provide an insight into the financial health of the companies. The data of each sector is divided into 3 portions - Full year, Latest Quarter and Current data. This database is packed with powerful features necessary for fundament research on any company.
The fields that we have covered are explained below: Year End • • • • • • • • • •
Year End - The first two digits show the year while the last 2 digits show the calendar month. E.g. 0903 show March 2009 results. Equity - The latest fully paid equity capital of the company. Net Sales - Net revenue earned by the company during the year. Net sales growth – YoY Sales growth reported by the company during the year. EBITDA - Operating profit earned during the year. EBITDA % - Operating profit margin. PAT - Net Profit reported by the company. EPS - Earning per share during the year. RONW (%) - Return on net worth. ROCE (%) - Return on Capital Employed
Quarter End • • • • • •
Qtr End - The first two digits show the year while the last 2 digits show the calendar month. E.g. 0903 show March 2009 results. Net Sales - Net revenue earned by the company during the quarter. Net sales growth - YoY Sales growth reported by the company during the quarter. EBITDA % - Operating profit margin. PAT % Profit after tax margin. EPS Un-annualised earning per share during the quarter.
Current Data • • • • •
CMP - Current market price is the closing price as on the particular day. 52 W H - 52 high price of the stock on BSE. 52W L - 52 low price of the stock on BSE. Market Cap. - Market Capitalization is calculated by multiplying the number of equity shares outstanding by the current market price. Promoters Holding Latest Promoter’s holding
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The Complete Magazine for the Indian Investor When you think about investment
Stock Ideas Fixed Income Research
Investment Monitor Personal Finance and much more Mutual Fund Research Sept, 2010 Investment Monitor 31
Equity Stock Ideas
IDBI BANK CMP: Rs. 38.45 Rating – BUY 52 Week High: Rs. 59.9 and 52 Week Low: Rs. 30.2
IDBI Bank rose 53% to Rs 155,312 crore in the FY’10 as against Rs 11837.2 crore during the previous year ended FY’09.
On the basis of PE, PBV, the company is trading at discount compared with its peers. Particulars
IDBI Bank has been depending on borrowings to support its lending business. Now bank is emphasizing on deposits to support its lending, leading to decreased cost.The bank has been growing its concentration on mobilizing the CASA deposits as witnessed by the CASA ratio trend which is estimated to increase from 14.78% in 2009 to 17% by 2012. Currently bank is undergoing a vigorous expansion plan there by targeting to establish 275 new branches, taking the total network to 1000 branches. This will act as a major contributor towards the long term growth in low cost deposits.
Increased emphasis on CASA deposits:
Shares Outstanding (Cr)
Reshuffling of deposits and skewness towards low cost deposits will improve margins and on this basis growth in NII is expected.Improvement in profits is also backed by growth in Fee based income, though the previous high growth rate will not be seen in Fee income.
Capital infusion, fuel for growth:
Low CASA of 14.6% compared to its peers which if it is able to improve its CASA it will further add strength.
As on 31st March 2010. Tier 1 capital of IDBI Bank was 6.2%, which is lower than the RBIs suggested level of 8%. To increase the Tier 1 capital to 8% GOI is expected to infuse capital of Rs.31000 Mn. by way of preferential placement of equity. This will provide headroom to IDBI bank to raise funds to support its business growth. Capital infusion might dilute the EPS, but it will help in improving the margins as IDBI Bank’s dependence on high cost deposits and borrowings would reduce.
Healthy business growth:
With the capital infusion, IDBI Bank would be in position to grow its business above the industry average, though achieving the previous high growth rate will not be possible.
At the current market price of Rs. 132, stock is available at a PE multiple of 9 x to its annualized (Q1 FY11) EPS of Rs 3.46.
Risks & Concerns
The Q1FY2011 results provide further evidence of the improvement in the bank’s core business and the operating parameters. Going ahead, the capital infusion would only aid the efforts to improve the core business. We are bullish on this counter so as to buy. Peer
Equity (Rs Cr)
Net Income (Rs Cr))
PAT (Rs Cr)
BANK OF INDIA
This growth would be supported by: Branch expansion. Capital infusion. Targeting infrastructure lending.
Financial Performance Quarterly
Total income rose 24% to Rs 4288.98 crore in the quarter ended June 2010 as against Rs 3463.37 crore during the previous quarter ended June 2009.Net profit of IDBI Bank rose 46.01% to Rs 250.89 crore in the quarter ended June 2010 as against Rs 171.83 crore during the previous quarter ended June 2009.
Total income rose 31% to Rs 15531.20 crore in the FY’10 as against Rs 3463.37 crore during the previous year ended FY’09. Net profit of
32 Investment Monitor Sept 2010
IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arena through its large network of Branches and ATMs, spread across length and breadth of India. We have also set up an overseas branch at Dubai and have plans to open representative offices in various other parts of the Globe, for encashing emerging global opportunities.As on March 31, 2010, the Bank had a network of 720 Branches and 1210 ATMs and plans to roll out another 300 branches during FY 2010-11. The Bank’s total business, during Fy 2009-10, reached Rs. 3.06 Lakh Crore (up by 41.7 %), Balance sheet reached Rs. 2.34 Lakh Crore (up by 35.5 %) while it earned a net profit of Rs. 1031 Crore (up by 20 %).
Equity Stock Ideas
Balkrishna Industries Ltd OUTLOOK – BULLISH. CMP – 674 TGT – 820 TIME PERIOD – 3 MONTHS
Robust Financial Performance For the Year FY10
The Company’s Top line has increased 12% to Rs.1574.47Cr from Rs. 1406.7 Cr of FY09. Bottom line for the year increased 138% to Rs.219.16cr. from Rs.92.13cr of FY09. Earnings per share of the company for the year witness a surge to Rs.113.38 per share. EBITDA margins witnessed a growth of 70%, stood at 25.28% compare to previous year 15.015. PAT margins shown a growth of nearly 100%, stood at 13.92% over the previous year. Expenditure of the company for the year stood at Rs.1176.43cr, which is around 2% lower than FY09. Interest expenses are down nearly half than the previous year due to capital structure changes. Particulars ( Rs. Cr)
Tyres for Construction / Industrial & Earthmover applications are also an integral part of BKT’s product offerings and this constitutes almost 40% of company’s turnover. This gives BKT a unique distinction of being first company from India to offer Radial OTR tyres.
The company has an edge over other players as it is both innovative and highly competitive. The company rolls out nearly 150 new sizes every year and it takes only 8-10 weeks to come out with a new product. The company always focuses on being competitive in the industry with its engineering skills. It has established its brand image through quality and after sales service and the brand “BKT” enjoys good reputation in the domestic as well as international market.
The company seems attractive when compared to its peers companies, as it is able to operate at higher operating margin of 25% against the industry average of over 15%, despite the fact that prices of natural rubber is trading in the higher territory. Company Name MRF
M.Cap (Rs. Cr)
Total operating Exp.
Income Tax provision
No. of shares outstandings (Mn) EPS (Basic) (Rs)
Low cost of Production
The company is one of the most reasonable producers of off-highway tyres, as it has access to low cost raw material and low labour rate system that prevails in the Indian market.
Wide Distribution Network
The company has a global distribution network ensuring extensive reach and penetration. It has presence in more than 100 countries across the globe. Nearly 63% to the export revenue is derived from Europe.
Diversified Product range
The Agricultural range start from 12 inches bead diameter to 48 inches and the Industrial / Construction / Earthmover range starts from 8 inches bead diameter tyre and shall go up to 51 inches very shortly. Although new entrants in Tractor Radial segment, ‘AGRIMAX’ range of BKT tractor radial tyres are on top of customer recall in a very short period BKT has now ventured in Forestry Tyre Segment.
JK Tyre & Indust
At the CMP of Rs 674, the stock is trading at a price earning multiple of 5.94x FY2010 EPS of Rs 113.38. The company is operating at a lower P/E as compare to other peer groups and the industry average P/E of 7x. We expect the stock is undervalued.
We expect the stock is undervalued at current market price so ‘BUY’ is the absolute recommendation for at least 3 – 6 months.
Balkrishna Industries Limited engages in the manufacture and sale of pneumatic tires in India and internationally. It offers tires primarily for agricultural, forestry, industrial, material handling, lawn and garden, all terrain vehicle, construction, and earthmover applications. The company also provides tubes and flaps; and coated and uncoated paperboards. In addition, it engages in processing synthetic textile fabrics.Balkrishna Industries Limited is headquartered in Mumbai, India. BIL has a worldwide distribution network ensuring extensive reach and penetration. The company is the part of well known industrial conglomerate in India, namely “Siyaram-Poddar Group” with group turnover of US$ 550 million, BIL is one of the world’s leading manufacturers of “offhighway tyres”. BIL has the widest product range containing more that 1800 SKU’s (Stock Keeping Units) and is “One Stop Shop” for off-highway tyre solutions. Tyres are sold under the “BKT” brand. About 95% of tyre production is exported, out of which 70% is sold in Europe, where farms are large and scientific methods of farming, requiring tractors with different tyre types for agribusinesses.
Investment Monitor 33
Equity Technical Analysis
Ranbaxy Laboratories Limited (Ranbaxy) CMP 483.60 TARGET 550 SL 450 OUTLOOK BULLISH
The Company has a global footprint in 46 countries, world-class manufacturing facilities in 7 countries and serves customers in over 125 countries.
TECHNICAL VIEW: - On the daily chart we can see ranbaxy has broken its resistance level of 466 after one month consolidation. In technical indicator (RSI AND MACD) are supporting its rise. Currently it is trading above its 8 day, 13 day and 21 day Ranbaxy Laboratories Limited (Ranbaxy), India’s largest pharmaceutiEMA. Investor can buy this stock near 475-480 level with stop cal company, is an integrated, research based, international pharmaloss of 550 for the target price of 550. ceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world.
Mphasis CMP 611 TARGET 700 SL 600 OUTLOOK BULLISH MphasiS consistently delivers Applications services, Infrastructure services, and Business Process Outsourcing (BPO) services globally through a combination of technology know how, domain and process expertise. Our results focus on real improvement in business performance for our clients. We bring to our clients a credible and
34 Investment Monitor Sept 2010
experienced global leadership team driving service delivery through the next generation global delivery model. We service clients in Financial Services, Manufacturing, Communications, Media & Entertainment, Healthcare & LifeSciences, Transportation & Logistics, Retail & Consumer Packaged goods, Energy & Utilities, and to Governments around the world. TECHNICAL VIEW: - On the daily chart of MPHASIS we can see it has bounced back from it support level of 572 currently it is trading near its resistance level of 620. Technical indicator RSI is supporting its rise. Investor can buy this stock above 623 for the target price of 700 with stop loss of 600.
Equity Technical Analysis
Archies Ltd CMP 133 TARGET 170 SL 120 OUTLOOK BULLISH Promoted by Anil Moolchandani and Jagdish Moolchandani, Archies Ltd., formerly known as Archies Greetings and Gifts (AGGL) is engaged in manufacturing and trading of a wide range of cards, stationery and gifts items under the brand name Archies. The company has been in business since 1979 and has grown quite well over the years.The company has also ongoing technical collaboration
Brigade Group CMP 146 TARGET 170 SL 120 OUTLOOK BULLISH Brigade Group was established in 1986, with property development as its main focus. Today, Brigade is one of South India’s leading property developers. We are headquartered in Bangalore, with
with American Greetings Corp. of the USA, a fortune 500 company and also the world largest publicity owned manufacturer and distributor of greeting cards, for designs and artwork, which are chosen and supplied by the collaborated in accordance with taste and then produce and sold here under the brand name Paper Rose. TECHNICAL VIEW: - On the daily chart of ARCHIES we can see this stock is in its uptrend and continuously breaking its high level. In technical indicator RSI also supporting its rise and its uptrend rally and can continue to the level of 170. Investor can buy this stock with stop loss of 120 for the target price of 170.
branch offices in several cities in South India and in Dubai. We have a uniquely diverse multi-domain portfolio that covers property development, property management services, hospitality and education. Our projects extend across several major cities in South India: Chennai, Chikmagalur, Hyderabad, Kochi, Mangalore and Mysore. TECHNICAL VIEW: - On the daily chart we can see BRIGADE ENTERPRISES has broken its resistance level of 140 after almost two month. Technical indicator (MACD AND RSI) is supporting its rise. Investor can buy this stock with stop loss of 130 for target price of 160 and 180.
Investment Monitor 35
heat is a type of grass grown all over the world for its highly nutritious and useful grain. It is one of the top three most produced crops in the world, along with corn and rice. Wheat has been cultivated for over 10,000 years and probably originates in the Fertile Crescent, along with other staple crops. A wide range of wheat products are made by humans, including most famously flour, which is made from the grain itself. Wheat is also preferred because of its mild, nutty flavor. Both the factors account for wheat being the most widely grown cereal grain in the world. Today, thousands of varieties of wheat are grown throughout the world, most requiring fertile soil and a temperate climate. Major wheat growing countries include China, India, France, and Russia. Recent projections by the International Food Policy research Institute (IFPRI) indicate that, by 2020, two-thirds of the world’s wheat consumption will occur in developing countries, where wheat imports are estimated to double by 2020. As noted earlier in this report, wheat demand worldwide is calculated to rise by 40% from 1993 to 2020 to reach 775 million tons. The expected increase in demand is partly motivated by population growth but also results from substitution out of rice and coarse grain cereals as incomes rise and populations become increasingly based in urban areas. they have steadily declined. The London Metal Exchange (LME) has felt it especially, with stockpiles falling about 20% since med-February. Currently, it only holds about 8 days worth of global demand.
CBOT Wheat Prices-
36 Investment Monitor Sept 2010
World production of wheat hovers around 685 million tons. Maximum contribution comes from European Union, which comprises 25 countries followed, by China, India, and United states.
World wheat consumption is consistently growing. Long-term trend supports the fact that is evident from above chart. Wheat being one of the major staple foods all across the world demand seems to remain strong owing to increasing population. Two major consuming countries of wheat are EU, China, India, Russia, USA and Pakistan.
More than 100 countries to meet food requirement of the people do import of wheat. Major importing countries that tops in the figures are European Union, China, Egypt, Japan, Brazil ane European Union. Other importing nations are Mexico, Indonesia, Algeria, Philippines, and Iraq. However the import amount varies year to year depending upon the domestic production.
In May, the U.S.D.A. forecast the Canadian crop at 24.5 million tonnes. Because of excessive spring rain and prevented plantings, the U.S.D.A.’s August forecast for the Canadian crop was 20.5 million tonnes, 4 million tonnes lower. The U.S.D.A.’s initial forecast for E.U. wheat production was 145.07 million tonnes. By August that forecast was trimmed to 137.51 million tonnes. The widest decrease in production was estimated for Russia. The U.S.D.A.’s May forecast for Russian wheat production was 58 million tonnes, but by August, the forecast dropped 13 million tonnes, to 45 million tonnes. In 2009, the Russian crop was 61.7 million tonnes. The production shortfalls in these key exporting regions more than offset larger than initially forecast crops in the United States, China and India. The U.S.D.A. forecast world wheat ending stocks in 2010-11 at 174.76 million tonnes, down 12.29 million tonnes from the July forecast and down 10% from 193.97 million tonnes in 2009-10. The U.S.D.A.’s initial forecast for the 201011 world wheat ending stocks was 198.09 million tonnes.
Main exporters of wheat are USA, Australia, Canada, and EU-25, ARGENTINA. Export market of wheat is getting competitive with the entry of India into it. India was the net importer of wheat sometime ago. Owing to its successful green revolution India attained the status of net exporting country. For export of wheat Asia and Africa is the lucrative market.
India produces about 70 million tonnes of wheat per year or about 12 per cent of world production. It is now the second largest producer of wheat in the world. Being the second largest in population, it is also the second largest in wheat consumption after China, with a huge and growing wheat demand. Food grain production occupies the most dominant position in India’s agriculture, covering over 65 per cent of the gross cropped area.
World wheat supply concerns culminating with Russia’s drought and that nation’s ban on grain exports effective Aug.Wheat, may gain as the dollar declined and on speculation that importers will increase purchases of U.S. crops after Russia banned foreign sales amid the worst drought in at least 50 years..U.S. exporters sold 1.41 million tons of wheat in the week that ended on Aug. 12, up 4.6 percent from the previous seven days, according to the U.S. Department of Agriculture. U.S. export commitments since Sept. 1 are up 8 percent from a year earlier at 52.4 million tons, USDA data show.The U.S.D.A. on Aug. 12 projected global wheat production in 2010-11 at 645.73 million tonnes, down 15.34 million tonnes from its July forecast and down 34.57 million tonnes, or 5%, from 680.30 million tonnes in 2009-10. The U.S.D.A.’s initial forecast for world wheat production in 201011 was issued in May at 672.18 million tonnes.
Nevertheless, the withdrawal from world wheat markets of Russia, the world’s third-largest wheat exporter, had an electric effect. With the announcement by Russian Prime Minister Vladimir Putin that Russia would ban grain exports from Aug. 15 at least through the end of 2010, the U.S.D.A. reduced its forecast for Russian wheat exports in 2010-11 by 12 million tonnes, to 3 million tonnes. In 2009-10, Russia exported 18.5 million tonnes of wheat. The new export forecast translated into a world wheat export share for Russia this year at 2.4% compared with 14% in 2009-10 and 12.8% in 2008-09. World wheat supplies were smaller than expected last spring, but they were not small, Mr. Meyers said. At 174.76 million tonnes, 2010-11 world wheat ending stocks were projected to be the third largest in nine years after 193.97 million tonnes in 2009-10 and 204.28 million tonnes in 2001-02, and would be 40% larger than 124.87 million tonnes in 2007-08, when world wheat prices surged to record levels. “There has been increasing demand for U.S. wheat and corn after the drought in the European Wheat surged 38 percent in July as drought slashed Russian production, & demand for U.S. crops will grow after Russia banned grain exports”
Investment Monitor 37
Nickel Trading Ideas- Sell
Market Strength Indicators :
MCX Nickel (Aug) futures, which are about to expire on 31st August, closed -1.11 % with a rise in in volume of 41.12 % on daily basis and tested low of 940.70 levels and high of 968 levels on Wednesday trading session. Nickel is trading below its 20 period SMA price (1006.35) and 50 period SMA (942.40) and 100 period SMA (950) on daily basis.
MACD (12, 26, 9) is down by 2.02 points from 16.18 points. Previous day (24 August).
14 Period RSI down by 2.69 points from 39.94 points Previous day (24 August).
CMP-958 Target-995 Outlook-Bullish
Technical Comment :
Nickel may consolidate above 928/940 levels. On the higher side it may go upto 974/995 levels. However above 975 there is no major resistance zone upto 995. Sustainabilty above 928/940 levels is the necessary condition for movement of Nickel towards 975/995 levels. It has good support around 940/928/920 levels and resistance area is 974/995/1008 levels.
Note On Price ,Volume and Open interest
Nickel price fall by (1.11 %) with a rise in volume by (41.12%) and fall in open positions by (2.07%) indicates that majority of traders are liquidating the positions at higher levels and in the short term large price swing is expected.This is a sign of significant bottom.
Chart as on 26/08/2010
38 Investment Monitor Sept 2010
Wheat Trading Ideas- Sell
Higher stocks and restrictions on exports are weighing on the wheat prices. India is not planning to lift a ban on exports of wheat and non-basmati rice as food inflation levels have made it necessary to prop up domestic availability. Indian government estimated in midJuly India’s wheat harvest at a record 80.71 million tonnes. India has allowed the export of 300,000 tonnes of non-basmati rice and 200,000 tonnes of wheat to Bangladesh. as good rainfall and higher planting have boosted crop prospects. India, which curbed grain exports in recent years to head off domestic price rises, made the announcement after two global suppliers cancelled deals to ship some 65,000 tonnes of Black Sea wheat to Bangladesh after Russia curbed grain exports. Support levels
Short term outlook remains Sideways to Bullish for Wheat.
Technical Comment :
Short Term trend in Wheat is Sideways. After a parabolic rise from 1140 levels to 1285 levels in the month of may, wheat futures are trading in a range of 45 Rs. Trading range is between 1215 levels to 1260 levels.Wheat is trading below its 20 Period SMA(1240) & 50 Period SMA (1239) on daily basis.An important observation is that wheat is trading above its 50 % Retracement levels around 1212.90 levels (drawn from the high 14/06/2010 at 1278 levels and low of 10/05/2010 at 1137 levels).RSI is trading below 50 (42).The MACD is below its signal line and Slight negative (-0.60). The MACD must penetrate its zero line to expect further downside to the levels of 1200/1210. Wheat may continue to consolidate above 1200-1210 levels. On the higher side it may go up to 1250/1265 levels. However 1245-50 is very crucial resistance zone for wheat because there are multiple factors acting as resistance at those levels. i.e. 20 period SMA ,50 Period SMA & Trendline resistance (Drawn from a high of 14/06/2010 at 1278 levels).Sustanability above 1200-1210 levels is necessary condition for the movement of wheat towards 1250/1265 levels.It has a good support area around 1196/1210 levels. Short to medium term outlook looks sideways to positive in wheat in days to come.
Wheat Technical Analysis
Investment Monitor 39
Indian rupee gives up gains on dlr strength last week, tracking weakness in domestic share market and strong dollar against major currencies. Indian rupee’s gains pared by import dollar demand. Oil firms, defence-related dollar buying weighs on rupee. Bids from defence companies and month-end dollar demand kept the rupee under pressure absorbing the offering from exporters. India’s biggest import and refiners are the largest buyers of dollars in the domestic currency market. Demand for dollars tends to peak towards month end when banks are required to make payments for their purchases. Domestic share index pared its early gains and ended the week at 5408 with a loss of 121 points. India follows the Liberalised Exchange Rate Management System (LERMS), under which it is absolutely necessary for corporate executives to understand how the exchange rate moves, and why. Considering the large volume of transactions, a movement of even 2–3 paise in the exchange rate can hit the bottomline of any corporate. As such, there are several factors that influence the currency market.
Factors affecting Currency MarketChange of Interest Rate
The value of the currency of any country depends on the interest rate of that country. In case of upward movement of interest rate in the United States, the US Dollar (USD) appreciates against other currencies as well as against the Indian Rupee (INR). Any change of interest rate by the Federal Reserve Bank of New York (FED) through the Federal Open Market Committee (FOMC) has a great impact on the currency market.In the recent past there have been instances of rate hikes by the FED, as a result of which the USD had appreciated against major international currencies as well as the Indian Rupee. Even an expectation of change of interest rate has a great impact on currency market. Whenever there is any such expectation, the market reacts sharply. The possibility of changes in interest rate is a speculative move, and the market reacts only for a short period of time. The market generally discounts some portion of such expectations well in advance, before they actually happen. Change of interest rate by the European Commercial Bank (ECB) is now equally important. The value of the Euro is influenced by a change of interest rate by ECB. Recently, there have been several occasions when the Euro strengthened against the USD following a hike in interest rate, or even the expectation of a hike in interest rate by the ECB.
Inflow of Foreign Funds
The exchange rate depends on demand and supply of currency. Strong economic fundamentals and good ratings by international rating agencies have boosted foreign investors’ confidence in the Indian market. Huge foreign investments have already come to India, while big investments through Foreign Institutional Investors (FIIs) and Foreign Direct Investment (FDI) are expected in the near future. In the last couple of months, substantial foreign funds have been infused into the Indian market. Since most of these have been in the form of USD, the supply of USD against the Indian Rupee became high, and it depreciated against the Rupee. On the other hand, at the time when FIIs wanted to withdraw funds from the market, the demand for USD in the Indian market became high, and it appreciated against the Rupee.
Price of Oil
A large portion of India’s import payment is mainly for payment of oil. Internationally, crude prices are named as BRENT, NYMEX, and
40 Investment Monitor Sept 2010
Dubai Crude. Whenever there is any hike in the oil price per barrel, the Indian Rupee depreciates against the US Dollar. As such, the Indian Government buys more USD against INR to honour the import liability, resulting in heavy demand for USD. Consequently, the Indian rupee depreciates against USD.
Comments from Political Leaders
Comments from political leaders and top bureaucrats do influence the market, but this is very short-term. It is quite common in India, particularly when it comes to comments from political leaders or the Governor of the Reserve Bank of India (RBI). We know that the Japanese economy is export-oriented, and that Japanese exporters welcome any move that depreciates the Japanese Yen. It has been observed that whenever the Yen strengthens against the USD, Japanese politicians tend to pass comments on economy that allows the Yen to slip back to its original level.
Release of Economic Data
Annual economic review, RBI credit policy, monetary policy, etc. also strongly influence the currency market. Understanding, interpretation and correlation of different data are important to gain a thorough understanding of the exchange rate movement by any corporate. Any mistake in the interpretation of data released could cause heavy loss to an organisation.
Indian rupee tumbled to one-week low against US dollar on (24 Aug) after breaking a range bound trade from last couple of session, as losses in local equities and sharp rise in dollar demand across the board weighed on local unit. Eventually, partially convertible rupee ended at 46.91/92 after hitting 46.98, from the previous close of 46.65/66. In Asia, regional equities were down as Nikkei falling to 15-month low on a strong Yen hurt exports amid rising fears of economic growth slowing down, while major crosses traded weak on flight to safety. However Euro rebound a bit on renewed risk appetite in early European trade after German GDP reading came in line with expectation, but broad based risk aversion sentiments and widening Greek yield spread outpaced the up move and dragged below fresh 6-week low despite better than expected Euro zone industrial orders. The British pound extended the decline to hit USD 1.5373 after MPC member commented on possibility of UK double-dip recession, while at economic docket home purchases dropped to five-month low on fiscal tightening measures. The Japanese Yen appreciated more than a percentage point versus US dollar amid risk aversion and lower yield of US treasuries. The rupee could not rally above the 46.5-mark and recorded a sharp decline since week to move very close to the 47 mark again. The downtrend that began from August 6 peak is still is force and third leg of this move can result in the Indian currency moving lower to 47.2 or 47.6. Near-term view for the currency will stay negative as long as it trades below 46.5. The medium-term trading band for the rupee stays between 46 and 47.5. The rupee has strong support around 47.2 that will prove hard to penetrate just yet. This view will be negated on a close below 47.5. The INR’s medium-term fundamentals look weak, as a widening current account deficit and overvaluation on a REER basis set the stage for further underperformance. We target USD/INR at 47.00 in three months,” the note highlighted. “While debt-creating capital inflows are set to rise in the coming months as domestic borrowing costs increase, we do not expect this to trigger sharp currency appreciation, as we think the RBI will likely absorb these flows.
he euro currency hit a more than five-week low near $1.2660 after European Central Bank Governing Council member Axel Weber said the ECB should extend its loose monetary stance, raising fears of more economic weakness ahead in the euro zone on 20 August. Weber’s “comments simply confirm what many already expect from the ECB,that the aggregate economy (despite recent solid performance from Germany) is not yet prepared to be taken off of monetary policy life support. The single European currency fell as low as $1.2674 its lowest since mid-July on Friday after the Axel Weber comment. Selling gained momentum after the euro broke below the 50-day simple moving average around $1.2730, with stop-loss sales triggered on a break of that level. Some market participants cited the euro being sold by central banks. U.S. jobless claims hit a nine-month high and a U.S regional manufacturing index showed the first contraction in a year, reviving fears of a double-dip recession in the world’s largest economy The U.S. dollar rose against major currencies as heightened worries about the global economy and sharp losses in stock prices sent investors to the greenback for safety.
Short term outlook remains bearish for EURINR.
Technical Comment :
Short term trend in the currency is down since 07 August peak of 61.4200 levels.The pair is trading well below its 20 period SMA (60.6200) levels . The RSI is below 50 (38.26). The MACD is below its signal line and positive. The MACD must penetrate its zero line to expect further downside. Moreover the pair Found some support at its 50 Period SMA (59.32) on Fridays trading session .below 50 Period SMA 57.70/57.10/56.40 are the levels which can act as a support in days to come.& intermediate resistance levels are 60.20/60.70/61.80.Short to medium term view for the currency pair remains bearish with a price objective of 57.10 & 56.40. Alternative scenario : Pair moving above 60.70 will challenge our bearish view and we can expect 61.80/62.50 levels above 60.70. Given all the fundamental & Technical factor for the pair (EURUSD) we have a bearish view for EURINR currency pair in medium to short term
Investment Monitor 41
AMC Speaks We have disscussed at current market scenario with Mr. Sankaran Naren of ICICI Prudential Mutual Fund. Here is the verbatim transcrption of disscussion:
Do you see India’s GDP growing at 8.5 percent for FY11 as projected by the Government? What are the major challenges you see in the domestic economy?
India definitely has the potential to grow at 8.5% albeit how certain events pan out . A crucial event has been the monsoos which has been supportive. We believe that good monsoons could help keep commodity prices low and moderate inflation . Another crucial area to be monitored will be crude prices. A drop in crude prices and a good monsoons will reduce the inflationary expectations and improve the fundamentals . Te challenges for the economy will be on the execution front . If there is continued focus on prudent policy action , project execution and capacity creation, the Indian economy and therefore the Indian capital market is expected to do much better than other economies and demonstrate robust growth.
What is your strategy for your Dynamic Fund . What will your recommend to investors who are already invested in the fund of considering it as an investment option.
AMC Speaks Sankaran Naren ( ICICI Prudential Mutual Fund )
Your views on the developments in the global economy and markets and their impact on the domestic equity market.
Global situation is expected to continue to remain fragile for a while. Given the current outlook, we need to assume below-trend global GDP growth for a long period of time. In comparison to the global economy , the Asian economies have demonstrated better resilience and growth . Asia fundamentals are much stronger than the rest of world and this fact has been proved in 2008 downturn as well. Therefore given the relatively higher growth rate and fundamental solidity demonstrated by Asian economies , flows will continue to come towards Asia, albeit ability to execute efficiently and sustain growth. With regards to the Indian market , while the Indian Market is linked to the Global Market due the FII flows, the linkage between the Indian economy and the global economy is limited. Therefore over the long term the Indian growth story is linked more to the internal growth story led by the domestic economy . The Indian growth rate even in a year like 2008 was higher than developed economies . Also India has the biggest advantage of demographics . While the 09 rally was liquidity driven , the consumption story of the Indian economy also supported the market well. So firstly while FII inflows have been key to the rally , the domestic consumption story has also been a significant contributing factor . Given that our saving rate is around 35% of GDP we believe that this story will continue ahead . Further the future inflows will be clearly dependent on what we demonstrate to the world around us . If was are able to project India as an economy that is backed by focus on improving infrastructure , increasing efficiency , ensuring speed to deliver and on ground execution , then flows will automatically come .
42 Investment Monitor Sept 2010
The ICICI Prudential Dynamic Plan is an ideal blend of aggression and defense. The fund is a conservative equity fund which has the potential to outperform the market during corrections. This strategy has worked well during market volatility , for instance, since last Sept since the large cap index has remained range bound. However there have been intra month and inter month volatility in the index which has given us opportunity to create a good risk adjusted portfolio. Our advice to investors to consider ICICI Prudential Dynamic Plan as apart of their core portfolio given its potential to cap the downside. It has the potential to mitigate portfolio risk and generate long term risk adjusted returns.
Could you kindly highlight on the stock selection criteria under the ICICI Prudential Focused Bluechip Fund? How is the allocation to holdings decided? Is there an internal limit on the allocation to individual holdings?
ICICI Prudential Focused Bluechip Fund is a large cap fund and follows a strategy of optimal diversification across 20 large cap stocks. The portfolio is constructed from amongst top 100 companies by market capitalization in India with no individual stock exceeding 10% of AUM. The allocation to individual holdings depends on relative valuation, growth potential, management quality and sector outlook. The strategy in the fund is to identify high conviction bets which we believe have the potential to generate alpha in the portfolio and improve the risk-return benefit for investors. We look at market volatility as an opportunity in this fund as it provides investment opportunities to us by playing against market greed and fear. . The fund , given its large cap bias is recommended for investors who are looking at long term out-performance over nifty with low risk.
How do you see current valuations in India relative to past and other emerging markets? Is there any scope for significant rerating or derating? As equity valuation normally have inverse correlation with interest rates and interest rates expected to be on uptrend in India as well as other emerging markets, how do you see valuation trending in future?
The valuations relative to past are at higher end of fair value . However as compared to emerging markets , India is relatively more expensive. This is however well supported by the buoyant outlook
Mutual Fund of India related to India being a long term consumption story, better demographics, limited concern on growth and being unaffected by the global factor pervading right now like the European crisis . Further re-rating of the Indian economy can happen if there is benign belief on inflation and a reduction in risk free interest rates in the market . A de-rating can happen in the short term because of big problems in the global market or very high prices of products like oil. However , global issues will only have a short term impact on Indian markets. The bigger impact will be from crude prices which if moves upward will be detrimental and which if remains range bound or moves downward will be positive. Surprisingly in India equity valuations have been correlated to crude prices which move in tandem with each other.
What should one keep in mind when investing in ELSS?
Just like investing in any other fund investors should also perform necessary due diligence while investing in an ELSS. Investors need to analyze the qualitative factors like company background , disclosure norms followed by the company , fund manager track record at the macro level . At the fund level investors need to analyze the portfolio quality of the fund and ensure the fund’s mandate in line with the investors risk appetite and investment objective . While performance is an important benchmark , emphasis should also be on performance consistency. ICICI Prudential Tax Plan for instance is a blend of large and mid/small cap fund, seeking to provide steady risk adjusted returns.
What do you suggest for a retail investor with regard to investments currently?
The investment option also depends on time horizon and investment objective beyond risk appetite. Firstly an investor with moderate risk should assign importance to asset allocation and invest across asset classes like equity, debt etc through mutual funds. Asset allocation is key to diversifying risk while providing risk adjusted returns. On the equity side we are very bullish about the opportunity for Indian economy in the long term. Our advice to investors is to invest when there is fear and value and disinvest when there is greed and euphoria. Investors who are not able to investors trough this model should avoid timing the market and invest through SIP’s and capitalize on the advantage of equity as a long term asset class. Investors should look at equity investments with rationality, take a long term view on the market and realize that equity markets outperform over the longer term. We further recommend investors to buy every dip and build a strong portfolio with the potential to generate optimal returns over the long term. Moderate investors should consider the ICICI Prudential Dynamic Plan as an integral part of their core portfolio given that the fund is a defensive fund and its potential to outperform markets during volatility and corrections.
Choosing a Fund
he first step to investing in Mutual Fund is to define the objective of investing. You should clearly lay down the purpose for which you desire to invest. There are several schemes tailor made to meet certain personal financial goals (children’s education, marriage, retirement etc.) which can be availed of. You should define the tenure of investment and the risk appetite you have. Thereafter, you can select a fund type that best meets your need i.e. income schemes, liquid schemes, tax saving schemes, equity schemes etc. Given the plethora of fund options available to you, you can then choose the particular fund that you are comfortable with. You can choose the fund on various criteria but primarily these can be the following: The track record of performance of schemes over the last few years managed by the fund Quality of management and administration Parentage of the Mutual Fund Quality and adequacy of disclosures Service levels The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall return The market price of the units of the scheme (where available) to see the discount/premium that the market assigns to the stated NAV of the scheme Independent rating of the schemes, if available You could be investing in a mutual fund either at the initial stage when the mutual fund approaches the market through an offer document route or at a subsequent stage. If you choose to invest at the initial stage, the offer document would detail the schemes being offered and the manner of investing. The
manner is usually similar to that of investing any public issue of any security (equity/debt). If you are planning to purchase the units subsequently, then the following choices exist: 1A close ended scheme. If the desired units are of a close-ended scheme, then the investor would be able to purchase them at the stock exchange where the MF has listed them. This purchase would resemble the purchase of an equity share wherein the investor would pay the quoted price of the unit as well as a brokerage for the purchase transaction. In the case of a close ended scheme, the sale also is effected through the stock exchange mechanism and resembles the sale of equity share.The pricing for the transaction, as was mentioned earlier, is driven by the price the units quote. This is driven by the NAV ( Net Asset Value) of the scheme. The price, however, may be either at a discount or premium to the NAV. 2. Purchasing a unit in a open-ended scheme is different as there is no exchange where these units are traded. Their price reflects the NAV of the scheme. The mutual fund in an open-ended scheme sells these units to the investor at the NAV (plus a sale / entry load). Selling units in an open-ended scheme is similar to the way they are purchased. It is the mutual fund that buys back the units and at a price based on the NAV. The actual price is the NAV less the exit load. The exit load is similar in concept to the entry load.
Understanding Basics Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.
Investment Monitor 43
on the perception of the company’s future performance and the demand-supply scenario. And hence the market price is generally different from its’ book value. There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. Andsince we are buying at book value, we are paying the right price of the assets whether it is Rs 10 or Rs.100.
Demystifying NAV myths
There is no such thing as a higher or lower price. We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.
A fund’s expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.
The NAV of a mutual fund has not been correctly understood by a large section of the investing community. This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.
Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV. It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply. An IT company share at say Rs 1000 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (of course Rs 1000 may ‘fundamentally’ be over or under priced, which will not be the case with MF NAV).
Advantages of Investing in Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. 2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gain in others.
Misconception about NAV
This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial. Why people carry this perception is because they assume that NAV of a MF is similar to the market price of an equity share. This, however, is not true.
Definition of NAV
Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the ‘book value’.
NAV vs Price of an equity share
In case of companies, the price of its share is ‘as quoted on the stock exchange’, which apart from the fundamentals, is also dependent
44 Investment Monitor Sept 2010
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors. 4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.
Mutual Fund Recommended Schemes For This Month EQUITY FUNDS ( DIVERSIFIED) Return(Annualized) %
Historical Risk Ratios 3Yrs
Fund Size (in Cr)
HDFC Top 200
Sundaram Select Focus
UTI Master Value
ICICI Pru Dynamic Reliance Vision
ELSS Return(Annualized) % Scheme Name
Historical Risk Ratios 3Yrs
Fund Size (in Cr)
HDFC Tax Saver
ICICI Pru Tax Plan
Reliance Tax Saver
Sundaram BNPP Tax Saver
Kotak Tax Saver
Balanced Funds Return(Annualized) % Scheme Name
Historical Risk Ratios 3Yrs
Fund Size (in Cr)
ICICI Pru Balanced
Birla SL '95
Reliance Reg Savings Bal
MIP Return(Annualized) % Scheme Name
Historical Risk Ratios 3Yrs
Fund Size (in Cr)
ICICI Pru MIP 25 reg
Birla SL MIP II-Wealth 25
DSP BR Savings Mgr Aggr
Investment Monitor 45
IFCI- Infrastructure Bond Investments benefits in Infrastructure Bonds
maximum yield on his investment. Furthermore, the sooner he will withdraw his investment, the more yield he will get.
Investment in infrastructure bonds issued by Industrial Finance Corporation of India (IFCI) would qualify for the additional Rs 20,000 Points to remember before investing in infrastructure deduction for individual taxpayers. The additional tax deduction bonds: would be available for investments made in such bonds in 2010-11.
Infrastructure Bonds do not offer any protection against high inflaSimply put, an individual can invest up to Rs 20,000 in infrastructure tion since the rate of interest they offer is pre-determined. bonds and claim a deduction of up to Rs 20,000 in addition to the existing aggregate limit of Rs 1 lakh allowed under Sections 80C, Against the pledging of the infrastructure Bonds with a bank, one 80CCC and 80CCD of the Income Tax Act. can borrow money from banks. The amount depends on the market value of the bond and the credit quality of the instrument. Following are the key features of the bond Moreover, it should be noted that although Infrastructure Bonds are considered to be safe, there is no assurance of getting the full The detailed analysis of the bond reveals that the person who is investment back. falling under the 30% tax bracket should invest in the bonds to get
Bonds Description Options
Buyback / Non Cumulative Option
Buyback / Cumulative Option
Non Buyback / Non Cumulative Option
Non Buyback / Cumulative Option
Min. Application / Face Value
In Multiples of
Buy Back Option
Coupon Yield on Redemption
7.85% per annum
7.85% to be compounded 7.95% annually per annum
7.95% to be compounded annually
September 15 every year
September 15 every year
September 15, 2020
September 15, 2020
September 15, 2020
September 15, 2020
Buy Back Period
Every Year Between August 16 to August 31, starting from Year 2015 till Year 2019
Every Year Between August 16 to August 31, starting from Year 2015 till Year 2019
Coupon Payment Date*
Redemption Amount (in case the buyback option is exercised) & final redemption amount at the end of 10 years. Year 5*
46 Investment Monitor Sept 2010
Bonds Key Features Issuer
1,00,000 Unsecured, Redeemable, Non-Convertible, Taxable Bonds of Rs. 5,000/- each aggregating to Rs. 50 Crore with a green-shoe option to retain over-subscription for issuance of additional Infrastructure Bonds
Axis Trustee Services Limited
National Securities Depository Ltd. and Central Depository Services (India) Ltd.
M/S Beetal Financial & Computer Services (P) Ltd.
Mode of Payment
Interest payment will be made through ECS/At Par Cheques/Demand Drafts
Private Placement basis
Unsecured, Redeemable, Non-Convertible, Taxable Bonds having benefits under section 80 CCF of the Income Tax, 1961 for long term Infrastructure Bonds
Demat form only
Demat mode only
Issue Open Date
August 9, 2010
BWR AA- by BRICKWORK RATINGS INDIA PVT LIMITED
Issue Close Date
Retail Individual and HUF
August 31, 2010 •The issuer would have an option to pre-close the issue by giving 1 day notice to the Arrangers
Proposed to be listed on BSE
Deemed Date of Allotment
M/S Beetal Financial & Computer Services (P) Ltd.
Yrs 0 1 2 3 4 5 6 7 8 9 10 IRR
-5000 393 393 393 393 5393
No Tax Rebate (0%) -5000 -5000 -5000 393 393 393 393 393 393 393 393 393 393 393 393 393 393 393 5393 393 393 5393 393 5393
-5000 393 393 393 393 393 393 393 393 5393 7.85%
-5000 393 393 393 393 393 393 393 393 393 5393 7.85%
-4000 393 393 393 393 5393
-4000 393 393 393 393 393 5393
-4000 0 0 0 0 7296
-4000 0 0 0 0 0 7868
Option- II 20% -4000 -4000 0 0 0 0 0 0 0 0 0 0 0 0 8486 0 9152
Yrs 0 1 2 3 4 5 6 7 8 9 10 IRR
-5000 0 0 0 0 7296
-5000 0 0 0 0 0 7868
No Tax Rebate (0%) -5000 -5000 -5000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8486 0 0 9152 0 9871 7.85%
-5000 0 0 0 0 0 0 0 0 0 10646 7.85%
Option- I 20% -4000 -4000 393 393 393 393 393 393 393 393 393 393 393 393 5393 393 5393
Option - III
-4000 393 393 393 393 393 393 393 393 5393 11.54%
-4000 393 393 393 393 393 393 393 393 393 5393 11.29%
-3500 393 393 393 393 5393
-3500 393 393 393 393 393 5393
-3500 393 393 393 393 393 393 5393
30% -3500 393 393 393 393 393 393 393 5393
-3500 393 393 393 393 393 393 393 393 5393 13.89%
-3500 393 393 393 393 393 393 393 393 393 5393 13.49%
30% -4000 0 0 0 0 0 0 0 0 9871 10.56%
-4000 0 0 0 0 0 0 0 0 0 10646 10.28%
-3500 0 0 0 0 7296
-3500 0 0 0 0 0 7868
-3500 0 0 0 0 0 0 8486
-3500 0 0 0 0 0 0 0 9152
-3500 0 0 0 0 0 0 0 0 9871
-3500 0 0 0 0 0 0 0 0 0 10646 11.77%
Option - IV
Investment Monitor 47
usiness, Sight-seeing, shopping are the things you usually plan for when you travel. What about unforeseen emergencies like lost baggage (and passports), flight delays, personal accidents, even a hospital stay in a strange unknown place where you are traveling? Very few people plan for real risks like these. Tata AIG’s Travel Insurance program is meant for exactly this – to take care of any unforeseen emergencies during your travel abroad or in India.
Why Tata AIG Travel Insurance?
Instant on-line travel insurance issuance. 100% reliability. In-house travel & emergency Assistance service AIG -Assist in North & South America; ISOS for rest of the world.
Types of Travel Insurance Solutions: Overseas Travel Domestic Travel Student Travel
(A.) Travel Insurance- Overseas Travel
Travel in peace anywhere in the world. Travel with Tata AIG’s Travel Guard. Tata AIG Travel Guard is unique as it gives Global protection policy valid 24 hours a day, 365 days a year. Flexible - There are three plans available under the Single Trip policies which are Silver, Gold and Platinum. There are also two options under an Annual Multi Trip program (similar to Airline Frequent Flier programs) where a traveler can buy an Annual Multi Trip Gold and Platinum Plans. You need no medical certification, whatever your age. AIG Assist / ISOS : Emergency Assistance, Medical Evacuation, Repatriation across the Globe .
The key features includes-
Coverage of Medical Expenses: Travel Guard takes care of your medical expenses due to accident and sickness while traveling so that you can concentrate on better things like enjoying the holiday. Checked Baggage Loss: Compensation for the loss of checked in baggage. Baggage delay: Compensation for reasonable expenses incurred for purchase of emergency personal effects due to delay in arrival of checked in baggage, whilst overseas. Loss of Passport: Compensation for expenses incurred in obtaining a duplicate or new passport. Personal Liability: Compensation for damages to be paid to a third party, resulting from death, bodily injury or damage to property; caused involuntarily by the insured. In-hospital Indemnity: Travel Guard pays a Daily benefit for each day you are an inpatient in a hospital due to injury or sickness. Trip Delay: Reimbursement of additional expenses occurred due
48 Investment Monitor Sept 2010
to trip delay (only if the trip has been delayed for more than 12 hours). Automatic-extension of the policy: Travel Guard allows you to extend your policy upto a period of 7 days from the policy expiry date. Personal Accident: Travel Guard gives you worldwide coverage against Accidental Death and Dismemberment while you’re abroad anywhere in the world. Sickness Dental Relief: The policy pays for immediate Dental Treatment occurring due to sudden acute pain during the course of an overseas Insured Journey. Dental benefits will be provided for Medically Necessary filling of the tooth or surgical treatment, services, or supplies. Any resident Indian between the age of 6 months and 70 years can take this insurance for travel abroad on business or leisure. This is available as - Including America policy (for North & South America including Canada) and Excluding Americas (for the rest of the world).
Insurance Schemes (B.) Travel Insurance- Student Guard
Student Guard Plus product is designed keeping in mind the student going abroad to pursue higher studies as well as the University insurance requirements for such courses. The following unique benefits of Student Guard Plus allow you to study worry free: Study Interruption: We’ll reimburse tuition fee paid in advance for the current semester if your studies are interrupted due to medical or compassionate reasons. Sponsor Protection: In case of death or permanent disablement of your sponsor, we’ll reimburse your remaining school fees up to a specified maximum limit. Accident Medical Expenses: On accidental injury, we’ll reimburse your actual hospitalisation cost or outpatient treatment incurred overseas, up to a specified maximum limit. Compassionate Visit (2-Way): If you are hospitalised for more than seven consecutive days, we’ll cover the cost of the round trip economy class air ticket and accommodation expenses so an immediate family member can be with you. Visit by student: In case of death or hospitalisation of parent (s) / spouse / child (ren), you need to visit for a duration more than seven consecutive days, we’ll cover the cost of the round trip economy class air ticket. Personal Accident: Student Guard gives you worldwide coverage against Accidental Death and Dismemberment while you’re abroad anywhere in the world. Maternity Benefits for Termination of Pregnancy: Medical expenses related to termination of pregnancy are covered subject to maximum limits provided in the schedule of benefits, subject to a waiting period of ten months, from the effective date of policy. Mental & Nervous Disorders: Medical expenses related to treatment for mental and nervous disorders on recommendation of a physician, including alcoholism and drug dependency are covered in the schedule of benefits. Cancer Screening and Mammography: Medical expenses related to cancer screening and Mammography examination on recommendation from a physician are covered subject to the maximum limits provided as per the schedule of benefits. Red 24 Service: Red 24 is a unique global security service providing advice to help individuals avoid and manage personal risks for themselves and their families. They are more of an advanced information bureau, who pro actively advice customers about potential risks in and around the country.
24 hrs. Worldwide Emergency Assistance Service Emergency Medical Evacuation Repatriation of remains
(C.) Travel Insurance- Domestic Travel Guard
A holiday is for a great change away from home. But what do you do if you fall ill in a completely new city! Despair at your helplessness? Don’t worry. There is Tata AIG Domestic Travel Guard, a unique travel insurance product for travel anywhere within India, that can take care of all that and more giving you that peace of mind even away from home. The feature includes- Accidental Death and Dismemberment Benefit, Accidental Death and Expense Benefit, Missed Departure (Rail / Air), Accommodation charges due to trip delay, lost ticket reimbursement and 24 x 7 Assistance.
It takes one single phone call and TATA-AIG’s worldwide network will offer that complete care away from home. So, do get yourself insured while traveling.
Round the clock assistance
The Assistance Services include Medical Assistance and Non Medical Assistance:
Non Medical Assistance includes:
1.Pre-departure services: information about foreign locations, passport / visa requirements, immunization requirements etc 2.Embassy referral services 3.Claims procedures Information services 4.Lost Luggage or Lost Passport: If You, outside India, notify the Assistance Company that Your luggage or passport has been lost, the Assistance Company will endeavor to assist You by contacting the appropriate authorities involved and providing direction for replacement. 5.General Assistance: The Assistance Company will serve as a central point for translation and communication for You during emergencies. 6.Pre-Departure Services: Prior to Your departure, upon request the Assistance Company will provide hazard information about foreign locations, information about immunization requirements and passport or visa requirements, general information about weather and State Department and private service warnings about travel to certain locations. 7.Emergency Travel Agency: The Assistance Company agrees to provide You with 24 hour travel agency service for airline and hotel reservations. 8.Emergency Cash Transfers and Advances: The Assistance Company will arrange for cash payments, to You, through a variety of sources, including credit cards, hotels, banks, consulates and Western Union. 9.Legal Assistance: If You are arrested or are in danger of being arrested as the result of any non-criminal action resulting from responsibilities attributed to You, Assistance Company will, if required, provide You with the name of an attorney who can represent You in any necessary legal matters.
1.Medical services provider referral. 2.Arrangement of Hospital admissions. 3.Monitoring of Medical Condition during Hospitalization. 4.Medical Evacuation: When, in the opinion of the Assistance Company’s medical panel, it is judged medically appropriate to move You to another location for treatment or return You to India, the Assistance Company will arrange the evacuation, utilizing the means best suited to do so, based on the medical evaluation of the seriousness of Your condition, and these means may include air ambulance, surface ambulance, regular airplane, railroad or other appropriate means. All decisions as to the means of transportation and final destination will be made by the Assistance Company. 5.Repatriation: The Assistance Company agrees to make the necessary arrangements for the return of Your remains to India in the event You die while this policy is in effect as to You.
What Is Not Covered?
You are not covered if any expenses incurred directly or indirectly in respect of: Traveling against the advice of the physician; for obtaining treatment; pre-existing ailments & complications arising out of them; Suicide or attempted suicide; war; terrorism; illegal acts; dangerous sports etc.
Investment Monitor 49
You have aspirations and dreams for your family and would like to ensure that you are able to provide for them. For this, you would like an avenue to save your hard earned money regularly so that it grows to fulfil your dreams. Introducing BSLI Bachat (Endowment) Plan, a traditional non-participating endowment plan that helps you build a corpus through regular systematic savings and get your savings augmented through additions every year and at maturity. With BSLI Bachat (Endowment) Plan, you can now start ensuring and protecting your family’s dreams and aspirations by saving as little as Rs. 400 per month. You choose your Monthly Base Premium based on your needs and as little as Rs. 400 You are insured for up to 180 x the Monthly Base Premium You get your Monthly Base Premiums back after 20 years – guaranteed – plus Band I
With Loyalty Addition
Age at Entry
30 days - 60 years
Premium Pay Term
Monthly Base Premium
Rs. 400 - Rs. 5,000
Up to 180 times Monthly Base Premium
Premium Payment Frequency
Annual, Semi-annual , Quarterly and Monthly
In this plan, you start by choosing the Monthly Base Premium or MBP. You can choose to pay your premiums either Monthly, Quarterly, Semi-Annually or Annually. You stand to benefit from a premium rebate if you choose to pay your premiums Semi-Annually or Annually as illustrated below.
Premium Rebate Premium payable by you
1 x MBP
3 x MBP
5.88 x MBP
11.52 x MBP
50 Investment Monitor Sept 2010
We reward you with a Bachat Addition at the end of every policy year. A Bachat Addition Rate is declared by us annually on the first of April each year and this Bachat Addition Rate will be used to determine the Bachat Addition you will earn during the upcoming year. The Bachat Addition Rate as of April 1, 2010 is – Band
For policies with MBP (in Rs.)
400 to 599
600 to 899
Bachat Addition Rate
The Bachat Addition you will earn every year is determined as follows:
You can double your Sum Assured in case of accidental death for a nominal additional premium of 1.2% x the Monthly Base Premium You plan to pay and stay invested for 10 years or more.
Premium Payment Frequ ency
EARN ANNUAL BACHAT ADDITIONS and A LOYALTY ADDITION 1. Bachat Addition
Insurance Schemes 4. Surrender Benefit. Bachat Addition:Bachat Addition:- Sum of all MBP’s paid to date x Bachat Addi- Once 36 MBPs have been paid, you may surrender your policy and
receive. All Monthly Base Premiums paid from the 2nd year onwards x the Bachat Additions earned to date will be paid when your policy ma- surrender factor below; plus tures or in case the life insured dies prior to maturity. In case of After the 10th policy year, all Bachat Additions earned; plus surrender, Bachat Additions will be paid only if the policy is sur- After the 15th policy year, the Loyalty Addition rendered after the completion of 10 years. The surrender factor is 100% after completing 10 policy years, We also reward you for your loyalty with a Loyalty Addition in- otherwise it is – tion Rate
creasing every year. The Loyalty Addition will be determined as follows:
Policy Year of Surrender
Loyalty Addition :Loyalty Addition= Sum of all Bachat Additions earned to date x
The Loyalty Addition will be paid when your policy matures or in case the life insured dies prior to maturity. In case of surrender, the Loyalty Addition will be paid only if the policy is surrendered after the completion of 15 years.
Sum of all Bachat Additions earned to date / (240 x MBP)
1. Tax Benefits – You will be eligible for tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Currently, Under Section 80C, premiums up to Rs. 1,00,000 are allowed as a deduction from your taxable income, each year Under Section 10 YOUR KEY BENEFITS (10D), the benefits you receive from this plan are exempt from tax, 1. Maturity Benefit : On maturity after 20 years, you will re- subject to mentioned exclusions
2. Policy Loans –
All Monthly Base Premiums paid; plus All Bachat Additions earned; plus The Loyalty Addition
2. Death Benefit
In the unfortunate event of death of the life insured, the nominee shall receive. All Monthly Base Premiums paid (or Sum Assured if higher); plus All Bachat Additions earned; plus The Loyalty Addition The Sum Assured depends on the Entry Age as follows: Band
For policies with MBP (in Rs.)
400 to 599
600 to 899
Bachat Addition Rate
3. Accidental Death Benefit Rider.
You have an option to increase the Sum Assured in case the life insured dies accidentally Age at Entry
30 days - 60 years
Premium Pay Term
Monthly Base Premium
Rs. 400 - Rs. 5,000
Up to 180 times Monthly Base Premium
Premium Payment Frequency
Annual, Semi-annual , Quarterly and Monthly
Starting from the 3rd policy year you can get a loan on your policy. The minimum loan amount is Rs. 5,000 and the maximum loan amount is 90% of the Surrender Benefit. The interest we charge on such loans will be fixed by us from time to time.
3. Grace Period and Revival –
If you are unable to pay your premium by the due date, you will be given a grace period of 30 days and during this grace period all coverage under your policy will continue. If you do not pay your premium within the grace period, the following will be applicable: a) In case your policy has not acquired a surrender benefit, then all benefits under your policy will cease immediately. b) In case your policy has acquired a surrender benefit, then your policy will be continued on a paid-up basis. You can reinstate your policy for its full coverage within two-years from the due date of the first unpaid premium by paying all outstanding premiums together with interest as declared by us from time to time and by providing evidence of insurability satisfactory to us.
Here’s how your Surrender Benefit works:
Let’s take a look at the surrender benefits under different premium bands, assuming that the premium are paid annually and earn 4% rebate:
Investment Monitor 51
Bond Price vs Yield “A bond’s price moves inversely to its yield.” This is a line of text that is frequently quoted in financial publications. You’ll find it in news stories about the economy, interest rates, inflation and certainly Treasury bond prices.
pon payment due from the date that the trade settles until the next coupon payment date, and the previous owner of the bond is entitled to the percentage of that coupon payment from last coupon payment date to the trade settlement date.
Bond prices are important for many reasons. They serve as a benchmark for many interest rates, they can be used to forecast future economic activity and future interest rates and, perhaps most importantly, a well managed and diversified investment portfolio should have some allocation to bonds.
Because you will be the holder of record when the actual coupon payment is made and will receive the full coupon payment, you must pay the previous owner his or her percentage of that coupon payment at the time of trade settlement. In other words, the actual trade settlement amount will consist of the purchase price plus accrued interest.
Understanding bond prices and yields can help any investor in any market, including equities. In this article we’ll cover the basics of bond prices, bond yields and how they’re affected by general economic conditions.
Bond prices are quoted in two ways. When you look at a bond quote, you will frequently see both the rupee price and the yield.
The Rupee Price
A bond’s rupee price represents a percentage of the bond’s principal balance, otherwise known as par value. In its simplest form, a bond is a loan, and the principal balance, or par value, is the loan amount. So, if a bond is quoted at Rs 99-29 ¾, and you were to buy a Rs 100,000 two-year Treasury bond, then you would pay Rs 99,929.68. Let’s look at how we calculated this number. A bond’s price consists of a “handle” and “32nds”. The two-year Treasury’s handle is 99, and the 32nds are 29 ¾. We must convert those values into a percentage to determine the rupee amount we will pay for the bond. To do so, we first divide 29.75 (29 ¾) by 32. This equals .9296875. We then add that amount to 99 (the handle), which equals 99.9296875. So, 99-29 ¾ equals 99.9296875% of the par value of Rs 100,000, which equals Rs 99,929.69. The two-year Treasury is trading at a discount, which means that it is trading at less than its par value. If it were “trading at par”, its price would be 100. If it were trading at a premium, its price would be greater than 100. Before we discuss discount versus premium pricing, remember that when you buy a bond, you buy more than principal balance; you also buy coupon payments. Different types of bonds make coupon payment at different frequencies. Coupon payments are made in arrears. When you buy a bond, you are entitled to the percentage of a cou-
52 Investment Monitor Sept 2010
Discount Vs. Premium Pricing
When would someone pay more than a bond’s par value? The answer is simple: when the coupon rate on the bond is higher than current market interest rates. In other words, the investor will receive interest payments from a premium priced bond that are greater than what they could earn in the current market environment. The same holds true for bonds priced at a discount; they are priced at a discount because the coupon rate on the bond is below current market rates.
Yield Tells It All (Almost)
A yield relates a bond’s dollar price to its cash flows. A bond’s cash flows consist of coupon payments and return of principal. Principal is usually returned at the end of a bond’s term, known as its maturity date. A bond’s yield is the discount rate that can be used to make the present value of all of the bond’s cash flows equal to its price. In other words, a bond’s price is the sum of the present value of each cash flow. Each cash flow is present valued using the same discount factor. This discount factor is the yield. Intuitively, if you think about this, discount and premium pricing makes sense. Because the coupon payments on a bond that is priced at a discount are smaller than on a bond that is priced at a premium, if we use the same discount rate to price each bond, the bond with the smaller coupon payments will have a smaller present value (lower price). In reality, there are several different yield calculations for different kinds of bonds. For example, calculating the yield on a callable bond is difficult because the date at which the bond might be called (the coupon payments go away at that point) is unknown. However, for non-callable bonds, the yield calculation used is a yield to maturity. In other words, the exact maturity date is known and the yield can be calculated with certainty (almost). But even
Investor Education yield to maturity has its flaws. A yield to maturity calculation assumes that all the coupon payments are reinvested at the yield to maturity rate, although this is highly unlikely because future rates can’t be predicted.
A Bond’s Yield Moves Inversely to Its Price
Remember that a bond’s yield is the discount rate (or factor) that equates the bond’s cash flows to its current dollar price. So what is the appropriate discount rate or, conversely, what is the appropriate price? When inflation expectations rise, interest rates rise or, in terms of bond pricing, the discount rate used to calculate the bond’s price increases and, therefore, the bond’s price drops. It’s that simple. The opposite scenario would be true when inflation expectations fall.
Yield Curve A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, twoyear, five-year and 10-year G-Sec yield. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.
A normal yield curve (pictured here) is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.
How to Determine the Appropriate Discount Rate
We’ve established that inflation expectation is the primary variable that influences the discount rate investors use to calculate a bond’s price. However, different bond has a different yield and that the longer the maturity of the bond, the higher the yield. This is because the longer a bond’s term to maturity, the greater the risk that there could be future increases in inflation and the larger the current discount rate that is required/used by investors to calculate the bond’s price will be. By this time, you should recognize this higher discount rate as being a higher yield. The credit quality (the likelihood that a bond’s issuer will default) is also considered when determining the appropriate discount rate (yield); the lower the credit quality, the higher the yield and the lower the price.
Prices and the Economy
Inflation is a bond’s worst enemy. When inflation expectations rise, interest rates rise, bond yields rise and bond prices fall. To that end, bond prices/yields, or the prices/yields of bonds with different maturities are an excellent predictor of future economic activity. To see the market’s prediction of future economic activity, all you have to do is look at the yield curve. The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped).
Understanding bond yields is a key to understanding expected future economic activity and interest rates, which is important in everything from stock selection to deciding when to refinance a mortgage.
Investment Monitor 53
Planetary Movement in the Month of September Sun will remain in Leo till 17th September and then enter into Jupiter is in Pisces and remained there for the whole month. Virgo and remained there for rest of the month. Venus will enter into Libra on 1st Sept. and remain there for New Moon will occur on 8th Sept. while New Moon will oc- whole month. cur on 23rd Sept. Saturn will remain in Virgo during the whole month. Mars will enter into Libra on 6th Sept. and will remain there Rahu & Ketu will remain in Sagittarius & Gemini respectively, remaining month. during the whole month. Retrograde Mercury is in Leo and will get direct on 13th Sept. Mercury will enter Virgo on 30th Sept.
Chart during New Moon – Sunrise 8 Sept 2010
Chart during Full Moon – Sunrise 23 Sept 2010
During the month retrograde Jupiter in Pisces aspects fully on Saturn. On 6th Sept., the Mars will leave Saturn in Virgo and enter Libra. This is expected to cause profit booking. On 17th Sept., Sun will join Saturn in Virgo, which is expected to bring volatility in the market. Our bias remains towards downward. expected to be highly volatile for the market.
Sectorwise Outlook Auto: The sector is likely to remain volatile with negative bias. Bank: The sector is likely to witness profit booking.
Reality: The sector is likely to witness volatility with downside bias. FMCG: The sector is likely to remain range bound.
Metal: The sector is likely to witness heavy selling during the month.
Pharma: The sector is likely to remain range bound.
Oil & Gas: The sector is likely to remain in range.
IT: The sector is likely to witness profit booking.
Power: The sector is looking weak and profit taking may be witnessed.
54 Investment Monitor Sept 2010
Query Time Q. I Purchased Reliance Power in IPO Price still I am holding tells me about your view weather sell or hold. Arun, M.P A. Currently reliance power trading below its issue price. I would advice you to hold the scrip as it is really strong in power business which will provide profitable returns in the near future. Q. In your last issue you advised me to market can down 5-7%. Thanks for the right advise. Is it the right time to invest? Suggest me some stocks for medium term investment. Q I have purchased shares of finpipe at an average rate of Rs 84.What is the future potential of this stock? Kindly advise since it comprises a huge chunk of my portfolio? Ravi,Jaipur A. Finpipe is a fundamentally very strong stock. There order book is very good. It has a short term target of 150, so I better advise you that hold this stock for further upside gains. After its 1st quarter results for FY’11 it has come to 78 levels but it again revived 30 % up to level of 100 in 3- 5 days. So I see a great potential in this stock. Q. What is your advice on karuturi global? The whole world knows by now that there is a shortage for food & the company has shifted its focus to that side of business. What is your long term view on the company? Rajat, New Delhi A. the Idea is good but not sure that they can deliver, management is unknown so can not give buy recommendation. Q. I am regular reader of this magazine three months back I had query for TISCO now as per current situation what will be the targets and where need to buy as commodity market and china moving downwards? Ranjeet, U.P A. TISCO currently trading at levels of 900 levels. Stock trading below 200 dma, technical indicator sign stock at short term down trend. I would advise investor to book profits at this level. Q. After 12 year experience in stock mkt and after reading regular your magazine since last 4 years I have shifted 99% 0f my holding to 5 companies Godrej Ind(50%), Itc(20%),(Tci,Ifglrefrec,Gati-10%each)for 10 yrs.I am 45 yrs old. I am feeling very comfortable by taking this step. Your opinion plz. Rohit, Jalandhar A. I appreciate your interest and investment in equity market. All stocks are fundamentally strong; you may also add some power and electrical sector stocks. Feel free to ask further.
Rajesh, Varanasi A. Yes this is right time to invest, some stock seems attractive at this level you can invest in Gati, Grasim, Tci, Ramcosys, Orchid chemical. Q. I am a regular reader of this magazine. Your stock recommendation is really good. Can you please suggest me some stocks for medium term investment. Please tell me their short term targets also? Abhinav Biyani- Sirsa A. Thank you for writing to us. You can take following scrip’s for investment Ramcosys for the target of 200; MIC with target of 51; Mount Everest mineral water target 250. Q. What is your advice on Jsw energy? Can I invest my money in this stock? Kavita Sharma, Hyedrabad A. Hpcl is a very high volatile stock. In near term it has a target of 400. So its better to hold at this point of time. The reason for such downfall is the change in norms of govt. regulation. Its expected results are also seeing down. So you must hold and accumulate. Q. Market is highly volatile. Can we expect much more correction in near future? What should be the trading strategy at this movement? Kavita Sharma, Hyedrabad A. Market can remain volatile and it has a major resistance at 5400 and major support at 5380. If market breaks support level then we can expect 5-7% down side. Trend is still bullish buyer should hold position with stop loss of support level.
Readers are requested to send one query at a time so that more number of investors can be given a chance. ______________________ Send in your queries RR Information & Investment Research (P) Ltd. 47, Rani Jhansi Marg, New Delhi -110055 Email: email@example.com
Investment Monitor 55
Mailbox Mutual Fund Analysis.
I am a regular reader of your magazine. I find that the funds you have suggested in your last edition is really accurate. I have invested in those funds and found that there NAV’s are up to 25 %. I am very much thankful to your analysis. Please continue your research and give us some valuable tips in future also. Naresh, Uttaranchal
Stocks & Technicals.
I am an active investor in stock market and has recently subscribed to your magazine. I noticed all your recommendations and analyzed. I bought Kgl, Bharti Airtel, and have given me good returns. KGL is a stock which has given me a retun of 45% which is very much in a time horizon of 1 month. I am extremely thankful to your research team. Pankaj, Patna
I am a regular subscriber of investment monitor and information provided is very specific, precise and useful for retail investors. I eagerly wait for next issue to have a snapshot of market via this section. It contains all the information about market movements, economic changes, mutual fund and FII activity, global scenario and debt market. Any investor can easily get all the information about the actions that have taken place during last months and their effect on stocks, industry etc. This section gives me insight to formulate strategy to invest in the coming month. Amit , Delhi
Commodity Technical Analysis.
I am a commodity trader having exposure in commodity market more than equity market. I really like the commodity section carried in your magazine. The articles cover all the fundamental and technical information with recommendations are very useful to play in commodity market. In last edition of the magazine you recommend to sell gold at 18400, I sold that and booked good profit which give me huge returns. Thank you so much for such outstanding calls. Ajay , Noida
The cover story – “Indian Corporate Shining”. I am a regular reader of your magazine. Before reading this article I was not having the knowledge of economy of India. But after reading this I got to know some new concepts. I realize that what the earning potential of a company are. Your magazine is a great source of knowledge. Please continue with this. 56 Investment Monitor Sept 2010
I am a regular reader of your magazine. The news byte section is useful as it updates up with the latest happening in the business world like takeovers, new expansion plans, new deals etc. I must appreciate the data give in data monitor as this database gives the insight in to the company information. Review and analysis section is very helpful to get an idea of stock performance and index movements. Its keep us updated about the company financial status on monthly basis. It helps in selecting the best investment stock out of the same group of companies. I have invested in some value stocks after reading this data Subash, Ranchi
I am a regular reader of your magazine. The topic you covered “Pharmaceutical Industry has covered most of the things. It gave me an insight of pharma industry. It gave me a knowledge of some new terms which I found interesting like “crams”. Thanks for such stuff. Gautam, Delhi Your suggestion are valuable to us. We look forward to a healthy feedback. Please mail your suggestion and recommedations at firstname.lastname@example.org
Published on Sep 7, 2010