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JUNE 2010, Rs. 25
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Volume XI-Issue(5)
This issue consists of 80 pages Including 24 pages of supplements on Mutual Fund Ready Reckoner
GREEK CRISIS A PARAPHRASE OF ECONOMIC TURBULANCE ?
Inside Stories With Stock Market Monitor
Plus Free Supplement
10
Market Commentary
12
Cover Story
45
Mutual Fund Articles
50
Insurance Articles
52
Investors Educations
Contents
CONTENTS | JUNE 2010 Head Office Ahmedabad Office Bangalore Office Chennai Office Chandigarh Office Dehradun Office Jaipur Office Kolkata Office Lucknow Office Mumbai Office Vadodara Office
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Volume: XI Issue :(6) June 2010 Editor: Rajat Prasad
Investment Monitor INSIDE STORIES Editor’s Desk..........................................3 News Bytes............................................4 Review & Analysis..................................6 Global Outlook.....................................18 Indian Economy....................................19 Industry Analysis..................................20
Delhi Associate division : Connaught Place Faridabad Office Ghaziabad Office Janakpuri Office Noida Office Pitampura Office Preet Vihar Office Rajendra Place ITO Office Vasant Kunj Office V.P. Research Research Team Designed by Media Marketing Exec.
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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.
Stock Market Monitor............................22 Equity Stock Ideas................................34 Equity Technical Analysis.......................36 Commodity Fundamentals.....................38 Commodity Technicals..........................40 Currency Fundamentals.........................42 Currency Technicals..............................44 Derivative Articles.................................46 FD Articles...........................................48 Query Time .........................................55 Mail Box...............................................56
GREEK CRISIS A PARAPHRASE OF ECONOMIC TURBULANCE ??
June, 2010 Investment Monitor 1
Editor’s Desk
Editor Desk
“ The U.S. economy is on solid footing as shown by the encouraging data. But there are still too many uncertainties about Europe. US purchases of new homes jumped in April to a two-year high and orders for durable goods climbed the most in three months, signaling the U.S. economy strengthened before the crisis of confidence in the European Union. The Bundesbank’s tight monetary policies exported recession across Europe as interest rates went up in countries that pegged their currencies to the deutsche mark. Europe’s single currency has plunged about 20% against the dollar in six months as Greece’s budget blowout undermines confidence in other indebted nations such as Portugal and Spain, fueling speculation the monetary union could splinter. Confidence in the system of European central banks is at stake. The most important thing would be to keep the purchases of government debt to a minimum and stop them as soon as possible. Coming home, short term interest rates have risen ahead of a 31 May deadline for telecos to pay for spectrum they won in the 3G auction. Government has raised $14.3 billion, nearly double the target, for 3G auction of high speed mobile spectrum. Inflation in India is moderating but the Government will continue to closely monitor the situation and, take all corrective steps to bring down prices, The RBI has shifted to a tighter monetary stance, having recently raised key policy rates in order to douse inflationary pressures. The Government expects a GDP growth of 8.5% during FY11 and has medium term target to achieve a growth rate of 10% per annum. Inflation for April stood at 9.59%, while food inflation is hovering at over 16%. With the expected rebound in agriculture should help limit further increases in food prices that have been a major contributor to recent high inflation. However, underlying inflationary pressures are likely to persist given the strong outlook for demand. It is difficult to forecast markets in the short run. But our economy is doing well and a key variable is oil price as India is very sensitive to oil price movement. If a weak global economy leads to lower oil prices, it is positive for us. At the current price, domestic markets are fairly valued. Over the medium to long term, returns should be in line with growth rates. The south west monsoon is important for India as about 60% of the country’s farmlands are rainfed and more than half of the workforce is employed in the agriculture sector. The quantum of rainfall in the crucial sowing month of July and distribution of rainfall during the monsoon season also holds key.”
RAJAT PRASAD
June, 2010 Investment Monitor 3
News Bytes
C O R P O R A T E N E W S
Balrampur signs pact with Tata Power to sell power
Balrampur Chini Mills Ltd said on Monday it has signed a pact with Tata Power Co Ltd to sell power at approximately 6.50 rupees per unit. The power will be sold from the firm’s 18 mega-watt Haidergarh unit currently and also from its Manakpur power plant, which will be operational from the second week of June, it said in a statement to the exchange.
Glenmark inks $325-mn licensing deal with Sanofi
Glenmark Pharmaceuticals licensed its chronic pain molecule to Sanofi Aventis for an upfront payment of $20 million (approximately Rs 89 crore), in a cumulative deal of $325 million (Rs 1,449 crore), the companies said on Monday. Glenmark is one of India’s few companies involved in original drug research. Costs of drug development is inhibitive, so the Indian company needs to sell molecules it discovers, in an out-licensing agreement with partners who can fund development till it is ready to be marketed. Glenmark expected to strike two such deals last fiscal, but remained in negotiations till March-end.
landmark sale of Ranbaxy to Japan’s Daiichi Sankyo in 2008. “The acquisition gives us immediate market leadership in India, the world’s second fastest-growing emerging market,” said Miles White, chief executive of Abbott Laboratories. Piramal will get $2.12 billion up front on completion of the deal in the second half of this financial and four unconditional annual $400 million payments helping Ajay Piramal, its eponymous owner, laugh his way to the bank, but making it a long haul for the acquirer to get returns.
Anil and Mukesh Ambani bury differences
In a major development, the two Ambani brothers -Mukesh and Anil- on Sunday decided to bury their differences and create an environment of harmony, co-operation and collaboration between their groups.”All existing non-compete agreement between the two groups executed in January 2006 cancelled,” Anil Ambani group said in a statement. The harmony comes within a few days of the Supreme Court declining to give any relief to younger brother in the gas dispute. “A new,
JK Lakshmi to acquire Egyptian co for Rs 800 cr
As part of its strategy to tap overseas markets, JK Lakshmi Cement, the Hari Shankar Singhania Group flagship, is holding talks to acquire an Egyptian cement firm for around Rs 800 crore. A person privy to the development said that the target company has an annual production capacity of two million tonne and the deal is likely to be sealed by the end of this calendar year. He, however, declined to disclose the identity of the overseas firm. The target was identified after a technical team from JK Lakshmi visited Egypt and the Middle East, he said. Delhi-based JK Lakshmi, which has a cash reserve of Rs 450 crore, had announced plans to raise Rs 700 crore later this year. A person close to the company said that if the Egyptianbuy materialised, it will be financed by the proposed fundraising and cash reserves.
BoR-ICICI bank merger: ICICI may be paying high for CASA gains
India’s largest private lender ICICI Bank’s proposed merger with the troubled bank — Bank of Rajasthan or BoR — appears to be an expensive deal. Going by the share swap details, BoR’s stock was valued roughly at twice its closing price on Tuesday.The rationale for the merger, according to the ICICI Bank management, is that it would have taken the bank three years to build the kind of low-cost current account and savings account (CASA) relationship, it gets to build upon now with the latest move. ICICI Bank has had its sights set firmly on expanding its share of CASA deposits. What BoR offers is its franchise — a network of 463 branches. According to a report by IDFC Institutional Securities, of the bank’s 463 branches, 271 are in metropolitan and urban areas.
Abbott to pay 17K crore for Piramal generics business
US drugmaker Abbott Laboratories has agreed to pay through the nose—$3.7 billion or Rs 17,000 crore—to buy the domestic formulations business of Piramal Healthcare in a scramble among global pharmaceutical companies to get a foothold in a promising market. The American company has valued a part of the Piramal business built over two decades of acquisition at more than nine times its sales, exceeding valuations of the
4 Investment Monitor June, 2010
simpler non-compete agreement executed limited to only gas-based power generation. RIL (Mukesh) and RNRL (Anil) will expeditiously negotiate gas supply arrangement as per the Supreme Court order and hope to conclude negotiations very soon,” it added. The cancellation of the existing noncompete agreement will provide enhanced operational and financial flexibility to both groups and greater ability t participate in high growth sectors such as oil and gas, petrochemical, telecom, power and financial services, the Anil Ambani Group said.
Godrej in pact to buy Latin American hair care firm
Personal care products maker Godrej Consumer Products Ltd (GCPL) is taking its global acquisitions spree to Latin America. On Sunday, it announced an agreement to buy a 100% stake in the Issue Group, which makes hair care products.The buyout is GCPL’s first in Latin America and the fourth in the past three months, taking total acquisitions since 2006 to six. “These acquisitions make us a leading player in 19 countries—five in Asia, 10 in Africa and now four in Latin America,” chairman Adi Godrej said. “It also makes us the second largest personal (care) products and insecticides company (in India), following Hindustan Unilever (Ltd), with sales of Rs4,000 crore, a third of which—or 35% revenues—(are) from overseas operations,” said Godrej. The Issue Group comprises Laboratorio Cuenca SA, Consell SA, Issue Uruguay and Issue Brazil. The Issue brand enjoys volume leadership in Argentina, with a market share in excess of 20%. The business had revenues of over $33 million (Rs155 crore) in 2009.
News Bytes Axis MF Launches Income Saver Fund
Axis Mutual Fund has launched a new scheme named as Axis Income Saver Fund, an open ended income fund. The new issue is open for subscription from 24 May 2010 and closes subscription on 16 June 2010. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. Post the new fund offer, the scheme re-opens for continuous sale and repurchase on 16 July 2010. The investment objective of the scheme is to generate regular income through investments in debt & money market instruments, along with capital appreciation through limited exposure to equity and equity related instruments. It also aims to manage risk through active asset allocation. The scheme shall offer growth and dividend options. Dividend option offers payout and reinvestment facility on a quarterly, half yearly and annual. The scheme expects to raise minimum subscription amount of Rs 1 crore during the NFO period. The minimum investment amount under this series is Rs 5000 and multiples of Re 1 thereafter. There will be no entry load. While, the exit load will be 1% if redeemed/switched out within 1 year from the date of allotment. The scheme would allocate 65% to 99% of assets in money market instruments and debt instruments securitized debt with low to medium risk profile. While, it will invest 1% to 35% in equity and equity related instruments with high risk profile. The scheme will be benchmarked against CRISIL MIP Blended Fund Index. Mr. Ninad Deshpande and Mr. Pankaj Murarka will jointly manage the fund.
Birla Sun Life MF announces changes in SID of all schemes
Birla Sun Life Mutual Fund has announced changes in the Scheme Information Document (SID) of all schemes. Accordingly, investor(s) who have provided their email address in the application form or any subsequent communication in any of the folio belonging to the investor, Electronic Mail (email) shall be treated as a default mode for sending various statutory communications including Abridged Annual Report to the investor. The investor(s) may however on request obtain a physical copy of Abridged Annual Report or any other statutory communication.
UTI MF announces change in benchmark index of UTI-Banking Sector Fund
UTI Mutual Fund has announced change in benchmark index of UTI-Banking Sector Fund with effect from 13 May 2010. Accordingly, the benchmark index has been changed from S&P CNX Banks Index to CNX BANK Index. UTI-Banking Sector Fund is an open-ended equity oriented scheme. The scheme has an investment objective to generate capital appreciation through investments in the stocks of the companies/institutions engaged in the banking and financial services activities.
Fidelity MF Pays Loyalty Premium to since inception investors in Fidelity Equity Fund
Fidelity Mutual Fund today announced a unique Loyalty Premium for investors in Fidelity Equity Fund (FEF) who have stayed invested since inception. This coincides with Fidelity completing five years of business in India. The eligible investors will receive 2 free units at current NAV for every 500 units of FEF held since inception. The units will be added to the eligible investors’ portfolios on 18 May 2010 at the applicable net asset value.
SBI MF Unveils PSU Fund
SBI Mutual Fund has unveiled a new fund named as SBI PSU Fund, an open ended equity scheme. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for
subscription from 17 May and closes on 14 June 2010. The objective of the scheme would be to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme through an active management of investments in a diversified basket of equity stocks of domestic Public Sector Undertakings and in debt and money market instruments issued by PSUs and others.
UTI MF Launches 367 Days Plan Series VIII – I
UTI Mutual Fund has launched a new fund named as UTI Fixed Term Income Fund – Series VIII – I (367 Days), a close ended income scheme. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for subscription from 20 May and closes on 28 May 2010. The investment objective of the scheme is to generate returns by investing in a portfolio of fixed income securities maturing on or before the date of maturity of the scheme. The scheme offers two options viz. growth and dividend option. The minimum application amount is Rs 10000 under dividend option and Rs 5000 under growth option & in multiples of Rs 10. Asset allocation will be in debt including securitized debt ranging from 05%-100% with risk profile low to medium and in money market instruments 0%-95% with low risk profile.
ICICI Prudential MF Announces Changes
ICICI Prudential Mutual Fund has announced the change in the names of ICICI Prudential Focused Equity Fund and ICICI Prudential Fusion Fund – Series II, with immediate effect. Proposed name of the schemes (respectively): ICICI Prudential Focused Bluechip Equity Fund, ICICI Prudential Equity Opportunities Fund .ICICI Prudential Focused Equity Fund is an open ended equity scheme, which has the investment objective to generate long-term capital appreciation and income distribution to unit holders from a portfolio that is invested in equity and equity related securities of about 20 companies belonging to the large cap domain and the balance in debt securities and money market instruments. ICICI Prudential Fusion Fund Series-II is a close ended fund and converted into an open-ended diversified equity scheme. The investment objective of the scheme is to generate longterm capital appreciation by investing predominantly in equity and equity related instruments of companies across large, mid and small market capitalization.
UTI MF announces changes under UTI Balanced Fund
UTI Mutual Fund has announced change in dividend distribution policy under UTI Balanced Fund-dividend option, with effect from 1 June 2010. Accordingly, dividend distribution under the dividend option will be made subject to availability of distributable surplus and a decision taken by the trustees to make dividend distribution. Existing policy says that total dividend distribution shall be at least to the extent of 90% of the distributable surplus available under dividend option of the scheme in any year/period. In clause IIC (a) of the Scheme Information Document (SID), under heading “change in investment pattern”, the paragraph i.e. the fund manager shall review the portfolio for adherence with the scheme asset allocation patterns and rebalance them with 30 days to confirm to the allocation limits, has been deleted.
M U T U A L F U N D N E W S
June, 2010 Investment Monitor 5
Review & Analysis
Review & BSE SENSEX MOVEMENT
BSE SENSEX MOVEMENT Company
27-05-2010
27-04-2010
Return %
Market Cap (Rs. in Crore)
PE Ratio
ACC
817.4
902.9
-9.5
15344.9
11.1
BHEL
2298.7
2475.4
-7.1
112523.5
31.4
Bharti Airtel
260.6
298.3
-12.6
98963.4
12.6
Cipla
317.5
334.6
-5.1
25488.1
27.4
DLF
270.6
317.2
-14.7
45923.2
68.1
HDFC
2754.5
2855.8
-3.6
79727.6
27.6
HDFC Bank
1895.0
1979.5
-4.3
86883.5
30.0
Hero Honda Motor
1895.2
1861.3
1.8
37846.2
17.4
Hind. Unilever
232.8
241.2
-3.5
51482.0
26.9
Hindalco Inds.
148.4
183.5
-19.1
28402.3
18.2
ICICI Bank
856.6
946.4
-9.5
95519.5
26.4
Infosys Tech.
2643.5
2741.7
-3.6
151686.5
26.1
ITC
275.2
269.7
2.0
105057.8
24.8
Jindal Steel
623.4
746.6
-16.5
58069.7
44.2 35.6
JP Associates
124.2
153.0
-18.8
26387.5
Larsen & Toubro
1629.4
1625.2
0.3
98277.3
29.4
M&M
528.7
537.1
-1.6
30582.1
16.2
Maruti Suzuki
1232.7
1283.2
-3.9
35615.2
16.4
NTPC
197.2
205.8
-4.2
162600.5
19.6
ONGC
1125.4
1045.1
7.7
240697.7
16.6
Rel. Comm.
139.2
168.4
-17.3
28731.2
71.1
Reliance Inds.
1021.9
1061.1
-3.7
334190.9
21.7
Reliance Infra.
1056.6
1134.7
-6.9
25873.0
21.2
St Bk of India
2215.7
2216.1
0.0
140670.4
14.4
Sterlite Inds.
644.8
829.3
-22.2
54189.0
64.5
Tata Motors
742.9
846.9
-12.3
42407.0
25.8
Tata Power Co.
1247.4
1366.6
-8.7
29600.9
30.8
Tata Steel
493.0
647.5
-23.9
43739.5
12.6
TCS
741.0
786.4
-5.8
145028.5
27.2
Wipro
657.1
697.6
-5.8
96514.1
21.2
6 Investment Monitor June, 2010
Review & Analysis
Analysis INDIAN MARKET
ASIAN MARKET 2,655.9 (-8.7%)
16,666.40 (-5.8%)
EUROPE MARKET
US MARKET
5049 (-9.9%)
10,259.0 (-6.7%)
FTSC
DJIA
3,525.31 (-8.3%)
1,103.1 (-6.8%)
CAC
S &P 500
SHANGHAI BSE SENSEX
9,639.7 (14.0%) NIKKEI
5,003.1 (-5.8%)
19,431.4 (-8.6%) CNX NIFTY
HANGSENG
NASDAQ
DAX
CNX Pharma Gainers
Bank Nifty Losers Company
2,277.7 (-4.9%)
5,937.14 (3.6%)
27/05/2010
27/04/2010
Change(%)
Company
27/05/2010
27/04/2010
Change(%)
ICICI Bank
856.8
946.95
-10.52
Divi's Lab.
718.65
692.1
3.69
Bank of India
316.5
384.9
-21.61
Lupin
1789.5
1672.05
6.56
IDBI Bank
109.85
122.75
-11.74
Dr Reddy's Labs
1331.6
1258.95
5.46
Oriental Bank
323.15
339.4
-5.03
Glenmark Pharma.
269.55
262.3
2.69
Union Bank (I)
290.5
311.45
-7.21
Glaxosmit Pharma
1981.1
1885.45
4.83
27/05/2010
27/04/2010
Change(%)
461.85
707.25
-53.13
57.5
74
-28.70
CNX Midcap Gainers Company
CNX IT Losers
27/05/2010
27/04/2010
Change(%)
HPCL
351.35
303.4
13.65
Educomp Sol.
United Phosp.
169.75
149.35
12.02
Moser Baer
Kansai Nerolac
1504.15
1328
11.71
Tech Mahindra
620.55
803.9
-29.55
Godrej Consumer
323.95
294.75
9.01
Core Projects
220.25
267.1
-21.27
73.4
67.45
8.11
Financial Tech.
1278.4
1577.1
-23.37
UCO Bank
BSE Metal Losers
CNX FMCG Gainers Company
Company
27/05/2010
27/04/2010
Change(%)
Company
27/05/2010
27/04/2010
Change(%)
Jyothy Lab.
202.65
164.8
18.68
Hind.Zinc
945.55
1225
-29.55
Godrej Consumer
323.95
294.75
9.01
Sesa Goa
337.3
431.2
-27.84
ITC
275.9
269.55
2.30
Sterlite Inds.
644.05
829.1
-28.73
GlaxoSmith C H L
1630.85
1598.95
1.96
Tata Steel
492.35
647.5
-31.51
Britannia Inds.
1672.15
1640.95
1.87
Welspun Corp
218.5
274.4
-25.58
June, 2010 Investment Monitor 7
Prime Economic Indicators
Prime Economic Indicators Gold Mumbai
Forex Reserve
Gold (Mumbai) (Rs) 18388
18500
1,250,000
Forex Reserve (Rs Cr) 1247286
1,245,000
18000
1,240,000
17500 17000
1,235,000
16937
1231355 1,230,000
16500
1,225,000 1,220,000
16000 27th April
27th May
Brent Crude
3700
3692
47 46
3600
45.5
3550
45
3500
44.5
3477
3450
44
3400
43.5
44.43
27th April
27t h M ay
0.0812
27th May
Call Rate (%)
10 Yr G-Sec (%)
Call Rate (%)
3.81%
0.038
3.80% 3.79%
0.079 0.078 0.077 0.076 0.075 0.074
3.78% 3.77%
0.0749
3.76% 3.75%
0.073 0.072 0.071
0.0375
3.74% 3.73%
27th April
27th May
3.72%
BSE Sensex 17,800
46.76
43 27t h A pr i l
10Yr G-Sec (%) 0.082 0.081 0.08
Rupee Vs Dollar
46.5
3650
3350
M ay
Ruppe Vs Dollar
Brent Crude (Rs/Barrel)
3750
A pr i l
17,691
27t h A pr i l
27t h M ay
WPI Inflation (%)
Sensex
10.08%
17,600
Inf lation (%) 0.099
17,400
9.87%
17,200 17,000 16,667
16,800 16,600
9.66%
0.0959
9.45%
16,400 16,200 16,000 27th April
8 Investment Monitor June, 2010
27th May
9.24% April
May
TERMSHEET FOR NABARD (BHAVISHYA NIRMAN BOND) I. GENERAL INFORMATION i. A 10 Year Zero Coupon Bond of National Bank for Agriculture and Rural Development (NABARD) hereinafter referred to as Bhavishya Nirman Bond is being issued by way of private placement as long term investment under Sections 2 (47)& 2(48) of Income Tax Act, 1961. ii. The bonds will be made available for investment as unsecured bonds during the Financial Years 2006-07, 2007-08 and 2008-09 unless NABARD decides otherwise. iii. The bonds will be listed at BSE. Each bond has a face value of Rs. 20,000/-. i. Face value:
ii. Issue Price:
Each bond has a Issue Price of Rs. 9,500/-.
iii. Tenure of Bond: iv. Coupon Rate iv. Minimum Investment: v. Tax Liability:
The bonds will be issued for tenure of 10 years from the deemed date of allotment. 7.73% p.a compounded. 11.05% p.a. Simple Yield The minimum investment under Bhavishya Nirman Bond shall be 5 bonds and thereafter in multiples of five bonds. No tax at source wil l be deducted by NABARD in terms of Section 194 A(3) of the Income Tax Act, 1961 on the income, which is paid, or payable. The said income will be treated as capital gains and capital gains tax, if any, will be payable by the investor directly to the Income Tax Authorities. The deemed date of allotment of bonds shall be the first day of the month succeeding the month in which the duly completed application for investment is received. The instructions and other details contained in the application form will be updated from time to time. Any investment made will be governed by the terms and conditions applicable on the date of realisation of application money. NABARD reserves the right to close/revise the terms and conditions at its sole discretion without assigning any reason.
vi. Deemed Date of Allotment: vi. Right to update/revise/close the bond issue:
Market Commentary
E Q U I T I E S
T
he market remained jittery during the month as the Greece debt crisis made investors edgy about its impact on global economic recovery. Notwithstanding the assurance of funds from International Monetary Fund (IMF) to Greece, debt crisis haunted global markets and impacted other emerging markets including India in the form of high volatility. A recent industry body report showed that business confidence in India improved on the back of economic recovery. The bi-annual Business Outlook Survey of the Confederation of Indian Industry (CII) showed that the Business Confidence Index (BCI) of the Indian industry increased by 1.5 points for the April-September 2010 period, compared to the past six months. During the month, Supreme Court judge P Sathasivam declared that the brothers’ MoU was not binding and that RIL and RNRL must renegotiate the gas contract in six weeks. The judge said that the government owned all the gas assets till they reached the users. He added that Production Sharing Contract (PSC) will override all the prior agreements and the MoU between the Ambani brothers is not binding. He also said that it was not feasible to restrain the government’s power on gas and it is a natural asset which belongs to the people. Trai chairman JS Sarma was quoted by media as saying the plan to charge a one-time fee for holding 2G radio spectrum in excess of 6.2 MHz would mean mobile phone companies must pay Rs 30,000-35,000 crore more to the government. Telecom stocks tumbled after the telecom regulator suggested telecom firms to pay a one-time fee for holding radio-spectrum beyond 6.2 mega hertz based on 3G prices. Idea Cellular, Bharti Airtel and Reliance Communication witnessed heavy selling pressure. Investors are concerned as Trai’s recommendations will have negative impact on the industry. After soaring 3G auction rates, which is to be followed by broadband auctions, telecom companies may now have to pay extra for 2G. This coupled with uncertainties in the sector and one paise per second tariffs could continue to weigh on telecom stocks.The Cabinet more than doubled the price of administered price mechanism gas to $4.2 per mbtu. Administered price mechanism (APM) gas is a term used for gas blocks awarded to state-run energy firms on nomination basis. The base price of APM gas supplied by state firms will rise to $4.2 per million British Thermal Units (mBtu), the same as the rate approved for Reliance Industries, bringing about near-uniformity in the cost of the fuel in India. This has triggered the buying pressure in ONGC counter, as ONGC may be able to save a revenue loss of Rs 5,000 crore in this year that will boost its bottom line proportionately. On the macro front, the latest economic data showed industrial output rose lower than expected 13.5% in March 2010. The growth was also slower than February’s 15.1% expansion. Manufacturing sector output rose 14.3% in March 2010. Industrial output rose 10.4% in the 2009/10 fiscal year, faster than the 2.6 % growth clocked in the previous fiscal year.
10 Investment Monitor June, 2010
The market tumbled on persistent concerns about the euro zone sovereign debt situation and tougher financial regulations in some developed markets. Investors feared that the euro zone’s efforts to tackle its sovereign debt crisis will fall short, jeopardizing the global economic recovery. Disappointing global economic data also contributed to the downdraft. The number of US workers filing new applications for unemployment benefits unexpectedly rose last week for the first time since early April. The index of leading economic indicators slipped last month for the first time since March 2009, while factory activity in the US mid-Atlantic region accelerated less than expected in May. Back home, sustained selling by foreign funds weighed on investor sentiment. Foreign institutional investors (FIIs) have sold shares worth a net Rs 8367.76 crore so far this month, till 20 May 2010, according to data from the stock exchanges.
They had bought stocks worth a net Rs 2667.35 crore last month. Domestic funds have bought stocks worth a net Rs 3286.54 crore so far this month, till 20 May 2010. The fourth quarter corporate results have been decent. The combined net profit of a total of 2,219 companies rose 23.9% to Rs 56,175 crore on 24.4% rise in sales to Rs 5,67,643 crore in the quarter ended March 2010 over the quarter ended March 2009. Meanwhile, India’s monsoon rains are on track to hit the country’s southern coast on 30 May 2010, and the Laila cyclone in the Bay of Bengal would not derail the vital June-September rainfall. The India Meteorological Department (IMD) in late April 2010 said rainfall is likely to be 98% of the long-term average. Good monsoon rains would help raise farm output, boost rural incomes and lower food inflation. 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. The quantum of rainf all in the crucial sowing month of July and distribution of rainfall during the monsoon season also holds key.
Market Commentary
I
ndian shares extended their losses to 10% from a recent peak as investors pulled out money from equities worldwide on escalating fears that European debt woes would damage the global recovery.
The rupee slipped to its lowest level in eight months as foreign institutional investors (FIIs) continued their relent- less selling in the share market and the dollar rallied against most currencies as money fled to safer US bonds and gold. A drop of at least 10% in share prices is usually considered a correction while a 20% fall is a sign of a bear market. In India, foreign investors have pulled out some $2 bil- lion (Rs9,480 crore) in May, re- ducing their net purchases this year to $4.6 billion.
ing the collapse of US investment bank Lehman Brothers’ Holdings Inc. The latest relaxation will allow banks to borrow Rs21,000 crore from the central bank. Telecom companies that successfully bid for third-generation (3G) spectrum have to pay Rs68,000 crore to the government and the banks’ share in this is expected to be at least Rs45,000 crore. Besides, advance tax outflow is also expected to be in the range of Rs35,000-45,000 crore. Indian corporations pay income tax every quarter on their projected profit. If banks suffer from any liquidity crunch, they will have to access the overnight call money market to meet the demand for funds from telecom firms. The liquidity in the banking system has fallen to an average of Rs 6,371.67 crore in the first three days of this week from an average of Rs52,197 crore.
This is happening despite factors favouring the domestic economy such as the successful telecom spectrum auction and softening of crude prices, a plus for an energy hungry nation. The FII pullout has exacerbated the fall of the rupee, which has lost some 7% this month. The local currency fell mirroring similar sharp falls in other Asian currencies. The dollar strengthened against all major currencies in the world except the Japanese yen. Overseas investors are betting that rupee will touch 48 a dollar level in a month’s time. The weakness also saw short- covering of dollars in the local markets. Any attempt by RBI to buy rupees in a bid to bolster the currency could add to pressures in the domestic money market, where interest rates are expected to inch up as companies raise money for telecom license fees and advance tax payments. The move by the Reserve Bank of India (RBI) to ease liquidity pressures will keep money market rates in check and may even bring down bond yields. Banks can borrow up to 0.5% of their deposit base from RBI, apart from which they can borrow twice a day for four days using the so-called liquidity adjustment facility, or LAF. Currently, LAF is conducted once a day except on Friday. Banks can borrow from RBI at 5.25% to take care of their temporary liquidity mismatches. If they have excess money, they can park that at the LAF window and earn 3.75%.
D E B T
There are fears that demand from telecom firms and advance tax outflow will cripple the banking system and make call money rates shoot up. The concern was also evident in bond yields that shot up by 20-40 basis points across tenures in the last two days. The yield on the benchmark 10year paper closed at 7.52% on Wednesday after dropping to 7.30% last week. According to bond dealers, the yields would have risen further without RBI’s latest measures.
These measures are ad-hoc in nature and the additional liquidity support under this scheme and the daily SLAF (second LAF) will be available with effect from 28 May and up to 2 July. This is a de-facto cut in the statutory liquidity ratio (SLR), or the portion of a bank’s deposits required to be invested in government bonds. Currently, banks need to invest 25% of their deposits in bonds. Now, they can bring it down to 24.5%. The last time RBI cut banks’ SLR was in November 2008, to help them tide over an acute liquidity crunch follow-
June, 2010 Investment Monitor 11
Cover Story
C O V E R S T O R Y
Over the past decade, Greece borrowed heavily in international capital markets to fund Government budget and current account deficits. The reliance on financing from international capital markets left Greece highly vulnerable to shifts in investor confidence. Investors became jittery in October 2009, when the newly elected Greek government revised the estimate of the government budget deficit for 2009 from 6.7% of gross domestic product (GDP) to 12.7% of GDP. Recently Eurostat, the European Union (EU)’s statistical agency, estimated Greece’s deficit to be even higher, at 13.6% of GDP. Investors have become increasingly nervous about Greece’s ability to repay its maturing debt obligations, estimated at 54 billion ($72.1 billion) for 2010. Recently the Greek government requested financial assistance from other European countries and the International Monetary Fund (IMF) to help cover its maturing debt obligations.
12 Investment Monitor June, 2010
Cover Story The debt crisis has both domestic and international causes. Domestically, analysts point to high government spending, weak revenue collection, and structural rigidities in Greece’s economy. Internationally, observers argue that Greece’s access to capital at low interest rates after adopting the euro and weak enforcement of EU rules concerning debt and deficit ceilings facilitated Greece’s ability to accumulate high levels of external debt. During the crisis, the Greek government has sold bonds in order to raise needed funds. Greece’s government has also unveiled, amidst domestic protests, austerity measures aimed at reducing the government deficit below 3% of GDP by 2012. It also appears likely that Greece will receive financial assistance from countries that use the euro as their national currency (the Euro zone) and the IMF in order to avoid defaulting on its debt. A common method for addressing budget and current account deficits, currency devaluation, is not possible for Greece as long as it uses the euro as its national currency. If the austerity measures and financial assistance from outside parties prove insufficient, Greece could be forced to default on, or restructure, its debt. Greece’s crisis has numerous broader policy implications. There is concern that Greece’s crisis could spill over to other European countries in difficult economic positions, including Portugal, Ireland, Italy, and Spain. Greece’s crisis has raised questions about imbalances within the Euro zone, which has a common monetary policy but diverse national fiscal policies. It has also come to light that complex financial instruments may have played a role in helping Greece accumulate and conceal its debt, which may have ramifications for debates in the United States and the EU over financial regulatory reform. Greece’s crisis could have several implications for the United States. First, falling investor confidence in the Euro zone could further weaken the euro and, in turn, widen the U.S. trade deficit. Second, given the strong economic ties between the United States and the EU, financial instability in the EU could impact the U.S. economy. Third, $14.1 billion of Greece’s debt is held by U.S. creditors, and a Greek default would likely have ramifications for these creditors. Fourth, some point to similarities between the financial situation in Greece and the United States, implying that Greece’s current crisis foreshadows what the United States could face in the future.
Build-Up to the Current Crisis
During the decade preceding the global financial crisis that started in fall 2008, Greece’s government borrowed heavily from abroad to fund substantial government budget and current account deficits. Between 2001, when Greece adopted the euro as its currency, and 2008, Greece’s reported budget deficits averaged 5% per year, compared to a Eurozone average of 2%, and current account deficits averaged 9% per year, compared to a Eurozone average of 1%.In 2009, the budget deficit is estimated to have been more than 13% of GDP. Many attribute the budget and current account deficits to the high spending of successive Greek governments. Greece funded these twin deficits by borrowing in international capital markets, leaving it with a chronically high external debt (115% of GDP in 2009). Both Greece’s budget deficit and external debt level are well above those permitted by the rules governing the EU’s Economic and Monetary Union (EMU).Specifically, the EU’s Stability and Growth Pact calls for budget deficit ceilings of 3% of GDP and external debt ceilings of 60% of GDP. Greece is not alone, however, in exceeding these limits. Of the 27 EU mem-
Others argue that the analogy is weak, because the United States, unlike Greece, has a floating exchange rate and the dollar is a reserve currency. Fifth, the debate about imbalances within the Euro zone is similar to the debates about U.S.-China imbalances, and reiterates how, in a globalize economy, the economic policies of one country impact other countries’ economies. (Investors have become INCREASINGLY nervous about Greece’s ability to repay its maturing debt obligations, estimated at 54 billion ($72.1 billion) for 2010.) Greece’s Debt Crisis: Background
June, 2010 Investment Monitor 13
Cover Story ber states, 20 currently exceed the deficit ceiling set out in the Stability and Growth Pact. Greece’s reliance on external financing for funding budget and current account deficits left its economy highly vulnerable to shifts in investor confidence. Although the outbreak of the global financial crisis in fall 2008 led to a liquidity crisis for many countries, including several Central and Eastern European countries, the Greek government initially weathered the crisis relatively well and had been able to continue accessing new funds from international markets. That said, the global recession resulting from the financial crisis put strain on many governments’ budgets, including Greece’s, as spending increased and tax revenues weakened.
Possible Causes of the Crisis
Greece’s current economic problems have been caused by a mix of domestic and international factors. Domestically, high government spending, structural rigidities, tax evasion, and corruption have all contributed to Greece’s accumulation of debt over the past decade.
poor productivity in the public sector as an impediment to improved economic performance. An aging Greek population—the percentage of Greeks aged over 64 is expected to rise from 19% in 2007 to 32% in 2060—could place additional burdens on public spending and what is widely considered one of Europe’s most generous pension systems. According to the OECD, Greece’s “replacement rate of 70%-80% of wages (plus any benefits from supplementary schemes) is high, and entitlement to a full pension requires only 35 years of contributions, compared to 40 in many other countries.” Total Greek public pension payments are expected to increase from 11.5% of GDP in 2005 to 24% of GDP in 2050.Weak revenue collection has also contributed to Greece’s budget deficits. Many economists identify tax evasion and Greece’s unrecorded economy as key factors behind the deficits. They argue that Greece must address these problems if it is to raise the revenues necessary to improve its fiscal position. Some studies have estimated the informal economy in Greece to represent between 25%-30% of GDP. Observers offer a variety of explanations for the prevalence of tax evasion in Greece, including high levels of taxation and a complex tax code, excessive regulation, and inefficiency in the public sector. Like his predecessor Constantine (Costas) Karamanlis, Prime Minister of Greece has committed to cracking down on tax and social security contribution evasion. Observers note, however, that past Greek governments have had, at best, fixed success seeing through similar initiatives.
Structural Policies and Declining International Competitiveness
Internationally, the adoption of the euro and lax enforcement of EU rules aimed at limiting the accumulation of debt are also believed to have contributed to Greece’s current crisis.
Greek industry is suffering from declining international competitiveness. Economists cite high relative wages and low productivity as a primary factor. According to one study, wages in Greece had increased at a 5% annual rate since the country adopted the euro, about double the average rate in the Eurozone as a whole. Over the same
Domestic Factors
High Government Spending and Weak Government Revenues Between 2001 and 2007, Greece’s GDP grew at an average annual rate of 4.3%, compared to a Eurozone average of 3.1%.High economic growth rates were driven primarily by increases in private consumption (largely fueled by easier access to credit) and public investment financed by the EU and the central government. Over the past six years,however, while the central government expenditures increased by 87%, revenues grew by only 31%, leading to budget deficits well above the EU’s agreed-upon 3% of GDP threshold. Observers identify a large and inefficient public administration in Greece, costly pension and healthcare systems, tax evasion, and a general “absence of the will to maintain fiscal discipline” as major factors behind Greece’s deficit. According to the OECD, as of 2004, spending on public administration as a percentage of total public expenditure in Greece was higher than in any other OECD member, “with no evidence that the quantity or quality of the services are superior.” In 2009, Greek government expenditures accounted for 50% of GDP. Successive Greek governments have taken steps to modernize and consolidate the public administration. However, observers continue to cite over-staffing and
14 Investment Monitor June, 2010
period, Greek exports to its major trading partner’s grew at 3.8% per year, only half the rate of those countries’ imports from other trading partners. Some observers argue that for Greece to boost its international competitiveness and reduce its current account deficit, it needs to increase its productivity, significantly cut wages, and increase savings. The Greece government has begun to curb public
Cover Story sector wages and hopes to increase Greek exports through investment in areas where the country has a comparative advantage. In the past, tourism and the shipping industry have been the Greek economy’s strongest sectors.
International Factors
Increased Access to Capital at Low Interest Rates
Greece’s adoption of the euro as its national currency in 2001 is seen by some as a contributing factor in Greece’s buildup of debt. With the currency block anchored by economic heavyweights Germany and France, and a common monetary policy conservatively managed by the European Central Bank (ECB), investors have tended to view the reliability of euro member countries with heightened degree of confidence. The perceptions of stability conferred by euro membership lowed Greece, as well as other Eurozone members, to borrow at a more favorable interest rate than would likely have been the case outside the EU, making it easier to finance the state budget and service existing debt. This benefit, however, may also have contributed to Greece’s current debt problems: observers argue that access to artificially cheap credit allowed Greece to accumulate high levels of debt. Critics assert that if the market had discouraged excess borrowing by making debt financing more expensive, Greece would have been forced to come to terms earlier with the need for austerity and reform.
Addressing the crisis: Bailout Packages
In an effort to restore investor confidence in the Greek economy plus other economies, announced that Greece would draw on 45 billion ($60 billion) in emergency financial assistance from Eurozone members and the IMF in order to avoid defaulting on its debt obligations. Although European leaders and the IMF have welcomed the austerity measures taken by the Greek government thus far, they are expected to request additional measures and further details on plans to meet budget deficit targets in exchange for financial assistance. A bold $1 trillion rescue by the European Union halted the slide of the euro and sent markets soaring worldwide in a gambit that may ultimately be seen as the moment Europe truly became a union. Still, the package did not resolve the basic dysfunction at the heart of Europe’s monetary union. Governments can still spend recklessly and saddle their partners with the bill. If the government is not able to satisfactorily reduce its budget deficit through fiscal austerity or financial assistance from a third party, it may be forced to restructure or default on its debt obligations.
Is India immune to Greek Crisis?
The Greek debt crisis rolling markets worldwide may at most “influence” India, but will have limited “adverse impact” on the country. the Greek crisis, which has knocked the euro amid concerns of a contagion effect and got some economic com-
June, 2010 Investment Monitor 15
Cover Story mentators raising the spectre of a “double-dip recession” in the Also export sensitivity to growth is pretty limited for India and US, was not as lethal as the 2008-09 crisis triggered by the US recovery is largely due to domestic demand. The export recovery may be postponed a bit as Europe has emerged as a good subprime crisis. market. India had very little direct exposure to European countries at Foreign institutional investors are clearly interested in governthe centre of the crisis, with the country’s banking system hav- ment bonds. The finance ministry has suggested increasing the FII ing no direct links with them and exports to Greece, Spain, limit but the RBI is not very keen on it. They are very wary about Portugal and Italy only 4% of total exports. Fears of a global money coming in through that route in particular. contagion from the Greek crisis have cast its shadow on the Also, portfolio investments from FIIs may be a little volatile this country’s stock markets, knocking the Sensex 8% down in the year. But on the whole, because of the global scenario, the RBI last six weeks, and also caused volatility in the foreign exchange may not be very keen on putting out all stops to attract capital markets as a battered euro and volatile global currencies raised inflows. Things are pretty much shaky and India needs funds for concerns about capital flows into India. That crisis tipped much infrastructure financing. of the developed world into a recession and forced the government to put fiscal prudence on the back burner as it had to launch a series of fiscal stimulus measures to stimulate demand in he economy.
Broader Implications of Greece’s Crisis Contagion
If Greece defaults, there is a risk of contagion to other Southern European countries, including Portugal, Ireland, Italy, and Spain (which, along with Greece, have been nicknamed the “PIIGS” or “GIIPS”). Like Greece, these countries borrowed heavily during the credit bubble before the current global financial crisis and have encountered investors who are increasingly nervous about the sustainability of their debt. Already, movements in the yields on Portugal’s, Ireland’s, Italy’s, and Spain’s bonds have closely followed Greece’s. Concerns about a spillover of Greece’s crisis to its neighbors are rooted in memories of the Asian financial crisis in 1997-1998, where it is believed that investor herding behavior contributed to the spread of the crisis How to fix the Greek Crisis throughout the region. Like the political manipulation of budget data, the inefficiency of the tax system is one of the Greek state’s most glaring weakSome argue that there are important differences among the nesses. “PIIGS” that would make contagion from Greece to these other European countries unlikely. It has been argued, for example, The Greek turmoil reflects a wider crisis of imbalances in the 16that the low levels of national savings in Greece and Portugal nation Eurozone, and everyone will have to make a contribution put these countries in the weakest financial position, at 7.2% to bring this wider crisis under control. Specifically, Greece and of GDP and 10.2% of GDP respectively, compared to an EU a few other countries - notably, Portugal and Spain - have very average of approximately 20%. Spain and Ireland, by contrast, big current account deficits, while Germany, Europe’s champion are closer to the EU average at 19% of GDP and 17% of GDP, exporter and the Eurozone’s largest economy, tends to run big respectively, putting them in a stronger financial position. Ad- current account surpluses. The Greek deficit was a remarkable 12 ditionally, Ireland has begun to implement far-reaching aus- per cent of gross domestic product in the third quarter of 2009, terity measures that were passed by its parliament in Decem- and Portugal’s stood at 10 per cent. ber 2009.IMF is reported to have downplayed the possibility of spillover from Greece to Spain or Portugal, suggesting that For sure, Greece and Portugal need to improve their competitivea crisis in Greece could be largely contained to that country. ness, but they would also benefit from stronger foreign demand Contagion is viewed as unlikely if the EU or IMF or both provide for their products and services, especially in Germany. In order financial assistance to Greece. to overcome the eurozone’s crisis, it will be as necessary to raise
Impact on Domestic Markets and Investments
It won’t have much impact. India will continue to grow as an emerging market although India won’t go unharmed as there will be a spike in risk aversion. Our view is that the European crisis may be a little drawn out and volatility will be immense but the long term trend is looking upward. The distinction is not really between G7 and emerging market but between risk and risk-averse markets. India’s faring well on the fiscal front. Our deficit number is huge but not as huge as some of the European countries so the growth story continues to remain strong.
16 Investment Monitor June, 2010
demand in Germany and other surplus countries as to hold down wages and root out corruption in Greece. This will be no easy task, for just as the mentality of German business is geared to the ruthless pursuit of international competitive advantage, so the mentality of German society is in many respects attached to the goal of amassing domestic savings. Yet in the long run it would be in Germany’s best interests to reduce the eurozone’s imbalances. The alternative - emergency financial support for Greece, arranged through gritted teeth and against the wishes of a dissatisfied German public opinion - would surely be worse.
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June, 2010 Investment Monitor 17 May,
Global Outlook
ASIA, EUROPE AND IMF
T
he financial crisis of 2008-09 and the sovereign crises of 2010 have allowed the International Monetary Fund (IMF) to reclaim the mantle of the institution as one before which “Insolvents Must Fawn”.
Not only is the IMF once again at the centre of things, its current clientele of fawning insolvents now includes rich industrial countries such as Iceland and Greece, with Spain, Portugal and Ireland as potential future clients. But Asia needs to wake up because the IMF’s resurgence has once again underlined why it remains not an international but a Euro-Atlantic monetary fund. When the Europeans and the IMF announced that the latter’s balance sheet would be put on the line for Europe, people asked: With whose permission? The United States appears to have been part of the decision-making process but the rest of the IMF membership, especially in Asia, does not seem to have been consulted, nor really asked to approve this decision.
However, the most substantive problem relates to governance reform at the IMF, with Europe constituting the principal impediment to it. Europe is overrepresented in terms of voting shares; it has too many voices speaking on its behalf in Executive Board discussions; and, above all, it has one of its own running the institution to take the late-night phone calls from Brussels and Paris and Berlin and London. With Europe in trouble and in need of IMF help, this was the most opportune time for concessions to be extracted from Europe. Not to put too fine a point on it, Europe for once did not have the bargaining power. The leverage that others had because of European weakness should have been exploited for three ends: to force Europe to reduce its voting share and to give up the veto it (and the US) enjoys in decision-making; to reduce its representation on the IMF’s Executive Board; and, above all, to make it commit publicly that the next managing director would not be a European. And that leverage was not exploited because a European was at the helm.. In the months ahead, governance reform at the IMF will once again occupy centre stage. If Europe recovers, we can be quite sure that the status quo ante will be restored with Europe continuing to stymie IMF reform efforts. The voluntary ceding of power is rare in history and a Europe suddenly stricken with remorse at the prevailing inequities is not on the cards. This is about power and Asia must play the power game. So, if Europe’s economic woes continue, Asia, while continuing to support a strong and supportive role for the IMF in Europe, must show its claws and force Europe to cooperate. If necessary, Asia must condition its support for an IMF role in Europe on the latter shedding its intransigence on IMF reform. And Asia should make reforms its highest priority to ensure merit-based selection of the next MD.
To be fair, skittish 24-hour markets do not afford the luxury of timeintensive consultation and democratic decision-making. But if this had really been an international monetary fund, a much more serious effort of consultation would and should have been made. If Asia feels miffed, it is justified in feeling so. But the IMF-in-Europe saga raises more substantive concerns. Europe desperately needed the IMF’s resources to rescue its periphery countries. But the IMF’s coffers have not been replenished as they were supposed to have been consequent upon the agreements struck last year. Recall that the member countries were supposed to contribute about $600 billion of additional resources to strengthen the IMF’s lending capacity. And guess who has not come through on these pledges. The major eurozone countries had committed substantial resources but have failed to take the necessary domestic action that would translate these commitments into disposable cash for the IMF. The crisis afforded an opportunity for the IMF’s MD to press Europe to take this action after all the money was needed to plough back (potentially) into Europe. But Europe was not pressed and it is still unclear when it will pay up.
18 Investment Monitor June, 2010
Which country in Asia can provide aplausible candidate for the next MD? Sadly, that is a question that has no ready or easy answer. And that uncertainty within Asia, reflected in inadequate Asian assertiveness — as much as European intransigence — is responsible for perpetuating the status quo .It seems increasingly clear that candidates for future managing directorship probably cannot come from the big Asian powers: China, India, Japan, or Korea. China creates anxieties within Asia; India, in the eyes of its Asian neighbours, is not convincingly internationalist or Asian, and Indian officials and intellectuals are still too uppity to put others at ease; and Korea and Japan are perhaps not perceived as sufficiently distant from the US to take on the mantle of Asian leadership. Asia needs its own bridging power. The IMF was always an institution in which the solvents had the power while the insolvents were supplicants. As we survey the economic wreckage across the globe, what we see is public sector balance sheets in the western world splattered with red ink while Asian balance sheets look respectably healthy. But the remarkable irony is this: the solvent Asians still don’t have the power and the near-insolvent-West still rules. How rigged is this world?
Indian Economy
Is the 8.5% Growth Achievable ?
C
ountry’s GDP growth in the third quarter of 200910 stood at 6.0 percent as against the growth of 6.2 percent registered in the same quarter of the previous year. The GDP growth for the whole fiscal 2009-10 was estimated to be 7.2 percent compared with the growth of 6.8 percent attained in 2007-08. Inflation numbers are observed to rise again. In May 2010 the overall inflation averaged at 9.59 percent compared to the inflation of 3.5 percent seen in the previous year. This rise in price index is on account of dearer food articles and fuel products. Meanwhile, Food Inflation rose to 16.44% for the week ended May 1, mainly due to high prices of fruits and vegetables. Inflation rose by 0.40% from 16.04% in the previous week. The foreign institutional investors (FIIs) were risk averse and were net sellers for the second straight week, selling stocks of Rs 8,244 million during the week. Domestic institutional investors (DIIs) continued to be the net sellers by selling Rs 83 million worth of shares in this week. Recent the IIP numbers also show improvement in the economic situation. For the period of eleven months the production grew at 13.5 percent as compared to the level in the month of March 2009. The cumulative growth for the period April-March 2009-10 stands at 10.4% over the corresponding period of the pervious year. This growth was much higher than the growth attained in the previous year. At the disaggregated level we have seen growth coming from all the sectors of the industry, the manufacturing, mining and electricity, in the month of May 2010. Consumer goods also recorded a high growth of 7.4 percent during the 11- month period mainly on account of high growth in the consumer durables category that registered growth rate of 25 percent. Fourteen of the seventeen industry sectors saw positive growth during the month of March 2010compared to the growth number in the previous year.
The Indian stock market tumbled to the levels of 4800, responding to the recent downtrend in the global cues backed by Greek debt crisis. The NSENifty falls from 5300 points in early mar to 4700/4800 level. The strong base of Indian bourses backed by good companies’ results is not so enough to take it to the higher levels just because of global cues. A trillion Dollar rescue plan for the Euro market was not so enough to chase the market upward despite it fell. India’s trade is observed to recover from the depression, which existed up to the later half of 2009. In the end of 2009 the exportrs again reported to get orders in good numbers. The data from November 2009 was also seen to substantiate the same. In April 2010, exports rose by 34.0 percent as against the rise of 23.0 percent in April, previous year. The inflow of foreign investments during the April- February period of 2010 was USD 33 billion which was only a billion and half USD higher than the investments made in the previous year. Country’s reserves was witnessed to drop to USD 250 bn level in early 2009 on account of drop in the foreign investments and now with the increase in the net capital account which includes the foreign investment, ECBs etc we see Forex reserves rise to USD 270 bn . Reserve position in the International Monetary Fund (IMF) declined by USD 20 million to stand at USD 1,321 million. Special Drawing Rights (SDRs) decreased by USD 75 million to stand at USD 4,907 million. Foreign currency assets expressed in USD include the effect of appreciation or depreciation on non-US currencies (such as Euro, Sterling and Yen) held in reserves. Indian Rupee in May 2010 traded between 45- 46 vis-à-vis the USD, the level in May 2009 was Rs 49-50. This sharp appreciation in Indian Rupee is an obvious cause of concern for the Indian exporters.
Outlook With such great bouncy economic figures i.e. IIP numbers, GDP growth rate, Forex reserves it is expected that India is growing at a much faster rate and formulating into a developed economy. Rupee appreciating against USD is showing the sign of improvement and bargaining power of Indian economy.
June, 2010 Investment Monitor 19
Industry Analysis
Banking sector T
This has led to rise in demand. Bank In the financial year so far the bank credit has recorded credit credit increased by Rs a growth of 12.6%. Non-food credit, accounting for 35527 crore to touch almost a 98% of the share of the total credit, recorded Rs 3124850 crore in the fortnight ended 12 a growth of 16.28% on 12 March 2010 as against a March. In the financial rise of 18.38% a year ago, but marginally higher than year so far the bank credit has recorded a 16.11% recorded in the previous fortnight. growth of 12.6%. Nonfood credit, accounting for almost a 98% of the share of the total credit, recorded a growth of 16.28% on 12 March 2010 as against a rise of Credit growth was broad-based with the infrastructure sector be18.38% a year ago, but marginally higher than 16.11% recorded in ing a major beneficiary. Credit to small and medium units as well the previous fortnight. Non- food credit growth has improved subthe agriculture sector has also witnessed rise. Additionally, with stantially from a 12-year low level of 10.3% touched at end Octothe economy now on a firm growth trajectory, corporate (both ber 2009, while it has crossed the Reserve Bank’s projection of 16% private and public) have begun announcing fresh capacity expangrowth ahead of targeted time of end March 2010. sion plans. he growth of scheduled commercial banks’ (SCBs) credit was recorded at 16.05% at Rs 3124850 crore as on 12 March 2010, lower than the growth of 18.23% registered last year. However, the growth of the bank credit has improved from a12-year low of 9.7% touched as on 23 October 2009 to 16.05% as on 12 March from year earlier.
CASH IN HAND
BAL WITH RBI
"ASSETS WITH BANKING SYSTEM"
"INVEST GOVT. SEC"
INV IN OTHER SECURITIES
"FOOD CREDIT"
LOANS
INLAND BILLS PURCH. & DISC.
"FOREIG BILLS PURCH & DISC"
"NON-FOOD CREDIT"
"TOTAL BANK CREDIT"
8-Dec
23,226
219867
107238
1077126
10,870
53,123
2551143
51718
44,381
2,594,118
2647241
9-Jan
21,609
196677
105897
1158338
9,967
45,521
2545620
50801
41,359
2,592,259
2637780
9-Feb
21,322
194466
118622
1176105
10,452
48,430
2573670
52378
41,880
2,619,498
2667928
9-Mar
20281
238195
122571
1155786
10624
46211
2675677
54871
45001
2,729,338
2775549
9-Apr
23338
222852
115754
1225715
10378
48976
2647556
55563
41371
2695514
2744490
9-May
26875
216462
111495
1254381
10260
58780
2654361
53940
37676
2687198
2745978
9-Jun
25365
206391
105126
1304006
10454
56416
2684358
53670
39548
2721160
2777576
9-Jul
23869
209614
95142
1326870
8898
48891
2709996
56227
39000
2756333
2805224
9-Aug
23,484
210431
95388
1357134
8859
49111
2709703
55853
41185
2757630
2806741
9-Sep
24,798
225681
93319
1364083
8003
42418
2771417
59683
43570
2832252
2874670
9-Oct
26060
242199
83590
1342342
7497
39904
2784387
61777
41028
2847287
2887191
9-Nov
27768
228609
80961
1375441
7260
42355
2808625
57569
42947
2866786
2909141
9-Dec
25133
247196
101048
1354262
7148
45239
2864741
65045
42146
2926693
2971932
10-Jan
26067
234244
87941
1387245
14313
43915
2922026
66900
40153
2985164
3029079
26-Feb-10
26718
279695
99122
1365231
14065
47891
2974848
69838
44637
3041432
3089323
12-Mar-10
24741
277982
108365
1379917
7020
49402
3010137
70145
44567
3075448
3124850
20 Investment Monitor June, 2010
Industry Analysis However, the non-food credit has expanded sharply by Rs 244711 crore in the second half of 2009-10 up to 12 March 2010, compared to a mere Rs 101399 crore increase during first half of the current fiscal. It rose by Rs 346110 crore in the financial year till 12 March to Rs 3075448 crore compared with the previous year, when it increased by Rs 327342 crore. Food credit recorded a rise of 3.13% to Rs 49402 crore on 12 March 2010 as against a rise of 10.11% over a year ago, mainly due to a fall in procurement by the Food Corporation of India (FCI). Food credit of SCBs rose by Rs 3191 crore in 2009-10 till 12 March as against a rise of Rs 3503 crore in the previous year.
Banking deposits Aggregate deposit growth of scheduled banks also improved above the RBI’s projection of 17% for end March 2010 to 18.14%, to yo-y basis, to Rs 4402943 crore as on 12 March 2010. The RBI had reduced the target for aggregate deposit’s growth sequentially from 19% in July 2009 policy review to 18% in October 2009 policy and further down to 17% in January 2010 policy review. Post the CRR hike and pickup in credit off take, liquidity in the system is drying up pushing short-term rates upwards. Moreover, select large private and public sector banks have also increased interest rates on deposits by 25-150bps, looking at the rising credit demand and also to lend more to meet their targets. As the interest rates are expected to rise banks with high proportion of low-cost deposits will be in a better position to capture the rising credit demand in a more profitable manner. Deposits increased by Rs 39613 crore in the fortnight ending 12 March 2010 mainly due to rise in time deposits. Time deposits increased by Rs 42986 crore, while demand deposits registered a fall of Rs 3374 crore. Deposits increased 14.8% in 2009-10 till 12 March 2010 compared with 16.6% growth in the previous year. Time deposits, accounting for a share of 85%, rose 18.04% to Rs 3837664 crore on 12 March 2010 from a 23.32% growth a year ago. Mean-
CASH IN HAND
BAL WITH RBI
"ASSETS WITH BANKING SYSTEM"
"INVEST GOVT. SEC"
INV IN OTHER SECURITIES
while, demand deposits or deposits with tenures of less than a year have accelerated 18.85% to Rs 565279 crore on 12 March 2010 compared with a rise of 7.18% a year ago.
Investments of the banking sector With higher deposit mobilisation, banks’ investment in government and other approved securities that qualify for treatment of statutory liquidity ratio (SLR) rose by Rs 7,641 crore during the fortnightended 12 March 2010. The SCBs’ investment in SLR securities increased by 17.52% (y-o-y) as on 12 March 2010, as compared with 20.08% a year ago. This increase was despite the credit offtake during the fortnight. However, the investment growth has eased below 20% mark after a year as investors withdrew money from securities with the fears of rise in bond yields. As per the latest data available, the banking sector’s SLR investment accelerated 18.9% or by Rs 220527 crore till 12 March as against by Rs 208417 crore in the corresponding period of 2008-09. The banking sector’s nonSLR investment in commercial paper, bonds and shares issued by private and public companies increased by Rs 11334 crore to Rs 111820 crore on 12 March 10 from 13 March 09 and by Rs 7046 crore from Rs 104773 crore on 27 March 2009. The banks investment in instruments issued by mutual funds also registered a rise of Rs 24752 crore to Rs 108516 crore.
Outlook The robust economic growth, rising industrial production, led by rising consumer confidence, together have boosted bank credit demand. Going forward, the rise in industrial activities, improved sales and fresh capex announcements will bolster demand and accelerate growth in bank credit. Moreover, the sanctions already made to infrastructure sector will see disbursements adding to the bank credit growth.
"FOOD CREDIT"
LOANS
INLAND BILLS PURCH. & DISC.
"FOREIG BILLS PURCH & DISC"
"NON-FOOD CREDIT"
"TOTAL BANK CREDIT"
9-Jan
12.92
-22.57
20.06
20.15
-24.51
14.33
21.58
6.66
-7.18
20.79
20.67
9-Feb
17.7
-23.5
46.85
19.97
34.65
9.3
19.12
6.37
-6.65
18.51
18.33
9-Mar
12.4
-7.36
34.88
20.56
-18.61
4.08
18.31
3.24
-4.64
17.77
17.51
9-Apr
28.27
-12.45
45.01
21.93
-18.95
19.38
18.92
4.32
-9.21
18.01
18.04
9-May
31.8
-30.17
23.09
27.46
-20.2
21.5
16.86
0.08
-18.73
15.67
15.79
9-Jun
31.87
-32.54
9.52
33.67
-15.37
11.41
16.08
-3.4
-14.13
15.14
15.06
9-Jul
22.78
-35.89
-3.62
36.35
-28.27
11.39
17.8
3.5
-12.28
17.02
16.92
9-Aug
10.63
-32.38
-2.71
32.16
-24.97
10.75
14.91
0.43
-12.44
14.12
14.06
9-Sep
5.6
-29.1
-9.56
39.58
-34.9
-6.1
13.36
5.53
-12.4
13.03
12.69
9-Oct
-1.38
-8.87
-34.26
37.94
-38.48
-22.48
9.42
11.1
-15.12
9.63
9.01
9-Nov
20.21
-2.14
-37.64
27.94
-36.39
-15.95
10.33
13.06
-6.79
10.59
10.09
9-Dec
8.21
12.43
-5.77
27.7
-34.24
-14.84
12.29
25.77
-5.04
12.82
12.27
10-Jan
20.63
19.1
-16.96
16.91
43.6
-3.53
14.79
31.69
-2.92
15.16
14.83
26-Feb-10
25.31
43.83
-16.44
16.08
34.57
-1.11
15.59
33.33
6.58
16.11
15.79
12-Mar-10
19.81
38.38
-9.08
17.98
-33.29
3.13
15.91
31.05
5.56
16.28
16.05
June, 2010 Investment Monitor 21
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
22 Investment Monitor June, 2010
Stock Market Monitor Company
Year End
Equity
Net Sales
Year End Growth% EBITDA
EBITDA %
PAT
EPS
ROCE
Quarter End RONW Qtr. End Net Sales Growth% EBITDA% PAT%
EPS
CMP
52WL
Current Data 52WH M Cap Pr. Hold%
June, 2010 Investment Monitor 23
Stock Market Monitor Company
24
Year End
Equity
Year End Net Sales Growth% EBITDA
Investment Monitor June, 2010
EBITDA %
PAT
EPS
ROCE
Quarter End RONW Qtr. End Net Sales Growth% EBITDA%
PAT%
EPS
CMP
52WL
Current Data 52WH M Cap Pr. Hold%
Stock Market Monitor Quarter End
Year End Company
Year End
Equity
Net Sales Growth% EBITDA
EBITDA %
PAT
EPS
ROCE RONW Qtr. End Net Sales Growth% EBITDA% PAT%
Current Data EPS
CMP
52WL
52WH
M Cap Pr. Hold%
June, 2010 Investment Monitor 25
Stock Market Monitor Company
26
Year End
Equity
Year End Net Sales Growth% EBITDA
Investment Monitor June, 2010
Quarter End EBITDA %
PAT
EPS
ROCE RONW Qtr. End Net Sales Growth% EBITDA% PAT%
EPS
CMP
52WL
Current Data 52WH M Cap Pr. Hold%
Stock Market Monitor Quarter End
Year End Company
Year End
Equity
Net Sales Growth% EBITDA
EBITDA %
PAT
EPS
Current Data
ROCE RONW Qtr. End Net Sales Growth% EBITDA% PAT%
EPS
CMP
52WL
52WH
M Cap Pr. Hold%
June, 2010 Investment Monitor 27
Stock Market Monitor Company
28
Year End
Equity
Year End Net Sales Growth% EBITDA
Investment Monitor June, 2010
Quarter End EBITDA %
PAT
EPS
ROCE RONW Qtr. End Net Sales Growth% EBITDA% PAT%
EPS
CMP
52WL
Current Data 52WH M Cap Pr. Hold%
Stock Market Monitor Company
Year End
Equity
Year End Net Sales Growth% EBITDA
EBITDA %
PAT
EPS
Quarter End ROCE RONW Qtr. End Net Sales Growth% EBITDA% PAT%
EPS
CMP
52WL
Current Data 52WH M Cap Pr. Hold%
June, 2010 Investment Monitor 29
Stock Market Monitor Quarter End
Year End Company
30
Year End
Equity
Net Sales Growth% EBITDA
Investment Monitor June, 2010
EBITDA %
PAT
EPS
ROCE
RONW Qtr. End Net Sales Growth% EBITDA% PAT%
EPS
CMP
52WL
Current Data 52WH M Cap
Pr. Hold%
Stock Market Monitor Company
Year End
Equity
Year End Net Sales Growth% EBITDA
EBITDA %
PAT
EPS
ROCE
Quarter End RONW Qtr. End Net Sales Growth% EBITDA%
PAT%
EPS
CMP
52WL
Current Data 52WH M Cap Pr. Hold%
June, 2010 Investment Monitor 31
Stock Market Monitor Quarter End
Year End Company
32
Year End
Equity
Net Sales Growth% EBITDA
Investment Monitor June, 2010
EBITDA %
PAT
EPS
ROCE RONW Qtr. End Net Sales Growth% EBITDA% PAT%
Current Data EPS
CMP
52WL
52WH
M Cap Pr. Hold%
Stock Market Monitor Quarter End
Year End Company
Year End
Equity
Net Sales Growth% EBITDA
EBITDA %
PAT
EPS
ROCE
Current Data
RONW Qtr. End Net Sales Growth% EBITDA%
PAT%
EPS
CMP
52WL
52WH
M Cap Pr. Hold%
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June, 2010 Investment Monitor 33
Equity Stock Ideas Financial Analysis
Bharti Shipyard
Recommendation - BUY Business Highlights
BSL gains management control of GOL The company presently owns 49.5% stake in Great Offshore limited (GOL) and has 2 executive directors (amongst 3) on the board of GOL suggesting control on the management and affairs of GOL.
Orders from GOL to benefit BSL, but margins may be impacted
For the quarter ended 31st March 2010, the company has reported a 22.8% growth in revenue to Rs 3491.6 million from Rs 2,842.7 million in corresponding quarter previous year. With the control over manufacturing and admin expenses, the company witnessed an EBIDTA of Rs 797.8 million for the Q4FY10. Consequently, EBITDA margins witness an improvement of 550 bps to 22.8% from 17.3%. Owing to low other income earned during the quarter, the net profit witnessed a marginal increase to Rs 355.7 million and therefore, net margins declined by 220bps to 10.2% from 12.4%. The company has booked a subsidy of Rs 250 million in the quarter. Till date the company has booked a cumulative subsidy of Rs 3,360 million.
GOL which is looking forward to expand its operations would raise Rs 1800 crores in near term through a mix of debt and equity for purchase of more assets. We reckon the entire orders from GOL to flow to Risks Bharati which would be to the tune of Rs 500 - 1000 crores per year Huge debt in the books – highly leverage.The company has huge for the next 3 to 4 years. debt of Rs 2000 crores and cash of Rs 200 crores on its balance Support to Order book- Order book to grow at 10 % to 20% per sheet which is equal to net debt to equity of 2x and interest outannum in FY11E and FY12E go of Rs 160 to 200 crores per annum. However, with minimum BSL has not been receiving new orders for almost 7 quarters now. The capex, profitability of BSL would be towards deleveraging. unexecuted order book has fallen from Rs 3360 Q4FY09 to Rs 2500 Outlook crores in Q4FY10 (FY10U sales to order book of 2x). The last delivery We believe the company would benefit from the flow of orders from the present order book is scheduled for mid CY12. We expect from GOL that would enable it to grow at CAGR of 20 to 25 % 10% growth in order book in FY11E and FY12E with orders flowing for the next 3 to 4 years. This order flow would at a time when primarily from GOL. orders are tough to come by for all the shipbuilders.Receipt of acAllotment of preferential warrants to promoters cumulated subsidy and flow of fresh orders would act as valuation There was a dilution of 5% (13,70,000 equity shares) in the equity support and would provide upside for the stock. capital in the current quarter due to conversion of preferential warValuations rants issued to the promoters at Rs 80/share. As per the company two At the current market price of Rs 238, the stock is available at 4.8x another similar dilutions would take place in FY11E and FY12E increasits annualized Q4FY10 earnings of 49.2 ing the stake of promoters in BSL from 46% in FY09 to 61% in FY12E. Company’s Background This would also help the company in deleveraging. The Group’s principal activity is to design and construction of variMinimal Capex for FY11E and FY12E ous types of sea going, coastal, harbour, inland crafts and vessels. Bharati would be spending around Rs 100 to Rs 200 crores in FY11E The product range consists of simple inland cargo barges, deep-sea and FY12E as capex mainly for ramping up Dabhol and Mangalore trawlers and dredgers and power-packed ocean going tractor tugs, facility. We foresee no major capex in near term. cargo ships, tankers and other support vessels required for the offshore industry. The Group also provides ship repair services. "Income Statement Period Ending"
" 3M Q4FY '09 "
" 3M Q4FY '10 "
Rs. in Million Net Revenue
2,842.70
3,491.60
Net Revenue Growth
NA
22.80%
Raw Material
1,468.00
1,829.30
Manufacturing & Admin Expenses
883.4
864.5
EBITDA
491.3
797.8
EBITDA Margins
17.30%
22.80%
Depreciation & Amortization
27
44.3
Total operating Exp.
2,378.40
2,738.20
EBIT
464.3
753.4
EBIT Margins
16.30%
21.60%
Other Income
224.5
25.7
Interest
227.7
240.2
EBT
461.1
538.9
EBT Margins
16.20%
15.40%
Income Tax provision
107.3
183.2
PAT
353.8
355.7
PAT Growth
NA
0.50%
PAT Margins
12.40%
10.20%
34 Investment Monitor June, 2010
Equity Stock Ideas
JSW Steel
Recommendation - BUY Investment Positives Expansion on Spree
The expansion project execution work is progressing in full swing to expand the crude steel capacity to 10 Mtpa and to set up 300 MW power plant at Vijaynagar, to be commissioned in FY 2011 and FY 2012 respectively.Recently, the company has successfully commissioned the Phase I (3.5 Mtpa) of the state of the art largest and widest new Hot Strip Mill at Vijaynagar. On its stabilization, it would enable the company to convert all slabs into value added HR Coils. Further, on completion of Phase II, the capacity of mill will go up to 5 Mtpa.
of Rs8,506 v/s Rs7,668 QoQ). • Pre-exceptional profit (adjusted for gain on translation) grew by 59% QoQ to Rs6.4bn on the back of lower interest cost of Rs1.94bn and low tax rate of 24%. Tax rate reduced on account of reduction in surcharge. • The company reported net profit of Rs7.2bn primarily on account of a one-time gain on translation of foreign currency loans (Rs960m) and low tax rate and interest cost.
Valuation
At CMP of Rs 1109, stock trades at P/E of 13.2x FY10. We assign BUY rating on the stock on the back of improved earnings quality associated with higher raw material integration and hassle-free superior volume growth, attractive returns on capital and better shaped balance sheet.
Business Model
Recently, the company acquired coking coal mines in USA for US$100m. Along with mines, assets include dedicated jetty, barge facility and railway load out. The mines have estimated resources of 123m tonnes. The company expects to produce 1m tonnes per annum (mtpa) in the first year of its operation beginning from September 2010 and subsequently, the production would be ramped up to 3mtpa in the third year. This would require total capital spending of US$60-100m over the next three years. The company indicated FOB cost at US$85-110 per tonne and CIF of US$120-145 per tonne.
The company is an integrated player with limited backward integration in terms of captive iron ore mine. The company currently procures 2mt of iron ore from its own mine, 2.5mt from NMDC at a contracted price and the balance through spot purchases. In terms of coking coal with the commissioning of new coke oven batteries, the company is expected to be 100% self reliant in terms of coke. Coking coal is imported from Australia on a long-term contract. Company’s 230MW power plant at Vijaynagar satisfies more than 60% of 5.5mt of steel production. The new capacity commissioned in February 2009 would procure its power requirement from JSW Energy at INR 3.2 per unit for which it has entered into a power purchase agreement.
Preferential allotment of equity warrants to Promoters
Risks
Acquisition of coking coal mines
The board approved the issuance of 17.5m warrants to the promoters Highly Leverage: The company has total debt of Rs 161.73 bn and its debt at a conversion price of Rs1,200. Post conversion of the warrants, the to equity ratio came to 1.49. The high debt to equity ratio is a hindrance in raising further capital for expansion. However, the management guided promoter holding would increase to 49.7% from the current 42%. for repayment of debt and streamlines the balance sheet to fund further Japanese firm JFE Steel intend to buy stake expansions through the proceeds from equity issuance. Japanese firm JFE Steel is looking for acquiring stake in the company at a significant premium to the market price. JFE is likely to buy a 14.9 Company Background per cent stake in the Indian company for Rs 1,600 a share with a total JSW Steel Ltd. (JSW) is the largest private steel maker in India with an installed capacity of 7.8mt post commissioning of India’s largest blast furinvestment of Rs 45bn. nace of 2.8mt in February 2009. The company has the most modern steel Strong Result plant with latest technologies for both upstream and downstream pro• For the quarter ended March 2010, Net revenue grew by 7.9% cesses. It is one of the lowest cost producers in the Indian markets on opQoQ to Rs52.0bn on the back of 5.6% rise in realisation (Rs33,994 v/s erational parameters excluding backward integration in terms of iron ore Rs32,194 per tonne) and 6.7% volume growth. and coking coal. The company’s product range is highly skewed towards • Higher rise in realisations, relative to increase in the iron ore cost, flat products as the slab manufacturing capacity stands at 5.3mt. increased the EBITDA by 23.4% QoQ to Rs13.3bn (EBITDA per tonne "Particulars (Rs. In Millions)"
" 12M FY '09"
" 12M FY '10"
" 3M Q4FY '09"
" 3M Q3FY '10"
" 3M Q4FY '10 "
"Net Revenue (%Growth)"
"141584.2 NA"
"190737.7 34.7%"
"36220.8 NA"
"48228 33.2%"
"52049.7 7.9%"
Raw Material
91,231.70
122,787.70
28,550.00
30,525.60
31,908.70
Manufacturing Expenses
20,449.70
26,077.30
5,311.30
6,914.60
6,833.00
EBITDA
29,902.80
41,872.70
2,359.50
10,787.80
13,308.00
EBITDA Margins
21.10%
22.00%
6.50%
22.40%
25.60%
Depreciation
8,276.60
12,986.60
2,722.00
3,298.00
2,850.70
Other Income
1023.9
4194
973
1,034.10
962.4
EBIT
22,650.10
33,080.10
610.5
8,523.90
11,419.70
EBIT Margins
16.00%
17.30%
1.70%
17.70%
21.90%
Interest
7,972.50
11,080.10
3,118.70
2,583.20
1,944.20
EBT
14,677.60
22,000.00
-2,508.20
5,940.70
9,475.50
Tax
2,191.30
6,467.10
-1,564.00
1,722.60
2,306.00
Minority Interest
0
-332.1
-311.4
-49.7
0
Shares of Associates
0
-110.5
-29.2
-29.2
0
Extraordinary items
7,901.30
0
-204.3
0
0
PAT
4,585.00
15,975.50
-399.3
4,297.00
7,169.50
PAT Margins
3.20%
8.40%
-1.10%
8.90%
13.80%
Shares outstanding (Mn)
202
191.1
154.2
190.8
189.2
EPS (Basic) (Rs)
22.7
83.6
-2.59
22.52
37.89
June, 2010 Investment Monitor 35
Equity Technical Analysis
Bank Of India CMP321 TARGET365 OUTLOOK- BULLISH Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalized banks. The Bank has 3101 branches in India spread over all states/ union territories including 141 specialized branches. These branches are controlled through 48 Zonal Offices . There are 29 branches/ offices (including three representative offices) abroad. On the daily chart we can see bank of India has support at 300-310 level. And we can see divergence in macd and rsi which are showing bullishness in this stock. We can buy it around 300-3010 for the target price of 365 and second target is 400.
Axis Bank CMP1198 TARGET1350 OUTLOOK- BULLISH Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 405.17 crores with the public holding (other than promoters and GDRs) at 53.09%. The Bank’s Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network
of more than 1000 branches and Extension Counters (as on 31st March 2010). The Bank has a network of over 4055 ATMs (as on 31st March 2010) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence. On the daily chart we can see axis bank is taking support on its up trend line which shows its trend is up. And when it is falling volume is not supporting its fall. We can buy it near 1100-1130 for the target price of 1350 with sl of 1050.
36 Investment Monitor June, 2010
Equity Technical Analysis
Shree Renuka Sugars
Educomp Solutions
CMP55 TARGET70-75 OUTLOOK- BULLISH
CMP - 450 TARGET - 400 OUTLOOK- BEARISH
The company was founded by narendra murkumbi and vidya murkumbi in 1998, not just dreamers but doers in their own right. The combination of dreamers and doers produced enriching result: over the last decade, the company has emerged among the most exciting proxies of a conventional Indian industry; the company is one of the largest and fastest growing sugar companies in India. Srsl has its corporate office in mubai (India) and headquarters in belgaum (Karnataka).its cane crushing operations are located in karnataka and maharashtra (munoli, athani, havalgah and gokak sugars in karnataka and ratnaprabha sugars in kaharashtra). It also operates three leased facilities at arag (maharashtra), aland and raibag (Karnataka). The company possesses India’s largest sugar refining capacity (4,000 tons per day) across two integrated refineries (1,000 tpd each at munoli and athani) and a port-based refinery in haldia (2,000 tpd each at Munoli and majority stake in kbk chem.engineering pvt ltd facilitates turnkey distillery, ethanol and bio-fuel plant solutions. SRSL also acquired a 100 klpd distillery from Dhanuka Petrochemical (khopoli, Maharashtra) that concerts rectified spirit into ethanol and increased its capacity to 300 klpd.
Educom was founded in 1990 and has been delivering highest quality IT Solutions to customers of all types. We have delivered It projects for all sizes of businesses from the smallest of SME’s to the largest corporate organizations. Educom also has a proven track record in the provision of Solutions and services to all parts the education sector from Primary through to Third level including some specialised education facilities. Educom draws from a wide range of Audio Visual products, to supply tailored Audio Visual solutions for your workplaces, from the design stage to the final installation and commissioning of the system. Educom can design, integrate, supply and install Audio Visual systems for Boardrooms, conference facilities, Auditoriums and meeting spaces such as university and school lecture theatres. We take the time to understand the needs of both the users and the organisation. We work with you to grasp the key requirements of the meeting space and the role that the audio visual technology needs to play Tailored solutions for Business, , Corporate, Churches and Education:
On the daily chart we can see Educom has broken its support level and falling continually from its high level and volume is also On daily chart we can see renuka sugars is taking support at support its fall. So we can sell it for the first target price of 400 the level of 50 and trading in a range of 50-55. in technical and second is 300. indicator (MACD and RSI) we can see bullish divergence which are giving support to it’s rise from this level. Investor can do accumulative buying in this stock at the level of 50-55 for the target price of 70-75.
June, 2010 Investment Monitor 37
Commodity Fundamentals
Nickel • Nickel finds its usage in various industries such as engineering, electrical and electronics, infrastructure, automobile and automobile components, packaging, Batteries etc. • Among base metals Nickel is the most volatile owing to its strong demand and tight supply. • Nickel demand is derived demand based on the growth of different industrial sector thus exhibits high volatility. About 65 per cent of nickel is used in manufacture of stainless steels, and 20 per cent in other steel and non-ferrous including “super” alloys, often for highly specialized industrial, aerospace and military applications.
Demand and Supply
• Major producers of Nickel are Russia, followed by Australia, Canada, New Caledonia and Indonesia, which represents over 65% of total world production. • World primary nickel consumption is about 1 million tons. Consumption centers are Japan 2 lakh tons and European Union 3.74 lakh tons. • Rapid expansion of global stainless steel production is fuelling demand for primary nickel.
%. In the post liberalization era, the Indian stainless steel industry has witnessed manifold increase. As India does not produce nickel, the increasing demand for the metal is being met through imports only. India’s nickel imports can be broadly divided into two nickel ore and concentrates and those of nickel and its articles such as nickel bars ,sheets etc.
China’s Participation in World Nickel Market
Outlook for 2010
A massive rise in Chinese nickel demand has been seen in recent years, due to increased demand from it’s booming stainless steel sector and battery (NiMh) manufacturers. The nickel mine production in the country then grew 77.7% in the next eight years. Nickel demand in China is expected to be strong, given the country’s booming economy. Consumption is expected to grow by around 27% to in 2010-11 due to strong growth in industrial production.
The quantities of nickel produced in the world for the calendar year of 2009 were western countries: 803,900.tonnes, eastern countries (CIS, China, Cuba): 577,500 tonnes and total: 1,381,400 tonnes, having decreased by 3.7% YoY as compared with that of 1,434,000 tonnes in the preceding year of 2008.While 65% of nickel consumption has been shared by production of stainless steel, under the present situation which the world output of crude stainless steel in 2009 had a decline of 5%, the world production of nickel stayed on a reduction by 3.7% and this small decrease of nickel production in 2009 is supposed to be due to the increased production of nickel by China.
Indian Scenario India does not produce nickel as of now as there are no sulphide deposits identified in the country. India’s requirements are met through imports. The only indigenous source of producing the metal is deposits of lacteritic oxides like chromite overburden. The only known deposit in the country is in Sukinda Valley in Orissa. In India too, growing demand for stainless steel is leading to increasing demand for nickel. Almost 70% of the stainless steel products manufactured in India have nickel contact at low 1-4
LME nickel stocks and also to be absorbed by more imports of nickel into China in 2009. LME nickel stocks were 78,800 tonnes at the beginning of 2009 but increased to 162,000 tonnes as of the end December of 2009. In the immediate future we could see rise in prices backed by low inventories compared to increased demand. Supplies increasingly influence the Nickel market. A short fall of supply is likely to be expected due to challenges faced by new projects, which will take time to resolve. Consumption of nickel is dominated by the stainless steel sector, which accounts for around 70% of demand for primary nickel. Since 2001, world output of stainless steel has increased at an average rate of almost 10%py, driven by China where growth has averaged over 50%py over the same period. At these growth rates China will overtake Japan as the largest primary nickel consuming country, possibly as early as 2011. The outlook for nickel demand to 2010 is one of higher than average growth than that for the other base metals. If the 5%py growth forecast by International Stainless Steel Forum in 2005 proves to be correct, then demand for nickel in stainless steel is likely to grow at between 3% and 5%py over the same period. There are a number of potential nickel mining and refining projects in various stages of development, as well as some expansions at existing facilities, that will ensure continued growth in supply of primary nickel to 2010.
38 Investment Monitor June, 2010
Commodity Fundamentals
ZINC ZINC
Out look- Asia
Zinc-The white metal is mainly used for the purpose of galvanizing steel. Galvanizing is the process by which steel is coated by using zinc; this protects the metal from being corroded. Along with this zinc is used to manufacture medicines. Zinc is a prosaic metal. Two-fifths of the world’s 11 million tons of annual consumption is used for galvanising steel, with a further fifth each going into dye-casting and brass-making. Demand for zinc, like that for aluminium, copper and lead, is generally a reliable indicator of the world’s real economic health.
Half of all refined zinc is consumed in the construction sector and a further 25 per cent in transport industries, including motor vehicle manufacturing. These industries are expanding rapidly in developing Asia, particularly India and China, as their economies grows. Despite zinc prices doubling in 2008–09, there is no evidence of significant moves to the use of substitutes for zinc. More over with India & China trying to go on with the economic growth, the demand for zinc seems to be there for quite some time.
Demand :
Outlook 2010
Last year, the world produced 11.28 million tons of metal but used only 10.83 million. Additions to Chinese inventories swallowed 2,68,000 tons of the 4,45,000 tons difference. There were some shifts in other warehouse stocks that allowed the London Metal Exchange (LME) to absorb 2,36,000 tons. The opening of new mines and the re-opening of idled ones is predicted to add 8,44,000 tons to global production this year, though some 1,40,000 tons could well be lost with closures and declining production at mature properties. Supply :
Chinese demand is reckoned to have risen by 18% to some 4.7 million tons last year, but that growth rate is unlikely to be maintained as Beijing squeezes the economic brakes. Forget the threatening world economic recession. From the start until the close of 2009, the metal’s price rose by 125%., the rise was based on strong Chinese demand for physical metal and enthusiastic buying of futures by fund managers looking for returns in a period of near-zero interest rates.
On the consumption side, much will depend on China and other Asian economies, particularly as any European or North American economic growth is unlikely to be more than lethargic. this year is likely to see zinc supply exceeding demand by anything between 3,00,000 tons and 9,00,000 tons. And under normal circumstances that would have already placed significant downward pressure on prices. But, and it is supposition, fund managers and investors appear to be counting on major demand growth in the coming decade.
Global Scenario Mine production had shown growth of around 3 per cent in 2009 to 10.5 million tonnes, reflecting increase production at new and existing mines. Operations are scheduled to commence at a number of locations in South America, Australia and Canada by end of year 2008. These projects include San Cristobal in Bolivia (capacity of 165 000 tonnes a year), Cerro Lindo in Peru (110000 tonnes a year), the Lennard Shelf restart in Australia (75 000 tonnes a year) and Langolis in Canada (54 000 tonnes a year). Reflecting the growth in mine output, refined zinc production in 2009 has increased by 5 per cent to12.2-12.5 million tonnes. A large proportion of the increase in refined zinc production is expected to come from new smelters in China and India.
Normally, rising LME warehouse stocks would be one of the signals for prices to soften, but the increases have continued this year and the metal’s spot and futures prices are not heading lower - not yet.
June, 2010 Investment Monitor 39
Commodity Technical
Natural Gas Natural Gas- MCX
Natural gas ended positive as traders were buying back previously sold contracts to cover their positions ahead of expiration But overall trend is down so far. Bargain-buying also provided some support for prices, which are at their lowest level in more than two weeks. U.K. natural gas prices for winter reached a six-month high relative to U.S. contracts, as pipeline and field shutdowns in Norway cut exports to Britain. The total volume for the day was at 8878 lots and the open interest was at 4949. Now support for the Natural Gas is seen at 178 and below could see a test of 160. Resistance is now likely to be seen at 208, a move above could see prices testing 220.
consolidation in the larger down trend. Current fall from 6.108 might extend further for a retest on 2.409 low next after sustaining below 61.8% retracement of 2.409 to 6.108 at 3.822. However, note that decisive break of 38.2% retracement of 5.68 to 3.81 at 4.524 will argue that whole fall from 6.108 has completed and will turn outlook bullish for a possible test on 6.108 high. Nymex Natural gas June future prices made a recent new low of $3.855 and currently trading higher at $4.178 levels. Although, prices made a new low but the momentum indicator MACD is treading higher compare to previous low.
This suggests market is likely to bottom out and can witness higher price movements in the short term. The key level to watch Nymex Natural Gas (NG) is at $4.450 levels on breach and sustain above confirms the upBias in natural gas remains on the downside and further decline trend for long run. Overall, prices are expected to test $4.457 should be seen to 3.810/855 support zone. Consolidation from levels. In case market breaches the resistance of $4.457 likely to 3.81 might have completed at 4.494 already. Break of 3.81/83 extend its gains. support zone will confirm down trend resumption and should target 3.0 psychological level next. On the upside, though, above 4.107 minor resistance will delay the immediate bearish Trading Ideas Natural Gas trading range is 183-208.6. case and turn bias neutral first. In the bigger picture, medium term rebound from 2.409 has Natural gas ended positive short covering ahead of expiry completed at 6.108 and the three wave corrective structure of Natural Gas June MCX: Buy in the range 184-186 targeting 200 the rebound argues that it’s merely a correction, or part of the then 208 with stop loss below 175
40 Investment Monitor June, 2010
Commodity Technical
Crude Oil Crude oil has fallen marginally over the week with weekend recover after the announcement of stimulus packages in European region. However, rising stocks is strong detrimental factor for crude to recover swiftly. Strong dollar and high inventories could be the resisting factors for crude in the near future. In the row of WTI, Dubai crude and Brent, the formers have fallen sharply while the lower at slower pace. Weakness in Euro retained the gains of Brent crude despite of EU recovery concerns. Total Oil stocks (Crude+Product) have reached 1086 million barrels as of second half of May.
Outlook for Crude
Crude oil is expected to consolidate from current levels with negative bias in the near term as crude stocks are showing signs of rising trend with underperforming global equity markets amid European economy concerns. Since macro economic numbers are almost peaked, we believe there is consolidated trading to negative bias in crude outlook in medium term.
Crude pushed strongly but the push halted at the retest level 70.10, which meets with the 76.4% Fibonacci correction level. Stochastic entered overbought areas; thus making us expect 70.10 to maintain its stance then head towards achieving the bearish intraday trend that targets mainly 67.65 that has become to represent the gate of return within the bearish path represented by the breached descending chanzznel yesterday. It is vital that stability is below 70.10 to maintain chances of achieving the expected bearish direction. The short term trend is to the downside as far as 79.20 remains intact with targets at 61.60. Trading Ideas U.S. inventories of crude and products are very high and that’s putting pressure on prices The discount of front-month New York oil futures to forward months narrowed, reflecting the supply drop at Cushing Crude June MCX: Sell in the range 3490-3500 targeting 3250 with stop loss above 3560
( Daily Chart- Crude)
June, 2010 Investment Monitor 41
Currency Fundamental
USD INR Fundamental Outlook Global Scenario Yen continued to fall against the dollar as Japan retreated keeping yen at lower levels against the greenback. However surprising news came from china as China’s central bank began to roll back its monetary stimulus for an economy poised to become the world’s second-biggest this year, seeking to reduce the danger of asset-price inflation after a record surge in credit.Chinese Central Banks sold three-month bills at a higher interest rate for the first time in19 weeks. The central bank has kept its benchmark one-year lending rate at a five-year low of 5.31 percent.
India 10-Yr Benchmark yields have started moving up once again after a phase of consolidation. Looking at the tools in government’s arsenal we feel that there are only 3 options left to in the monetary kitty of the government. (1)Withdrawal of Stimulus Packages (2) Hike of CRR (3) Increase of interest rates. However sucking of liquidity from the system will not be effective as rise in agriculture commodity prices have been mainly due to demand supplydynamics rather than excess liquidity.
Indian Liquidity Scenario
A look at liquidity scenario in the country indicates demand for Credit rising up slowly. Commercial Credit growth which fell to 9% rose to 11% by the first fortnight of December however M3 which is a broad indicator of Money flow in the economy continue to fall. A divergence between Credit Growth and Money Flow indicates a tight liquidity situation may arise in near future.
The Indian Rupee exchange rate for April, 2010 averaged 44.44 INR to USD that’s 100.7 basis points lower than the March, 2010 rate of 45.45, and 553 basis points lower than the April, 2009 rate of 49.98.The fall in the INR/USD exchange rate from March to April provides evidence that the short term trend in INR/USD is down. In other words, weaken of the US Dollar against the Indian Rupee in the short term. If that trend continues in the curYear
USD/INR
Year
USD/INR
Year
USD/INR
1973
7.66
1986
12.6
1999
43.12
1974
8.03
1987
12.95
2000
45
1975
8.41
1988
13.91
2001
47.23
1976
8.97
1989
16.21
2002
48.62
10 year benchmark yields continued to increase with yields quoting at highs of 7.66% levels. The rise however was in anticipation of increase in interest rate by the government.
1977
8.77
1990
17.5
2003
46.6
1978
8.2
1991
22.72
2004
45.28
1979
8.16
1992
28.14
2005
44.01
Factor that affecting Currency Future
1980
7.89
1993
31.26
2006
45.17
1981
8.68
1994
31.39
2007
41.2
1982
9.48
1995
32.43
2008
43.41
2009
48.32
Foreign exchange rates, like any other asset class move depending on various factors, like demand supply, interest rate parity, trade and capital flows, speculators taking positions, clients hedging risk arising from their trade and capital flows etc. some of the important factor are mention below: •Macro economic views •Monetary Policy •RBI intervention •Flow information •Performance of other Asian currencies •Performance of equity markets •USD sentiment •Performance of key commodities affecting trade •Policy announcements affecting flows – trade or capital •Data announcement
42 Investment Monitor June, 2010
1983
10.11
1996
35.52
1984
11.36
1997
36.36
1985
12.34
1998
41.33
rency market, we should see an average daily rate in May, 2010 that is close to 43.44. The average Indian Rupee conversion rate over the last 12 months was 46.90. The average rate over the last 10 years was 45.55. The minimal change in the Indian Rupees to dollars exchange rate over the last 12 months compared to average conversion rates over the last 10 years serve as an indicator that the long term trend in INR/USD is relatively flat.
Currency Technical Historical Indian Rupee Rate (INR)
Candlestick Watch
The highest currency rate for INR/USD over the last 12 months was 48.51. The lowest was 44.44. The market high was attained in May, 2009. The market low was achieved in April, 2010.
Data
Duration
Price
Average
Last 10 Years
45.55
Average
Last 12 Months
46.9
HIgh
Since 1973
51.13
Low
Since 1973
7.27
High
Last 12 Months
48.51
Low
Last 12 Months
44.44
Patten
Doji
Piercing Line
Dark Cloud Cover
Engulfing Bullish
Engulfing Bearish
Value
NA
NA
NA
NA
NA
Evening Star
Morning Star
Shooting Star
Hammer
Harami Bullish
Harami Bearish
NA
NA
NA
NA
NA
NA
Value NA
NA
Technical Outlook
The average exchange value during that period of history was 25.81 INR/USD. The highest rate was 51.13. The lowest was 7.27. The market high was attained in March, of 2009. The market low was achieved in June of 1973. Recent rates experienced in April of 2010 are high relative to the historical 25.81 average.
Conclusion Looking at USDINR prices in coming week we expect that uptrend to be continuing. U.S. citizens are getting some relief as the price of oil, which is priced in dollars, has started to decline. This is good news for the Federal Reserve because it means that it will be able to keep interest rates at their current low level, or even eventually lower them if growth continues to slow, and not have to hear the entire inflation hawks squawk about how they should be raising rates. While the drop in the price of oil (which I strongly believe is only temporary) will certainly help the economy in the short run, the United States has many more problems than just expensive oil. The jobs market is still a mess and credit is still tight. I suspect that the economic weakness that we have been seeing will continue. USDINR expected to touch 49.0 in coming week and sustain above that level price of dollar would gone to the level of 51.0
Asian market behaves mixed despite the US stocks closed higher on last Friday -as the economic concerns eased a bit. This could have a customary impact on Indian stock markets, bringing in no such momentary triggers at the opening hours. However, the dollar trading higher in its initial sessions can cause some shakes to the Indian rupee. The Indian rupee weakened for last week on account of increasing fund outflows by the FII’s and falling share markets. There was extended selling by the exporters but of little use against volatile dollar index. Indian rupee has lost more than 3.80 percent past week which could prompt investors to book profits. The onshore as well as the off shore (NDF) dollar premium have risen in wake of importers demand causing further downside in currency. We expect dollar
Support & Resistance Level
LTP
S1
S2
R1
R2
Value
46.90
46.50
45.80
47.50
48.30
Retracement
46.90
46.70
46.10
47.30
49.25
Moving Averages Days
EMA 9
Value
6.1752
BIAS
Buy
EMA 18
EMA 27
5.6570 5.4328 Buy
Buy
EMA50
EMA 100
5.3293
5.5880
Neutral
Neutral
Technical Indicator
to trade uptrend for the coming days. We had witness steak rally in Dollar from the price level of 44.60 in last couple of week. Dollar test the price level of 47.33 but could not sustain those price levels and pressure was seen building in the same thereby touching low of 46.57. 46.50 may provide good support, breach of which can take it down to test 45.80. At current price level dollar have immediate resistance of 47.50 after that next resistance would be around 48.30.
Trading Strategy
Conclusion
Recommendation
Buy USDINR near 46.40 - 46.60 SL 45.80 Target 47.30 / 47.80 / 48.10
4.0453
Outlook
Side way uptrend
Natural
Strategy
Buy on Dip
Indicator
RSI (14)
MACD (25,9)
Williams %R
Trix
Momentum
Value
1.59
0.4957
6.94
0.1426
BIAS
Sell
Buy
Natural
Buy
June, 2010 Investment Monitor 43
Mutual fund Article
Gold ETF: Investment Outlook in a Changing World
I
f one ponders a little on the history of ‘human economy, one would realize that despite all the human prosperity since civilization began, it is Gold alone that still lingers around. And, despite the conjecture during the 90’s that Gold is slowly being relegated to disuse - the fetish and the economics behinds this metal remains firmly in place. But what is the reason behind it?
Firstly because, the ‘Money’ is only as good as the ‘exchange’ it can bring for you. Either now or later! And this is largely dependent on the willingness of the 2nd and 3rd party to accept such ‘money’. And this is where gold comes in. Gold’s ‘value’ is embedded in human history and collective psychology. Gold derives its economic value from the basic human urge to possess it. It is this natural ability of drawing human possessiveness that makes Gold as the natural currency of the world, and helps gold display characteristics quite similar to that of ‘ordinary money’. The dynamics of Gold investment is based on the assured purchase value that the metal commands almost anywhere. And this inherent quality has stuck on. No surprise then that Gold is still considered the final value hedge against the purchasing power of any currency that may be brought into question. Thus, at a subterranean level, a gold investment involves taking of two positions. An orthodox value hedge, and (this is implicit) a ‘pseudo’ currency stance. This intrinsic characteristic of gold is widely accepted by Major Central Bankers, Corporates, Financial Institutions and High Networth Individuals. Therefore investment in Gold or gold backed security is seen as an essential part of a larger investment management wisdom. But, investing in Gold has a minor side-effect. Buying physical gold involves the risk of theft, misplacement and potential wrong-pricing by the sellers. Additionally, when an investor needs to sell his physical gold, again at that point, the investor has to go through the inconvenient route of valuation, bargaining, transaction and delivery.
44 Investment Monitor June, 2010
All these angles involve risk, skill, and time - making the whole process inconvenient. But thankfully an alternative method to investing in Gold exists. That too, without the inconvenience of the physical transaction, that is Gold Exchange Traded Fund(GETF). Gold ETF is nothing but pure Gold, traded online through a medium of exchange. Normally, each unit of gold ETF is worth approximately 1 gram of Gold at any-point of time. The investors take-away from GETF are: • That it allows the investor to invest in gold without bothering for the purity, the security or the liquidity of Gold investment that is attendant with gold hoarding. • GETF’s online tradability and transact-ability is exactly like any other stock scrip. Making buying and selling an almost intraday day affair! An idea quite difficult with physical gold. In other words, what GETF does is, it gives you an ability to buy, sell, or hold gold at convenience. This idea though relatively new has caught majorly elsewhere in the world. In India too, with rising awareness Gold ETF’s are gaining ground.
Mutual fund Article higher. On the other hand, the supply of gold is expected to come under increasing duress due to rising cost of production in the gold mining sector. Moreover, gold prices may witness additional support, given the scarcity of the metal vis-à-vis the demand, and the high turnaround time needed for the new capacity to pitch-in. As per the reports, the production trends of the gold mining industry have largely been on a decline. This, coupled with the fact that no major mining discoveries have been noted in last two years, gives reasons to cheer for the gold investors. But the real push for gold demand as an investment commodity is expected to come from the unraveling ‘sovereign debt’ saga being played out in the Euro-zone. At the crux of the crisis is the rising investor perception that certain European nations may find it difficult to service the high levels of debt that they may have incurred in the past. Along with this, the additional debilitating factor has been the inability of the involved nations to service their loan by using the fiat currency dictum (since they were bound by the Maastricht Treaty). But the double whammy has come in due to the fact that the predominant portion of these nations debt is held by external investors. As per estimates, around US$ 600 bn may be needed by these nations in the current year alone; with nearly U$ 2 trillion required over the period of two years. As of for now, the US$ 1 trillion bailout package by the EU & IMF may have addressed the immediate element of the crisis; but the risk perception remains high in the minds of the investor. Also, due to the expanding money supply, it is expected that the inflation may begin to build up in the global economy sooner or later. In this backdrop, where the investor perception regarding the key global currency is largely bearish, it is conjectured that it may result in increased buoyancy in the underlying gold prices.
Outlook
From an investor point of view, this improved potential of gold, along with the convenience of the ETFs, has come as an ‘Akhaya Tritiya’ offering. Though, prudential allocation and reasonable investment time horizon must always be a cornerstone in the investment decision matrix.
The gold demand in India and in China, the two top gold consumers, has continued to remain buoyant. It is further expected that the reviving economic outlook and the improving income levels will push the demand for gold in these countries even
This article is contributed by Ms. Laxmi Iyer, Head (Products) at Kotak Asset Management Company Ltd.
The investment potential of gold is influenced by two factors; namely, the ‘long hands of economics’; and the gold’s negative correlation with the predominant currencies of the world. Currently both these factors weigh favorably for gold.
June, 2010 Investment Monitor 45
Derivative Article
Implied Volatility What Is Implied Volatility?
Implied volatility represents the expected volatility of a stock over the life of the option. As expectations change, option premiums react appropriately. Implied volatility is directly influenced by the supply and demand of the underlying options and by the market’s expectation of the share price’s direction. As expectations rise, or as the demand for an option increases, implied volatility will rise. Options that have high levels of implied volatility will result in highpriced option premiums. Conversely, In the financial markets, the market’s expectations decrease, options are rapidly becoming a widely as or demand for an option diminishes, accepted and popular investing meth- implied volatility will decrease. Options containing lower levels of implied volaod. Whether they are used to will result in cheaper option prices. insure a portfolio, generate income or tility This is important because the rise and leverage stock price movements, fall of implied volatility will determine they provide advantages other financial how expensive or cheap time value is to the option.
The estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets. It is not uncommon for investors to be reluctant about using options because there are several variables that influence an option’s premium. Don’t let yourself become one of these people. As interest in options continues to grow and the market becomes increasingly volatile, this will dramatically affect the pricing of options and, in turn, affect the possibilities and pitfalls that can occur when trading them. Implied volatility is an essential ingredient to the option pricing equation. To better understand implied volatility and how it drives the price of options, let’s go over the basics of options pricing.
Option Pricing Basics
instruments don’t.
How Implied Volatility Affects Aside from all the advantages, the most Options complicated aspect of options is learn- The success of an options trade can be ing their pricing method. Don’t get dis- significantly enhanced by being on the side of implied volatility changes. couraged - there are several theoretical right For example, if you own options when pricing models and option calculators implied volatility increases, the price of that can help you get a feel for how these these options climbs higher. However, a change in implied volatility for the prices are derived. worse can create losses, even when you
Option premiums are manufactured from two main ingredients: intrinsic value and time value. Intrinsic value is an option’s inherent value, or an option’s equity. If you own a Rs. 50 call option on a stock that is trading at Rs. 60, this means that you can buy the stock at the Rs.50 strike price and immediately sell it in the market for Rs.60. The intrinsic value or equity of this option is Rs.10 (Rs.60 - Rs.50 = Rs.10). The only factor that influences an option’s intrinsic value is the underlying stock’s price versus the difference of the option’s strike price. No other factor can influence an option’s intrinsic value. Using the same example, let’s say this option is priced at Rs.14. This means the option premium is priced Rs.4 more than its intrinsic value. This is where time value comes into play. Time value is the additional premium that is priced into an option, which represents the amount of time left until expiration. The price of time is influenced by various factors, such as time until expiration, stock price, strike price and interest rates, but none of these is as significant as implied volatility
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are right about the stock’s direction. Each listed option has a unique sensitivity to implied volatility changes. For example, short-dated options will be less sensitive to implied volatility, while long-dated options will be more sensitive. This is based on the fact that long-dated options have more time value priced into them, while short-dated options have less. Also consider that each strike price will respond differently to implied volatility changes. Options with strike prices that are near the money are most sensitive to implied volatility changes, while options that are further in the money or out of the money will be less sensitive to implied volatility changes. An option’s sensitivity to implied volatility changes can be determined by Vega - an option Greek. Keep in mind that as the stock’s price fluctuates and as the time until expiration passes, Vega values increase or decrease, depending on these changes. This means that an option can become more or less sensitive to implied volatility changes.
Derivative Article
Source: www.nseindia.com
How to Use Implied Volatility to Your Advantage
One effective way to analyze implied volatility is to examine a chart. Many charting platforms provide ways to chart an underlying option’s average implied volatility, in which multiple implied volatility values are tallied up and averaged together. For example, the volatility index (VIX) is calculated in a similar fashion. Implied volatility values of near-dated, near-themoney CNX Nifty Index options are averaged to determine the VIX’s value. The same can be accomplished on any stock that offers options. Because each stock has a unique implied volatility range, these values should not be compared to another stock’s volatility range. Implied volatility should be analyzed on a relative basis. In other words, after you have determined the implied volatility range for the option you are trading, you will not want to compare it against another. What is considered a relatively high value for one company might be considered low for another. Figure 1 is an example of how to determine a relative implied volatility range. Look at the peaks to determine when implied volatility is relatively high, and examine the troughs to conclude when implied volatility is relatively low. By doing this, you determine when the underlying options are relatively cheap or expensive. If you can see where the relative highs are (highlighted in red), you might forecast a future drop in implied volatility, or at least a reversion to the mean. Conversely, if you determine where implied volatility is relatively low, you might forecast a possible rise in implied volatility or a reversion to its mean. Implied volatility, like everything else, moves in cycles. High volatility periods are followed by low volatility periods, and vice versa. Using relative implied volatility ranges, combined with forecasting techniques, helps investors select the best possible trade. When determining a suitable strategy, these concepts are critical in finding a high probability of success, helping you maximize returns and minimize risk.
Using Implied Volatility to Determine Strategy
You’ve probably heard that you should buy undervalued options and sell overvalued options. While this process is not as easy as it sounds, it is a great methodology to follow when selecting an appropriate option strategy. Your ability to prop erly evaluate and forecast implied volatility will make the process of buying cheap options and selling expensive options that much easier.
An implied volatility range using relative values
When forecasting implied volatility, there are four things to consider:
Make sure you can determine whether implied volatility is high or low and whether it is rising or falling. Remember, as implied volatility increases, option premiums become more expensive. As implied volatility decreases, options become less expensive. As implied volatility reaches extreme highs or lows, it is likely to revert back to its mean. If you come across options that yield expensive premiums due to high implied volatility, understand that there is a reason. Check the news to see what caused such high company expectations and high demand for the options. It is not uncommon to see implied volatility plateau ahead of earnings announcements, merger and acquisition rumors, product approvals and other news events. Because this is when a lot of price movement takes place, the demand to participate in such events will drive option prices price higher. Keep in mind that after the market-anticipated event occurs, implied volatility will collapse and revert back to its mean. When you see options trading with high implied volatility levels, consider selling strategies. As option premiums become relatively expensive, they are less attractive to purchase and more desirable to sell. Such strategies include covered calls, naked puts, short straddles and credit spreads. By contrast, there will be times when you discover relatively cheap options, such as when implied volatility is trading at or near relative to historical lows. Many option investors use this opportunity to purchase long-dated options and look to hold them through a forecasted volatility increase. When you discover options that are trading with low implied volatility levels, consider buying strategies. With relatively cheap time premiums, options are more attractive to purchase and less desirable to sell. Such strategies include buying calls, puts, long straddles and debit spreads.
Conclusion
In the process of selecting strategies, expiration months or strike price, you should gauge the impact that implied volatility has on these trading decisions to make better choices. You should also make use of a few simple volatility forecasting concepts. This knowledge can help you avoid buying overpriced options and avoid selling under priced ones.
June, 2010 Investment Monitor 47
Fixed Deposit
Fixed Income FIXED INCOME
An 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. Investors in fixed-income securities are typically looking for a constant and secure return on their investment. For example, a retired person might like to receive a regular dependable payment to live on, but not consume principal. This person can buy a bond with their money, and use the coupon payment (the interest) as that regular dependable payment. When the bond matures or is refinanced, the person will have their money returned to them. 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. Here are some key points which is need to keep in mind while investing in fixed Income schemes –
Time Period Like in any other investment, time period is also a vital aspect of fixed income instruments. Often there are higher rates of return available for a short duration of time. a.Long-term instruments eg - investor plans to use the funds for their retirement corpus, hence they need some long-term instruments that have a higher rate of return. b.Short term instruments will require constant watch in order to look for new opportunities as the older instruments mature. In the search for such a choice some amount of returns might have to be compromised. There should also be a mixture of investments across different types to avoid the concentration of risk in a certain area. This would also help investor to get different rates of return on the instruments
Liquidity
The prime reason to invest in an instrument is to earn returns, but there is also the question of liquidity. Liquidity means that in case some of the invested money is required for emergency or other use then this can be withdrawn through the presence of an exit route. Investor has to anticipate this to fix how much money she should have in liquid instruments.
Disadvantage:
There will be lower return in this case. i. A fixed deposit can be withdrawn after payment of a penalty in terms of the interest earned. ii. Other instruments like long-term bonds will not allow exit except at specific time intervals, but they are likely to have a higher return.
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Safety
The most important aspect of fixed income investments is safety. These investments need a lower risk as they represent an entirely different asset class. Let’s see how different fixed income investments cover this point:
Fixed deposits:
An FD with a public sector bank will have a very low credit risk compared to other banks as a public sector bank has government backing and will not be allowed to fail in any circumstances.
Company deposits:
They provide higher return but there is a higher credit risk also. This could result in a sudden stop in payments of interest and even the capital can be at risk if the position of the company deteriorates.
Debentures:
They offer a regular return, and are present in two forms: secured and unsecured. The latter is more risky as there is no security behind the debentures and in case of a poor financial situation of the company the investor could find it difficult to recover his/her investments.
Why to Invest in Fixed Income ? 1. Low risk tolerance
One of the key benefits of fixed-income instruments is low risk i.e. the relative safety of principal and a predictable rate of return (yield). If your risk tolerance level is low, fixed-income investments might suit your investment needs better.
2. Need for returns in the short-term
Investment in equity shares is recommended only for that portion of your wealth for which you are unlikely to have a need in the short-term, at least five-years Consequently, the money that you are likely to need in the short-term (for capital or other expenses), should be invested in fixed-income instruments.
3. Predictable versus Uncertain Returns
Returns from fixed-income instruments are predictable i.e. they offer a fixed rate of return. In comparison, returns from shares are uncertain. If you need a certain predictable stream of income, fixed-income instruments are recommended. Here are the advantages of investing in fixed income 1. Legal rights in case of bankruptcy or dissolution. 2. Higher yields 3. Lower volatility of return 4. Lower risk
Fixed Deposit 5. Flexibility 6. Large variety 7. Predictability and reliability of income. 8. Stabilize portfolio returns if included with stocks
Avenues of Fixed Income 1. Income Fund
A mutual fund which emphasizes current income in the form of dividends or coupon payments from bonds and/or preferred stocks, rather than emphasizing growth. Income funds are considered to be conservative investments, since they avoid volatile growth stocks. Income funds are popular with retirees and other investors who are looking for a steady cash flow without assuming too much risk.
2. MIP
A type of investment vehicle that provides a specified monthly payment to the investor. This monthly payment is intended to be a stable form of income and is therefore typically suited for retired persons or senior citizens without other substantial sources of monthly income. MIPs are designed with the explicit objective of giving a regular return (in the form of an income) to investors. The periodicity of returns depends upon the option chosen by the investor. MIPs generally come with the monthly, quarterly, half-yearly and annual options. Investors who choose the growth option, will be obviously not be entitled for a return by way of dividend, but will get a return in the form of capital appreciation. MIPs are designed with the explicit objective of giving a regular return (in the form of an income) to investors. The periodicity of returns depends upon the option chosen by the investor. MIPs generally come with the monthly, quarterly, half-yearly and annual options. Investors who choose the growth option, will be obviously not be entitled for a return by way of dividend, but will get a return in the form of capital appreciation.
(a) Axis Income Saver Fund -
Axis Mutual Fund has launched a new scheme named as Axis Income Saver Fund, an open ended income fund. The new issue is open for subscription from 24 May 2010 and closes subscription on 16 June 2010. The investment objective of the scheme is to generate regular income through investments in debt & money market instruments, along with capital appreciation through limited exposure to equity and equity related instruments.. The scheme shall offer growth and dividend options. Dividend option offers payout and reinvestment facility on a quarterly, half yearly and annual. The scheme expects to raise minimum subscription amount of Rs 1 crore during the NFO period. The minimum investment amount under this series is Rs 5000 .
(b) Reliance MIP
The primary investment objective of this Scheme is to generate regular income in order to make regular dividend payments to unit holders and the secondary objective is growth of capital. The current NAV is 20.4391 . Allocation in equity and its related securities is 20% ( risk is medium to high ) . Allocation of total assets in Fixed income securites is 80% ( risk is low to medium ). Securitised Debt will be a part of the debt securities, upto 25 percent of corpus.
3 . Retal Bond Issue :
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents. The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply “Treasuries”. Two features of a bond - credit quality and duration - are the principal determinants of a bond’s interest rate. Bond maturities range from a 90-day Treasury bill to a 30year government bond. Corporate and municipals are typically in the three to 10-year range. There are two favourate picks of investors in this category -
(a) Shri Ram Transport Finance NCD –
After the issue of non-convertible debentures (NCDs) by L&T Finance Ltd in February, Shriram Transport Finance Co. Ltd, a nonbanking finance company (NBFC) whose main business is truck financing, has hit the debt market and issued NCDs.. Just like a fixed deposit, an NCD is a loan that a company takes from you for a fixed term. In the interim, you get interest. An NCD comes with five options having tenors between five and seven years. Options I and II have a put/call option, which means premature redemption is allowed. While option III has a staggered payment facility, option IV doubles your money after six-and-a-half years. Option V is similar to option I, except that it offers higher interest rate as it is “unsecured” and matures after seven years. After looking to its financials and offer , it seems to be a very efficient investment option .
(b) NABARD Bhavishya Nirman -
A 10 year Zero Coupon Bond of NABARD hereinafter referred to as “ BHAVISHYA Nirman Bond” is being issued by way of private placement as long term investment under Section 2 (47) & 2( 48 ) of Income Tax Act , 1961 . The present issue is made under Section 19 (a) of NABARD Act , 1981 as approved by the Board of Directors of NABARD .The issue price has been fixed at Rs.9500/per bond for investments up to Rs.5.00 crore per day, per applicant. The investors are required to subscribe for minimum 5 bonds .Maturity Value is Rs 20,000 per Bond Listing will be on Bombay Stock Exchange ,AAA rating by CRISIL & CARE
4. GOI Saving Bonds –
Currently 8% Savings (Taxable) Bonds are available. The same are available online through ICICI direct. The maturity period of 8% Saving Bonds is 6 years without any early redemption option. Saving Bonds are issued by the Government of India. As these bonds are sovereign in nature, payment is guaranteed on maturity. The minimum permissible investment for 8% Savings Bonds is Rs.1000/- and in multiples of Rs. 1000/- thereof. There is however is no maximum limit of investment . Interest is payable at half-yearly intervals from the date of issue or compounded with half-yearly rests, payable on maturity alongwith the principal, as the investor may choose. The interest payment dates are 1st July and 1st January every year .
June, 2010 Investment Monitor 49
Insurance Article
Payout on Annuity For some investors, an annuity can be an appropriate part of a sound financial plan. However, one feature of annuities that is commonly misunderstood is payout options. Here we define these options, how they are calculated and how they are taxed.
Phases of an Annuity
Joint-Life Option This common option allows you to continue the retirement income to your spouse upon your death. The monthly payment is lower than that of the life option because the calculation is based on the life expectancy of both the husband and wife.
The two phases in the life of an annuity are the accumulation phase and the annuitization phase (or payout phase). During the accumulation phase, you can add funds to your annuity contract by depositing cash, converting life insurance cash values or doing a 1035 exchange from another annuity (to name a few ways of contributing). If you follow the annuity rules, your annuity will accumulate earnings on a tax-deferred basis until you make withdrawals. Once you reach age 59.5, you can begin to withdraw funds from the annuity without penalty charges.
Annuity Payout Options There are a few different methods for taking annuity payouts. Generally speaking, the two most common methods to receive cash payouts are the annuitization method and the systematic withdrawal schedule. The other is taking a lump-sum payment. The annuitization method gives you some guarantee of monthly income for a determined period. Under the systematic withdrawal schedule, you have complete control over the timing of distributions but no protection against outliving annuity assets.
Annuitization Method Let’s look at some different options you have with the annuitization method.
Life Option The life option typically provides the highest payout because the monthly payment is calculated only on the life of the annuitant. This option provides an income stream for life, which is an effective hedge against outliving your retirement income.
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Period Certain With this option the value of your annuity is paid out over a defined period of time of your choosing, such as 10, 15 or 20 years. Should you elect a 15-year period certain and die within the first 10 years, the contract is guaranteed to pay your beneficiary for the remaining five years.
Life with Guaranteed Term Many people like the idea of income for life (which they get with the life option), but they are afraid to choose that option in case they die in the near future. The life-with-guaranteed-term option gives you an income stream for life (like the life option), so it pays you for as long as you live. But with this option, you can select a guaranteed period, such as a 10year guaranteed term, for which your annuity is obligated to pay to your estate or beneficiaries even if you die before that guaranteed period is over.
Insurance Article Systematic Withdrawal Schedule Under this method, you can select the amount of payment that you wish to receive each month and how many you want to receive. However, the insurance company will not guarantee that you will not outlive your income payments. How much you receive and how many months you receive payments depends on how much you have in the account. The burden of life-expectancy risk is on your shoulders.
Lump-Sum Payment Taking out the assets in your annuity in one lump sum is usually not recommended because, in the year you take the lump sum, ordinary income taxes will be due on the entire investment-gain portion of your annuity. Clearly, this is a very inefficient payout option from a tax minimization perspective.
Electing Not to Take Payments Some individuals have no need for income from the funds that have accumulated in their annuity. If the same is true for you, be sure to check your beneficiary designation is correct since the annuity can be transferred to your beneficiary at your death.
Finally, the size of your monthly payout depends also on the insurance company that you use, and its expected investment returns on your money. If the company can make a 5% instead of a 3% return with your money, your payment will be higher. However, the increase in your payment when returns are higher depends on whether you select a fixed monthly payout or a variable monthly payout from your annuity. If you select the fixed amount, your payout will not change, and the insurance company assumes all investment risk. Under the variable payout, the size of the monthly payout fluctuates based on market conditions, so you assume the market risk.
Tax Treatment of Annuity Payouts Once your contract is annuitized, part of each payment (from a fixed annuity) is considered a partial return of the basis (your contribution) and part is taxable income using an exclusion ratio. Once you select your payout method with your insurance company, you should ask for your exclusion ratio, which tells you how much is excluded from being taxed. If your exclusion ratio is 80% on a $1,000 monthly payout, then $800 is excluded from income tax and $200 is subject to ordinary income tax. Premature distributions (those occurring before you reach age 59.5) are subject to a 10% penalty, and for annuities purchased before Aug 14, 1982, the FIFO (first-in, first-out) method is used for withdrawals. For annuities purchased after Aug 13, 1982, the withdrawal rule is LIFO (last-in, first-out), meaning that earnings will come out first. You have to pay not only a 10% penalty on the withdrawal, but also income tax on any portion of the withdrawal attributable as investment gain. It is not a wise decision to pull funds prior to age 59.5, so try to avoid it at all costs.
Credit Quality Concerns
How Does the Insurance Company Compute your Monthly Payment? There are several factors that insurance companies use to compute your monthly payment amount; two of the most common are gender and age - both of which affect your life expectancy. Since women have longer life expectancies than men, women won’t receive as high of a payment as their male counterparts. And, of course, the older you are, the lower your life expectancy. A 75-year-old man with the life option will receive a higher monthly payout than a 65-year-old man because the older man’s life expectancy is shorter. Another major factor that affects the size of your monthly payout is the payout option that you select - which affects how long the payments will last. For example, if you select the joint-life option, your monthly payout most likely will be lower as the payment continues to your spouse after your death.
A final factor to consider is the credit quality of the insurance company. Remember that just because you have accumulated your annuity at one insurance company over the past 20 years, you don’t necessarily need to start your payouts with them. If another insurer with a high rating has offered you a higher monthly payout, it might be worth your time to look into doing a tax-free 1035 exchange to the new insurer, but make sure to check the surrender charges on your current contract before you initiate any transfer! The insurance companies have well-paid employees in specialized departments that will provide you with an estimated payout for each option. Make them earn that extra 1.5% in fees that they charge annually to your contract - have multiple quality insurance companies give you a quote on the current value of your annuity with multiple payout options.
Conclusion Deciding on the best annuitization payout method to choose for your annuity is not an easy decision. Consider your priorities, the amount you need each month and how long you think you will need these payments.
June, 2010 Investment Monitor 51
Investor Education
Diversification I
f there’s one thing that even the newest investor understands, or has at least heard of, about a portfolio it’s diversification blending a variety of asset classes to reduce exposure to risk. But a well-diversified stock portfolio is just one component of putting together the best possible portfolio. Diversifying not just among different stocks, but among different assets, is how an investor can truly mitigate risk. Even with a welldiversified stock portfolio, an individual is still exposed to market risk (or systematic risk as finance professors like to call it), which cannot be diversified away by adding additional stocks.
What Exactly Is Diversification?
Basically, diversification among various asset classes works by spreading your investments among various assets (e.g. stocks, bonds, cash, T-bills, real estate, bullions etc.) with low correlation to each other; this allows you to reduce volatility in your portfolio because different assets move up and down at different times and at different rates. Thus, having a portfolio diversified among different assets creates more consistency and improves overall portfolio performance.
How Does Correlation Work?
If two asset classes are perfectly correlated they are said to have a correlation of +1. This means that they move in lockstep with each other, either up or down. A completely random correlation - a relationship in which one asset’s chance of going up is equal to the chance of dropping if the other asset rises or falls - is said
52 Investment Monitor June, 2010
to be a correlation of 0. Finally if two asset classes move in exact opposition - for every upward movement of one there is an equal and opposite downward movement of another, and vice versa - they are said to be perfectly negatively correlated, or have a correlation of -1.
Eliminate Specific Risk and Minimize Systematic Risk
It is assumed that all investors are rational and will therefore hold portfolios that are diversified to the point where specific risk has virtually been eliminated and their only exposure to risk is to that which is inherent in the market itself. Thus, the residual risk of a portfolio should be equal to market risk, i.e. systematic risk, and systematic risk can be reduced by investing over a broader market, i.e., a larger universe. International diversification provides a good example of the effects of diversifying across asset classes. A portfolio invested 50% in domestic large-cap stocks and 50% in international large-cap stocks would have approximately half the residual risk of a portfolio comprised solely of domestic large-cap stocks, assuming that the investments in each market were sufficiently diversified to eliminate specific risk. Some investors may choose to be exposed to specific risk with the expectation of realizing higher returns. But this is contrary to financial theory and such investors are therefore deemed to be irrational. Deliberate exposure to specific risk is unnecessary
Investor Education Diversified among Assets
Others 5% Gold 23%
Equity Equity 50%
Debt Gold Others
Debt 22% and is essentially gambling...unless you are trading on inside information, but we won’t go there, as trading on inside information is a flagrant violation of the securities laws.
A Diversified Stock Portfolio vs. A Diversified Portfolio of Assets
When we talk about diversification in a stock portfolio, we’re referring to the attempt by the investor to reduce exposure to unsystematic risk (i.e. company-specific risk) by investing in various companies across different sectors, industries or even countries. When we discuss diversification among asset classes the same concept applies, but over a broader range. By diversifying among different asset classes you are reducing the risk of being exposed to the systemic risk of any one asset class; in other words, the risk that diversification within an asset class, such as stocks, cannot eliminate. Like holding one company in your stock portfolio, having your entire net worth in a portfolio of any one asset - even if that portfolio is diversified - constitutes the proverbial “all of your eggs in one basket”. Despite the mitigation of unsystematic risk (risk associated with any individual stock) you are still very much exposed to market risk. By investing in a number of different assets you reduce this exposure to market risk or the systemic risk of any one asset class. Most investment professionals agree that although diversification is no guarantee against loss, it is a prudent strategy to adopt towards your long-range financial objectives.
How to Diversify Your Portfolio
To this point we have talked more in a theoretical sense. Now, let’s look at some examples to sink your teeth into. Bonds are a popular way to diversify due to their very low correlation with some of the other major asset classes, particularly equities. Other fixed-interest investments such as T-bills, bankers’ acceptances and certificates of deposit are also popular. Bullions (gold and silver) are now becoming fashion because they have provided very good returns over the past years.
Gold is inversely related to stock.Geography and type of security: Domestic stock, international stock, emerging markets debt, etc. Another viable option is real estate, which has proved its worth during various stages in the economic cycle, and has a relatively low correlation with the stock market. Using real estate as an asset to diversify a portfolio is an excellent and practical investment largely due to the fact that many people (through their homes or otherwise) are invested in the real estate market. It’s amazing how many people tend to overlook the investment potential of this asset. Investing in real estate doesn’t mean that you need to go out and purchase a house or building, although that is a viable option for entering this market. As an alternative to a direct property purchase, individuals can invest in the real-estate market through real estate investment trusts, or REITs. REITs sell like stocks on the major exchanges, and they invest directly in real estate through properties or mortgages. REITs typically offer investors high yields as well as high liquidity. Because of the real estate market’s relatively low correlation with the stock market, by investing in an REIT an individual is able to diversify away some the stock market’s inherent risk. Real estate, and more specifically REITs, is just one of the means to accomplish this reduction in exposure to risk.
Over-Diversification
Over-diversification can occur when two or more investments overlap. Overlap is a problem only if it’s done inadvertently. Some investors desire additional exposure to one or more sectors and achieve this by deliberately creating overlap in their portfolios. Although this is contrary to financial theory, deliberate overlap is a matter of choice and as such is a part of some investors investment strategy.
Conclusion
Diversification is a key building block to anyone’s financial plan, including the understanding of what diversification does and how it helps an individual’s overall financial position. It is crucial that investors know the difference between systematic and unsystematic risk, as well as understand that by diversifying among asset classes they can mitigate exposure to systematic risk.
June, 2010 Investment Monitor 53
Investor Education
All about IDRs T
he stock market has got a new product--Indian depository receipts (IDRs). You can now invest in it in the hope of making money over the long term. It is like an equity share, but with subtle differences. The Indian equity market trades shares of companies that are listed in India, the companies can be Indian or foreign, but need to have a significant business presence in India and must be here for Indians to buy shares in them. For example, Hindustan Unilever Ltd is a subsidiary of Unilever Plc, an international consumer goods company, but has a large business footprint in India and is listed on the Bombay Stock Ex- change and the National Stock Exchange. But if you want to own a piece of international firms such as Microsoft Corp., Google Inc. and Apple Inc., it is a difficult process that most retail investors find clunky.
What happened till now?
The Reserve Bank of India (RBI) has allowed investments in international equity instruments up to $200,000 (Rs94.8 lakh). However, since you need to have a demat account in the country in which you invest and a bank account with funds in the same country’s currency, it may turn out to be a cumbersome process.
These are international firms that have subsidiaries or branches working in India. But since these subsidiaries are not listed, the firms offer shares to Indian investors. Standard Chartered Plc is the first firm to come out with an IDR issue, offering its international shares through IDRs.
Why do you need an IDR?
An IDR is meant to diversify your holdings across regions to free you from a “region bias“ or the risk of a portfolio getting too concentrated in the home market. You need to study the firm’s financials before you buy its IDR. However, since these IDRs are listed, bought and sold on the Indian markets, the impact of global markets and exchange- rate risks are reduced, though not totally eliminated.
The Reserve Bank of India (RBI) has allowed investments in interIDRs and equity shares IDRs are similar to eqnational equity instru- uity shares. IDR holders have the same rights shareholders; you can vote for or against ments up to $200,000 as company moves or decisions as and when it (Rs94.8 lakh). However, comes to you, get dividends, bonus and rights issues as and when the company declares since you need to have them. a demat account in the How are IDRs taxed? country in which you IDRs are taxed differently from equity shares. If you sell an IDR within a year of purchase, your invest and a bank acgains will be taxed at your income-tax rates. count with funds in the For exits made after a year, the tax rate will be without indexation and 20% with indexsame country’s currency, 10% ation. Since the IDR does not deduct dividend it may turn out to be a distribution tax, dividends are taxed in your as per your income tax rates. IDRs also cumbersome process. hand don’t impose securities transaction tax.
Another alternative is to go through a domestic mutual fund (MF) that invests its corpus abroad in a foreign fund, which invests in international companies or directly in scrips. But MFs are directly affected by currencyexchange risk because your investments in Indian rupees are converted into global currencies before they are deployed in the international markets. The recent winding up of Franklin India International Fund, a feeder fund that invested in US government securities, besides underperformance by several other international funds over the past three years, shows that these funds are fraught with exchange-rate and global market risks.
What is an IDR?
Now, you have the option of buying an IDR instead. An IDR is a depository receipt denominated in Indian rupees issued by a domestic depository in India. Much like an equity share, it is an ownership pie of a company. Since foreign companies are not allowed to list on Indian equity markets, IDR is a way to own shares of those companies. These IDRs are listed on Indian stock exchanges. You need not take the trouble of taking your money abroad yourself, but can invest rupees into the international companies that have now begun to come at your doorstep.
54 Investment Monitor June, 2010
Is there a currency risk?
In theory, the price of the underlying share of the international firm at the foreign ex- change and the exchange rate would play a role in determining the price of the IDR on the domestic exchange. But, in practice, this may not play out fully because the IDR would need to be bought and sold in Indian rupees and its price discovery would happen based on demand and supply, just like any other equity share. Dividends declared by the firm will be distributed in foreign currency and this would be then converted to Indian rupees at prevailing ex- change rates.
How can you apply?
You can apply for an IDR the way you apply for equity shares. The facility of Application Sup ported by Blocked Amount is also available for IDR holders. In other words, your application money won’t leave your bank account till you are finally allotted the shares. The money is blocked, but continues to earn interest on it. If you aren’t allotted shares, or IDRs in this case, the money is released.
Query Time
Query Time Q What is your advice on karuturi global? The whole world knows by now that there is a shortage for food & the company has shifted its focus to that side of business. What is your long term view on the company? Gaurav, Bihar A. The Idea is good but not sure that they can deliver, management is unknown so can not give buy recommendation. Q. I am regular reader of this magazine three months back I had query for TISCO now as per current situation what will be the targets and where need to buy as commodity market and china moving downwards? Saurav, Delhi A. TISCO currently trading 30% down from current high at 510 levels. Stock trading below 200 dma, technical indicator sign stock at short term down trend. I would advise investor to enter at 450 levels. Q. After 12 year experience in stock mkt and after reading regular your magazine since last 4 years I have shifted 99% 0f my holding to 5 companies Godrej Ind(50%), Itc(20%),(Tci,Ifglrefrec,Gati-10%each)for 10 yrs.I am 45 yrs old. I am feeling very comfortable by taking this step. Your opinion plz. Suresh, Banglore A. I appreciate your interest and investment in equity market. All stocks are fundamentally strong; you may also add some power and electrical sector stocks. Feel free to ask further. Q. I Purchased Reliance Power in IPO Price still I am holding tells me about your view weather sell or hold. Santosh Gahan, Orissa A. Currently reliance power trading below its issue price. I would advice you to hold the scrip as it is really strong in power business which will provide profitable returns in the near future. 5. Q. In your last issue you advised me to market can down 5-7%. Thanks for the right advise. Is it the right time to invest? Suggest me some stocks for medium term investment. Naveen , Delhi A. Yes this is right time to invest, some stock seems attractive at this level you can invest in Gati, Grasim, Tci, Ramcosys, Orchid chemical. Q. Sir, I want to invest in my money in currency for long time investment. I can hold position for long horizon around 2-3 year’s. So please suggest me in which currency I can invest for good return in future. Punnet Roy, Bangalore
A. As per currency market, I would like to suggest you to invest in JYNINR. JYN looking very solid in long horizon and probably would give good return to investor as well as you can short GBPINR.GBP is looking weak due to 2-3 time dept issue of U.K economic and we believing that create position in both the currency would give you desire return. Q. I am physical trader in Chana and regular subscriber of your magazine; I want to know how I can hedge my commodities in exchange. I also convey that extraordinary cover story you have covered in May month on Metals. I really enjoy and benefited from the same. Can you please cover the same for agri commodities in coming issues? Rohit- Mumbai A. Hedging in commodities in exchanges are very simple, you must open a trading account in any broker firm, you may hedge your exact quantity by selling/buying to contrary of your physical buy/ Sell. For that, you may to maintain a given margin from exchange. Hedge is good tool for mitigating your risk. Also, we will cover on agro commodities time to time. Q. I am a client of RR Commodities since last two year; I have read the article on Gold in last issue. The way it has defined was amazing and really I enjoyed a lot by the article, further I bought gold in exchange the level around 17800. Should I hold or book profit in gold? Ajay Jain , Delhi A. First of all thanks for being our valuable customer and subscribe our magazine regularly. You have kept position in gold at right time and further gold looking strong due to strength in Dollar. Dollar still looking bullish and the same time gold too. So you can hold your position with Profit Trialing Stop Loss of rupee 18180.
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 June, 2010 Investment Monitor 55
Mailbox Mutual Fund Analysis. I have been a regular reader of the magazine and I like the article on Mutual fund and equity analysis. The article is complete in itself as it is provides information on the Mutual fund with its background, the companies and its return over a period of times, its current market price, unit of trading, return over a period of times. The idea provide in Mutual fund analysis is very helpful. It helped me in making good investment decisions. The information is provided with the growth, Fund Manager helps us to make wise decision. Sunil, Delhi Stocks & Technicals. I am an active stock trader. Your magazine was recommended to me via one of my friend. I like the Magazine with its unique contents covering all the investment options. I specially like the stock & technical section of the magazine. It provides the information about the fundamentals and technically strong stocks to the subscribers along with a brief explanation. The section helps the investors to choose the good investment option to get benefit in the market. Dilip, Delhi Market Commentary
The cover story - Is it right time to invest. I must appreciate the cover story on - Is it right time to invest? It keeps us update on various parameters which affect the market directly or indirectly. New and existing Investors must follow these basic parameters to invest in such a volatile market. By reading this cover article one can easily get the idea about current market scenario. I am looking forward for more such investment tools to maximize my benefit in future. It seems that lot of effort backs such a revealing article. I expect that your team will continue the hard and intellectual work in the times to come. The presentation is generic and approach is illustrative and practical in nature. Bapi, Orissa
to thanks the team of Investment Data Monitor Monitor for keeping their subscriber updates in the market and I am a regular reader of your magprovide beneficial information. azine. I must appreciate the data give in data monitor as this daCommodity Technical Analysis. tabase gives the insight in to the company information. Its keep I am a commodity trader; I really us updated about the company filike the commodity features carnancial status on monthly basis. It ried in your magazine. The comhelps in selecting the best investmodity analysis that you give in ment stock out of the same group your magazine are usually spot of companies. I have invested in on. Also the special report on gold some value stocks after reading was excellent. It is also thought this data. me about the scenario for gold in the world and in India. I would Rajesh,Rajasthan also suggest you to bring out an article on features of various commodities and use of stop loss while trading so that one may take better decision.
I am a subscriber of investment monitor and follow the market commentary section every month for my investment strategies. I am eagerly waiting for the Investment Monitor June 10 issues to have snapshot of market via this section. Since marSandeep , pune ket action is active these days and the outlook of equity market section Your suggestion are valuable to us. We look forward to a healthy feedback. Please provided me the profit as well. I want mail your suggestion and recommedations at monitor@rrfcl.com 56 Investment Monitor June, 2010