August_10

The Complete Magazine for Indian Investors

August 2010, Rs. 25

Investment Monitor www.rrďŹ nance.com www.rrfcl.com

Volume XI-Issue(8) Volume XI-Issue(8)

This issue consists of 56 pages.

Indian Corporate Shining

Inside Stories 9 Market Commentary 12 Cover Story 42 Mutual Fund Articles

With Stock Market Monitor

48 Insurance Schemes 52 Investor Education

Contents

CONTENTS | AUGUST 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, NIIT , 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 gurmeet@rrfcl.com Research Team Pradhan pradhan@rrfcl.com Satyendra satyendratiwari@rrfcl.com Ravi Kumar Mittal ravimittal@rrfcl.com Shishir Sharma shishir@rrfcl.com Arun Rana arunrana@rrfcl.com Ginni Kaur ginnikaur@rrfcl.com Designed by Prasant Nath prasant@rrfcl.com Media Marketing Exec. Aseem Srivastava aseem@rrfcl.com 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 :(8) August , 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 Fixed Deposit ..............................................46 Derivative Article.......................................50 Astro Market ...............................................54 Query Time .................................................55 Mail Box........................................................56

August, 2010 Investment Monitor 1

Editor Desk

EDITOR’S DESK Good corporate results, coupled with steady monsoon progress, prompted the market upward. Strong outcome of the Europe stress tests has further added to the gains.

Europe’s stress tests were a joke for various reasons. There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making this a wasted opportunity. Market is now having a lot more information about the exposure of European banks to euro-zone government bonds than they did before. This could be enough to make their decision on Europe.

Governments all over the world are infusing money into their economies.

This power of liquidity can drive up prices of stocks, commodities and other risky assets, and the system can be saved from so called default. However, saving the system doesn’t mean it has been fixed. As long as global monetary system not gets fixed, we will remain in an environment of in volatility and instability.

Coming home, Indian corporate has witnessed a strong financial performance in the current result season. Earnings are likely to grow further in the next two years, offering investors an opportunity in a market where valuations currently appear very costly.

Corporate results in the past few quarters have been encouraging, monsoon rains are likely to be normal, the Indian economy is growing briskly, FII flows have been good and the Indian stock markets continue to outperform world’s major indices by a comfortable margin. However, we advice a cautious approach towards the market as the situation was no different in the last quarter of 2007.

The south west monsoon is important for India as about 60% of the country’s farmlands are rain-fed and more than half of the workforce is employed in the agriculture sector. This year’s monsoon rains is expected to be at 102% of the long-period average. Good monsoon rains would help raise farm output, boost rural incomes and lower food inflation.

Continuing with Inflation… In the short term, inflation is causing riskier assets like stocks, commodities and corporate bonds to increase, in turn, building ecstasy as people get richer. However, the fact to understand here is that inflation is an undue expansion of money and credit whose effect is raising prices of things we consume or assets that we own or want to buy. If this continues for a long a bust in the market can’t be ruled out.

GST, which will replace the existing VAT; service tax; excise and central sales tax, is likely to be in place from April 1, 2011, as scheduled. This is expected to simplify indirect taxes and streamline the movement of goods and services across the country with a single tax structure, rather than the current multiple tax structure.

RAJAT PRASAD

Regarding new take over codes, with higher trigger limit of 25%, Indian companies will find it easier to get funding for strategic partners as they can own more meaningful share. While India is hardly associated with hostile takeovers, but now companies with promoter holding below 25% are now at substantial risk. The new recommendations, if implemented, will bring India in line with regulations in other countries.

RBI, with an intention to curb rising inflation, has increased repo rates by 25bps and reverse repo rates by 50bps in its monetary policy review. WPI inflation may soften in the coming months but we may not see a sudden and significant drop-off. RBI is preoccupied with managing inflation expectations while parallel managing growth. Domestic growth may remain robust going forward.

August, 2010 Investment Monitor 3

News Bytes

Corporate News Piramal sells diagnostic unit to SRL for Rs600 crore

Drugmaker Piramal Healthcare Ltd said it will sell its diagnostic services unit to Super Religare Laboratories Ltd (SRL) for Rs600 crore to focus on fewer and larger businesses left in its basket. Piramal will transfer 107 of its laboratories to the Malvinder Singh-promoted SRL. It will receive Rs300 crore upfront while the balance Rs300 crore would come over next three years, Piramal chairman Ajay Piramal, said on Wednesday. Post the deal, Piramal would continue to be involved in the diagnostics business by way of representation on SRL’s board of directors and its executive committee, it said. Piramal is heading towards a situation where they have lot of cash on balance and less (cash) coming from sales,“ another analyst with a Mumbai-based brokerage said.

mates, grew 16% to Rs7,236 crore over the year before period. “We are seeing higher demand environment across our industry verticals despite macro challenges. We added the highest number of billable employees ever, in this quarter,” said Wipro Chairman Azim Premji in a statement.

Govt clears PowerGrid FPO, to divest 10% stake

The government on Thursday approved disinvestment in transmission firm PowerGrid Corporation through a follow-on public offer (FPO) to raise about Rs8,400 crore. The Cabinet Committee on Economic Affairs (CCEA) gave its nod to the 20% FPO by PowerGrid.

The company would issue 10% fresh equity, while the Centre would divest 10% of its stake in the PSU. The government holds 86.36% stake in PowerGrid. The offer comprises over 84 crore (84,17,68,246) Cabinet approves merger of State Bank of Indore with SBI equity shares of Rs10 each constituting 20% of existing paid-up capiDecks have been cleared for the merger of State Bank of Indore tal. At current market valuation, the FPO is likely to mop up about with its parent State Bank of India, with the Cabinet approving the Rs8,400 crore. The company targets to augment transmission capacconsolidation of the country’s largest lender today. “Cabinet gave its ity to 23,400 MW in the current fiscal from 19,800 MW at present. nod to the merger of State Bank of Indore with SBI,” Information and broadcasting minister Ambika Soni told reporters. This will be SAIL revamps unit at Bokaro under Rs 70k cr expansion plan the second merger of an associate bank with the SBI after a simi- As part of its Rs 70,000 crore expansion programme, state-owned lar exercise with the State Bank of Saurashtra in August 2008. The Steel Authority of India Ltd (SAIL) today commissioned a newly renmerger proposal was approved by the central board of SBI last year. ovated unit at its Bokaro Steel Plant (BSL). SAIL chairman C S Verma Following this, the Centre also gave an in-principle approval. SBI inaugurated the revamped blast furnace at BSL, which was upgraded holds 98% stake in State Bank of Indore. SBI has already announced at a cost of Rs 805 crore, a company statement said. “Blast Furnace-2, a share swap ratio of 34:100 for the merger. It has agreed to give 34 upgraded at a cost of Rs 805 crore, is the first unit to be commissioned shares of SBI for every 100 shares of State Bank of Indore held by under BSL’s current phase of expansion and modernisation and is part minority shareholders. For this purpose, SBI would issue up to over of SAIL’s growth plan to take hot metal production capacity to the 1.16 lakh shares of face value of Rs10 each to minority shareholders level of 23.5 million tonnes by 2012-13 (from present 14 MT). A blast of State Bank of Indore. SBI had also said that the issued capital of furnace is central to steel-making and is a furnace in which combusSBI would increase from Rs634.96 crore to a maximum of Rs635.08 tion is intensified by a blast of air through a hot mixture of ore, coke, crore after the merger. etc, to smelt iron. The renovation will result in higher productivity levels, the company said, adding that the upgradation was done by HSBC to buy RBS’s banking assets in India Luxembourg-headquartered engineering company Paul Wurth in HSBC Holdings said it would buy the Indian retail and commercial consortium with infrastructure major Larsen & Toubro. banking businesses of Royal Bank of Scotland as the part-nationalised UK bank continues its retreat from overseas markets. HSBC Merger between RNRL and Reliance Power said it would pay a premium of up to $95 million over the tangible Reliance Power and sister firm Reliance Natural Resources will connet asset value (TNAV) of the businesses when the deal is complet- sider a merger on Sunday, continuing a spree of activity in companies ed, probably in the first half of next year. The price will be reduced controlled by billionaire Anil Ambani since the end of a high-profile if bad debts in the business increase during the next two years. The gas supply dispute with his brother. Shares in Reliance Power, valued deal could end up being neutral or even costing RBS, as the TNAV at $8.75 billion, closed up 3.3 per cent, while Reliance Natural shares, could be near neutral or negative and a deterioration in bad debts in with a market capitalisation of $2.3 billion, ended down 1.9 per cent the next two years could wipe out the premium. on Friday amid rampant market talk about a deal. The companies both announced a potential deal after the close of trading. The boards Wipro Q1 profit up 31% to Rs1,319 crore RNRL and RPL will meet separately on July 4 to consider a merger, India’s third largest software services firm, Wipro Ltd said first possibly through a share swap, the two companies informed the stock quarter profit jumped 31% to Rs 1,319 crore, on improved busi- exchanges. RNRL has the gas agreement and RPL has power plants. ness from western customers and large new deals from customers Without the one, the other will be incomplete. Reliance Natural had such as Hungary’s Magyar Telekom, as business improves for the lost a May Supreme Court ruling in a long-running gas supply dispute Indian IT industry as clients outsource more to cut costs and re- with Reliance Industries, controlled by Anil’s elder brother, Mukesh main competitive. Revenue for the quarter, which beat street esti- Ambani, who is the world’s fourth-richest man.

4 Investment Monitor August, 2010

News Bytes

Mutual Fund News SEBI plans a standard set of disclosure norms for MFs

The Securities and Exchange Board of India (SEBI) is planning a standard set of disclosures for mutual fund fact sheets, advertisements and scheme information documents (SID), a person familiar with the matter told ET. This will not only give a clearer picture about the performance of the schemes, but will also help investors compare similar schemes of different fund houses. The regulator is aiming at more of quantitative disclosures, and not just qualitative disclosures as is the case at present.

SEBI directs MFs to have uniform exit load

The Securities and Exchange Board of India (SEBI) has directed mutual funds (MFs) to have a uniform exit load — a fee charged for early redemptions — for investments through the lump sum route as well as systematic investment plans (SIPs). The securities market regulator communicated this to mutual funds in a briefly-worded letter without providing any reason.

SBI Mutual Fund has declared that its SBI Infrastructure Fund - Series 1, which is a close ended scheme, will be converted to an open ended scheme. The change has been in effect from 09th July, 2010.

After the conversion to open ended scheme, the fund will charge 1 per cent exit load, if units are redeemed within 1 year from the date of allotment.

SBI Infrastructure Fund - Series 1 is an equity scheme, with investment objective to provide investors with opportunities for longterm growth in capital through an active management of investments in a diversified basket of equity stocks of companies directly or indirectly involved in the infrastructure growth in the Indian economy and in debt and money market instruments.

L&T Mutual Fund launches five-month FMP

L&T Mutual Fund on Wednesday announced the launch of L&T FMP-I, a close-ended income scheme with a tenure of five months.

The scheme will open and close on July 22, 2010. The company has fixed December 22 as its maturity and December 23 as its redemption payout date, a company release said here. The investment objective of the scheme would be to achieve growth of capital through investments made in a basket of debt/fixed income securities maturing on or before the maturity of the scheme, the release said.

Reliance Life aims to double market share in three years

Anil Ambani Group’s life insurance venture Reliance Life on Friday said that it has sold 60 lakh policies in less than 5 years of operations and aims to double its market share to 10 per cent in the next three years. “The 6 million-policies landmark in less than five years of operations is a testimony to the trust and confidence of our customers...the company is targeting a 10 per cent overall market share in the next three years to become one of the largest private sector insurers.

Sundaram Finance to run mutual fund without foreign partner

After buying out the stakes of its mutual fund joint venture partner BNP Paribas, city-based Sundaram Finance is not in a hurry to tieup with any other group for its asset management business. “The mutual fund business will be 100 percent owned by us. After we bought out Newton Investment Management’s stakes in 2002, the mutual fund business was run by us without any joint venture partner for four years. The business grew from Rs.800 crore to Rs.2,800 crore when BNP Paribas came in as our partner,” said Chairman S. Viji.

Biggest Thai money manager to start $247-mn Indian bond fund Kasikorn Asset Management, Thailand’s biggest money manager, plans to raise as much as 8 billion baht ($247 million) selling the nation’s first mutual fund investing in bonds of Indian banks and companies. The fund will invest in five state-owned and private companies such as Indian Oil, ICICI Bank and Export-Import Bank of India, said Patchara Samalapa, managing director of Kasikorn Asset, which oversees about $16 billion of assets. Kasikorn Asset’s ‘K Indian Fixed Income 2 Years A fund’, which will expire in two years, will probably offer a return of about 3% a year, Patchara said.

That compares with the return of 1.5% on the bank’s two-year fixed deposits and 2.3% on Thai government bonds.

ICICI Prudential Mutual Fund

ICICI Prudential Mutual Fund has hereby made available Daily Systematic Transfer (DST) Facility to the investors/unit holders of ICICI Prudential MIP 25 under the dividend option of the source scheme, effective from July 9, 2010. ICICI Prudential Monthly Income Plan and ICICI Prudential MIP 25 have been included in the existing list of source schemes whereby investor can avail daily systematic transfer facility to target scheme, wherein the specified amount, subject to minimum of Rs 250 and in multiples of Rs 50, can be transferred to the target scheme.

The investment objective of the scheme is to generate regular income through investments primarily in debt and money market instruments. As a secondary objective, the scheme seeks to generate long term capital appreciation from the portion of equity investment under the scheme.

IDBI Mutual Fund

IDBI Mutual Fund has launched a new open ended liquid scheme, IDBI Liquid Fund. The new fund offer will be available from 07th July, 2010 to 8th July, 2010. The minimum investment amount of the scheme is Rs 5,000. The investment objective of the scheme is to provide investors with high level of liquidity along with regular income for their investment. The scheme would allocate 50 per cent to 100 per cent of assets in debt and money market instruments.

August, 2010 Investment Monitor 5

Review & Analysis

Re v i e w & BEST PERFORMERS IN THE MONTH Company Name

27/07/10

28/06/10

(%) Change

WORST PERFORMERS IN THE MONTH Company Name

A' GROUP

27/07/10

28/06/10

(%) Change

A' GROUP

RECENTLY ANNOUNCED SPLITS Company Name

Annc.

Date

Old Face Value

New Face Value

HDFC

18/8/10

10

2

Magma Fincorp

13/8/10

10

2

Jet Airways

642.30

527.5

21.76

Tata Global Beverage

118.25

1,200.60

-90.15

Bharti Airtel

322.55

265.55

21.46

Tulip Telecom Ltd.

192.70

861.45

-77.63

Titan Ind Ltd.

2824.3

2336.3

20.89

Reliance Natural Res

43.3

66.8

-35.18

Rainbow Papers

11/8/10

10

2

91.15

77.35

17.84

Maruti Suzuki India

1207.9

1396

-13.47

Farmax India

3/8/10

5

1

M&M Fin.Services

540

460.25

17.33

REI Agro Ltd.

28.55

32.95

-13.35

Pratibha Ind

30/7/10

10

2

Idea Cellular Ltd.

68.5

58.7

16.7

Dr. Reddy's Labs

1331.9

1477.45

-9.85

MMTC Ltd

29/7/10

10

1

Allahabad Bank

185.80

159.85

16.23

Hero Honda Motor

1,865.70

2,046.35

-8.83

Shriram Trans.Fi

664.6

577.8

15.02

Splash Media

29/7/10

10

1

Indian Oil Corp

362.85

397.7

-8.76

Bank of India

396.35

345.95

14.57

Essar Oil Ltd.

128.65

141

-8.76

Emami

21/7/10

2

1

Educomp Solutions

619.40

542.25

14.23

UltraTech Cement

844.25

923.50

-8.58

English Ind Cla

7/7/10

10

2

Tulip Telecom

6/7/10

10

2

795

2,939.15

-72.95

Roselabs Ind

2/7/10

10

5

UCO Bank

B1' GROUP

B1' GROUP

Rubfila Internationa

8.86

3.45

156.81

Triton Valves

Vaghani Techo.-Build

33.25

13.17

152.47

Orbit Corporation

132.15

278.75

-52.59

Tata Global Bev

30/6/10

10

1

Frontier Informa

4.24

1.91

121.99

Roselabs Industries

31.9

64.45

-50.5

Allied Computer

29/6/10

1

10

First Winner Industr

47.45

22.05

115.19

Dhanalaxmi Roto

13

25.65

-49.32

Veritas

28/6/10

10

1

TCI Finance

45.85

22.2

106.53

Zensar Technologies

175.00

328.7

-46.76

Chartered Logis

23/6/10

10

Stanpacks (India

8.45

4.18

102.15

Ras Propack Lami

38.15

71.15

-46.38

1

Fast Track Entertain

4.30

2.16

99.07

Nesco Ltd.

678.15

1,255.65

-45.99

Genesys Int

23/6/10

10

5

Katare Spg. Mill

29.65

15.1

96.36

Mavens Biotech Ltd.

19.45

34.8

-44.11

Sterlite Ind

21/6/10

2

1

Galada Power & T

13.01

6.99

86.12

Sark Systems

19.6

34

-42.35

Bodal Chemicals

10/6/10

10

2

10.50

6.05

73.55

Guj. Craft Indus

6.33

9.74

-35.01

78.8

877.60

-91.02

Uniroyal Industries

S' GROUP

S' GROUP

FII/MF ACTIVITY (Rs. Cr)

Shree Ajit Pulp

94.80

42.05

125.45

English Indian C

Ind. Inv Trust

125

68.3

83.02

Emami Ltd.

429.05

779.85

-44.98

Filatex India

75.65

42.2

79.27

Span Diagnostics

74.35

123.5

-39.8

Damodar Threads

67.8

39.15

73.18

Zenith Birla (India)

20.9

30.55

-31.59 -23.68

Newtime Infra.

38.95

23.65

64.69

Dynamic Industri

15.05

19.72

Rajoo Engineers

20.52

12.65

62.21

CCAP Ltd.

64.35

78

-17.5

Ortin Laborator.

30.90

19.55

58.06

SKS Logistics Ltd.

32.50

39.30

-17.3

Real Strips

82.3

52.7

56.17

Nicco Parks & Re

70.30

85

-17.29

Siyaram Silk

313

200.7

55.95

Anil Special Steel I

17

20.55

-17.27

25.40

16.35

55.35

Sulzer India

1,140.00

1,363.75

-16.41

CSS Technergy Ltd.

RECENTLY ANNOUNCED BONUS Company Name

1st to 26th July , 2010 Equity

Debt

MF Activity

-2861.6

365.3

FII Activity

10907.2

7963.4

RECENTLY ANNOUNCED RIGHTS

Annc. Date

BC/RD Date

Ratio

Aegis Logistics

07/07/2010

12/8/2010

2:3

Anukaran Commerc

13/07/2010

12/8/2010

5:1

Bajaj Auto

22/07/2010

12/8/2010

1:1

Cera Sanitary.

16/07/2010

12/8/2010

Minal Indus.

09/07/2010

MMTC Setco Automotive TVS Motor Co. Zodiac Cloth. Co

Company Name

Annc. Date

BC/RD Date

Camlin FineChem.

15/07/2010

Gulf Oil Corpn.

21/07/2010

1:1

REI Agro

28/05/2010

08/06/2010

2:1

12/8/2010

2:3

Sadbhav Engg.

09/06/2010

17/06/2010

1:20

29/06/2010

12/8/2010

1:1

Sadbhav Engg.

09/06/2010

17/06/2010

3:1

28/06/2010

12/8/2010

1:1

21/07/2010

12/8/2010

1:1

Suzlon Energy

02/06/2010

10/06/2010

2:15

07/07/2010

12/8/2010

1:2

Trent

02/07/2010

10/07/2010

4:9

6 Investment Monitor August, 2010

02/08/2010

Ratio 3:5 1:3

Review & Analysis

Analysis DIVIDENDS DECLARED (26/07/2010 to 25/08/2010)

DOMESTIC INDICES PERFORMANCE Index

(27/06/10)

(27/07/10)

Points Chg

(%) Chg

SENSEX

17774.26

18096.13

321.87

1.81%

BSE-MIDCAP BSE-SMALLCAP

7163.13

7414.61

Company Name

Ex- Date

BC/RD Date

Div (%)

ACC

28/07/2010

29/07/2010

100

29/07/2010

50 15

251.48

3.51%

Aditya Bir. Nuv.

9087.8

9408.91

321.11

3.53%

Aditya Bir.Chem.

26/07/2010

BSE-100

9480.25

9664.43

184.18

1.94%

BSE-200

2255.68

2302.81

47.13

2.09%

Ambuja Cem.

05/08/2010

BSE-500

7113.33

7268.54

155.21

2.18%

Bharti Airtel

18/08/2010

20

BSE Auto

8305.97

8436.24

130.27

1.57%

Bombay Dyeing

30/07/2010

25

BANKEX

10843.57

11453.93

610.36

5.63%

Cummins India

05/08/2010

300

BSE CD INDEX

4735.86

5367.63

631.77

13.34%

DCM Shriram Con.

30/07/2010

20

CAPITAL GOODS

14680.93

15011.75

330.82

2.25%

BSE FMCG INDEX

3184.32

3235.54

51.22

1.61%

Deccan Cements

05/08/2010

30

BSE HEALTHCARE

5788.53

5649.97

(138.56)

-2.39%

FDC

10/08/2010

175

3.27%

Gillanders Arbut

28/07/2010

50

Godrej Consumer

30/07/2010

Hind Aluminium

02/08/2010

15

24/08/2010

135

BSE IT INDEX

175.38

06/08/2010

60

5363.7

5539.08

BSE Metal

15046.9

15549.58

502.68

3.34%

BSE Oil & Gas

10846.48

10488.7

(357.78)

-3.30%

BSE PSU INDEX

9518.53

9506.59

(11.94)

-0.13%

BSE TECk INDEX

3297.56

3456.7

159.14

4.83%

Hindalco Inds.

BSE REALTY

3217.2

3454.64

237.44

7.38%

IL&FS Transport

26/07/2010

30

BSE IPO

2,109.68

2,130.31

20.63

0.98%

JK Tyre & Indust

05/08/2010

35

DOLLEX-30

3,130.13

3,177.75

47.62

1.52%

DOLLEX-100

2,103.67

2,136.42

32.75

1.56%

Kajaria Ceramics

10/08/2010

50 625

02/08/2010

100

DOLLEX-200

805.55

819.03

13.48

1.67%

Larsen & Toubro

17/08/2010

S&P CNX NIFTY

5333.5

5430.6

97.1

1.82%

Mundra Port

09/08/2010

15

S&P CNX DEFTY

4003.95

4028.65

24.7

0.62%

S&P CNX 500

4429.25

4508.9

79.65

1.80%

NMDC

29/07/2010

100

CNX NIFTY JR

11335.75

11549

213.25

1.88%

Orient Paper

29/07/2010

150

8158.5

8366.85

208.35

2.55%

Peninsula Land

27/07/2010

75

26/07/2010

15

CNX Midcap

189.05

3.16%

Pennar Inds.

5398.45

97

1.83%

Pidilite Inds.

26/07/2010

100

10090.65

548.45

5.75%

453.65

33.44

7.96%

Pioneer Invest

05/08/2010

10

2778.4

2803.05

24.65

0.89%

Ramkrishna Forg.

29/07/2010

10

3413.51

3516.75

103.24

3.02%

Ratnamani Metals

18/08/2010

110

CNX IT

5979.6

CNX 100

5301.45

BANK Nifty

9542.2

CNX Reality

420.21

Nifty Midcap 50 CNX Infra.

6168.65

WORLD MARKET INDICES PERFORMANCE Index

(28/06/10)

(27/07/10)

Points Chg

(%) Chg

10537.7

399.20

3.94%

US DJIA

10138.5

S&P 500

1041.24

1113.84

72.60

6.97%

1836

1888.81

52.81

2.88%

NASDAQ 100 USA

EUROPE Frankfurt (DAX 30)

6157.22

6207.31

50.09

0.81%

London (FTSE)

5071.68

5365.67

293.99

5.80%

Paris (CAC 40)

3576.45

3666.4

89.95

2.52%

Hang Seng Index

20726.7

246.70

1.19%

ASIA 20973.4

SAIL

29/07/2010

17

Shree Cement

05/08/2010

80

Solar Inds.

11/08/2010

35

Somany Ceramics

29/07/2010

30

Tata Motors

10/08/2010

150

Tata Power Co.

16/08/2010

120

TCS

29/07/2010

Temptation Foods

17/08/2010

7.5

Trent

09/08/2010

65

30/07/2010

200

TVS Motor Co.

26/07/2010

50

U P Hotels

23/08/2010

40

Unity Infra.

24/08/2010

50

06/08/2010

10

Japan NIKKEI

9693.94

9496.85

(197.09)

-2.03%

Visa Steel

Shanghai Comp

2535.28

2575.37

40.09

1.58%

Wheels India

05/08/2010

45

Zenith Computers

28/07/2010

9

August, 2010 Investment Monitor 7

Prime Economic Indicators

Prime Economic Indicators Gold Mumbai 18, 800

Forex Reserve For ex R eser v e ( R s C r )

1, 277, 000

Gol d ( M umbai () R s)

18, 706

1, 276, 454

1, 276, 500

18, 600

1, 276, 000 18, 400

1, 275, 500

18, 200

1, 275, 000

18, 000

1, 274, 500 17, 754

17, 800

1, 274, 000

1, 273, 921

1, 273, 500

17, 600

1, 273, 000 17, 400

1, 272, 500 M ay

17, 200 27t h J une

Brent Crude 3,655

3,651

Ruppe Vs Dollar

Brent Crude (Rs/Barrel)

3,650

R upee Vs D ol l ar

46. 8

46. 67

46. 7

3,645

46. 6

3,640

46. 5

3,635

46. 4

3,630 3,624

3,625

46. 3 46. 2

3,620

46. 18

46. 1

3,615 3,610

J une

27t h J ul y

46

27t h June

27t h Jul y

45. 9 27t h J une

10Yr G-Sec (%) 7. 71%

27t h J ul y

Call Rate (%) Cal l Rat e (% )

7.00%

10 Yr G- Sec ( %) 7. 70%

7. 70%

5.80%

6.00%

7. 70%

5.00%

7. 69%

4.00%

7. 69%

3.00% 7. 68%

7. 68%

2.00%

7. 68%

1.00% 0.00%

7. 67% 27t h J une

27t h J ul y

BSE Sensex

27t h June

10.71%

Inf lation (%)

18,077

18,100

27t h Jul y

WPI Inflation (%)

Sensex

18,200

3.40%

18,000

10.55% 10.50%

17,900 17,800

10.29%

17,700 17,600

10.16%

17,574

10.08%

17,500 17,400 17,300

9.87% 27t h June

8 Investment Monitor August, 2010

27t h Jul y

May

June

Market Commentary

Rising Stocks , Rising Risk

S

tocks scaled 29-month highs in July 2010, helped by sustained foreign fund buying, strong macroeconomic scenario backed by revival in monsoon and decent first quarterly earnings so far has enabled the domestic market to appreciate. Roll-over trend, some blue chip corporate results, RBI’s monetary policy and global markets dictated the trend; overall the market maintained its bullish momentum.

As per a UN report released on 22 July 2010, India climbed four notches to be ranked the ninth most attractive investment destination in 2009 with a total foreign direct investment inflow of $34.61 billion. The World Investment Report-2010, prepared by the United Nations Conference on Trade and Development (UNCTAD) said that India attracted sizeable overseas investment despite the overall drop in such inflows due to the global financial crisis.

The central bank also said real policy rates are not consistent with strong economic growth. SEBI committee had recommended an increase in the acquisition threshold for the initial trigger of an open offer from the current level of 15% to 25% of the voting capital of a listed company. While no change has been recommended in the annual creeping acquisition limit of 5%, the committee has recommended that creeping acquisition be permitted only to acquirers who already hold more than 25% of the voting capital, subject to the aggregate post-acquisition shareholding not exceeding the maximum permissible non-public shareholding.

The annual monsoon rains were 7% below normal during the period from 1 June 2010 to 26 July 2010, improving rapidly from a deficit of 16% on 19 July 2010 as the rain-bearing monsoon winds ended a weak phase in the middle of the month. Southwest monsoon was vigorous over East Madhya Pradesh and Gujarat State and active over The government data released on 22 July 2010 showed the fuel Orissa, Rajasthan, West Madhya Pradesh, Konkan & Goa, Madhya price index rose 14.27% in the year to 10 July 2010, unchanged Maharashtra, Vidarbha, Chhattisgarh and interior Karnataka during when compared to previous week’s rise of 14.27%. The food price past 24 hours index climbed 12.47%, lower than previous week’s annual rise of 12.81%. The primary articles index was up 16.48%, compared with Investors poured money into equity funds focused on India and Chithe previous week’s reading of 16.25%. The headline inflation rose na in the month July, as concern about economic growth spurred lower-than-expected 10.55% in June 2010. The rate of increase was withdrawals from developed-market stocks. India funds received a higher than May’s rise of 10.16%. Inflation for April 2010 was re- net $187 million, the most in 51 weeks, while China money manvised upwards to 11.23% from 9.59%. Prime Minister’s Economic agers took in $138 million.Results of Europe’s test of banks’ capital Advisory Council C. Rangarajan said fertiliser subsidy bill must strength came out after the close on Friday 23 July 2010 and revealed come down and diesel prices could be freed once inflation begins that only seven out of ninety one banks had failed an adverse test to come down. scenario that assumed a sovereign risk shock and a double-dip recession.

The goods and services tax (GST), which is to replace the existing value added tax (VAT), service tax, excise duties and central Foreign funds have bought Indian equities worth a net Rs 6053.03 sales tax among others, will be in place from 1 April 2011. Reports crore this month so far, till 22 July 2010, as per data from the stock indicated that the Centre and states on Wednesday, 21 July 2010 exchanges. Foreign funds had pumped in Rs 7713.97 crore in equiarrived at a broad consensus on rolling out independent India’s big- ties in June 2010. Domestic funds have sold shares worth a net Rs gest tax reforms that will simplify the manner in which corporates, 3539.31 crore this month so far, till 22 July 2010. They had sold eqsmall enterprises and traders will be levied taxes on goods and ser- uities worth a net Rs 4777.05 crore in June 2010. On the corporate vices. The new indirect tax reform is to streamline the movement front, the combined net profit of a total of 522 companies fell 14.4% of goods and services across India with a single tax structure. to Rs 25167 crore on 19.5% rise in sales to Rs 337763 crore in Q1 June 2010 over Q1 June 2009.

The Reserve Bank of India hiked repo rate by 25 basis points to 5.75% and the reverse repo rate by 50 basis points to 4.50% on July Power stocks gained on reports the government plans to create a 27, 2010, with immediate effect. The central bank kept cash re- Rs 50,000 crore debt fund that will raise low-cost and long-term serve ratio (CRR) unchanged at 6%. The RBI also revised the GDP resources for re-financing power projects in an attempt to bridge a forecast to 8.5% for the year ending March 2011 (FY 2011), from funding shortfall.

8% with an upside bias earlier. The central bank said the upward revision in growth forecast is primarily based on better industrial Outlook production and its favorable impact on the services sector and also Corporate results in the past few quarters have been encouraging, giving due consideration to the global scenario. The RBI also raised monsoon rains are likely to be normal, the Indian economy is growthe baseline projection for inflation based on wholesale price index ing briskly, FII flows have been good and the Indian stock markets for March 2011 to 6% from 5.5% indicated in the April 2010 policy continue to outperform world’s major indices by a comfortable marstatement, taking into account the emerging domestic and external gin. However, we advice a cautious approach towards the market as scenario. The central bank said consumer price inflation remains the situation was no different in the last quarter of 2007 at elevated levels and demand-side pressures need to be contained.

August, 2010 Investment Monitor 9

Global Outlook

I

n an effort to calm investors’ jitters over the potential impact of the euro zone debt crisis on Europe’s banking system, banking regulators assessed how 91 banks across Europe would cope with another economic downturn.

The test shows whether banks passed or failed tests requiring them to have a 6% tier one capital ratio under scenarios of worsened economic conditions. It also shows their tier one ratio under the worst of those scenarios, which included a fall in the value of sovereign bonds they hold.

The buzz of stress tests which actually highlights the strength of their financial systems. This exercise was an important contribution to bolstering confidence in the European banking system and strengthening the resilience and robustness of the global financial system.

EU regulators scrutinized 91 of the bloc’s banks to assess whether they have enough capital to withstand a recession and sovereigndebt crisis, with a Tier 1 capital ratio. Governments are seeking to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal.

A stress test on US banks early last year helped draw a line under worries about the sector there. European regulators were aiming to achieve the same. But there have been clear splits in the 27-nation EU about how to model the test and how much to divulge, stoking worries that it will be less credible.

Outcome Seven European Union banks failed the region’s stress tests with a combined capital shortfall of 3.5 billion euros ($4.5 billion), according to the Committee of European Banking Supervisors, which coordinated the initiative.

As expected, Spain notched up the most casualties, with five of its small savings banks — the so-called cajas — deemed to have insufficient capital to deal with future adverse shocks following the collapse of the country’s property boom. The five — none of them listed on stock markets — were Diada, Unnim, Espiga, Banca Civica and Cajasur, which was bailed out by the Bank of Spain in May. Banks in Germany and Greece were also seen as weak spots and in need of restructuring, but state-owned Hypo Real Estate was the only German lender to flunk and state-controlled ATE bank was the only Greek bank to fail.

10 Investment Monitor August, 2010

Europe tested how 91 banks would cope with another recession and losses on government debt after the Greek crisis hit markets and raised fears the euro zone could unravel. It aimed to repeat a health check on US banks last year that helped restore investor confidence and underpinned a recovery by bank shares.

Banks’ holdings of government bonds were subjected to a 23.1 per cent loss on their Greek debt, a 12.3 per cent loss on Spanish bonds and a 4.7 per cent loss on German debt, all based on 5-year bonds and their value at the end of 2009.

European regulators found that seven banks need to raise a combined 3.5 billion euros ($4.5 billion) of capital. Market expectations had ranged from 30 to 100 billion euros.

Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks didn’t have adequate reserves to maintain a tier 1 capital ratio of at least 6% in the event of a recession and sovereign-debt crisis.

More than a dozen others scraped through with just over the required 6% of Tier 1 capital in the most stressful scenario.

The banks that failed the stress tests are in close contact with national authorities over how they will raise capital.

The hunt for weak spots in European banking has focused on Spain’s regional savings banks, as well as regional German lenders, known as landes banks. Spain and Germany have set up funds to help weak banks recapitalize and Spain wants more cajas to merge. With the latest data showing signs of a strengthening recovery in Europe, banks could find themselves in a healthier position than expected.

The Committee of European Bank Supervisors said its test was more severe than the US health check of its banks. The adverse scenario in Europe was a one in 20 years possibility, compared to a one in 7 years probability in the US test, it said. But markets have had their doubts.

Outlook The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity, according to CEBS. That means the tests are set to ignore the majority of banks’ holdings of sovereign debt. Regulators tested portfolios of sovereign five-year bonds, assuming a loss of 23.1 percent on Greek debt, 12.3 percent on Spanish bonds, 14 percent on Portuguese bonds and 4.7 percent on German state debt.

Indian Economy

Indian Economy-An Insight

Industrial Production

India’s industrial production data for May, although lower than expected, is a sign of stabilization and should be read with other economic indicators. Industrial output rose 11.5 percent in May from a year earlier, well below forecast of a 16 percent rise and the revised 16.5 percent growth in April.

Forex Reserves

India’s foreign exchange reserves rose to $281.901 billion as on July from $279.422 billion.

Changes in foreign currency assets, expressed in dollar terms, include the effect of appreciation or depreciation of other currencies held in Inflation its reserves such as the euro, sterling and yen, the central bank said.

India’s wholesale price index (WPI) rose an annual 10.55% in June Foreign exchange reserves include India’s Reserve Tranche position 2010 as compared to 10.16% in May 2010 driven by high food and in the International Monetary Fund (IMF). fuel prices. The annual rate of inflation for June fell shy of expectations, but stayed put above 10% for a fifth month, raising the Merchandise Trade prospect of the Reserve Bank of India increasing key rates later this India’s merchandise trade grew persistently since November 2009. month to rein in galloping prices.

The merchandise exports grew by 36.2 percent in the opening month of this fiscal as against the negative growth of 33.2 percent Monetary Policy observed in the same month of previous year. India’s merchandise In July, RBI hikes repo rate and reverse repo rate by 25 bps to 5.5% imports registered a satisfactory growth of 43.3 percent in May 2010 and 4% respectively. The main focus was on anchoring inflation- as compared to negative 36.6 percent in same month of 2009. ary expectations. The move is on expected lines and well-calibrated to GDP upcycle currently underway.On 28th of July there can be Fiscal Management further modifications in monetary policy. RBI is under pressure to The total expenditure incurred by the government has amounted to increase CRR by additional 25 bps to curb inflation rate which is be Rs 67226 crores in the opening month of 2010-11 showing an innow 10.53%. crease of 1.5 percent from the growth numbers attained previously.

On the revenue side, the numbers are quite encouraging; it has regExport Data Surges istered an impressive growth of 9 percent in April 2010. In absolute India’s exports grew by over 30% for the fifth straight month in June terms, revenue receipt increased from Rs 11846 crore in April 2009to $17.75 billion indicating a possible turnaround in global econ- 1to Rs 12979 crore in April 2010-11. As a consequence, the level of omy, amid a slowdown in China and lingering concerns over the fiscal deficit has actually come down from Rs 54158 crore in April Euro zone. In absolute terms, the exports are still below the levels 2009 to Rs 53993 crores in the same month of 2010. seen in 2008, indicating that the high growth rate is partly due to the base effect, reflecting a sluggish 2009 when exports contracted Let us now assess the performance of different components of tax by 5%.Exports grew 32% to $ 50.8 billion in April-June 2010 from revenue of the central government during this month. With the a year ago, while imports rose 34% to $83 billion during the period, commencement of new financial year 2010-11, the collection of data on Monday showed. In the first quarter, a number of sectors gross tax revenue indicated positive movement after many months. such as engineering, chemicals, pharmaceuticals, gems & jewellery The overall tax revenue registered a growth of 27 percent in April and iron ore notched up impressive growth rates.

2010.

This significant increase in overall tax collection is mainly corroborated with the strong revival in the collection of indirect taxes. The outstanding growth figures were mainly inculcated in the area of customs (106.4 percent) and excise duties (314.1 percent). The collection in direct taxes also remained buoyant in April 2010, where the corporate tax revenue registered a growth of 23.4 percent as against the negative growth of 8.4 percent in April 2009. Growth in the income tax collection has somehow slowed down from 20 percent in April 2009 to 8.3 percent in the same month of the current fiscal year.

August, 2010 Investment Monitor 11

Cover Story

Indian Corporate Shining

After bleeding profusely during much of 2008 and the early part of 2009, equity markets are now gradually moving towards valuation levels that were seen during the early part of January 2008. Broader indices have already touched their two year highs in 2010 and are looking for fresh triggers. Quarterly results, especially the last quarter results carry higher importance for investors as during this time, India its scorecard Inc not only shows for the quarter but also for the whole financial year. Hence, it has substantial impact on the equity market direction.

Corporate India posted better results during the quarter ending June 2010 as compared to that of the previous quarter. This can be sensed from the improving macroeconomic numbers and estimates for the year.

12 Investment Monitor August, 2010

Cover Story Indian Economy

facilitate conversion of small businesses to limited liability partnership (LLP) format.

According to the estimates by the Ministry of Statistics and Programme Implementation, the Indian economy has registered a growth of 7.4 per cent in 2009-10, with 8.6 per cent year-on-year (y-o-y) growth in its fourth quarter. The growth is driven by robust performance of the manufacturing sector on the back of government and consumer spending. GDP growth rate of 7.4 per cent in 2009-10 has exceeded the government forecast of 7.2 per cent for the full year.

According to government data, the manufacturing sector witnessed a growth of 16.3 per cent in January-March 2010, from a year earlier. Already, the economy is expected to grow by over 7 percent in FY10 and the consensus is that the economic growth will be around 8-9 percent during the current year. Thanks to several stimulus packages given by the government of India and revival in the domestic demand.

Industrial Production

Economic activities which showed significant growth rates in 200910 over the corresponding period last year were mining and quarrying (10.6 per cent), manufacturing (10.8 per cent), electricity, gas and water supply (6.5 per cent), construction (6.5 per cent), trade, hotels, transport and communications (9.3 per cent), financing, insurance, real estate and business services (9.7 per cent), community, social and personal services (5.6 per cent). The Gross National Income is estimated to rise by 7.3 per cent in 2009-10 as compared to 6.8 per cent in 2008-09. The per capita income is estimated to grow at 5.6 per cent in 2009-10.

India’s industrial output grew by 11.5 per cent in May 2010. The manufacturing sector that accounts for 80 per cent of the index of industrial production (IIP) grew 12.3 per cent in May 2010.

Rising Foreign Investments

The number of registered foreign institutional investors (FIIs) was 1710 as on May 31, 2010 and the total FII inflow in equity during January to May 2010 was US$ 4606.50 million while it was US$ 5931.80 million in debt. Net investment made by FIIs in equity between June 1, 2010 and June 14, 2010 was US$ 530.05 million while it was US$ 875.73 million in debt. As on June 4, 2010, India’s foreign exchange reserves totalled US$ 271.09 billion, an increase of US$ 9.88 billion over the same period last year, according to the Reserve Bank of India’s (RBI) Weekly Statistical Supplement. India accounted for more than one-fifth of the US$ 22.1 billion private equity investments received by the emerging markets across the globe in 2009. Moreover, India received foreign direct investment (FDI) worth US$ 25,888 million during April-March, 2009-10, taking the cumulative amount of FDI inflows during August 1991 March 2010 to US$ 1, 32,428 million, according to the Department of Industrial Policy and Promotion (DIPP).

Robust Domestic Investments

The measures initiated in the Union Budget 2010-11 would help revive private investments and put the economy on 9 per cent growth, according to Mr Pranab Mukherjee, Union Finance Minister. The measures that would help revive private investments include enhancing allocation to the micro, small and medium enterprises (MSME) sector to US$ 535.8 million, increasing the limit for presumptive taxation, raising the threshold for compulsory auditing of accounts of small businesses, extension of interest subvention for exports in certain sectors and exemption from capital gains tax to

The domestic investment announcements witnessed a growth of 16 per cent during the calendar year 2009. The government recently approved six proposals for setting up of special economic zones (SEZs).

A major factor buoying investments is robust consumption demand, with domestic consumption of items such as automobiles and consumer electronics pacing up the growth of industrial revival. The domestic auto industry is set to hit an all-time high sales figure of 12.2 million units in 2009-10, surpassing the previous sales record of 10.1 million units in 2006-07. Maruti Suzuki, Daimler and Mahindra & Mahindra plan to invest around US$ 30 billion in the next four years. The auto makers are supplementing the investment in order to meet demand in the global marketplace.

Furthermore, the natural gas industry has entered a high investment phase to create infrastructure to handle increasing volumes. GAIL (India) Limited plans to invest nearly US$ 11.2 billion in five years with nearly 70 per cent of it going towards expanding the natural gas pipeline network. Gujarat State Petronet LNG Limited has expanded its pipeline network aggressively within Gujarat over the past five years. The company’s current expansion plans envisage investment of around US$ 335 million in FY11. Delhi’s Indraprastha Gas has planned a capex of US$ 357.2 million in the next three years, effectively tripling its US$ 182.4 million of gross block as it moves beyond National Capital Region (NCR) to nearby satellite towns.

Significantly, the central government is envisaging an investment of US$ 21.89 billion in the food processing industry by 2015. The government plans to attract the private sector and financial institutions to set up mega food parks and cold storage chains.India’s economy may be entering a new investment cycle going by expansion plans across industry sectors, a move that could create more jobs, boost demand for machinery and supporting infrastructure, and portend a

August, 2010 Investment Monitor 13

Cover Story strong pick-up in the growth momentum in the years ahead.

Investment in the infrastructure sector is expected to be around US$ 429.1 billion during the Eleventh Five Year Plan (2007-12), as against US$ 193.1 billion during the Tenth Plan. Life Insurance Corporation of India (LIC) is planning to invest more than US$ 4.28 billion in the equity market. Hinduja Group is planning to invest US$ 10 billion to US$ 15 billion in over the next five years for developing power projects. These projects will have the capacity to generate 10,000 megawatts (MW) of electricity. BEML Ltd, an earth moving equipment maker, plans to invest US$ 148.4 million for developing new and existing facilities by the year 2012-13. The company expects to garner a turnover of US$ 916.7 million from the investment from the current fiscal.

In a 50:50 joint venture, Reliance Broadcast Network Ltd (RBNL) and CBS Studios International plan to launch television channels in India. The proposed investment of US$ 100 million has been planned over the five years. Suryalakshmi Cotton Mills Limited plans to set up 25-Mw thermal power plant. The project is estimated to cost around US$ 28.85 million. Accord Communications Ltd plans to invest more than US$ 6.5 million in a manufacturing facility for producing mobile handsets. Larsen & Toubro (L&T), the country’s largest engineering company, will invest around US$ 5.46 billion to build its thermal power business in the next five years. Tata Power has lined up investments of US$ 5.19 billion for its upcoming plants in Mundra, Maithon and Jojobera over the next three years.

Oil Sector Reforms

The first set of reforms has come in the Oil sector, with hike in GAIL’s pipeline tariff in April 2010, followed by a hike in APM gas price in May, and rounding up the quarter with a move towards deregulation of major oil products in June 2010. The scope and further hopes of these reforms have already driven PSU Oil & Gas stocks to significantly outperform the market indices in 1QFY11.

India’s out performance over the global markets has been driven by a rising confidence in the government reforms post the fuel price de-regulation.

Sector Trends Agriculture

Agriculture is one of the strongholds of the Indian economy and accounts for 14.6 per cent of the country’s gross domestic product (GDP) in 2009-10, and 10.23 per cent (provisional) of the total exports. Furthermore, the sector provided employment to 58.2 per cent of the work force. ccording to Annual Report 2009-10 of the Ministry of Agriculture, production of foodgrains during 200910 is estimated at 216.85 million tonnes (MT) as per 2nd Advance Estimates. ndia’s exports of agricultural and floricultural products, fruits and vegetables, animal products and processed food products during April-December 2009-10 were worth US$ 54.16 million.

India’s agri-export turnover is expected to double in the next five years, according to APEDA. Agri-export turnover is set to rise to nearly US$ 18 billion by 2014.

Manufacturing

India is fast emerging as a global manufacturing hub. India has all the requisite skills in product, process and capital engineering, thanks to its long manufacturing history and higher education system. India’s cheap, skilled manpower is attracting a number of companies, spanning diverse industries, making India a global manufacturing powerhouse.

14 Investment Monitor August, 2010

According to a United Nations Industrial Development Organisation’s (UNIDO) ‘International Yearbook of Industrial Statistics 2010’, India ranks among the top 10 producers of manufacturing output in 2009. India’s manufacturing value added (MVA) per capita is US$ 283. India’s industrial output grew by 11.5 per cent in May 2010. The manufacturing sector that accounts for 80 per cent of the index of industrial production (IIP) grew 12.3 per cent in May 2010.

Exports from Special Economic Zones (SEZs) grew by over 122 per cent to US$ 49.5 billion in 2009-10 compared to US$ 22.4 billion in 2008-09. IT, IT hardware, petroleum, engineering, leather and garments are the leading exports from SEZs.

Infrastructure

The country’s core sector, comprising six key infrastructure industries, accelerated by 5.1 per cent year-on-year in April 2010, compared with 3.7 per cent in April 2009, according to the data released by the Union Ministry of Commerce and Industry. The growth was primarily led by an increase in the production of cement, which stood at 18.87 million tonnes (MT), compared to 17.36 MT during April 2009. The infrastructure sector seems to have emerged as a favourite for the private equity (PE) in 2010. There have been 19 deals in this sector at an approximate investment of US$ 1.1 billion, as compared to 14 deals with an investment of US$ 257.5 million during the same period last year.

Electricity production grew by 6 per cent in April 2010, as against 6.7 per cent in the same month of the previous fiscal. Finished steel production registered a growth of 4.7 per cent during the month, against a decline of 1.3 per cent in the corresponding period of 2009.

Among other industries, production of crude petroleum rose by 5.2 per cent, as against minus 3.1 per cent, while production of petroproducts registered an increase of 5.3 per cent, as compared to a contraction of 4.5 per cent during April 2009. Infrastructure investment in India is set to grow dramatically.

The major ports in India handled 45.8 million tonnes cargo in February 2010, as compared to 45.2 million tonnes in February 2009.

The cargo growth during April-February 2010 registered an increase of 5.5 per cent as compared to the corresponding period in the 2009 fiscal.

The domestic airlines flew about 4.78 million passengers in May 2010, an increase of almost 22 per cent over the number carried in the same period in the previous year. Airbus has forecast that India will need 1,032 new aircraft worth US$ 138 billion by 2028, while Boeing has forecast that the country will require 1,000 aircraft worth US$ 100 billion over the next two decades.

During the first month of the 2010-11 fiscal, the Railways reported an increase of 9.69 per cent in its total earnings at US$ 1.62 billion, as compared to US$ 1.5 billion in the same month last fiscal. The Railways garnered US$ 459 million in total passenger earnings in April 2010, compared to US$ 411.6 million in April 2009.

An in-principal approval for converting 10,000 km of state roads to national highways has been given by the Empowered Group of Ministers (EGoM). It is estimated that around US$ 3.3 billion would be required over the next five years to undertake this project. Further, the Cabinet Committee on Infrastructure (CCI) has approved four highway projects of about US$ 543.8 million on June 10, 2010.

The government is also implementing the National Solar Mission, aimed at setting up 20,000 MW of solar power capacity by 2020. The Asian Development Bank (ADB) has approved a financial assistance

Cover Story for US$ 200 million under the Assam Power Sector Enhancement Tata Consultancy Services (TCS), the country’s largest software exporter by revenue, was awarded a contract in March 2010 to adInvestment Programme. minister the UK’s National Employee Savings Trust (NEST) scheme’s administered services under a 10-year deal, worth around US$ 906 Services The services sector has been at the forefront of the rapid growth of million. Aditya Birla Minacs, the information technology business the Indian economy. Trade, hotels, transport and communication solutions firm, has acquired UK-based Compass BPO, finance and grew 12.4 per cent in Jan-March 2010 over the corresponding quar- accounting (F&A) services provider. India’s largest back office firm, ter from a year earlier. Similarly, financing, insurance, real estate Genpact, has acquired US-based analytics and data management serand business services grew at 7.9 per cent in the fourth-quarter of vices provider, Symphony Marketing Solutions (SMS).

2009-10. Community, social & personal services grew by 1.6 per cent in the fourth quarter.

Consumer Markets India ranks second in the Nielsen Global Consumer Confidence surWTO ranks India ninth in commercial service exports. According vey released on January 7, 2010—an indication that recovery from to the Economic Survey 2009-10, services exports reached US$ 102 the economic downturn is faster in India with consumers more willbillion in 2008-09 registering a growth of 12.5 per cent over 2007- ing to spend. Approximately 315 hypermarkets are expected to come 08. The miscellaneous services category share has increased by 16.1 into existence in Tier-I and Tier-II cities across India by the end percentage points to 76.4 per cent in 2008-09 as compared to 2000- of 2011, according to a joint study by consultancy firm KPMG and 01. While the share of software services increased by 6.5 percentage industry body ASSOCHAM named ‘Reinventing India’s Retail Secpoints to 45.5 per cent, the share of non-software services increased tor’. by 9.6 percentage points to 30.9 per cent in 2008-09.

Technopak President Raghav Gupta has said that the country’s modAccording to the Department of Information Technology, the total ern consumption level will double within five years (taking 2010 as ITeS-BPO exports is estimated to have risen from US$ 1.5 billion in reference) to an annual figure of US$ 1.5 trillion from the present 2001-02 to US$ 12.7 billion in 2008-09, a CAGR of about 39.2 per level of US$ 750 billion. cent. BPO now accounts for about 27 per cent of total exports.

According to a FICCI-Technopak report, despite the economic slowThe services sector (financial and non-financial) attracted foreign down, India’s fast moving consumer goods (FMCG) sector is poised direct investments (FDI) worth US$ 4.4 billion between April and to reach US$ 43 billion by 2013 and US$ 74 billion by 2018. The reMarch 2009-10 while the cumulative FDI between April 2000 and port states that implementation of the proposed Goods and Services March 2010 has been US$ 23.6 billion, accounting for 21 per cent of Tax (GST) and the opening of Foreign Direct Investment (FDI) are expected to fuel growth further and raise the industry’s size to US$ the total FDI inflow.

47 billion by 2013 and US$ 95 billion by 2018.

Sensex PAT Growth 39 25

28

43

42

33

31 30

24

33

30

26 17 19

24

20

15

6

Q1 FY Q2 05 FY Q3 05 FY Q4 05 FY Q1 05 FY Q2 06 FY Q3 06 FY Q4 06 FY Q1 06 FY Q2 07 FY Q3 07 FY Q4 07 FY Q1 07 FY Q2 08 FY Q3 08 FY Q4 08 FY Q1 08 FY Q2 09 FY Q3 09 FY Q4 09 FY Q1 09 FY Q2 10 FY Q3 10 FY Q4 10 FY 10

12

40

-11

-17

-20

-17

August, 2010 Investment Monitor 15

Cover Story M&As abroad now part of India’s growth strategy Traditionally, for several decades, Indian corporates have been the target of international acquisitions. Considering the large domestic market and the lucrative low-cost efficiencies for exports, there was a significant interest from international companies in Indian businesses, either in the form of setting up subsidiaries or in acquisitions, increasing stakes, buybacks etc. Indian companies started making large acquisitions overseas only from late 1990s and early 2000.

Engineering: Earnings growth of 13% YoY is largely driven by BHEL – up 13% YoY, while L&T is the other stocks with double digit earnings growth at 12%. ABB reported earnings growth of 6% YoY. FMCG: 6% earnings growth in sector has stark dispersion with 22% earnings growth for ITC and 21.5% growth for Colgate. Nestle and HUL have modest earnings growth of ~12% YoY, while Godrej consumer reported with 19% earnings growth

The year 2010 has seen a notable reversal in the deal appetite from Infrastructure: Earnings growth of major companies like DLF Indian corporates. During the first quarter of 2010, there has been (32%), JP Associates (16%), Reliance Infra (11.5%). deals worth over $12 billion.

Pharmaceuticals: Earnings growth of 20% for sector boosted by The most prominent deal this year has been the Bharti Airtel’s ac- Sun Pharma (+50% YoY), Ranbaxy Labs (+12.5% YoY), and Lupin quisition of Zain Telecom’s African assets valued at $10.7 billion. (+18% YoY). Cipla and Sun Pharma contribute equally to Universe, There have also been other significant deals during the first quarter earnings growth for Cipla is moderate at 20% YoY, driving the overof 2010 such as Bharti Airtel’s acquisition of Warid Telecom, Shree all Universe growth down.

Renuka Sugar’s acquisition of Equipav SA, Religare Enterprises buy Metal: Companies from metal space posted strong results due ing Northgate Capital etc. to increase in domestic demand and increase in commodity prices There is a considerable shift seen in 2010 in the outlook of Indian across the globe. Earnings growth for Tata steel (20%), Jindal Steel companies which have started relooking at outbound acquisitions (20%) and SAIL (16.5%). as one of their key growth strategies. This outlook is backed by increase in confidence levels, stronger fundamentals, including signifi- Conclusion cant improvement in business and financial performance, enhanced availability of finance and several attractive opportunities in the India will overtake China to become the world’s fastest growing global markets. We expect to see this trend continue this year. economy by 2018, according to the Economist Intelligence Unit (EIU), the research arm of London-based Economist magazine. High Robust Corporate Earnings volume growth can be attributed to recovery in the private capex cycle, robust order books and a thrust on infrastructure spending by Earnings growth has been the bedrock of Indian equities during the the government. up cycle of FY03-08 (EPS CAGR of 25%). Post the global financial crisis, Indian earnings flattened for two consecutive years. While 2HFY10 marked the beginning of earnings growth, markets need more certainty about the resumption and sustenance of the trend.

Robust earnings of the major corporate houses for the Q1FY11 reflect the Indian’s sustainable growth. The markets also looking at the monsoon forecasts which are due by mid-April 2010. A prediction of a normal monsoon is likely to be bullish for the markets.

India has 52 billionaires in 2009 as the Forbes report. This is with all courtesy to the improvement in the India company situation. Governments continuous efforts to reduce fiscal deficits and improvement in monetary policies by implementing base rate system for banks to lend money, providing liquidity in the system, implementation of 3G technology, improvement in tax system and improving standards for foreign funds inflow will lead to show growth for Indian corporates.

Distribution of earnings growth of companies within sectors The biggest concern can be seen that Indian stock market is on prefor FY10

Autos: In March 10, auto sector witnessed robust growth in number of vehicles with several players setting all time records or scaling significant benchmarks. Sector earnings growth of ~15% YoY boosted by Bajaj Auto (+15% YoY) and Tata Motors (+ 6.33% YoY). Hero Honda would show earnings growth of mere 5% YoY. Maruti and M&M are reported earnings growth of 9% and 11.5%, respectively.

mium as compare to other world markets so a little bit correction can be seen in the coming months. As the world markets are bouncing back after releases of good data in Europe and US, it will benefit indirectly Indian markets in Export and rupee strong hold in the world.

India has been stated as the world’s fastest growing wealth creator, all thanks to a vibrant stock market and higher earnings from the strata of Indian companies. The number of top companies in India has outshone their performances in terms of net profit in just three months of the start of the fiscal year. This depicts a fast growth in corporate earnings.

Banks: Sector earnings growth of 16% YoY. Amongst the Top 10 banks in terms of contribution to universe, HDFC Bank, Axis bank, and PNB reported approximately 20% earnings growth, ICICI and Canara Bank reported 15%+ earnings growth. SBI and other banks reported earnings growth of 10%+, while IDBI and BOI reported Amongst all the developments in India, the major one has been in 7+earnings growth the IT sector. The Indian IT company scenario has witnessed a fast growth pace and it has in its basket a lot of job opportunities. That IT: Sector earnings growth of 15% YoY comprises of more than is why the IT sector has been considered a prime career option. As 20% earnings growth for TCS and Wirpo, while earnings growth for a matter of fact, this sector happens to be the fastest growing sectors Infosys was at 27% for the FY10. in the India Company premise.

16 Investment Monitor August, 2010

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Investment Monitor 17

Industry Analysis

Pharma- Sweet Pills

The Indian pharmaceutical market is pegged at roughly $8bn, having grown at more than 10% a year over the last decade. The domestic market is likely to grow at 12–14% a year for next few years on account of three main factors. The first is increased healthcare spending by the government. Currently, the Indian government’s spending on healthcare is around 3.5% of its overall spending, compared with roughly 10% in other emerging markets. The second is higher penetration of health insurance. Currently, healthcare insurance accounts for about 5% of national healthcare spending. The third factor likely to propel market growth is greater awareness among the Indian population of quality healthcare and an increase in income levels for the population in general. With rapid growth seen in the domestic market, Indian companies such Cipla, Mankind, and Alkem and multinational companies such as Glaxo, Abbott Laboratories, Pfizer, etc have developed clear domestic strategies and established themselves as leading players in this space.

Export of pharmaceutical products from India increased from US$ 6.23 billion in 2006-07 to US$ 7.74 billion in 2007-08 and to US$ 7.81 billion in 2008-09—a combined annual growth rate (CAGR) of 21.25 per cent, according to Minister of State for Commerce. Pharmaceutical exports from the country have recorded growth rates of 21.61 per cent, 14.37 per cent and 28.54 cent, respectively, in the three consecutive years of 2006-07, 2007-08 and 2008-09.

Various multinationals have also paid high premiums to acquire leading Indian companies in order to get a taste of the domestic market growth. While the acquisition of Ranbaxy at an EV/sales ratio of 3.7x (or $4.6bn) by Daiichi Sankyo was a harbinger of the future, the recent acquisition of Piramal Healthcare’s domestic business for a premium EV/sales ratio of more than 8.2x ($3.7bn) only underlines the importance of being present in the growing Indian drug market.

The size of the global market for pharmaceuticals is expected to grow nearly $300 billion over the next five years, reaching $1.1 trillion in 2014. The 5 - 8 percent compound annual growth rate during this period reflects the impact of leading products losing patent protection in developed markets, as well as strong overall growth in the world’s emerging countries. Global pharmaceutical sales growth of 4 - 6 percent is expected this year, consistent with IMS’s prior forecast. In 2009, the market grew 7.0 percent to $837 billion, compared with a 4.8 percent growth rate in 2008.

Targeting Bottom of Pyramid

The saturation of urban markets has led companies in India to focus on deriving growth from the rural segment of the market. We estimate that the size of the Indian market will more than to $20bn by 2015 and that the size of the rural market will increase to around 44% of the total. We project that almost half of total growth until 2015 will come from the rural market, compared with 30% from metropolitan areas and 25% from Class I geographies. The government is also aiming to improve healthcare services for the rural masses and public spending is likely to quadruple from $1.5bn to $6bn.

The drugs and pharmaceuticals sector has attracted foreign direct investment (FDI) worth US$ 1.67 billion between April 2000 and February 2010. The total plan outlay for the Department of Pharmaceutials for 2009-10 is US$ 36.5 million.

The size of India’s pharmacy retail market is estimated at US$ 4.5 billion, which is dominated by 12-15 big players. Medicine retail chain Guardian Lifecare plans to double the number of its stores to 400 over the next two years with an investment of US$ 21.7 million.

18 Investment Monitor August, 2010

140 ANDA approvals

100 per cent FDI is allowed under the automatic route in the drugs and pharmaceuticals sector including those involving use of recombinant technology. the government is planning to set up a US$ 430.5 million corpus fund for the pharma industry soon. The fund would be set up with the help of the government and the industry and will be used for helping the pharma industry in R&D.

India,s share in total ANDA approvals 160 125 27%

120 100 72

80

20

21 7% 24 14 6%

25% 20%

20%

15%

49 14%

60 40

35% 136 30%30%

10%

9% 26 7%

5%

0

0% 2001

2002

2003

2004

2005

ANDA approvals % share

2006

2007

2008

% share

T

he BSE Healthcare Index has increased 5.7% during Q4FY10 compared to the BSE Sensex which remained flat during the quarter. The out performance has been mainly due to new ANDA approvals, niche opportunities in the US market and domestic formulations showing healthy growth leading to margin expansion and higher profitability.

Industry Analysis Formulations

The India formulations business grew by approximately 14% p.a over the last six years to reach US $8.4 bn in 2007, a growth rate much higher than global pharmaceutical market as a whole. Demand in India is growing markedly due to rising population figures, the increasing number of population over 60 years of age and the development of incomes.

Other markets, such as Brazil, Mexico, South Africa, the CIS, and Eastern Europe, have also provided instrumental growth opportunities for Indian companies. Demand for generics in these semiregulated markets has led to the establishment of manufacturing facilities, marketing capabilities, and distribution networks by Indian companies in these territories.

Generics

Key Market Dynamics

CRAMS

Broad cuts in spending applied by public payers to reduce growth in drug budgets. Publicly funded health systems are under increased pressure to reduce growth in drug budgets following the global economic downturn.

Indian generic drug makers received half a dozen more approvals from the US Food and Drug Administration (FDA) in 2009, over the previous year. Dr Reddy’s Laboratories received the highest number of tentative and final approvals in 2009 at 32, followed by Aurobindo at 26 and Wockhardt at 23.14. India tops the world in exporting generic medicines worth of US$ 11 billion and currently, the Indian pharmaceutical industry is one of the world’s largest and most developed. Rising prevalence of life cycle diseases, aging population, increasing percapita spend, lower penetration of modern medicine and increasing insurance awareness lead to robust growth opportunity in generic segment.

India’s market share in the global contract manufacturing business is likely to more than double to 7% in 2007-2012 while supply revenues will grow from US$800m to US$3b, giving rise to a significant opportunity for well-established CRAMS players.

Patent expiries shift major therapies to generic dominance. Over the next five years, products with sales of more than $142 billion are expected to face generic competition in major developed markets.

Collectively, the impact of patients shifting to lower-cost generics in major therapy areas such as cholesterol regulators, antipsychotics and anti-ulcerants will reduce total drug spending by about $80 $100 billion worldwide through 2014. This impact particularly will be felt in the U.S., where nearly two-thirds of the total value of patent expiries will occur. Patent expiries in the U.S. will peak in 2011 and 2012 when six of today’s ten largest products are expected to face generic competition. (Source: IMS Forecast)

DRUGS UNDER DEVELOPMENT

Outsourcing

The global outsourcing market opportunity is expected to grow at 9.9% CAGR from US$46b in 2007 to US$73.9b by 2012. Of this, contract manufacturing (the most scalable opportunity) is expected to grow from US$27.8b to about US$45.3b by 2012, a CAGR of 10.3%.

2.2

2900

1800

2007- US$46bn

Contract Manufacturing Clinical Trials

16 27.8

CCS

New drug development has become very time-consuming, taking 10-12 years and US$1b-1.3b in development costs (including costs of failures). Clinical trials alone take up 6-7 years of development time. Most of the easier-to-develop drugs have already been discovered and the pharmaceutical industry is entering a phase where it will have to work on more complex molecules. This has stretched the time required to successfully develop a new drug. Stringent regulatory requirements, in terms of data on clinical trails and associated paperwork, have also lengthened the time-line of new product development.

Declining R&D productivity and increasing patent expiries, coupled with generic competition and fewer blockbuster drugs has led to a significant increase in the total number of drugs under development over the last ten years.

1999

2009

Geographic balance of the pharmaceutical market continues to shift toward pharmerging countries. Pharmerging markets are expected to grow at a 14 - 17 percent pace through 2014, while major developed markets will grow 3 - 6 percent. As a result, the aggregate growth through 2014 from pharmerging markets will be similar to the growth experienced in developed markets -- about $120 - $140 billion. This compares to aggregate growth over the past five years of $69 billion in pharmerging markets and $126 billion in developed markets. The U.S. will remain the single largest market, with 3 - 6 percent growth expected annually in the next five years and reaching $360 - $390 billion in 2014, up from $300 billion in 2009.

Closer scrutiny of new products contributes to lower initial spending by payers. The number of new molecular entities launched annually over the next five years is expected to remain in the range of 30 to 35 products.

Outlook

The pharmaceutical sector has outperformed in times of uncertainity as well as downturn and underperformed during bullish markets.

As the broader market remains zigzag. As we are of the view of that investors exposed to high beta exposure would like to hold pharma stocks.

August, 2010 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.

LEGEND

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

20 Investment Monitor August, 2010

Stock Market Monitor Year End

Quarter End

Current Data

Abrasives and Grinding

August, 2010 Investment Monitor 21

Stock Market Monitor Year End

22

Investment Monitor July, 2010

Quarter End

Current Data

Year End

Quarter End

Current Data

August, 2010 Investment Monitor 23

Stock Market Monitor Year End

24 Investment Monitor August, 2010

Quarter End

Current Data

Stock Market Monitor Year End

Quarter End

Current Data

August, 2010 Investment Monitor 25

Stock Market Monitor Year End

26 Investment Monitor August, 2010

Quarter End

Current Data

Stock Market Monitor Year End

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Current Data

August, 2010 Investment Monitor 27

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Investment Monitor August, 2010

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Stock Market Monitor Year End

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August, 2010 Investment Monitor 29

Stock Market Monitor Year End

32 Investment Monitor August, 2010

Quarter End

Current Data

Stock Market Monitor Quarter End

Year End

Current Data

The Complete Magazine for the Indian Investor When you think about investment

think

Stock Ideas Fixed Income Research

Investment Monitor Personal Finance and much more Mutual Fund Research August, 2010 Investment Monitor 31

Equity Stock Ideas

MIC Electronics Ltd

Income Statement

CMP: Rs. 38.45 Rating – BUY 52 Week High: Rs. 59.9 and 52 Week Low: Rs. 30.2

Rs. In Cr.

Investment Rationale Rising Global Footprint

MIC Electronics has confidence in LED display and LED lighting products due to comprehensive and competent design & development base which was built over the last two decades. High technically advanced products will help company to get footprint in USA, South America, South Africa, UAE, Australia and Asia. Company has approximately 6% revenue share from foreign markets.

Energy Efficiency

The substantial savings in the consumption of electrical energy will be the single most significant factor in the adoption of LED lighting solutions especially in the Public lighting systems, Process industries and where the lighting loads are significant and expected to be ON round the clock. It is estimated that electricity for lighting costs US$ 185 bn annually, world over, and consumes 2300 Twh of power and 2 generates about 2 bn tonnes of CO2 annually. Since LEDs are about 10 times more efficient than incandescent lights. Governments in many countries are formulating favourable policies of incentives, it is expected that LED lighting will have rapid growth in the next several years. Energy efficiency will be a major driver for moving LEDs into the general (white) lighting market

Improved Order Book

Due to the economic slowdown, the LED display business had to witness a degrowth for the few quarters. The revenues grew by 10% in Q3FY10. With a gradual recovery taking shape in the global economy, we believe that the order flow will continue to improve, going forward. MIC recently bagged a contract from the Municipal Corporation of Delhi (MCD) to install 50 display screens across the high streets and key locations. MIC also got order from commonwealth Games 2010 for 19 LED screens expecting rental income worth Rs. 8.56 cr.

Collaboration with IOCL

Particulars

12M

12M

3M

3M

FY '09

FY '08

Q3FY '10

Q3FY '09

Net Revenue

295.44

360.77

70.41

64.20

Net Revenue Growth

-18.1%

NA

9.7%

NA

Total Expenses

221.72

270.45

45.62

46.96

EBITDA

73.72

90.32

24.79

17.24

EBITDA Margins

25.0%

25.0%

35.2%

26.9%

Depreciation & Amortization Total operating Exp.

5.65

2.31

0.77

0.76

227.37

272.76

46.39

47.72

EBIT

68.07

88.01

24.02

16.48

EBIT Margins

23.0%

24.4%

34.1%

25.7%

Other Income

2.20

1.82

0.04

0.02

Interest

6.90

2.75

3.60

2.04

EBT

63.37

87.08

20.46

14.46

EBT Margins

21.4%

24.1%

29.1%

22.5%

Income Tax provision

(3.35)

15.17

3.27

1.59

PAT

65.90

70.08

17.02

12.78

PAT Margins

22.3%

19.4%

24.2%

19.9%

No. of shares outstandings (Mn)

10.06

10.06

10.06

10.06

EPS (Basic) (Rs)

6.55

6.96

1.69

1.27

Peer Comparison Company Name

LTP

M.Cap.(cr.)

P/E

P/BV

MIC Electronics

38.44

39,900

6.4

1.33

21.65

Genus Power

202.15

302

5.9

1.05

18.39

Zicom Electron.

83.1

109

6.1

0.83

19.56

APW Pres.Sys.

142

89

16.5

1.74

21.36

115.4

86

94

1.97

-1.7

Centum Electron

RONW

Valuation Matrix Company Name

FY09

FY08

FY07

Price Earning (P/E)

5.66

15.18

22.89

Price to Book Value ( P/BV)

1.25

4.52

0.9

Price/Cash EPS (P/CEPS)

5.15

14.33

4.16

EV/EBIDTA

5.48

11.52

16.51

MIC has tied up with IOCL to initiate a pilot project to market solar1.26 2.96 2.81 based LED lanterns on a commercial scale in select states. It will focus Market Cap/Sales on combining LED with solar power which enable the company to utilize IOCL marketing might and resources. We expect to improve Company Background marketing efficiency of the company in distribution and operating Established in the year 1988 and promoted by Dr MV Ramana Rao, costs reduction. a technocrat, MIC Electronics is the largest player in the Indian LED market. The company has three divisions--LED Media, LED LightTrue Colour LED Sign Market ing and Communications & Electronics. It is engaged in the design, The growth in the full-Colour market, in terms of square meters, re- development and production of True Color LED Video Display Sysportedly declined to about 15% from about 25- 30% in the preceding tems, telecom software solutions and communication equipment years. The growth rate is expected to further come down as outdoor (ICT). Considering the vast opportunities in the LED lighting and advertisers are slashing their budgets for digital bill boards. The real display business and low margins prevailing in the ICT business, growth both in the LED display and lighting markets is starting now MIC has been de-focusing on the latter since the past two years. It because of maturity achieved in technology, increasing applications, is the only company in India to have a “Design-to-Manufacture” pricing and acceptance. capability for the manufacture of LED Display Systems. MIC has a strong presence in the domains of LED Video Display (indoor/outFinancial Performance door), Graphics and Text Displays, LED Lighting Solutions, TeleFor the quarter ended March 2010, Net revenue grew by 9.7% QoQ com Software and Communication & Electronic Products, and is to Rs70.41cr. EBIDTA margin rose to 35% in Q3FY10 as compare to supported by its headquarters at Hyderabad and three manufacturprevious year at 27%. Company reported a net profit of Rs.17cr for ing locations. To meet the demand for its products worldwide, the Q3FY10, a rise of 40% compare to the Q3FY09. Increased operating company has set up establishments in Australia, Korea and the US. efficiency leads to rise in net profit.

32 Investment Monitor August, 2010

Equity Stock Ideas

Karuturi Global Ltd.

Particulars

CMP: Rs. 19.35 Recommendation: BUY Target: Rs. 30 and Time Horizon: 12 Months

Investment Rationale

The company leads the US$64bn global cut flower industry with a 8%market share. The company is producing 555m roses annually

throughthree strategically located production centers in Kenya, Ethiopia andIndia. With floriculture imparting flexibility to the business model, the company is now foraying into the agri-venture. The company has already acquired 311,700 hectare of land in Ethiopia. This will change the game for the company, with phase I of 60,000 hectare to be operational over the next three years.

Food security is gaining prime importance globally as evidence fromthe fact that the global rush for farmlands with over US$60bn in-

vested over last two years. We expect the company as a key proxy to play the food security theme. The company is targeting to implement 60,000 hectare and garner potential revenues of US$146m from the agriventure

by FY13. The company has fund-raising plans to expand its agriculture export business from its fields in Ethiopia. The company has already raised $75 million through FCCBs. Apart from this the company expected to raise further $75 million via debt which is expected to link with LIBOR plus 400 points.

FY’09

FY’10

Q4’09

Net Revenue

4,458.4

5,323.0

1,238.0

Q4’10 1,746.0

Sales Growth

N/A

19.40%

N/A

41.00%

EBIDTA

1456

1833

465

561

EBIDTA Margins

33%

34.40%

37.60%

32.10%

Depreciation

154.2

345.5

56

132 21.7

Other Income

87.8

43.6

22.4

EBIT

1301

1487

409

429

29.20%

28%

33.10%

24.60% 23.3

EBIT Margins Interest

208

60

45.6

PAT

1173

1464

382.5

425

26.30%

27.50%

30.90%

24.40%

PAT Margins Shares Outstanding (Mn)

489

452

489

452

EPS (Rs)

3.13

2.59

0.91

0.84

Risk

Risk of execution and capitalization (capex to the tune of US$150m for 60,000hectare) are critical. Political risks arising from KGL’s large presence in Ethiopia and Kenya . Likely pressure on sales volumes and realisations of cut roses on account of the overall slowdown in economic activity.

The company is in talks with Standard Chartered’s PE arm and

Reliance Capital to raise $100mn by diluting upto 10% stake in its sub- Food Processing sidiary Karuturi Overseas Ltd. The company has issued 24.1 crore The company has entered into the food processing industry, with the comconvertible warrants to its promoter and a consortium of foreign insti- missioning of its food processing unit for gherkins near Tumkur, Karnataka in February 2008 with an installed capacity of 6000 tonnes per annum. It tutional investors (FIIs) at Rs 12 each.

The revenue of the company has witnessed a decent growth has entered into contracts with local farmers to ensure uninterrupted supduring past years on the back of the acquisition of Sher Agencies Lim- ply of gherkins. The company exports processed gherkins to international ited in 2007-08; expansion to newer markets like Japan, Middle East and processed food firms and super markets in major consuming nations such Russia; expansion of facilities in Ethiopia and Kenya and establishment of as European Union, Japan, Russia and the United States. In 9M 2008-09, the food processing business contributed to approx 3-4% of the total revenues food processing facilities. of KGL.

The government has identified floriculture as a ‘sunrise’ industry and accorded it a 100% export oriented status.

Key Financials Particulars (Mn)

FY05

FY06

FY07

FY08

FY09

FY10

Shares Outstanding

120

80

120

331

453

489

Face Value (Rs)

1

1

1

1

1

1

Equity Capital

120

80

120

331

453

489

Reserve & Surplus

84

227

846

2,827

5,775

7,240

Shareholders Fund

204

307

966

3,158

6,228

7,729

Net Sales

149

438

1,018

3,974

4,536

5,323

PAT

60

141

391

1,021

1,173

1,465

EPS (Rs)

0.5

1.8

3.3

3.1

2.6

3.13

P/E (x)

37.5

10.4

5.7

6.0

7.2

5.8

P/BV (x)

11.03

4.89

2.33

1.97

1.36

1.19

EV/EBITDA (x)

36.9

10.9

6

6.9

9.1

7.44

ROE (%)

48.3

51.3

57.1

35.1

21.2

18

ROCE (%)

44.6

48.7

31.2

25.7

14.6

-

Financial Analysis

The company witnessed a 19.4% growth in topline to Rs 5,323 mn during FY10 compare with Rs 4,458 mn during FY09. Net profit increased by 24.8% to Rs 1,464 mn from Rs 1,173 mn, during the same period. On quarterly basis, the company reported a whopping growth of 41.0% to Rs 1,746 mn during 1Q FY10 as compared to Rs 1238 mn during the 1Q FY09. Net profit increased by whopping 11.8% to Rs 425 mn from Rs 383 mn. Financial Performance Q4 FY ‘10

Internet Service Provider

KGL provides internet services through its subsidiary, KTPL. The company has taken over an All India ISP, Estel Communications Private Limited, giving it a pan-India presence. KTPL provides internet services across the country to large and medium-sized companies including MNCs like Ericsson, Microsoft and Nokia. Besides, the company also provides VOIP (Voice over Internet Protocol) services and software applications.

Company Background

KGL has achieved a formidable presence in the US$64bn global cut flower industry with an 8% share. While the journey to this coveted position started from India, the key trigger was its foray into the African continent. Given growth inhibitions in the Indian floriculture environment (in terms of land acquisition as also distance from the global floriculture hub – Holland), KGL moved into Africa in 2005 and today operates rose farms in three ‘low cost operating’ countries – India, Ethiopia and Kenya. KGL is the only company in the world with a capacity to produce 555m rose stems annually (on 239 hectares). While flori operations have gained a strong hold and would sustain the momentum on the back of organic expansion in Ethiopia, the game changer for KGL is their aggressive agri expansion. Given KGL’s scale in Ethiopia, it has struck a deal with the Ethiopian government for leasing 311,700 hectare of land (~7x the size of Mumbai city) for agriculture. With the project entailing a stupendous scale, KGL intends to develop the land parcel in phases and is targeting to complete 60,000 hectare over the next three years. With ‘food security’ emerging as the next big theme, KGL is well placed to capture this opportunity. However, execution and capitalization concerns remain. KGL also has business interests in areas of food processing (operates a gherkins processing unit), ISP (provides dedicated leased lines and e-infrastructure to software companies and BPOs) and flower retailing. However, all these businesses contribute below 5% to the company’s overall revenues. With the agriculture venture kicking off, we expect the share of these businesses to reduce further.

August, 2010 Investment Monitor 33

Equity Technical Analysis

BHARTI AIRTEL

companies. The company provides all the services under the Airtel brand.

CMP 320 TARGET 330 -350 SL 300 VIEW BULLISH SUPPORT 300 AND 294 RESISTANCE 325 AND 345

Bharti Airtel has broken its resistance level of 310 and given closing above the resistance level of 310. Currently it is trading above its 50 and 100 days exponential moving average and in technical indicator MACD and RSI supporting its rise. In up coming days if it will sustain at this level then it can touch 340345 level.

Bharti Airtel Ltd is a provider of telecommunication services with presence in all the 22 licensed jurisdictions in India and in Sri Lanka.

The company is the largest GSM mobile service provide in India. The company offers an integrated suite of telecom solutions to enterprise customers, in addition to providing long distance connectivity both nationally and internationally. The company has fourteen subsidiary

On the daily chart we can see Mcleod Russel has bounced from the level of 170 and has broken its resistance of 170. In technical indicator MACD is supporting it rise. Volume is also supporting its rise. Mcleod Russel has resistance around 230. We are expecting this stock will retrace around 230 levels if it will break that level then its next target around 250.

ONMOBILE GLOBAL

The Company provides Telecom VAS, Voice Portals, RingBack Tones, Mobile Content Aggregation & Distribution, Interactive Media Portals, Mobile advertising, 1-to-1 direct marketing on mobiles and M-Commerce. OnMobile has a large R&D center and network operations center and also has offices in Mumbai, Delhi, Singapore, Paris, Jakarta, London, Kuala Lumpur, Seattle and Sydney.

CMP TARGET SL VIEW

SUPPORT RESISTANCE

281 325 AND 350 285 BULLISH 287 AND 275 301 AND 350

Onmobile Global is trading near its resistance level of 301-303.

In technical indicator RSI and MACD is supporting its uptrend OnMobile Global Limited (OnMobile), the company’s saga started way move and it is trading its 8 days 13day and 21 days moving averback to the year 2000, it was incorporated on 27th September 2000 as age. If it will break its resistance of 302 then it can touch the Onscan Technologies India Private Limited. OnMobile is India’s largest level of 335 and 350 in upcoming month. white labeled Value Added Services (VAS) Company for Mobile, Landline and Media Service Providers headquartered in Bangalore, India.

34 Investment Monitor August, 2010

Equity Technical Analysis

WOCKHARDT LTD CMP 141 TARGET 160 SL 140 VIEW BULLISH SUPPORT 140 AND 132 RESISTANCE 160 AND 170 Wockhardt Limited (WL) is a global pharmaceutical company incorporated in 8th July of the year 1999. WL is engaged in the manufacturing and marketing of pharmaceutical and biotechnological products, also involved in new drug discovery and clinical trials and

VOLTAS LTD CMP TARGET OUTLOOK

206.85 220/230 BULLISH

has an active multi-disciplinary R&D program. The Company has 10 manufacturing plants across India and UK, which are certified under USA’s FDA (United States Food & Drug Administration) and UK’s MHRA, subsidiaries in US, UK and Brazil, majority- owned companies in South Africa and Mexico and the company’s marketing offices situated in Africa, Russia, Central and South East Asia.

Wockhard ltd has broken its long term down trade line and started its pull back rally and also broken its resistance level of 142 and trading above that level. In technical indicator MACD and RSI is also supporting its rise. If it will keep continue above 145 level then its target in upside is 160.

for a wide spectrum of industries in areas such as heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, mining and construction equipment, materials handling equipment, water management & treatment, cold chain solutions, building management systems, and indoor air quality.

Voltas is one of the world’s premier engineering solutions providers On the daily chart we can see voltas have given breakout with and project specialists. Founded in India in 1954, Voltas Limited heavy volume. And technical indicator MACD also supporting its offers engineering solutions rise. Investor can buy it with the target price of 220/230.

August, 2010 Investment Monitor 35

Commodity Fundamentals

C

Copper - A Metal Used Through The Ages

opper was one of the first metals ever extracted and used by humans, and it has made vital contributions to sustaining and improving society since the dawn of civilization. Copper was first used in coins and ornaments starting about 8000 B.C., and at about 5500 B.C., copper tools helped civilization emerge from the Stone Age. The discovery that copper alloyed with tin produces bronze marked the beginning of the Bronze Age at about 3000 B.C.

The Washington-based construction consulting firm, CG/LA Infrastructure LLC, expects China alone to account for over 28% of global infrastructure spending over the next two decades. The nation has obviously changed the game and the historical supply/demand trends with its voracious demand.

How Do We Use Copper Today?

In the past year or so, copper prices have largely moved in tandem with the Chinese economy. So when its government increased the level of reserves banks have to hold in order to curb lending, the real estate suffered and so did the reddish commodity.

Naturally, that has caused investors to wonder how long that downturn will continue. If it does, Chinese traders might have some difficulty financing their physical inventories. And if that happens, they may dump the supplies onto the market, which could lead to lower prices.

Along with that, China is committed to spending at least $585 billion on such projects and India is projected to spend over $500 billion by 2015. All in all, Asia (excluding Japan) could shell out a total of roughly $1.4 trillion in the next few years on infrastructure.

country, which is the world’s largest copper producer. Finally, the quality of the copper being produced is steadily falling. Mining giant Rio Tinto recently predicted that its production would fall about 15% in 2010 because of that.All of those factors together point to a supply deficit from 2011 onwards…

Copper is easily stretched, molded, and shaped; is resistant to corrosion; and conducts heat and electricity efficiently. As a result, copper was important to early humans and continues to be a material of choice for a variety of domestic, industrial, and high-technology applications today.

Copper is an industrial metal that is mainly used in building construction (electrical and plumbing). Copper is an excellent conductor Fortunately, most industry insiders see Chinese demand as an overof electricity and is very resistant to corrosion. whelmingly positive story both in the medium and long term. And while analysts differ sharply on the subject, the more bullish of Presently, copper is used in building construction, power generation the lot believe it will contribute about two-thirds of growth in the and transmission, electronic product manufacturing, and the produc- world’s copper demand. tion of industrial machinery and transportation vehicles. Copper wiring and plumbing are integral to the appliances, heating and cooling Past numbers seem to indicate the same… China now accounts for systems, and telecommunications links used every day in homes and about 40% of global copper demand, up from about 25% three years businesses. Copper is an essential component in the motors, wiring, ago. Similarly, prices gained 160% between the start of 2009 and radiators, connectors, brakes, and bearings used in cars and trucks. April 2010, with a peak of $8,043 a ton.

The average car contains 1.5 kilometers (0.9 mile) of copper wire, and the total amount of copper ranges from 20 kilograms (44 pounds) The Supply Story for Copper in small cars to 45 kilograms (99 pounds) in luxury and hybrid veThe supply-side picture also supports the bullish view of copper, hicles. especially since there have been no major, new discoveries made in many years. Meanwhile, already existent cheaper copper from Copper is often considered an accurate indicator of economic growth. open-pit mines will run out in the next decade.

An economic expansion is usually present or beginning if demand for Even if major discoveries are made tomorrow, bringing new mines copper is increasing. on-stream takes time and carries a high capital cost. So does expand ing existing ones, for that matter. And very few mining companies COPPER : THE DEMAND STORY are going to do either with the financial crisis still reverberating Much of the growing global demand for copper doesn’t come from the around the world.

U.S. or Europe. Instead, it comes from emerging economies around the world, their rising living standards and increased infrastructure That’s especially true with resource-rich Australia considering a projects. The rapid rise of a middle class in emerging markets has led 40% “super-profits” tax on mines. Because of that, BHP Billiton will to dramatic increases in demand. Unsurprisingly, much of that stems most likely cancel its planned expansion of the Olympic Dam mine. from China, where as much as 25% of the population is now consid- The fourth largest copper deposit in the world, BHP had originally ered middle class. And that figure may double over the next decade. planned on expanding production there by fourfold over the next As people move from one class bracket into higher ones, they au- decade. tomatically begin seeking out better lifestyles. That includes better housing, which means an increase in residential construction. And To make matters worse, the similarly resource-rich Canada is conthat means more wiring for electricity, more plumbing and more sidering similar measures. And the Chilean earthquake earlier this basic electrical appliances… all of which require huge amounts of year certainly didn’t help. Though it didn’t damage the actual mincopper. ing infrastructure too much, it did divert investment away from the

36 Investment Monitor August, 2010

Commodity Fundamentals The Royal Bank of Scotland (RBS) estimates that global copper production will increase just 1.5% this year and an average of 4% for the next three years. It cites declines in ore grades at existing mines and a scarcity of big new copper projects.

Of course, the naysayers have a ready reply to all of that. They say that higher prices will lead to lessened demand, and in turn more copper production and eventually lower prices. But history doesn’t support that view.

RBS estimates that global mine production of copper rose only 15% in the period from 2002 to 2008 in spite of copper prices quadrupling during that time. Nick Moore, the head of commodity strategy, commented, “It is this that really must ring alarm bells for the supply outlook.”It should also ring bells for investors.

FUTURE OUTLOOK

Despite a recent improvement in risk sentiment, copper prices are languishing. The commodity has fallen around 13% for the year and nearly 20% from its April peak. In part, that comes from a drop in copper imports to China. And China’s attempts to control inflation and property bubbles haven’t helped either. Add in double dip concerns about Europe and you get a very wary Wall Street. Bearish analysts have since forecasted further downward pressure on the commodity. But in focusing on just those facts, pessimists are missing out on the bigger picture. And the bigger picture shows a much more bullish outlook ahead.

Emerging Nations Demand For Copper

Few people notice any other emerging nations but China these days.

But contrary to popular belief, others do exist… and they need copper too.

For instance, India’s state-run Hindustan Copper recently said, “India’s copper demand will likely grow by at least 7% in 2010-11, fed by the power sector.”

Energy consultancy Platts adds that India suffers from a peak power deficit of over 12%. To cope, the country has begun tendering nine major power transmission projects. Worth $12.3 billion together, they only await the OK from regulatory authorities.

Elsewhere in Asia, other power projects worth billions of dollars exist. And as they get underway, they’ll rely very heavily on copper.

Of course, China does remain the dominant factor in price movements. It now accounts for about a third of global copper demand, up from near 25% in 2007.

So the bears do have a point when they note how imports to China dropped April – June. Though even that just means it’s drawing down some its inventory held in warehouses. According to Reuters, appetite for copper actually rose 5% in May from the prior month.

“A fall in imports was offset by rising [domestic] output and a drop in stock levels.” Copper bears also point to China’s efforts to burst the property bubble in the country. But according to Standard Chartered Bank, the real estate sector accounts for only about 10% of the country’s total copper consumption.

Power generation accounts for the majority. And the build-out of China’s power grid isn’t slowing down anytime soon. Too many cities there continue to struggle with overloaded power infrastructure for that to happen.

Copper Supplies Point to Higher Prices

Fundamentals on copper’s supply side also point to higher prices.

As with other base metals, copper mines have long lead times to come onstream. So most industry insiders expect demand to outstrip supply in the coming years.

Developing new copper mines and expanding existing mines costs a lot as well. And that means there will be little growth in global production in the near future.

The February earthquake in Chile, the world’s largest copper producer, made it worse too. The quake didn’t damage the mining infrastructure there. But it did divert investment away from the sector and state-owned Codelco, the global leader in copper production.

Also consider how the quality of copper taken from existing mines continues to fall. Credit Suisse even noted last month that mining companies are missing output forecasts because of that very problem.

Unfortunately, the company is representative of the larger industry.

The world’s four largest producers of copper – Codelco, Freeport McMoran Copper & Gold, BHP Billiton and Xstrata ADR– have been slow to respond to rising demand. That’s largely because of the quality issue.

Naturally then, copper inventories have fallen as well. Worldwide, 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.

August, 2010 Investment Monitor 37

Commodity Technical

Gold Trading Ideas- Sell

to an 11-month low. Gold was also under pressure from a further 0.608-tonne outflow from the world’s largest gold exchange-traded fund, the SPDR Gold Trust, on Thursday, which analysts said points to weaker investment demand for the metal.

Outlook- Short term Sell Rally CMP-18400 Stopp loss -18620 Target -18200/18000 Trading Range-18000-18610 Gold prices ended the week almost 2 percent lower, and the market has been largely treading water after news of massive gold swap operations conducted by the Bank of International Settlements in recent months stirred fears of gold dumping. Spot gold slipped as low as $1,185.85 an ounce and was at $1,189.65 an ounce against $1,207.75 late in New York. Gold’s decline coincided with gains in US Treasuries, as falling inflation and tumbling consumer sentiment enhanced the allure of safe-haven government bonds. Wall Street dropped 2.5 per cent after data showed consumer sentiment fell

Technical Analysis MCX Gold futures for August rose above Rs 18400 per 10 grams and failed to hold on above the critical levels The topping out activity is visible in Gold. There has been volatility at higher levels and recent fall has been sharp. But market has been unable to make fresh highs.

In Indian chart, base has been formed on the historic trend channel of last 5 years. Further second vertical channel, displayed in green, has been developed-the base of which now recons to 17100. Further fall from these hangouts will drag gold towards 16700 levels.

International chart is no different. The trendline support clubs with inverse H&S patterns neckline at $1166, which is now a major support for us. The area of $1166 will be crucial and market is likely to

(Mcx Weekly chart)

38 Investment Monitor August, 2010

Commodity Technical

Silver Trading Ideas- Sell

can be seen at these levels but still charts are showing some bearishness in the prices over coming near term.

Outlook- Short term Sell Rally CMP-28800 Stopp loss -29060 Target -28200/28000 Trading Range-28000-29100 Silver prices ended with a weak momentum this week, but still trading in the same upwards moving channel where 228650 could be the stronger weekly support and a close below could see sharp declines thereafter in the coming near future. On the higher side 29500 have became a very strong resistance where only a close above could be some more upside will be expected till 30000. But still RSI is showing slightly bearishness and MACD is quite neutral at the same time. No decisive movement

Silver continued to gyrate inside converging range last week. More importantly, the corrective structure suggests that fall from 19.48 is resuming. Break of 17.565 will confirm decline resumption and should target key support zone of 17.08/195. On the upside, though, above 18.535 will mix up the outlook again and bring more choppy sideway trading instead.

In the longer term , the up trend from 01 low of 4.01 topped out at 21.44 and subsequent price actions are treated as correction/consolidation to this up trend. Fall from 21.44 completed after drawing support form 8.5 key level. However, subsequent rally from 8.4 is not displaying a clear impulsive structure and hence prefer the case that it’s just the second wave of the wide range consolidation pattern.

(MCX Silver Weekly Chart)

(Commex Weekly Chart)

August, 2010 Investment Monitor 39

Currency Fundamental

Highlight

INR/USD-Currency Fundamental uncertainties and challenges to the economic outlook remain, not least from the unprecedented scale of public spending cuts expected in coming years. While we do not expect a double-dip recession, our economic growth estimates for 2010 (1%) and 2011 (2%) are below the current consensus. We have nudged up our £/$ target for end-2010 to 1.46, but it has been revised down to 1.43 for end-2011.

The profile for Bank rate is unchanged compared to last month. Although growth prospects remain relatively upbeat, the disinflationary trend in the US looks like it could continue for some time given the sheer extent of slack. With recovery still in its early stages and renewed concerns about the housing market and jobs growth, not to mention the softer global backdrop, we believe the FOMC may choose to tread more cautiously on raising interest rates. We now look for the first hike in the Fed target rate by end Q1 2011 and predict it to end next year at 2.25%.

Indian Rupee rose to its highest level in a week tracking strength in domestic share market and Dollar’s weakness against major currencies.

Domestic share index pared its early gains and ended the day almost flat at 18,130.98 points with a gain of 17.83 points.

Foreign fund flow into and out of the share market are a key driver for the Rupee. So far in 2010, Foreigners have bought shares worth a net $8.8 billion, in addition to last year’s record $17.5 billion inflow that had helped the Rupee gain 4.7 percent.

Euro fell, ending its longest weekly rally in nine months versus the dollar on concern stress tests of European Union banks failed to identify sources of weakness that would aggravate the region’s debt crisis.

Tests showed that only seven banks flunked the EU’s crisis scenario failed to ease concern lenders may lack sufficient capital. Seven banks The euro-zone sovereign debt crisis remains an important theme, alneed to raise only a combined 3.5 billion euros ($4.5 billion) of capital though tensions in euro area financial markets appear to have eased slightly The key event over the past month was the announcement that is much below than the expectation.

Global Risk Shifting to Emerging Market

that the Chinese authorities were ending the renminbi’s soft peg against the USD. While the timing of the change surprised markets.

The sovereign debt crisis in Europe and the impact on the euro and US dollar, attention has drifted from some recent developments in monetary data that suggest all is not well with the global economy. In summary, broad monetary data are suggesting that the world economy is operating at two speeds. In the developed economies, money supply data suggest that the economic recovery, though underway, is not secure and growth is slow, see chart a. By contrast, money supply for some key emerging market economies suggests that the economic recovery is robust and growth is fast,see chart b. However, assuming the latter continues, this may be a misleading conclusion to draw, as should the developed economies falter, there will be significant negative trade implications for growth in the emerging market countries as well.

Overarching themes driving global financial markets have not changed significantly in the last month but some of the intensity has faded. Renewed euro buying relative to the dollar does not mean that concerns about the risk of sovereign debt default in Europe has gone away or that worries about the fragility of European banks have disappeared. However, they are now being seen more in the perspective of proliferating signs of weaker growth in the US, amid concern that job creation will be particularly slow in this economic upturn compared with the historical experience. Of course, the historical experience in our view should take into account the shock not just to the economy but to banking sectors in this downturn. Indeed, we would argue that in this sense, the slowness of the economic recovery is not odd at all but in fact should be expected, based on the past experience of when both such shocks occur simultaneously.

In the US, the past month has seen a less rapid pace of private sector (non-farm) payrolls growth. This, combined with weaker business surveys and an imminent fiscal tightening in many parts of the world, has raised concerns of a so-called ‘double-dip’. Reflecting this, the US dollar has lost around 2% in trade-weighted terms since our last Outlook. While we expect US private final demand to recover, the labour market picture is sufficiently fragile to warrant the Fed waiting until early 2011 before considering its first increase in the federal funds rate. Complicating the picture, however, there is much uncertainty about the timing and pace of asset sales as part of the Fed’s quantitative easing strategy. Thus far, the US economy has been insulated from developments in the eurozone and we expect this to continue barring further market volatility..

The problems be setting the global financial system are predominantly located in the advanced economies and, as such, the drag on growth is most likely to be severe in those countries. This is indeed turning out to be the case, and so our forecast suggests that the rise in developed economies interest rates is going to be slower than in the developing economies as a group, as the latter are less affected by the negative shock emanating from the de-levering of balance sheets in advanced economies. In consequence, our projection of exchange rates shows a generalised appreciation of developing countries currencies against those of the advanced economies.

It would not be a surprise if the volumes of FX trades also follows this pattern.

Rupee Outlook 2010

The indications are that UK economic growth accelerated significantly in the second quarter, which along with a largely market friendly emergency Budget, has provided a fillip for the currency. However, considerable

40 Investment Monitor August, 2010

‘‘The rupee’s economic fundamentals are deteriorating as growth slows in Asia, the balance of payments declines and because monetary policy may not be sufficient to temper inflation. India’s currentaccount deficit widened to a record $13 billion in the first quarter from a shortfall of $12.2 billion in the previous period, official data show. Foreign net capital flows into stocks reached $8.8 billion this year, half of the $17.6 billion in 2009, an all-time high. Industrial production rose 11.5 percent in May from a year earlier, slowing from the 16.5 percent pace in April, a report on July 12 showed. The government estimates the economy will expand 8.5 percent in the year to March 31, the fastest pace in three years. The currency was ranked by economists at the start of the year as Asia’s second-most promising for 2010.’’

Currency Technical

USD/INR In the mid of speculation whether RBI will raise its key policy rates by 25 basis points at July 27 meet or not, it is difficult for the USD-INR pair to clearly choose its direction.

The rupee reversed lower from the peak of 46.5 formed on July 15 and once more declined below the 47.2 mark. Concern regarding slowing growth in the US stoked fears of money flowing out of emerging markets, pushing the rupee lower. Dollar demand from importers was the other reason cited for the weakness in the Indian currency. Dollar was negatively impacted by weak economic data and lower-than-expected earnings from some of the leading companies Support Levels

Resistance Levels

46.95

47.40

46.65

48.30

Remarks

USD/INR Technical Analysis TechnicalThe Indian currency moved in line with our expectation and oscillated in the band between 46.5 and 47.2 over the past week before recording a sharp fall on last week.

Short-term trend in the currency is down since the June 21 peak of 45.5. The third leg of this downtrend appears to be in motion now that has the targets of 47.2 and 47.8.But as indicated in, area around 47.2 is a strong medium-term support for the rupee. Since it broke beyond this support to record the low of 47.38, it will now head towards the recent trough at 47.7. Medium-term view for the currency will turn negative only on a strong weekly close below 47.2.Supports for the ensuing sessions would be at 46.95 and 46.65.

Short-term outlook remains Bearish for Rupee No Remarks

August, 2010 Investment Monitor 41

Mutual Fund

Mutual Fund selection in current scenerio

A

mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals). The mutual fund will have a fund manager that trades (buys and sells) the fund’s investments in accordance with the fund’s investment objective.

Types of Mutual Fund Schemes

SIP Route to Wealth Creation A systematic investment plan (SIP) is an investment option that involves investments on a systematic basis over a period of time.

Under a SIP option, an investor commits making a regular investment in a particular mutual fund or deposit. Investing in mutual funds through this route is much easier, more efficient, and is one of the best ways to see your investments grow over time.

In a SIP, the investor invests a specific amount of money for a continuous period, at regular intervals. By doing this, you can compulsorily save a fixed amount each month. Further, you can avail the advantage of rupee cost averaging. This is because you automatically participate in the market swings. The amount of investment remaining the same, you buy more units in a declining market and less in a rising market.

By consistently investing the same amount at regular intervals.

The advantage of rupee cost averaging is that the net asset value (NAV) is averaged out, as you will be entering the fund at differ-

42 Investment Monitor August, 2010

ent NAVs, which may be higher or lower depending on the market condition.

One should invest as early as possible to earn more and more returns. Power of compounding helps the investor to fetch more returns in SIP as compare to lump sum investment option in a long term. As such, the returns are enhanced under the SIP schemes.

When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. You reduce your average cost per share over time. Thus, rupee cost averaging helps make market fluctuations work for you, and reduces the risk when you invest all your money just before a market downturn.

So SIPs can be especially effective while buying equity funds. The NAVs of these funds can vary widely. SIP options The SIP option is available with all types of funds like equity, income or gilt. You can change a SIP structure only in the multiples of the SIP amount. In case you are investing in two different schemes of the same fund, you can fill in a common SIP form for all the schemes.

SIP offers more flexibility and helps identify funds that suit your risk-return profile.

In case of SIPs, the asset allocation keeps pace with the investor’s changing risk-return profile. Besides, investing this way offers instant liquidity whenever required. An investor who is not having a lump-sum amount to invest and also does not want to take much risk on his investments should always select a SIP option.

This will enable him to invest regularly and improve investing discipline. Because it’s systematic, a SIP ensures you plan for your long-term goals along with the shortterm ones. It is a disciplined investment plan and helps reduce your susceptibility to market fluctuations. It is a powerful tool that helps preserve capital and also translates into creation of wealth in the long run.

These are ideally suited for investors who wish to sail smoothly in turbulent market conditions. The investor is at a liberty to enter or exit from the scheme whenever he wishes to, depending on the market conditions. He can redeem his units at any time irrespective of whether he has completed his minimum investment in that scheme or not.

For more understanding lets see the chart -1

Investor’s Knowledge Point 1.Why invest in Mutual Fund

Investing in Mutual Funds offers several benefits: Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets.

Mutual Fund large cap (SIP of Rs 5000 monthly) Scheme Name

Birla SL Equity

1 year

5 year

10 year

Total Amt Invested

Present Value

Profit - sip

Total Amt Invested

Present Value

Profit - sip

Total Amt Invested

Present Value

Profit - sip

60,000

65,062

5,062

300,000

450,907

150,907

600,000

2,720,951

2,120,951

HDFC Top 200

60,000

66,693

6,693

300,000

522,460

222,460

600,000

3,358,150

2,758,150

DSPBR Top 100 Equity

60,000

64,718

4,718

300,000

486,127

186,127

600,000

1,176,407

576,407

ICICI Pru Growth

60,000

63,942

3,942

300,000

423,868

123,868

600,000

2,013,147

1,413,147

Kotak 30

60,000

65,264

5,264

300,000

439,734

139,734

600,000

1,115,202

515,202

Reliance Vision

60,000

66,582

6,582

300,000

461,579

161,579

600,000

3,443,137

2,843,137

Tata Pure Equity

60,000

66,329

6,329

300,000

469,018

169,018

600,000

2,649,112

2,049,112

Chart-1 Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.

Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.

Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.

Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments.

Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience.

SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.

2. Points to remember while investing in Mutual Fund

Do not speculate: Always evaluate risk-taking capacity.

Do not chase returns: Because what goes up must come down.

Do not put all eggs in one basket: Diversification reduces the risk.

Do not stop working on Mutual Funds: Continuous evaluation of funds is a must.

Do not time the market: Every time is good for investments.

Mutual Funds are subject to market risks and there is no assurance that the fund objective will be achieved.

NAVs fluctuate depending on forces affecting the Capital market.

Past performance may or may not be sustained in the future.

3. Monitoring Mutual Fund Investments

Most people think that once they invest in a fund, the job of taking care of their investments has been successfully passed on to the fund manager. But this can be a dangerous strategy to adopt. Let us explain why.

Fig in Rs. The performance of a fund, especially equity-oriented funds, is to quite an extent dependant on the calls of the fund manager.

If your fund manager quits, the investment style may change, and the fund’s performance could suffer. Hence, you should carefully monitor the fund’s performance any time such changes occur, and exit the fund if its performance dips drastically.

How do you keep track of your fund’s performance? All AMCs provide you with their annual report, a half-yearly report (unaudited results) and a quarterly and monthly fact sheet/ newsletter. Over and above this, public disclosure of the NAV of a scheme happens on the AMFI website, on the AMC’s own website, as well as in the financial dailies. While NAV information tells you very little other than how well your investments are doing, it is basically the portfolio disclosure that happens through the newsletters and AMC reports that one should be interested in. Also, try to gauge the fund’s performance vis-à-vis its benchmark and its peers (at least to the extent possible).

The fund manager will not tell you when to exit the fund.

This is something you will have to decide, based on the information available. So, keep track of the fund’s performance. After all, it’s your money and you should know what the fund is doing with it.

4. NAV

A mutual fund’s price per share or exchange-traded fund’s (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.

How to Calculate NAV Calculating mutual fund net asset values is easy. Simply take the current market value of the fund’s net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00

5.Tips To Do Mutual Fund Analysis

It is needless to say that you need to have some rudimentary knowledge of investing in stocks and securities apart from street smartness to research mutual funds. Here are a few tips for analysis before investing mutual funds.

August, 2010 Investment Monitor 43

Mutual Fund Look at the portfolio of your pick of funds Most of the plans will have invested in multiple stocks or securities for diversification. Critical point here is in what proportion they have invested in different stocks. Giving a higher weightage to a high returning stock leaves less opportunity for broader allocation and may back fire when market is bearish (plummeting steadily).

Also higher returning stocks carry high element of risk.

The Optimum Portfolio Size What should be the optimum portfolio size (assortment investments under one plan) for your pick of fund? Well, opinions are divided about this, but it is crucial to look into the specifics of stock bets and sectors you will be exposed to. Higher exposure to specific sectors may see you loosing out on broad based rallies in the bourses (stock markets). Optimally 65 % to 85% may be allocated in stocks from different sectors for diversification plus growth and the balance being in typical bond and money market instruments.

Is Your Pick of Funds Really Diversified Notice that the competing plans, though from different fund companies, perform almost on par as if they have a correlation. They indeed have. So, does it mean you have diversified by spreading your money amongst them? Well, think again. Similar plans have similar pattern of their holdings of stocks and with a similar portfolio. This means, in actual effect you are not diversifying. They all go up and down almost as if they do it in tandem. For clear diversification, pick those with different portfolios though they are similar plans (ex: growth, index or dividend paying etc).

6. Is Low NAV Cheap?

Is a fund with a low NAV a better investment option than a fund with a higher NAV? Since you can buy more units when the NAV is low, isn’t it cheaper? Should mutual fund schemes with a higher NAV be avoided? These are questions, which trouble many firsttime investors in mutual funds.The answer to these questions is that it is irrelevant how high or low the NAV of a fund is. The amount of your investment remaining unchanged, between two funds with identical portfolios, a low NAV would mean a higher number of units held and consequently a high NAV would mean lower number of units held. But under both circumstances, the product of the number of units and the applicable NAV, which is the value of your investment, would be identical. Thus it is the stocks in a portfolio that determine returns from a fund, the value of the NAV being immaterial. When one sells those units, the return will be the same as that of another scheme, which has performed similarly. The ‘cost’ of a scheme in terms of its NAV has nothing to do with returns. What you want to buy in a scheme is its performance. The only instance where a higher NAV may adversely affect you is where a dividend has to be received. This happens because a scheme with a higher NAV will result in a fewer number of units and as dividends are paid out on face value, higher NAV will result in lower absolute dividends due to the smaller number of units. But even here, total returns will remain the same. So from whichever angle you see it, the NAV makes no difference to returns. Mutual fund schemes have to be judged on their performance. And the simplest way to do this is to compare returns over similar periods.

7. Ground Rules for Investing

Investing is a complex exercise only because we insist on making it so. But the basic principles are simple. As simple that anyone can become a good investor just by following simple and easily understood rules, which also help avoid big mistakes. Here are my rules for investment success.

Develop a Plan: For your short-term goals, make sure you’re

44 Investment Monitor August, 2010

taking appropriate risks. Invest money that you’ll need in the next two years to five years in cash and short-term bonds. If you’ve taken on too much risk for short-term objectives, pull back now. For your long-term financial goals, consider equities.

Invest Regularly: Investing a little bit of money each month is the surest way to reduce the risk of investing, because you lessen the possibility of buying at the market top. Also, no one is smart enough to anticipate all the moves, both up and down.

Buy and Hold: Short-term trading makes more brokers than investors rich. The income tax department likes the practice, too. If you meet anyone who claims to have made money through shortterm trading, resist your temptation to listen any further and move on to a more productive conversation.

Start Early: It is not the “market timing” but time in the market that matters. Power of compounding will turn things in your favour.

Investing is a long-term proposition. Research your investments, remember your goals, re-examine your risk, and limit how much you listen to day-to-day market commentary. And don’t let your emotions overpower your sense of reason.

Understanding Risk Ratios Sharpe Ratio - The Sharpe ratio tells us whether a portfolio’s

returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio’s Sharpe ratio, the better its riskadjusted performance has been. A higher Sharpe ratio is therefore better as it represents a higher return generated per unit of risk. Thus the Sharpe ratio should be used to compare the performance of a number of funds. Alternatively one can compare the Sharpe ratio of a fund with that of its benchmark index. For an investor who puts in all his/her money in a single fund, Sharpe ratio is a useful measure of risk-adjusted return.

Beta - the beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole.

This common measure compares a mutual fund’s volatility with that of a benchmark and is supposed to give some sense of how far you can expect a fund to fall when the market takes a dive, or how high it might climb if the bull is running hard. A fund with a beta greater than 1 is considered more volatile than the market; less than 1 means less volatile. So say your fund gets a beta of 1.15 -- it has a history of fluctuating 15% more than the benchmark If the market is up, the fund should outperform by 15%. If the market heads lower, the fund should fall by 15% more.

Standard Deviation - A statistical measure of the historical

volatility of a mutual fund or portfolio, usually computed using 36 monthly returns. More generally .a measure of the extent to which numbers are spread around their average. Meet the most popular of the risk measures -- one with a distinct advantage over beta. While beta compares a fund’s returns with a benchmark, standard deviation measures how far a fund’s recent numbers stray from its long-term average.

Mutual Fund R – Squared - A statistical measure that represents the percentage of a fund’s or security’s movements that are explained by movements in a benchmark index. -squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A higher Rsquared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100, yet has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta.

Sr No

Top 10 Average Assets under Management (AAUM) for the month of JUN-2010 (Rs in Lakhs) . See Chart -2 For Recommended schemes See chart -3

Mutual Fund Name

Avg AUM for the month (Rs in Lakhs)

1

Reliance Mutual Fund

10132015.43

2

HDFC Mutual Fund

8664809.74

3

ICICI Prudential Mutual Fund

7379542.94

4

UTI Mutual Fund

6444564.61

5

Birla Sun Life Mutual Fund

6311155.02

6

Franklin Templeton Mutual Fund

3456392.05

7

SBI Mutual Fund

3373338.68

8

LIC Mutual Fund

3004938.17

9

Kotak Mahindra Mutual Fund

2854087.32

10

DSP BlackRock Mutual Fund

2141574.99

Chart- 2 EQUITY FUNDS ( DIVERSIFIED) Return(Annualized) % Scheme Name

Latest NAV

HDFC Top 200

198.394

ICICI Pru Dynamic

100.92

Reliance Vision

271.55

Sundaram Select Focus ICICI Pru discovery

Fund Size (in Cr)

1 Yr

3 Yr

7220.6

37.66

2,281.56

44.42

3,502.5

86.79 46.89

Historical Risk Ratios 3Yrs 5 Yr

Std Dev

16.66

27.92

33.37

11.69

25.52

29.98

40.54

7.73

22.65

34.59

1,090.38

31.17

8.32

23.55

1,185.20

68.79

16.66

23.79

Sharpe Ratio

Beta

R- Square

0.51

0.92

0.96

0.38

0.81

0.92

0.27

0.95

0.95

37.88

0.30

1.02

0.92

39.24

0.46

0.99

0.81

ELSS Return(Annualized) % Scheme Name

Latest NAV

Fund Size (in Cr)

1 Yr

3 Yr

HDFC Tax Saver

224.1

2,520.82

52.91

ICICI Pru Tax Plan

135.29

1,179.34

57.50

Historical Risk Ratios 3Yrs 5 Yr

Std Dev

Sharpe Ratio

Beta

R- Square

11.85

21.20

33.90

0.36

0.92

0.94

11.77

18.48

37.01

0.37

0.97

0.87

Reliance Tax Saver

20.64

2,184.44

46.64

8.63

-

33.18

0.29

0.87

0.88

Sundaram BNPP Tax Saver

43.40

1,355.65

32.18

12.06

23.12

35.56

0.38

0.96

0.92

Kotak Tax Saver

18.12

555.46

36.72

1.80

-

37.45

0.13

1.01

0.93

Balanced Funds Return(Annualized) % Scheme Name

Latest NAV

Fund Size (in Cr)

1 Yr

Historical Risk Ratios 3Yrs

3 Yr

5 Yr

Std Dev

Sharpe Ratio

Beta

RSquare

ICICI Pru Balanced

43.01

262.62

27.66

4.56

14.49

24.62

0.14

0.93

0.96

HDFC Prudence

200.90

4,249.51

48.72

15.91

24.51

29.15

0.50

1.07

0.89 0.86

Birla SL '95

296.96

302.58

33.76

13.03

20.98

27.83

0.41

1.00

Tata Balanced

79.84

275.66

36.27

11.32

20.10

27.47

0.39

1.03

0.94

Reliance Reg Savings Bal

21.46

562.9

37.41

19.45

16.37

0.16

0.63

1.05

0.90

MIP Return(Annualized) % Scheme Name

Historical Risk Ratios 3Yrs

Latest NAV

Fund Size (in Cr)

1 Yr

3 Yr

5 Yr

Std Dev

Sharpe Ratio

Beta

RSquare

ICICI Pru MIP 25 reg

18.74

441.39

10.70

7.61

10.60

11.19

0.32

1.20

0.73

Reliance MIP

20.88

4,953.74

16.38

14.18

13.04

10.45

0.93

0.96

0.54

HDFC MIP-LTP

21.94

6,668.43

15.93

11.81

13.27

10.60

0.70

1.14

0.73

Birla SL MIP II-Wealth 25

17.22

310.68

10.84

6.41

8.96

12.01

0.25

1.28

0.72

DSP BR Savings Mgr Aggr

18.43

162.40

9.59

7.95

10.45

6.63

0.56

0.70

0.72

Chart -3

August, 2010 Investment Monitor 45

Fixed Deposit

Fixed Deposits / Income- Safer Option For Investors

A

n investment that provides a return in the form of fixed periodic payments and eventual return of principal at maturity. Unlike a variable-income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance.

1. High interest.

2. Short-term deposits as well as long term 3. Lock-in period is only 6 months (Min ) 4. No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year 5. The benefits of company deposit are numerous like superior returns from reputed companies, fixed and assured returns , premature enThe best route to earn fixed income is to invest in fixed deposit of cashment , simplicity of transactions, TDS benefits, wide choice, All these features have made company deposits a preferred instrument of companies and capital gain bonds investment.

Fixed Deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial insti- Like most investment option, Company Fixed Deposits are a mixed tutions and Non-Banking Finance Companies (NBFCs) also accept bag. Company FDs can be an interesting investment option if you such deposits. Deposits thus mobilised are governed by the Com- know how to select the right FD, and how to avoid the no-so-good panies Act under Section 58A. These deposits are unsecured, i.e., ones. if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option Here are some of the points that investors should An example of a fixed-income security would be a 5% fixed-rate government bond where a $1,000 investment would result in an annual $50 payment until maturity when the investor would receive the $1,000 back. Generally, these types of assets offer a lower return on investment because they guarantee income.

Why to Invest in Fixed Deposit ?

Since then company deposit market has grown by leaps and bounds. Today, company deposit market has grown to approximately Rs.25,000 crores. Hundreds of top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej etc. and government companies like HUDCO are accepting deposits from public. The numbers of depositors have increased to around 5 million. Investment in fixed deposit will fetch an investor –

keep in mind

Spread your risk - The deposits should be spread over a large number of companies engaged in different industries. This way, you’ll be able to diversify your risk among various industries/companies. Try not to put more than 10% of your total investments in one particular company.

Choose the right period of deposit- Ideally, the investment should be for 1 to 3 years depending upon the rate of interest.

Periodic review- The performance of the companies should be reviewed at maturity. This will help you decide whether to renew or reshuffle the deposit. It is also wise to keep a track of these companies by checking their share prices, annual reports and other details reported in newspapers.

Rate of Interest ( % )

Comany Name

Minimum Deposit (In Rs)

6M

12M

24M

36M

48M

60M

72M

84M

SHRIRAM UNNATI

25000

-

8.75

9.50

10.00

10.00

10.00

-

-

UNITECH LTD

25000

11.00

11.00

11.50

12.00

-

-

-

-

DHFL ASHRAY PLUS DEPOSIT

2000

-

9.00

9.10

9.25

9.25

9.25

9.25

9.25

HUDCO (Ind/Trust)

10000

7.00

7.25

7.60

7.60

8.25

8.25

8.25

NHB Suvridhi (Tax Saving) (ind/huf only)

10000

46 Investment Monitor August, 2010

8.00

Fixed Deposit Factors to be considered while selecting a company for fixed deposit investment How To Choose A Company For Making Deposit

There are many companies operating in Company Deposit market.

Investors, however, have to be careful while selecting a company for investing their hard earned money.Investor should keep some points in their mind before investing .

One can spread his investment in more than one company, so that interest from one company does not exceed Rs. 5000/Further, advantage of investing in company fixed deposits is that one can analyse the company before investing in it because companies accepting deposits are old-established reputed companies with proven track records.

It is also important that company fixed deposit should be made for short term , i.e., tenure should be for 1-4 years depending upon the rate of interest.This will help the investor to switch to other company if need be Recently, nomination facility has been introduced in company fixed deposits.

Following is a checklist for selecting good companies: Period of Deposit Ideally the investment should be for 1 to 4 years depending upon the rate of interest.

Capital Gain Bonds: ( Tax Saving u/s 54EC) REC – ( Rural Electrification Corporation Ltd) Minimum Amount

Amt. Rs. 10000/-

Minimum Bond

1 (one) Bond

Period

3 years (lock in)

Rate of interest

6.00% p.a.

NHAI – National Highway Authority of India Minimum Amount

Rs.10000

Minimum Bond

1 (one) Bond

Period

3 years ( lock in)

Rate of interest

6.00% p.a.

Rural Electrification Corporation Limited (REC) and National Highway Authority of India (NHAI) are permitted to issues capital gains bonds under Section 54 EC. Some key features of Section 54 EC bonds are: Highest credit rating of AAA by CRISIL, CARE and FITCH. Interest is taxable although no TDS is deducted.

Lock-in of around 3 years and non- transferable.

Minimum amount of investment Rs10000 and multiples.

Periodic Review of the Companies The performance of the companies should be reviewed at maturity i.e., whether to renew or reshuffle the deposit. A watch should also be kept over the companies by checking their share prices, annual reports and other news reported in the commercial columns of daily papers.

Limits on raising Company Deposits Manufacturing companies are permitted to mobilize deposits as indicated below : Up to 25% of their net worth from their public; and Up to 10% of their net worth from the share-holders and others.

Net worth means paid-up capital plus free reserves, minus miscellaneous expenditure, if any

Recommended Fixed deposit Schemes Capital Gain Bonds

Capital Gains Bonds are instruments offering you tax exemption for transferring gains of long term capital assets. Under Section 54 EC of Income Tax, 1961 an investor need not pay any tax on any long-term capital gains arising on sale of any asset, if the amounts of capital gains are invested in certain specified bonds.

A part from Fixed deposit , some other option prevails for fixed income purpose (these are some tax saving schemes ) which are as follows –

1. Capital gain bonds – Capital gain bonds ( under sec - 54 EC )

Under Section 54 EC of Income Tax, 1961 and investor need not pay any tax on any long-term capital gains arising on sale of any asset, if the amounts of capital gains are invested in certain specified bonds.

2. Schemes under section 80 C –

1. Fixed deposits for a duration of five years with banks and post offices: One of the bug bears senior citizens had with section 80C was that it leaned towards the younger generation by giving tax breaks for long-term corpus building products or on home loans. There was nothing that allowed a retired person to earn an income and yet get a tax break. The extension of specific five-year bank and post office deposits to come under section 80C fills this gap.

The current rate of interest is between 5.70% and 8.25% a year.

Like Hudco deposits , HUDCO Public Deposit Scheme qualifies under Section 80C (2)(xvi)(a) of Income-tax Act, 1961. Accordingly, the deposits with minimum lock in period of 5 years made under HUDCO Public Deposit Scheme will qualify for deduction from gross total income upto Rs. 1,00,000/- and NHB SUVRIDHI , duration of deposit is 60 months, interest rate offered is 8 % .

Return 5.70-8.25% Duration 5 years Safety zero risk

August, 2010 Investment Monitor 47

Insurance Schemes

TATA AIG LIFE INSURANCE MAHA LIFE GOLD

Tata AIG Life MahaLife Gold Plan is truly one of a kind. For starters, it offers you the following benefits: Only a 15-year premium paying period for lifetime Coverage.

Guaranteed annual cash payment of 5% of Sum Assured from the 0th policy anniversary onwards.

On death or at maturity at age 100, the entire Sum Assured will be paid.

Annual Cash Dividends* from the 6th policy Anniversary onwards.

Tax benefits as per current tax laws and subject to Amendments made from time to time.

BENEFIT TABLE (RS.) Sample illustration showing the Benefit for a Sum Assured of Rs. 3,00,000 & Life Expectancy of 80 Years Guaranteed Benefits Age

5 35 45

Sum AsAnnual Premium* sured (1) 26,550 300000 26,550 300000 26,700 300000

Non Guaranteed Benefits Accumulated Cash Dividend## Accumulat- High Rate Low Rate ed Coupon# ( 2) (3) (4) 990000 17,85,600 4,03,200 540000 9,48,600 2,14,200 390000 6,69,600 1,51,200

Death Benefit High Rate

Low Rate

(1)+(2)+(3) (1)+(2)+(4) 30,75,600 16,93,200 17,88,600 10,54,200 13,59,600 8,41,200

* Premium payable for 15 years. # Coupons accumulated without interest till age 80 *Annual Cash Dividends are not guaranteed and are based on the years for the purpose of This illustration. actual Performance of the Company. ## Annual Cash Dividend accumulated without interest. Annual Cash.

WHO IS ELIGIBLE FOR THIS POLICY? One is eligible for this policy right from birth. Which Means, if you buy this policy for your child, you only have To pay premiums for 15 years, after which the child gets An income as well as coverage for his entire life. The maximum age at entry is 60 years. This makes the Policy ideal for providing lifelong income and protection.

WHAT IS THE RATE OF PREMIUM?

The premium is decided according to the age of the Applicant and is dependent on the coverage chosen. The Tata AIG Life MahaLife Gold Plan has four premiums Paying age bands. 0-35, 36-45, 46-50 and 51-55 years. Premiums from age 56-60 are age-specific rates.

The Minimum coverage limit is Rs. 25,000 while the Maximum coverage is subject to approval from financial Underwriters.

PAYOUT IN CASE OF DEATH BELOW AGE 4

In case of unfortunate loss of life before the completion of age 4 of the life insured, the amount payable will be as per the table given below Age at the time of death

Amount payable

0

20% of Sum Assured

1

40% of Sum Assured

2

60% of Sum Assured

3

80% of Sum Assured

48 Investment Monitor August, 2010

Dividends are payable from 6th policy anniversary and are not guaranteed Some benefits are guaranteed and some benefits are variable with returns Based on the future performance of your company (Tata AIG Life).

If your Policy offers guaranteed returns then these will be clearly marked “Guaranteed” in the illustration table on this page. If your policy offers Variable returns then the illustrations on this page will show two different Rates of assumed future investment returns.

These assumed rates of return Are not guaranteed and they are not the upper or lower limits of what you Might get back as the value of your policy is dependent on a number of Factors including future investment performance.

The above Annual Cash Dividends in columns (3) & (4) have been determined using assumed future Investment returns of 10% & 6% respectively. The rates used have been set Annual Cash Dividend accumulated without interest. Annual Cash Dividends are payable from 6th policy anniversary and are not guaranteed.

HOW WILL I RECEIVE MY ANNUAL COUPONS AND ANNUAL CASH DIVIDENDS? You will receive a cheque every year for Coupons from the 10th policy anniversary onwards and towards Annual Cash Dividends from the 6th policy anniversary onwards.

Insurance Schemes

BIRLA SUN LIFE INSURANCE DREAM ENDOWMENT PLAN

Presenting the BSLI Dream Endowment Plan, a plan that gives you the guarantee of Receiving your chosen Basic Sum Assured on the Guaranteed Savings date chosen by you. What’s more, you retain the freedom to keep pace with the ever changing world of your dreams for your family.

You will receive a minimum amount of no less than the Basic Sum Assured chosen by you on the Guaranteed Savings Date of your choice.

You have the freedom to choose the number of years you want to pay your premiums.

You have the freedom to increase the financial security for your loved ones by choosing an Enhanced Sum Assured You have the freedom to increase your savings by choosing an Enhanced Savings Premium You have the freedom to meet any emergency funds requirements by making partial withdrawals.

You enjoy tax benefits under section 80C and section 10(10D) of the Income Tax act, 1961

Plan at a glance

Entry Age - 30 days to 65 years Policy Term - 30 years Guaranteed Savings Date - 10th , 15th , 20th , 25th and 30th policy anniversary Pay Term - Single pay | Short pay - 5, 10, 15, 20 years Guaranteed Savings Date Basic Sum Assured - Minimum Rs. 3,00,000 , subject to minimum Basic Premium Rs. 8,000 Enhanced Sum Assured - Minimum Rs. 50,000 Entry Age: 18 to 65 years, max age on Guaranteed Savings Date: 75 years Enhanced Savings Premium - Minimum Rs. 5,000

YOUR BASIC CHOICE

1. Basic Sum Assured - the minimum death benefit payable on death of the life insured . You choose the Basic Sum Assured to meet your particular insurance and guaranteed savings objectives, subject to a minimum of Rs. 3,00,000 and minimum Basic Premium of Rs. 8,000.

2. Guaranteed Savings Date - the policy anniversary on which the Guaranteed Savings Fund is vested. On this date, the Guaranteed Savings Fund is guaranteed to equal the Basic Sum Assured and will then grow at 3% p.a. less policy charges. Once vested, the Guaranteed Savings Fund is the minimum value of your Basic Fund Value payable on death, surrender or maturity - guaranteed. You choose the Guaranteed Savings Date to meet your particular guaranteed savings objectives. Your options are 10th , 15th , 20th , 25th or 30th policy anniversary.

3. Pay Term - your annual policy premium is due every policy year prior to the Guaranteed Savings Date. We also offer a single pay option, short pay options being 5-Pay, 10-Pay, 15-Pay or 20Pay for your convenience. Based on your above choices and the

entry age and gender of the life insured, we will calculate the Basic Premium payable by you. Basic Premium (net of an investment guarantee charge) will be used to purchase units in the investment fund Enhancer under Guaranteed Option.

Guaranteed Savings Fund is the accumulation at 3% per annum of all Basic Premiums and Enhanced SA Premiums (net of an investment guarantee charge) paid till date less policy charges deducted monthly less any partial withdrawals from the Basic Fund Value.

YOUR BASIC BENEFITS

1. Guaranteed Additions - in the form of additional units will be added to your policy on the 10TH policy anniversary and on every 5th policy anniversary thereafter while your policy is in effect. Each Guaranteed Addition is 2% of the average Basic Fund Value in the last 60 months.

2. Death Benefit - in the unfortunate event the life insured dies while the policy is in effect, we will pay to the nominee the higher of Basic Fund Value or Basic SumAssured .

3. Surrender Benefit - in case of emergencies, you can surrender your policy and receive the Basic Fund Value less applicable surrender charge. There is no surrender charge once you have completed 5 policy years.

4. Maturity Benefit - is payable once your policy matures at the end of the policy term. You will receive the Basic Fund Value at maturity.

YOUR ENHANCED SUM ASSURED ;-

1. Enhanced Sum Assured - is optional and is the additional amount you desire to be paid under the Death Benefit prior to the Guaranteed Savings Date. You can choose any amount of Enhanced Sum Assured, subject to a minimum of Rs. 50,000. e will calculate the Enhanced SA Premium payable by you and this premium (net of an investment guarantee charge) will purchase units in the investment fund Enhancer under Guaranteed Option and thus augment your Basic Fund Value.

2. Enhanced Savings Premium - is optional and is the additional premium you wish to invest in this plan. You can choose any amount of Enhanced Savings Premium, subject to a minimum of Rs. 5,000. Enhanced Savings Premium (net of a policy allocation charge) is invested in the Self-Managed Option. Self-Managed Option gives you access to our well established suite of 10 investment funds, complete control in how to invest your premiums and full freedom to switch from one investment fund to another. 10 investment funds range from 100% debt to 100% equity to suit your particular needs and risk appetite - Income Advantage, Assure, Protector, Builder, Enhancer, Creator, Magnifier, Maximiser, Multiplier and Super 20. If you wish to diversify your risk, you can choose to allocate your Enhanced Savings Premium in varying proportions amongst the 10 investment funds. Our only requirement is that the percentage allocated to any investment fund be in increments of 5%, ranging from 5% to 100%. You also have full flexibility to switch monies from one investment fund to another at any time provided the switched amount is for at least Rs. 5,000.

Switches must however be within the investment funds offered under the self managed option.

Partial Withdrawals

You are allowed to make unlimited partial withdrawals free of charge any time after (a) three complete policy years or (b) life insured attaining the age of 18, whichever is later. The minimum amount of partial withdrawal is Rs. 5,000. There is no maximum limit, but you are required to maintain a minimum Fund Value equal to one annual policy premium plus any surrender charge.

August, 2010 Investment Monitor 49

Derivative Article

Warrants: A HighReturn Investment Tool

A

warrant is like an option. It gives the holder the right but not the obligation to buy an underlying security at a certain price, quantity and future time. It is unlike an option in that a warrant is issued by a company, whereas an option is an instrument of the stock exchange. The security represented in the warrant (usually share equity) is delivered by the issuing company instead of by an investor holding the shares.

Companies will often include warrants as part of a new-issue offering to entice investors into buying the new security. A warrant can also increase a shareholder’s confidence in a stock, provided the underlying value of the security actually does increase over time.

Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock. In the case of warrants issued with preferred stocks, stockholders may need to detach and sell the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so the investor can earn dividends.

Types of Warrants

Call warrant: A call warrant represents a specific number of shares that can be purchased from the issuer at a specific price, on or before a certain date.

Put warrant: A put warrant represents a certain amount of equity that can be sold back to the issuer at a specified price, on or before a stated date.

Covered warrants: A covered warrants is a warrant that has some underlying backing, for example the issuer will purchase the stock beforehand or will use other instruments to cover the option.

Basket warrants: As with a regular equity index, warrants can be classified at, for example, an industry level. Thus, it mirrors the performance of the industry.

Index warrants: Index warrants use an index as the underlying asset. Your risk is dispersed—using index call and index put warrants—just like with regular equity indexes. It should be noted that they are priced using index points. That is, you deal with cash, not directly with shares.

50 Investment Monitor August, 2010

Wedding warrants: are attached to the host debentures and can be exercised only if the host debentures are surrendered.

Detachable warrants: the warrant portion of the security can be detached from the debenture and traded separately.

Naked warrants: are issued without an accompanying bond, and like traditional warrants, are traded on the stock exchange.

Characteristics of a Warrant

Warrant certificates have stated particulars regarding the investment tool they represent. All warrants have a specified expiry date, the last day the rights of a warrant can be executed. Warrants are classified by their exercise style: an American warrant, for instance, can be exercised anytime before or on the stated expiry date, and a European warrant, on the other hand, can be carried out only on the day of expiration.

The underlying instrument the warrant represents is also stated on warrant certificates. A warrant typically corresponds to a specific number of shares, but it can also represent a commodity, index or a currency.

The exercise or strike price is the amount that must be paid in order to either buy the call warrant or sell the put warrant. The payment of the strike price results in a transfer of the specified amount of the underlying instrument.

The conversion ratio is the number of warrants needed in order to buy (or sell) one investment unit. Therefore, if the conversion ratio to buy stock XYZ is 3:1, this means that the holder needs three warrants in order to purchase one share. Usually, if the conversion ratio is high, the price of the share will be low, and vice versa.

In the case of an index warrant, an index multiplier would be stated instead. This figure would be used to determine the amount payable to the holder upon the exercise date.

Investing in Warrants

Warrants are transferable, quoted certificates, and they tend to be more attractive for medium-term to long-term investment schemes.

Tending to be high-risk, high-return investment tools that remain largely unexploited in investment strategies, warrants are also an attractive option for speculators and hedgers. Transparency is high and warrants offer a viable option for private investors as well.

This is because the cost of a warrant is commonly low, and the initial investment needed to command a large amount of equity is actually quite small.

Derivative Article Advantages

Let us look at an example that illustrates one of the potential benefits of warrants. Say that XYZ shares are currently priced on the market for Rs.1.50 per share. In order to purchase 1,000 shares, an investor would need Rs.1,500. However, if the investor opted to buy a warrant (representing one share) that was going for Rs.0.50 per warrant, he or she would be in possession of 3,000 shares using the same Rs.1,500.

Warrants are issued by private parties, typically the corporation on which a warrant is based, rather than a public options exchange.

Warrants issued by the company itself are dilutive. When the warrant issued by the company is exercised, the company issues new shares of stock, so the number of outstanding shares increases.

When a call option is exercised, the owner of the call option receives an existing share from an assigned call writer (except in the Because the prices of warrants are low, the leverage and gearing they case of employee stock options, where new shares are created and offer is high. This means that there is a potential for larger capital issued by the company upon exercise). Unlike common stock shares gains and losses. While it is common for both a share price and a outstanding, warrants do not have voting rights. warrant price to move in parallel (in absolute terms) the percentage gain (or loss), will be significantly varied because of the initial differ- Warrants are considered over the counter instruments, and thus ence in price. Warrants generally exaggerate share price movements are usually only traded by financial institutions with the capacity to in terms of percentage change. settle and clear these types of transactions.

Let us look at another example to illustrate these points. Say that share XYZ gains Rs.0.30 per share from Rs.1.50, to close at Rs.1.80.

The percentage gain would be 20%. However, with a Rs.0.30 gain in the warrant, from Rs.0.50 to Rs.0.80, the percentage gain would be 60%.

A warrant’s lifetime is measured in years (as long as 15 years), while options are typically measured in months. Even LEAPS (longterm equity anticipation securities), the longest stock options available, tend to expire in two or three years. Upon expiration, the warrants are worthless unless the price of the common stock is greater than the exercise price.

In this example, the gearing factor is calculated by dividing the original share price by the original warrant price: Rs.1.50 / Rs.0.50 = 3.

Warrants are not standardized like exchange-listed options. The The “3” is the gearing factor - essentially the amount of financial number of warrants that must be exercised by the holder to buy the leverage the warrant offers. The higher the number, the larger the underlying asset depends on the conversion ratio set out in the offer potential for capital gains (or losses). documentation for the warrant issue.

Warrants can offer significant gains to an investor during a bull market. They can also offer some protection to an investor during a bear market. This is because as the price of an underlying share begins to drop, the warrant may not realize as much loss because the price, in relation to the actual share, is already low.

Disadvantages

A Bittersweet Stock Jump

One notable instance in which warrants made a big difference to the company and investors took place in the early 1980s when the Reliance Industries received governmentally guaranteed loans totaling approximately Rs.1.2 cr. Reliance used warrants - 14.4 lacs of them - to “sweeten” the deal for the government and solidify the loans.

Like any other type of investment, warrants also have their drawbacks and risks. As mentioned above, the leverage and gearing warBecause these loans would keep the auto giant from bankruptcy, rants offer can be high. But these can also work to the disadvantage management showed little hesitation issuing what they thought of the investor. was a purely superficial bonus that would never be cashed in.

If we reverse the outcome of the example from above and realize a drop in absolute price by Rs.0.30, the percentage loss for the share price would be 20%, while the loss on the warrant would be 60% obvious when you consider the factor of three used to leverage, but a different matter when it bites a hole in your portfolio.

Another disadvantage and risk to the warrant investor is that the value of the certificate can drop to zero. If that were to happen before it is exercised, the warrant would lose any redemption value.

At the time of issuance Reliance stock was hovering around Rs.5, so issuing warrants with an exercise price of Rs.13 did not seem like a bad idea. However, the warrants ended up costing Reliance approximately Rs.311 lacs, as their stock shot up to nearly Rs.30. For the Indian government, this “cherry on top” turned quite profitable, but for Reliance it was an expensive afterthought.

Conclusion

Warrants can offer a smart addition to an investor’s portfolio, but warrant investors need to be attentive to market movements due Finally, a holder of a warrant does not have any voting, shareholdto their risky nature. This largely unused investment alternative, ing or dividend rights. The investor can therefore have no say in the however, can offer the small investor the opportunity for diversity functioning of the company, even though he or she is affected by without having to compete with the elephants any decisions made.

Comparison with Call Options

Warrants are very similar to call options. For instance, many warrants confer the same rights as equity options, and warrants often can be traded in secondary markets like options. However, there also are several key differences between warrants and equity options:

August, 2010 Investment Monitor 51

Investor Education

The Wacky World of Mergers and Acquisitions (M&As)

O

ne plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that’s the reasoning behind M&A.

The acquirer then builds up a substantial stake in its target at the current stock market price. Because this is done early in the morning, the target firm usually doesn’t get informed about the purchases until it is too late, and the acquirer now has controlling interest. In the U.K., there are now restrictions on this practice.

This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

A Saturday night special is a sudden attempt by one company to take over another by making a public tender offer. The name comes from the fact that these maneuvers used to be done over the weekends. This too has been restricted by the Williams Act in the U.S., whereby acquisitions of 5% or more of equity must be disclosed to the Securities Exchange Commission.

Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today’s dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value.

Types of M&As

There are several ways that two or more companies can combine their efforts. They can partner on a project, mutually agree to join forces and merge, or one company can outright acquire another company, taking over all its operations, including its holdings and debt, and sometimes replacing management with their own representatives. It’s this last case of dramatic unfriendly takeovers that is the source of much of M&A’s colorful vocabulary.

Hostile Takeover

This is an unfriendly takeover attempt by a company or raider that is strongly resisted by the management and the board of directors of the target firm. These types of takeovers are usually bad news, affecting employee morale at the targeted firm, which can quickly turn to animosity against the acquiring firm. Grumblings like, “Did you hear they are axing a few dozen people in our finance department…” can be heard by the water cooler. While there are examples of hostile takeovers working, they are generally tougher to pull off than a friendly merger.

Dawn Raid

This is a corporate action more common in the United Kingdom; however it has also occurred in the Unites States. During a dawn raid, a firm or investor aims to buy a substantial holding in the takeover-target company’s equity by instructing brokers to buy the shares as soon as the stock markets open. By getting the brokers to conduct the buying of shares in the target company (the “victim”), the acquirer (the “predator”) masks its identity and thus its intent.

52 Investment Monitor August, 2010

Saturday night special

Takeovers are announced practically everyday, but announcing them doesn’t necessarily mean everything will go ahead as planned.

In many cases the target company does not want to be taken over.

What does this mean for investors? Everything! There are many strategies that management can use during M&A activity, and almost all of these strategies are aimed at affecting the value of the target’s stock in some way. Let’s take a look at some more popular ways that companies can protect themselves from a predator. These are all types of what is referred to as “shark repellent”.

Golden Parachute

A golden parachute measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executives’ contracts include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money and therefore act as a strong deterrent to proceeding with their takeover bid.

Greenmail

A spin-off of the term “blackmail”, greenmail occurs when a large block of stock is held by an unfriendly company or raider, who then forces the target company to repurchase the stock at a substantial premium to destroy any takeover attempt. This is also known as a “bon voyage bonus” or a “goodbye kiss”.

Macaroni Defense

This is a tactic by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. Why is it called macaroni defense? Because if a company is in danger, the redemption price of the bonds expands, kind of like macaroni in a pot! This is a highly useful tactic, but the target company must be careful it doesn’t issue so much debt that it cannot make the interest payments. Takeovertarget companies can also use leveraged recapitalization to make themselves less attractive to the bidding firm.

Investor Education People Pill

Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense really depends on the situation.

ten provide little incentive to subsidiary managers, especially because their efforts are buried in the firm’s overall performance.

Poison Pill

With this strategy, the target company aims at making its own stock less attractive to the acquirer. There are two types of poison pills.

The ‘flip-in’ poison pill allows existing shareholders (except the bidding company) to buy more shares at a discount. This type of poison pill is usually written into the company’s shareholder-rights plan.

The ‘flip-over’ poison pill allows stockholders to buy the acquirer’s shares at a discounted price in the event of a merger. If investors fail to take part in the poison pill by purchasing stock at the discounted price, the outstanding shares will not be diluted enough to ward off a takeover.

An extreme version of the poison pill is the “suicide pill” whereby the takeover-target company may take action that may lead to its ultimate destruction.

Sandbag

With the sandbag tactic the target company stalls with the hope that another, more favorable company (like “a white knight”) will make a takeover attempt. If management sandbags too long, however, they may be getting distracted from their responsibilities of running the company.

White Knight

A white knight is a company (the “good guy”) that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a “black knight”). The white knight offers the target firm a way out with a friendly takeover.

Advantages

The rationale behind a merger and acquisition is that “the parts are greater than the whole.” These corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can help a company raise additional equity funds. A break-up can also boost a company’s valuation by providing powerful incentives to the people who work in the separating unit, and help the parent’s management to focus on core operations.

Most importantly, shareholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company’s traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent corporation. The parent company might attract more investors and, ultimately, more capital.

Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that’s great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company.

Disadvantages

That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap credit markets and costlier finance that may be affordable only for larger companies.

And the smaller size of the firm may mean it has less representation on major indexes, making it more difficult to attract interest from institutional investors.

Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance, the division of expenses such as marketing, administration and research and development (R&D) into different business units may cause redundant costs without increasing overall revenues.

Conclusion

The next time you read a news release that says that your company is using a poison pill to ward off a takeover attempt, you’ll now know what it means. More importantly, you’ll know that you have the opportunity to purchase more shares at a cheap price. M&A has an entire vocabulary of its own, expressed through some of the rather creative strategies employed in the process, such as the ones we’ve touched on above. Hopefully by reading this article you are at least a bit wiser in the wacky world of M&A terminology. By understanding what is happening to your holdings during a takeover or attempted takeover, you may one day even save money.

For employees of the new separate entity, there is a publicly traded stock to motivate and reward them. Stock options in the parent of-

August, 2010 Investment Monitor 53

Astro Market

Market

Planetary Movement in the Month of August Sun will remain in Cancer till 16th August and then enter into Leo and remained there for rest of the month.

New Moon will occur on 10th August while New Moon will occur on 24th August.

During the whole month, Mars will remain in Virgo with Saturn.

Jupiter is in Pisces and remained there for the whole month.

Venus will enter into its debilitated sign of Virgo on 21st August and remain there for whole month.

Saturn will remain in Virgo during the whole month.

Rahu & Ketu will remain in Sagittarius & Gemini respectively, during the whole month.

Mercury is in Leo and will remain there for rest of the month. Mercury will become retrograde on 21st August.

Chart during New Moon – Sunrise 10 August 2010

Chart during Full Moon – Sunrise 24 August 2010

During the month retrograde Jupiter in Pisces aspects fully on the combination of Saturn and Mars in Virgo. Rahu and Ketu are also in Square to the Yoga, adding strength. The month of August is expected to be highly volatile for the market.

Sectorwise Outlook Auto: The sector is likely to remain volatile with negative bias as profit booking is expected at higher levels.

FMCG: The sector is likely to remain in demand during the month and remain range bound.

Bank: The sector is likely to witness selling pressure during the month.

Pharma: The sector is likely to remain in demand during the month and remain range bound.

Oil & Gas: The sector is looking weak and profit taking may be witnessed.

IT: The sector is likely to witness selling pressure and is

Reality: The sector is likely to witness volatility with upward bias.

Metal: The sector is likely to witness profit booking during the start of the month. Fresh buying may emerge during the end of month.

Power: The sector is likely to remain in range.

54 Investment Monitor August, 2010

looking weak

Query Time

Query Time

Q. Hi sir, what is your advice on KGL? Can I invest in this stock?

Arun, M.P

Q I have purchased shares of Ind-Swift at an average rate of Rs 27.What is the future potential of this stock? Kindly advise since it comprises a huge chunk of my portfolio?

Ravi,Jaipur A. Ind-Swift with a face value of Rs 2 is currently trading at Rs 35 with a 52 week high/low of Rs 37.40/16.40 at a 20% premium to your acquisition cost. You can hold this stock for further upside gains.

Q. What are the future prospects of Voltas? Can I enter at current levels?

Rajat, New Delhi

A. The company’s net profit witnessed a growth of 51 % in FY10 on a YOY basis and was Rs 384 against Rs 254 crore for FY09 The margins have seen an improvement across the segments due to low commodity prices and a very significant pickup in the volumes of mining and construction equipment. You may enter it into and hold it on a long term basis..

Q. I have 100 shares of Bharti Airtel purchased at Rs 296.Please advise whether to hold or sell?

Ranjeet, U.P A. Due to 3G Auction and the Zain acquisition may also play a deterrent role in the future. We believe that the stock may underperform in the near term, our suggestion is that you should book profit and make a quick exit.

Q. I have 400 shares of XL telecom and energy at an average price of Rs 43.What are the prospects of this company?

Rohit, Jalandhar A. In terms of its financial position the company’s topline has declined significantly on a YOY basis. The company has posting net loss for the last five years. Given this situation, our suggestion is that you should exit the counter even if uou have to book loss.

A. Kgl has a vast geographical presence outside india. Its profit margins are also high. For long term investment you can keep this stock to have good returns.

Q. According to RR Research I am having a position of KSB Pumps @ 480. What do you suggest in near term ?

Rajesh, Varanasi A. Yes, KSB Pumps is trading at 578 levels. In near term it has a target of 650. You can hold this stock at this level to have a huge return.

Q. In previous magazine the cover story on yuan appreciation is really outstanding. We need such type of article so that our knowledge will improvise. Please comment on that?

Abhinav Biyani- Sirsa A. Thanks to your appreciation about the article. Its is in our best practice that we should provide to our investors some good stuff. It will be maintained in future also. Please read this session cover story on the topic India corporate shining. It will help you in understanding corporate behavior.

Q. I have purchased 500 Hpcl shares at 470? Please suggest me?

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.

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: monitor@rrfcl.com

August, 2010 Investment Monitor 55

Mailbox Mutual Fund Analysis.

I am a regular reader of your magazine. I actually find very difficult to enter into mutual fund market but after reading this article I realized that it’s a good investment tool to invest. I was skeptical about mutual fund markets but if I will invest in good funds then it will give me a good return.

Naresh, Gurgaon

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 Aban at your recommendations and get a huge return by selling it at 850 purchased at 750. Similarly KSB pumps has given a 100 point jump in which I had position and booked profit. I always followed your recommendations and got good profits. I believe that in future also i am going to receive same response.

Subash, Delhi

Market Commentary

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.

Ajay , 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 buy crude at 3526, I bought that and booked profit at 3650 which give me huge returns. Thank you so much for such outstanding calls.

The cover story – “China Currency Reforms”.

I am a regular reader of your magazine. Before reading this article I am not having such knowledge of currency market. But after reading this I actually built up with my concepts.

I realized the indirect relationships of inflation, currency reforms. It actually helped me a lot. I am expecting such kind of articles in near term also.

Vijay , Mathura

Data Monitor

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.

Santosh, Ranchi

Industry analysis

I am a regular reader of your magazine. The topic you covered “Fuel Deregulation” has covered most of the things. It gave me an insight of oil industry. It gave me an idea why government is deregulating oil prices.

Thanks for such wonderful articles.

Your suggestion are valuable to us. We look forward to a healthy feedback. Please mail your suggestion and recommedations at monitor@rrfcl.com

56 Investment Monitor August, 2010